Hey! That's My LLC!: The Importance of Looking to Facts, Not Initial Reports, to Resolve Membership Disputes in Louisiana Member-Managed LLCs

Author:Emily J. Gill
Position:J.D./D.C.L., 2014, Paul M. Hebert Law Center, Louisiana State University
Pages:937-973
 
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Hey! That’s My LLC!: The Importance of Looking to
Facts, Not Initial Reports, to Resolve Membership
Disputes in Louisiana Member-Managed LLCs
INTRODUCTION
Brad and Jennifer, a long-term couple, decided to co-own a
business together. Jennifer formed the business as a limited liability
company (LLC) by completing the necessary forms on the
Louisiana Secretary of State’s website.1 She listed Brad and herself
as the sole owners of the LLC. After several profitable years, Brad
and Jennifer separated, and Jennifer, out of spite, sought to damage
Brad financially and retain the business for herself. She filed an
additional document with which she was able to remove Brad’s
name from the organizational documents filed with the secretary of
state.2 She informed Brad that according to the official documents
on record with the secretary of state, she was the sole owner of the
LLC, and therefore, he could no longer access the compan y’s funds
or records. With the simple filing of a document, she had divested
Brad of his ownership interest in their co-owned business.
In light of recent decisions by Louisiana courts addressing
similar issues, Brad’s situation is as dire as it appears.3 Mystified by
the officiality and formality of LLC organizational documents filed
with the secretary of state, courts have confused their probative
value and considered them determinative of ownership in LLC
ownership disputes.4 LLC organizational documents have no effect
on ownership rights and are merely intended to apprise third parties
of who has management authority in the business and upon whom
Copyright 2014, by EMILY J. GILL.
1. LOUISIANA SECRETARY OF STATE, http://www.sos.la.gov (last visited Feb.
23, 2014) [http://perma.cc/WN7Q-QZM5] (archived Feb. 24, 2014).
2. Such removal can be accomplished by filing an annual report, LA. REV.
STAT. ANN. § 12:1308.1(A) (2010); infra Part I.C.2.a, a Notice of Change of
Members and/or Ma nagers of a Limited Liability Compa ny form, Tom Schedle r,
Sec’y of State, #983A Notice of Change of Members and/or Managers of a
Limited Liability Company, http://www.sos.la.gov/BusinessServices/Publis hed
Documents/983AChangeofMemberManagerLouisianaLimitedLiabilityCompany.p
df (last modified Sept. 2011) [http://perma.cc/4QDE-KWZ2] (archived Feb. 24,
2014); infra Part I.C.2.b, or a certificate of correction, LA. REV. STAT. ANN. §
12:1310(F) (2010); infra Part I.C.2.c.
3. See Settles v. Paul, 61 So. 3d 854 (La. Ct. App. 2011); Moise v. Moise,
956 So. 2d 9 (La. Ct. App. 2007); infra Part II.C.
4. See Settles, 61 So. 3d at 858–59 (using an inappropriate legal theory to
circumvent the fact that plaintiff was not listed i n the LLC’s initial report); Moise,
956 So. 2d at 11 (referring to a member or manager list in an initial report as a
“definitive designation”); infra Part II.C.
938 LOUISIANA LAW REVIEW [Vol. 74
process can be served.5 Unfortunately for Brad, some Louisiana
courts have been unable to resist the temptation to treat these
documents as determinative of ownership.6
This judicial confusion is particularly unfortunate in light of the
emergence of a new type of crime known as “business identity
theft,” which includes the fraudulent alteration of organizational
documents filed with the secretary of state.7 In 2012, the Louisiana
Legislature addressed some of the ramifications of this crime and in
doing so compounded confusion over the probative value of LLC
organizational documents by giving courts the false impression that
the inclusion of an owner’s name on one of these documents is of
great significance.8
In light of this misleading legislation and recent court decisions,9
one owner is currently capable of divesting another owner of an
ownership interest in an LLC by merely removing his or her name
from an organizational document filed with the secretary of state.
This Comment argues that to remedy this unfortunate reality, courts
must explicitly acknowledge that these documents are not
determinative of ownership and must, instead, consider the totality
of the facts and circumstances when determining an LLC’s true
owners.10
In reaching this conclusion, Part I of this Comment discusses the
organizational documents that can be filed with the secretary of state
in the formation and operation of an LLC. Next, Part II examines the
unique initial report of the member-managed LLC and the courts’
confusion of its probative value. Finally, Part III suggests that LLC
membership disputes are properly resolved b y analyzing each
situation’s facts and circumstances and analogizing to the resolution
5. See infra Part I.C.1.
6. See Settles, 61 So. 3d at 859 (using an inappropriate legal theory to
circumvent the fact that the plaintiff was not listed in the LLC’s initial report);
Moise, 956 So. 2d at 11 (referring to a member or manager list in an initial report
as a “definitive designation”); infra Part II.C.
7. See NATL ASSOC. OF SECYS OF STATE, DEVELOPING STATE SOLUTIONS TO
BUSINESS IDENTITY THEFT: ASSISTANCE, PREVENTION, AND DETECTION EFFORTS BY
SECRETARY OF STATE OFFICES 5–8 (2012), available at http://sdsos.gov/cont ent
/html/corporations/corporationpdfs/white-paper-business-id-theft-012612.pdf [http:
//perma.cc/5K9U-QSJZ] (archived Feb. 24, 2014); Yuki Noguchi, Identity Theft a
Growing Concern For Businesses, NATL PUB. RADIO (Feb. 29, 2012, 3:31 AM),
http://www.npr.org/2012/02/29/147582287/identity-theft-a-growing-concern-for-
businesses [http://perma.cc/ZT3B-C9Q2] (archived Feb. 24, 2014); infra P art II.B.
8. See LA. REV. STAT. ANN. §§ 12:2.2 (creating an electronic notification
system when a member’s name is removed from an organizational document with
the secretary of state), :1701 (creating a cause of action for a member who has
been fraudulently removed from these documents) (Supp. 2013); infra Part II.B.
9. See Settles, 61 So. 3d 854; Moise, 956 So. 2d 9; infra Part II.C.
10. See infra Part III.A–C.
2014] COMMENT 939
of ownership disputes in closely held corporations. It also argues
that the Legislature should take action to clarify that LLC
organizational documents do not determine ownership in an LLC.
Because the Legislature and courts have failed to recognize this
truth, every member in a member-managed LLC is at risk.
I. THE DOCUMENTS: FORMING AND OPERATING A LIMITED LIABILITY
COMPANY
Many small, closely held businesses prefer the LLC model
because it offers the limited liability of a corporation with the pass-
through taxation and flexible, informal governance of a partnership.11
Louisiana passed LLC legislation in 1992,12 which was based largely
on a draft of the ABA Prototype Limited Liability Act and
Louisiana’s existing corporation and partnership law.13 Specifically,
the laws regarding LLC formation were adopted nearly wholesal e
from corporation law.14
The essential documents necessary to form an LLC in Louisiana
are the articles of organization,15 the initial report,16 and sometimes
the operating agreement.17 The rules governing these formation
documents and their adoption from corporation law are the sources
of the problems addressed by this Comment.18
11. GLENN MORRIS & WENDE LL HOLMES, BUSINESS ORGANIZATIONS § 44.01,
in 8 LOUISIANA CIVIL LAW TREATISE 482–83 (1999); ROBERT W. HAMILTON ET AL.,
CASES AND MATERIALS ON CORPORATIONS INCLUDING PARTNERSHIPS AND LIMITED
LIABILITY COMPANIES 1182 (11th ed. 2010).
12. Limited Liabil ity Company Law, LA. REV. STAT. ANN. §§ 12:1301–1369
(2010).
13. MORRIS & HOLMES, supra note 11, § 44.01, at 483.
14. Id. at 484. See Deborah A. Wisnowski, The Louisiana Limited Liability
Company Law: A Gumbo of Previously Existing Business Entities, 39 LOY. L.
REV. 185, 194 (1993).
15. LA. REV. STAT. ANN. § 12:1304(A) (2010). See infra Part I.A.
16. § 12:1304(A). See infra Part I.C. If the secretary of state finds that these
documents comply with the formation provisions set forth in Chapter 12, then he
must record them and issue a certificate of organization, which serves as
conclusive evidence that the LLC has been duly organized “except that in any
proceeding brought by the state to annul, forfeit, or vacate a limited liability
company’s articles of organization, t he certificate of organization shall be onl y
prima facie evidence of due organization.” LA. REV. STAT. ANN. § 12:1304(B)
(2010).
17. LA. REV. STAT. ANN. § 12:1301(A)(16) (2010). See infra Part I.B.
18. See discussion infra Part II.A.

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