Today, the Business Court entered an Order granting summary judgment against members of a limited liability company who contended that an investor who was the principal source of funding to the LLC had a fiduciary duty to the LLC and its members.
The case, Kaplan v. O.K. Technologies, arose following the dissolution of a company formed to commercialize a process for filtering hog waste. Kaplan, a minority member of the LLC, was its only source of funds and controlled the LLC’s checkbook. Over time, he lent the LLC nearly $2 million, which the company used to pay salaries and legal expenses, among other things.
When the company’s prospects faded, Kaplan stopped funding the company and asked for repayment of his loans. The other members responded by voting to dissolve the LLC, which was placed in receivership. Kaplan sued to collect his substantial debt.
The other members of the LLC claimed that because Kaplan had "complete control over all expenditures," and because he knew that the LLC was completely reliant on his contributions, he had an "enhanced fiduciary duty" to the LLC and the other members.
Judge Tennille held:
Being an investor in a company does not create a fiduciary relationship. . . . Kaplan, as a minority shareholder, had no fiduciary duty to the other shareholders even though he was the sole financial contributor to O.K. Like an investor in a corporation, Kaplan’s position as the holder of the purse strings did not create a fiduciary duty. At all pertinent times, Kaplan was a minority shareholder without dominance or control over either O.K. or any of the other shareholders and therefore without a fiduciary duty.
Op. at 5-6. Judge Tennille stated that, in any event, it was "unclear what Defendants believe Kaplan’s fiduciary duty required him to do." (Op. at 9). The Court held that Kaplan was not required to provide "limitless funding" and he was entitled to seek to collect the debt owed to him.
The LLC members also contended that Kaplan had not followed the procedures set forth in the LLC’s Operating Agreement in making his loans. The Court ruled, however, that these claims were barred by ratification and estoppel. It held "Defendants are estopped from objecting to the loans by their continued acceptance of reimbursement and salary made possible by the loans, as well as their inaction when O.K. creditors were paid with the loaned money." (Op. at 8).
Two other claims made by the Defendants, for negligent misrepresentation and unfair and deceptive practices, are worth mentioning.
Summary judgment was granted on Defendant’s claim of negligent misrepresentation, because the Court found that Defendants, as majority shareholders of the LLC, could have investigated any questions of the validity of the representations made by Kaplan. As members of the majority, the Defendants had "the opportunity to question and determine for themselves whether any documentation provided was inaccurate." (Op. at 14).
Last, the Court granted summary judgment on Defendant’s unfair and deceptive practices claim. The Court held that "the dispute here arises from an internal dispute over the direction of O.K. by its shareholders. Commerce is not affected by the parties’ inability to work together as an LLC." (Op. at 14).