Recent Developments in Partnership and LLC Law

Phil Jelsma

Phil Jelsma is a partner in the San Diego law Firm of Crosbie Gliner Schiffman Southard & Swanson LLP. He is a member of the Business Law Section’s Partnerships and LLCs Committee and worked on the passage of RULLCA and AB 506. He is the Executive Editor of the recent CEB Publication "Understanding Fiduciary Duties in Business Entites."

Carpenters Pension Trust v. Lindquist Family LLC, 2014 WL 1569195 (N.D. Cal. 2014). An LLC lent significant sums to Mark Lindquist over the years. These debts and promises to repay were not evidenced by promissory notes. Mrs. Lindquist, his mother, was the managing member of the LLC. Plaintiff obtained a judgment against Lindquist and then Lindquist and the LLC executed promissory notes, pledge agreements, and UCC filings. Plaintiff sought the declaratory judgment that the notes, pledge agreements, and UCC filings were executed to evade or avoid liability. When Plaintiff served Broch-miller, a nonparty, with a subpoena, he sought to withhold information in exchanges with the LLC’s attorneys on the basis of the attorney-client privilege. Plaintiff argued that the privilege was waived based on intentional disclosure of privileged information with respect to emails between the LLC attorneys and the members other than Lindquist. Applying corporate law, the court examined the scope of the members’ duties and whether the members were aware of the information that was furnished to enable the attorney to advise the LLC. The court concluded that Bro-chmiller, Mrs. Lindquist, her sister, and Kirk Lindquist could assert that their communications with the LLC attorneys were protected by the attorney-client privilege.

CB Richard Ellis, Inc. v. Terra Nostra Consultants, 230 Cal. App. 4th 405 (2014). A creditor of an LLC sought judgment against the members on the basis that they had been distributed assets of the LLC on dissolution. At issue were when the LLC dissolved and whether the assets were distributed to the members on dissolution. The members complained that the trial court erred in instructing the jury as follows: "Dissolution of a limited liability company occurs when it ceases operating in the ordinary course of its business, with the intention, on the part of its members, not to resume the ordinary course of its business. Dissolution of a limited liability company is not the same as cessation of all business activity. A limited liability company may continue to do business after it has dissolved for the purpose of winding up its affairs, paying its creditors and distributing its remaining assets. In determining whether a dissolution of [the LLC] . . . occurred, you may consider all evidence bearing on that issue, including; for example, the ordinary business of the limited liability company, the assets of the limited liability company both before and after a distribution, the continuation of the ordinary business and the cessation of its ordinary business activities." The members asserted that any distribution "before" dissolution was not "upon" dissolution. The court analyzed California’s LLC statute and concluded that a "de facto" dissolution could occur and is an acceptable predicate to this type of claim. The fact that the LLC had not filed dissolution documents did not mean that the creditor could not invoke provisions designed to protect creditors on dissolution. Thus a jury could find that the distribution did occur on dissolution.