Summary
finding that a limited liability company was a business organization similar to a corporation for purposes of a lawyer-client relationship
Summary of this case from Phila. Indem. Ins. Co. v. Midwest Steel Fab, LLCOpinion
No. 106,078.
2012-09-7
Paul T. WHITE, on behalf of all members of B.W. II, L.L.C, Appellant, v. Vito BARBIERI and Barbieri & Associates, L.C., Appellees.
Appeal from Johnson District Court; James F. Vano, Judge. Gregory V. Blume, of Overland Park, and Patrick J. Doran, of Kansas City, Missouri, for appellant. Richmond M. Enochs and Paul M. Croker, of Wallace, Saunders, Austin, Brown and Enochs, Chartered, for appellees.
Appeal from Johnson District Court; James F. Vano, Judge.
Gregory V. Blume, of Overland Park, and Patrick J. Doran, of Kansas City, Missouri, for appellant. Richmond M. Enochs and Paul M. Croker, of Wallace, Saunders, Austin, Brown and Enochs, Chartered, for appellees.
Before GREEN, P.J., ATCHESON and BRUNS, JJ.
MEMORANDUM OPINION
PER CURIAM.
Paul T. White, who was a member of B.W. II, L.L.C., (LLC), filed this action against the LLC's attorney, Vito Barbieri, and his law firm. Barbieri has served as legal counsel for the LLC since its formation in 1997. According to the amended petition, White filed the lawsuit both as an individual and in a derivative capacity. In addition to asserting that Barbieri had breached a fiduciary duty, White also sought a declaratory judgment. The district court dismissed White's individual claims and subsequently granted summary judgment on the remaining claims in favor of Barbieri.
On appeal, we conclude that White does not have standing to bring an individual claim because Barbieri represented the LLC and did not owe a fiduciary duty to each member of the LLC. But because White was a member of the LLC at the time the legal services in question were rendered by Barbieri and he continued to be a member of the LLC at the time he instituted this action, we conclude that White does have standing to bring a derivative claim against Barbieri. Finally, we conclude that the request for declaratory judgment is premature and that it was appropriately dismissed by the district court. Thus, we affirm in part, reverse in part, and remand to the district court for further proceedings on the derivative claim.
Facts
White held a 25% membership interest in the LLC from the time of its creation in 1997 until March 4, 2010. The managing member of the LLC is Ronald Bratton, who owns a 50% membership interest in the company. In addition, to his interest in the LLC, Bratton is the president of Bratton Brothers Contracting, Inc. (Bratton Brothers). The remaining 25% membership interest in the LLC is owned by Glen Wright.
From the time of its formation, Barbieri has served as the LLC's attorney and also serves as the resident agent for the LLC. The principal purpose of the LLC is to purchase or otherwise acquire real estate, to develop improvements on real estate, and to own, lease, or manage real estate. In turn, the LLC has an agreement with Bratton Brothers to act as its nominee for the purpose of obtaining post office leases, acquiring sites, obtaining financing for construction of post office facilities, and to conduct other activities necessary for the LLC to develop, own, and manage post office facilities.
On October 16, 2002, Bratton and Wright signed a consent to enter into an agreement to sell the Highland Post Office and an accompanying lease to Bratton Brothers. White did not sign the consent agreement. Instead, White had his personal attorney request certain financial information from the LLC relating to the Highland Post Office transaction.
A special meeting of the LLC's members was set for December 19, 2002, to consider various matters including the sale of the Highland Post Office to Bratton Brothers. Evidently, the notice was prepared by Bratton and was sent to White's personal attorney. Although White requested that his personal attorney be permitted to attend the special meeting, the request was denied. According to White, a request for additional documents from the LLC to be reviewed prior to the special meeting was also denied.
At the special meeting, which White refused to attend, the other members of the LLC voted to sell all of its rights, title, and interest in the Highland Post Office to Bratton Brothers. Subsequently, the LLC also assigned the Highland Post Office lease to Bratton Brothers. It appears that most, if not all, of the documents relating to the transaction were prepared by Barbieri. In a letter dated January 23, 2003, White's personal attorney stated his concerns about the transaction and his belief that Bratton had breached his fiduciary duties as the manager of the LLC.
White's personal attorney and Barbieri continued to correspond with one another regarding various requests for documents and matters related to the Highland Post Office transaction over the next several years. In a letter dated May 9, 2006, White's attorney asserted that Barbieri had a conflict of interest representing Bratton Brothers and the LLC. Specifically, White's attorney alleged that Barbieri's dual representation in the Highland Post Office transaction had “crossed the line” and that the LLC could not waive the conflict.
On August 25, 2006, White's attorney sent a formal demand letter purportedly on behalf of the LLC in which he asserted a derivative claim seeking return of the ownership of the Highland Post Office to the LLC, modification of the termination provisions of the LLC's operating agreement, and use of cash reserves to pay down the LLC's mortgages. A few months later, on October 27, 2006, White filed a lawsuit against the LLC, Bratton, Bratton Brothers, and Wright. In April 2009, the parties to that lawsuit were able to reach a settlement agreement in mediation. Unfortunately, a dispute arose regarding the terms of the settlement and the task of interpreting the agreement fell to this court. See White v. B.W. II, L.L.C., No. 104,360, 2012 WL 98486, at *1, *4 (Kan.App.2012) (unpublished opinion).
In the meantime, White instituted the present action against Barbieri on May 28, 2009. In an amended petition filed in this case on August 7, 2009, White alleged on behalf of himself and on behalf of all of the members of the LLC that Barbieri had breached his fiduciary duty by simultaneously representing the LLC, Bratton, and Bratton Brothers during the Highland Post Office transaction. White also sought a judgment declaring that the indemnification clause in the LLC's operating agreement violates public policy.
Prior to the filing of the amended petition, Barbieri filed a motion to dismiss in which he argued that White failed to state a claim. On November 24, 2009, the district court dismissed White's individual claims, finding that Barbieri owed no fiduciary duty to White personally. But the district court allowed the derivative claim to go forward. Furthermore, the district court found it to be premature to resolve the issue of whether the fiduciary duty claim was barred by the statute of limitations. Subsequently, White filed a motion for partial summary judgment, and Barbieri filed a motion for summary judgment.
In a journal entry entered on November 3, 2010, the district court denied White's partial motion for summary judgment and granted Barbieri's motion for summary judgment as a matter of law. Specifically, the district court found that White had transferred all of his interest in the LLC pursuant to a membership certificate dated March 4, 2010 and that “[t]he only two remaining members of [the LLC] since March 4, 2010, Ronald Bratton and J. Glen Wright, have expressed their opinions via affidavit to this Court that Paul White does not fairly and adequately represent the interests of [the LLC].” As such, the district court concluded that “White's right to maintain this derivative action was extinguished after he executed the Membership Certificate ... pursuant to K.S.A. 17–76, 112(b)(3) and Sections 8.4 and 9.1 of the Operating Agreement of [the LLC].”
On March 25, 2011, the district court filed a journal entry denying White's motion for relief from judgment, and on April 25, 2011, White filed a notice of appeal in this case. Thereafter, on January 6, 2012, this court filed a decision in White's lawsuit against the other members of the LLC, and a mandate was issued on February 9, 2012. See White v. B.W. II, L.L.C., 2012 WL 98486, at *1.
Analysis
Standard of Review
“When the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law, summary judgment is appropriate. The trial court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. When opposing a motion for summary judgment, an adverse party must come forward with evidence to establish a dispute as to a material fact. In order to preclude summary judgment, the facts subject to the dispute must be material to the conclusive issues in the case. On appeal, the same rules apply; summary judgment must be denied if reasonable minds could differ as to conclusions drawn from the evidence. [Citation omitted.]” Kansas One–Call System v. State, 294 Kan. 220, 225, 274 P.3d 625 (2012).
Individual and Derivative Standing
White contends the district court erred in finding that he was not a proper party to bring an individual action or a derivative action against Barbieri. Because standing to sue is a component of subject matter jurisdiction, the issue can be raised at any time. Whether standing exists is a question of law subject to unlimited review. See Mid–Continent Specialists, Inc. v. Capital Homes, 279 Kan. 178, 185, 106 P.3d 483 (2005). In order to demonstrate standing, a plaintiff must allege “such a personal stake in the outcome of the controversy as to warrant his invocation of jurisdiction and to justify the court's remedial powers on his behalf.” Harrison v. Long, 241 Kan. 174, 176, 734 P.2d 1155 (1987).
White first argues that the district court erred in finding that he did not have individual standing to sue Barbieri. In support of this argument, White asserts that Barbieri not only owed a fiduciary duty to LLC but also owed a fiduciary duty to each member of the LLC. We disagree.
K.S.A. 17–7673(b) provides that a LLC—similar to a corporation—is “a separate legal entity, the existence of which as a separate legal entity shall continue until cancellation of the limited liability company's articles of organization.” (Emphasis added.) Moreover, according to Kansas Rule of Professional Conduct 1.13(b)(2011 Kan. Ct. R. Annot. 513), an attorney retained by an organization “shall proceed as is reasonably necessary in the best interest of the organization. ” (Emphasis added.) In other words, “an attorney's duties to a limited liability company run only to the company itself and not to its members.” Penn, LLC v. Prosper Business Development Corp., No. 2:10–cv–993, 2011 WL 2118072, *15 (S.D.Ohio 2011) (unpublished opinion). See also Miller v. Staab, No. 91,931, 2005 WL 1429834, at *4, (Kan.App.), rev. denied 280 Kan. 983 (2005) (“[A]s a general legal principle, attorneys representing corporations owe no duty to third-party shareholders.”). Thus, because Barbieri's fiduciary duty as an attorney ran only to the LLC, we conclude that the district court did not err in dismissing White's individual claim.
White next argues that the district court erred in finding that his “right to maintain this derivative action was extinguished” when he transferred his membership interest back to the LLC on March 4, 2010. It is undisputed that White held an ownership interest in the LLC at the time the present lawsuit was filed on May 28, 2009. Furthermore, it is undisputed that so long as White continued to have a membership interest, he had the right to bring a derivative action on behalf of the LLC under K.S.A. 17–76,131. But the statute does not state what happens when a plaintiff transfers his or her membership in an LLC after a derivative action has been filed.
Additionally, K.S.A.2011 Supp. 60–223a(b)(1) states that a plaintiff bringing a derivative action must plead that he or she “was a shareholder or member at the time of the transaction complained of.” Moreover, the cause of action recognized in K.S.A.2011 Supp. 60–223a(a) applies when a shareholder or member files “a derivative action to enforce a right that the [company] may properly assert but has failed to enforce.” In Smith v. Roger Smith & Sons, Inc., No. 105,456, 2012 WL 2148173, at *7–8 (Kan.App.2012) (unpublished opinion) (petition for review pending), this court held that K.S.A. 60–223a allows a shareholder's derivative action to continue after the shareholder loses his or her ownership interest.
We find the reasoning in Smith to be sound and equally applicable to limited liability companies. Similar to the Smith court, we find that it is not the proper role of the judicial branch to add a continuing-ownership requirement to either K.S.A. 60–223a or K.S.A. 17–76,131. Moreover, it is clear from the record that the remaining members of the LLC are unwilling to pursue this action, and it is a question of fact whether White will fairly and adequately represent the LLC. If White's allegations against Barbieri are true—which we must assume for the purposes of summary judgment—then the LLC will ultimately benefit from this action. Accordingly, we conclude that White continues to have standing to pursue a derivative claim on behalf of the LLC for Barbieri's alleged breach of fiduciary duty. Declaratory Judgment
White also contends that the district court erred in failing to rule on his declaratory judgment claim. But Kansas courts “ ‘will not render advisory opinions on abstract or moot questions of law.’ [Citations omitted.]” Wichita Computer & Supply, Inc. v. Mulvane State Bank, 15 Kan.App.2d 258, 260, 805 P.2d 1255,rev. denied 248 Kan. 999 (1991). As this court held in Westar Energy, Inc. v. Wittig, 44 Kan.App.2d 182, 215, 235 P.3d 515 (2010), “[i]ndemnity can only be determined after the final nonappealable action is taken in the underlying legal action or investigation.” Consequently, because the present case has not been finally resolved, we find that issues of indemnification are not ripe for adjudication.
It should also be noted that in the companion case White filed against the other members of the LLC, this court concluded that “the issue of whether White will ultimately be obligated to indemnify the LLC for the attorney fees incurred by Barbieri in defending the legal malpractice case cannot be resolved until after the underlying legal action—which is currently on appeal before this court—is finally resolved.” (Emphasis added.) White v. B.W. II, L.L.C., 2012 WL 98486, at *6. Furthermore, this court concluded that it was reasonable for the Honorable Thomas M. Sutherland to order in the companion case that $50,000 from the proceeds from the settlement of that case be held in escrow until further order of the court. 2012 WL 98486, at *6. Thus, if it is ultimately necessary for the issue regarding the distribution of the $50,000 to be resolved by a court, it should be resolved by Judge Sutherland in the companion case.
Affirmed in part, reversed in part, and remanded with directions.