Kansas Court Enforces Statutory Indemnification and Awards Attorneys' Fees in Fiduciary Duty Lawsuit
The Kansas LLC Act requires an LLC to indemnify its members or managers, in some cases, for their attorneys’ fees to the extent they are successful in litigation. The statute was recently interpreted to require an LLC to indemnify a member for his attorneys’ fees in a lawsuit where the member successfully sued to establish his membership in the LLC and to recover on fiduciary duty claims against two other members. Davis v. Winning Streak Sports, LLC, No. 107,613, 2013 WL 1010622 (Kan. Ct. App. Mar. 15, 2013).
Background. Christopher Davis sued Winning Streak Sports, LLC (WSS), U.S. Hardwood Distributors, Inc. (Hardwood), and Lauren Larson. (Hardwood and Larson were members of WSS.) Davis sought a declaratory judgment that he owned a 49% membership interest in WSS, and claimed damages from Hardwood and Larson for breaches of their fiduciary duties as members of WSS.
Davis was partially successful. The trial court ruled that he was a member of WSS, but only a 0.96% member, and awarded him damages of $600,000 for breaches of fiduciary duties by Hardwood and Larson. The court also awarded WSS $74,788 on its counterclaim against Davis for breach of contract. Both sides appealed, and in 2010 the Court of Appeals affirmed the trial court’s rulings. Winning Streak, Inc. v. Winning Streak Sports, LLC, No. 100,725, 2010 WL 348272 (Kan. Ct. App. 2010) (unpublished opinion), rev. denied, 222 P.3d 564 (Kan. 2010).
Claim for Attorneys’ Fees. Davis then brought suit to recover his attorneys’ fees incurred in the original action against WSS. Davis contended that he was entitled to indemnification for his attorneys’ fees under Section 17-7670(b) of the Kansas LLC Act. The trial court ruled on summary judgment that Davis was not a prevailing party and therefore was not entitled to recover his attorneys’ fees, and Davis appealed.
The Court of Appeals saw the interpretation of Section 17-7670(b) as central to its resolution of the appeal. This section has two components: paragraph (a) authorizes an LLC to indemnify any member, manager, or other person from any and all claims, and paragraph (b) mandates indemnification in limited circumstances:
(a) Subject to such standards and restrictions, if any, as are set forth in its operating agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.
(b) To the extent that a member, manager, officer, employee or agent has been successful on the merits or otherwise or the defenses of any action, suits or proceeding, or in defense of any issue or matter therein, such director, officer, employee or agent shall be indemnified against expenses actually and reasonably incurred by such person in connection therewith, including attorney fees.
Kan. Stat. Ann. § 17-7670.
The parties focused their arguments on whether Davis or WSS was the prevailing party, but the Court of Appeals saw those arguments as misplaced. “The statute in plain and simple language requires indemnity to the extent that a litigant prevails. There is no doubt that Davis prevailed, at least in part, in this litigation.” Davis, 2013 WL 1010622, at *5 (emphasis in original).
Because Davis prevailed in part, and because the statute is mandatory (“such director, officer, employee or agent shall be indemnified”), the court concluded that Davis was entitled to indemnification to the extent he was successful in the original litigation, and that the amount of the fees would have to be decided by the trial court. Id.
The court went on to consider additional arguments made by WSS that were not reached at trial.
No Operating Agreement. WSS had no operating agreement, and WSS claimed that therefore Davis could not seek relief under Section 17-7670(b). Paragraph (a) authorizes LLCs to indemnify managers and members, “[s]ubject to such standards and restrictions, if any, as are set forth in its operating agreement,” and WSS argued that an operating agreement is therefore required for both paragraphs. The court, however, ruled that the plain language of paragraph (b) controlled and that the lack of an operating agreement did not render Section 17-7670(b) inoperative. Id. at *8.
Unconstitutionally Vague. WSS argued that paragraph (b) is unconstitutionally vague, because it begins by referring to “a member, manager, officer, employee or agent,” and then refers to “such director, officer, employee or agent.” The first phrase refers to a member or manager, while the second phrase refers to “such director.” The court said this was an obvious clerical error in the drafting of the statute, and read the paragraph to include LLC members in the class of persons entitled to indemnity to the extent they are successful. Id. at *9.
Claims Personal to Davis. Lastly, WSS argued that Davis’s claims, whether or not successful, did not qualify for indemnification because they advanced only his personal, private interest. Note that paragraph (b) of Section 17-7670 is silent about the nature of the “action, suits or proceeding,” and in fact refers to “any action, suits or proceeding” (emphasis added).
The court apparently assumed that paragraph (b) requires a nexus between the lawsuit and the interests of the LLC, i.e., that there be some benefit to the LLC. But the court did not require that the lawsuit benefit only the LLC. “WSS does not provide any support for the notion that indemnity is not required when the underlying action benefits both the LLC and the individual plaintiff.” Id.
The court took note that (a) Davis contended he was a member of the LLC at the time of his suit, (b) some of Davis’s claims not only affected him personally but also dealt with the integrity of the LLC’s books and records, and (c) the issues Davis brought forth also benefited the LLC’s interest in properly identifying its members and their interest in the LLC, and in the accuracy of its books and records. “We cannot conclude, as WSS argues, that Davis’s suit advanced only his private interest.” Id. at *10.
The court therefore ruled that Davis was entitled to summary judgment on his indemnification claim for attorneys’ fees, and remanded the case to the trial court to determine the amount of attorneys’ fees that Davis should recover.
Comment. This case revolves around a poorly drafted paragraph of the Kansas LLC Act: Section 17-7670(b), quoted above. The Court of Appeals discussed the statute’s inconsistent reference to “such directors.” But beyond that, the scope of the statute’s indemnification requirement is breathtakingly wide. The statute requires an LLC to indemnify a member or manager to the extent it is successful in maintaining or defending “any action, suits or proceeding.” There is no explicit requirement that the member’s or manager’s suit or defense be in its capacity as a member or manager, or even that the suit have any connection to the LLC.
The court did not directly address the scope of paragraph (b), but it appeared to implicitly accept WSS’s premise that Davis would not have been entitled to indemnification for his attorneys’ fees if his suit had only addressed his personal interests.
So when does Section 17-7670(b) apply? Presumably a member that is successful in a suit for dissolution of the LLC, or in a suit for breach of fiduciary duty by a manager or other member, would be entitled to its attorneys’ fees under paragraph (b). Either of those claims arguably would, at least in many cases, benefit the LLC as well as the individual plaintiff.
This statute is an outlier in another respect. Many state LLC statutes authorize an LLC to provide in the LLC’s operating agreement for indemnification of managers and members, but few if any other LLC statutes require indemnification of members’ or managers’ attorneys’ fees. Both Washington and Delaware, for example, authorize but don’t require indemnification. RCW 25.15.040; Del. Code Ann. tit. 6, § 18-108.
Kansas recently became the latest state to authorize series limited liability companies. Governor Sam Brownback signed Substitute House Bill 2207 on March 29, 2012, amending the Kansas Limited Liability Company Act to authorize series LLCs. Sub. H.R. 2207. The bill will become law on July 1, 2012, and Kansas will then join the eight other states that have authorized series LLCs.
Series LLCs. A series LLC can partition its assets and members into one or more separate series, each of which can have designated members and managers, and can own its own assets separately from the assets of the LLC or any other series. The liabilities of each series will be enforceable only against the assets of that series, and each series can enter into contracts, sue, and be sued in its own name.
Multiple series within one LLC can be used to avoid some of the inefficiencies and costs involved with using multiple LLCs. For example, separate parcels of real estate could each be owned by a separate series, but all within one LLC. Or, the divisions of a business could be held within one LLC, but with each division in a separate series.
Other States. Delaware was the first state to authorize series LLCs, in 1996. Del. Code Ann. tit. 6, § 18-215. Since then Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, and Utah have enacted statutes similar to Delaware’s, although there are some differences. I previously wrote about series LLCs when Texas passed its series LLC law in 2009, here, and when the Internal Revenue Service proposed regulations for series LLCs, here.
Kansas Requirements. The Kansas statute is similar in many respects to the Delaware Act. Both authorize an LLC’s operating agreement to establish one or more designated series, and both provide that the liabilities of a series are enforceable only against the assets of the series and not against the LLC generally (and vice versa), if
- the records of the series account for its assets separately from the assets of any other series or the LLC generally,
- the operating agreement states the liability limitations, and
- the certificate of formation, and in the case of a Kansas LLC, the articles of organization, give notice of the limitations on liability.
Series LLCs are relatively new. There are few reported opinions dealing with series LLCs, and the IRS’s proposed regulations have not yet been finalized. There are therefore many unresolved legal questions about series LLC issues such as taxation, bankruptcy, liability limitations, and piercing the veil, particularly when doing business in states outside the state of formation. Caution is advised when implementing a series LLC, given the uncertainty and lack of predictability inherent in their use.
Judgment creditors of LLC members usually have the right under state law to obtain a charging order against a member’s LLC interest. A charging order mandates that any distributions by the LLC that would otherwise be made to the member be paid instead to the creditor. The charging order provides no benefit, though, if no distributions are made to the LLC’s members. And if the judgment debtor is the only member of the LLC, it’s unlikely that he or she will cause the LLC to make distributions, since those would have to go to the creditor.
The U.S. District Court in Kansas recently had to determine the scope of a charging order against a single-member LLC in Meyer v. Christie, No. 07-2230-CM, 2011 U.S. Dist. LEXIS 118590 (D. Kan. Oct. 13, 2011). Although the Kansas LLC Act says a charging order against an LLC member’s interest is the creditor’s exclusive remedy, the court surprisingly found that, in the case of a single-member LLC, the creditor could assert management rights and take control of the LLC.
The relevant facts are straightforward. The plaintiffs obtained a final judgment of about $7 million against the defendants, who had interests in several Kansas LLCs. The plaintiffs asked the judge to issue a charging order against the defendants’ interests in the LLCs, under the authority of Kansas’s LLC Act:
Rights of judgment creditor. On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the limited liability company interest. This act does not deprive any member of the benefit of any exemption laws applicable to the member’s limited liability company interest. The rights provided by this section to the judgment creditor shall be the sole and exclusive remedy of a judgment creditor with respect to the member’s limited liability company interest.
Kan. Stat. Ann. § 17-76,113 (emphasis added).
A charging order is a limited remedy – the creditor has only the rights of an assignee, i.e., the economic right to receive distributions, and no rights to participate in management. The Kansas statute also provides that the charging order is the exclusive remedy, so the creditor cannot attach or foreclose on the member’s interest and thereby take control. (The charging order provisions of some state LLC Acts are silent on whether the charging order is a creditor’s exclusive remedy. See my discussion of Florida’s Olmstead v. FTC case on charging orders, here.)
The court acknowledged the Kansas LLC Act’s clear statement that the charging order is the only remedy by which a member’s judgment creditor can reach the member’s LLC interest, and discussed the partnership law origins of the LLC charging order. In the case of partnerships, a creditor’s charging order against a partner will not entitle the creditor to participate in the management of the partnership. Meyer, 2011 U.S. Dist. LEXIS 118590, at *10.
But, said the court, the result is different in the case of an LLC with only one member. That’s because of a specific provision in the Kansas LLC Act:
If the assignor of a limited liability company interest is the only member of the limited liability company at the time of the assignment, the assignee shall have the right to participate in the management of the business and affairs of the limited liability company as a member.
Kan. Stat. Ann. § 17-76,112(f). That paragraph is not in the Act’s section on charging orders, but is part of a long section dealing with assignments of LLC interests.
Without discussion, the court simply assumed that the holder of a charging order not only has the rights of an assignee but actually is an assignee. The court then held that under Section § 17-76,112(f), “the assignee/creditor shall have the right to participate in the management of the business and affairs of the LLC as a member.” Meyer, 2011 U.S. Dist. LEXIS 118590, at *11. With those rights, the holder of a charging order against an LLC’s sole member can take over the LLC, make distributions to itself, and liquidate the LLC if it so chooses.
The problem with the court’s holding is that the creditor’s rights under a charging order are limited to satisfaction of the debt. Once the judgment debtor’s obligation is satisfied, the charging order is extinguished. An assignment, in contrast, is a permanent transfer of the property rights assigned. The charging order statute accordingly recognizes that the rights of the creditor are limited: “To the extent so charged, the judgment creditor has only the rights of an assignee of the limited liability company interest.” Kan. Stat. Ann. § 17-76,113 (emphasis added). The Meyer court ignored the inherent limitations of charging orders. Its confusion between the limited economic rights granted under a charging order and the full transfer of rights granted under a true assignment led it to the wrong result.
Some states have added provisions to their LLC Acts to clarify this point and avoid a Meyer result. Thomas Rutledge recently blogged about the Meyer case, here, and pointed out that Kentucky has amended its LLC Act to provide that “[a] charging order does not of itself constitute an assignment of the [LLC] interest.” Ky. Rev. Stat. § 275.260(3).
Michigan similarly provides in its LLC Act that a charging order is not an assignment of the member’s interest, and that the holder of a charging order does not become a member of the LLC. Mich. Comp. Laws § 450.4507.
One recent publication that is a useful reference for investigating state LLC charging order laws is Carter G. Bishop, Fifty State Series: LLC Charging Order Statutes , Suffolk University Law School Research Paper No. 10-03 (Oct. 6, 2011) .
It’s not uncommon in today’s struggling economy for an LLC member to find itself unable or unwilling to satisfy the LLC’s capital calls. Can the other members recover damages from the defaulting member if they make up its required capital contribution? The Kansas Court of Appeals was faced with this question in Canyon Creek Development, LLC v. Fox, No. 103,190, 2011 Kan. App. LEXIS 128 (Kan. Ct. App. Sept. 2, 2011).
Background. Mike Fox, Don and Linda Julian, and Jeff Horn formed two Kansas LLCs in 2004 to develop residential real estate. Fox owned 50% of each LLC, and the others owned the other 50%. The real estate business struggled, and in 2008 Don Julian demanded that Fox contribute capital to each LLC to pay outstanding project loans. Fox failed to meet the capital calls, and Julian and Horn contributed capital and made loans to the LLCs to cover the debt-service obligations.
The additional capital contributed by Julian and Horn gave them a majority interest in each LLC, which they used to remove Fox from management and to elect themselves in his place. The LLCs then sued Fox to recover the amounts of the capital he had failed to contribute to the LLCs. The trial court found for the LLCs on their breach of contract claims and Fox appealed.
The LLCs’ operating agreements provided that a majority in interest of the members could require that all members contribute additional capital. (The operating agreements for the LLCs were identical in all relevant respects.) Under the original 50-50 ownership split there was no majority, and Fox argued that Julian therefore had no authority to demand that the members contribute capital.
Court’s Analysis. The agreements went further, though, and also stated: “Notwithstanding the foregoing, each Member and Economic Interest Owner shall contribute such additional capital as may be required to pay debt service, insurance and real estate taxes owing by the Company.” Id. at *14. The court found that this requirement was not subject to a majority vote and that Julian, as one of the managers, was empowered by this clause to make the debt-service capital call on behalf of the LLCs. Id. at *19.
The court therefore found that Fox breached the operating agreements by failing to provide the capital contributions demanded by the LLCs. It then turned to what it called “the more vexing issue regarding the proper remedy for Fox’s breach.” Id. at *20.
The operating agreements provided that if a member failed to contribute capital that was required by the agreement, then the other members had the right, but not the obligation, to contribute pro rata any portion of the non-contributing member’s required capital contribution. The contributed capital would then be added to the capital accounts of the contributing members, and the percentage interests of the members would be adjusted accordingly. The percentage interests of the contributing members would therefore be increased and the percentage interests of any non-contributing members decreased. (The percentage interests control voting and the allocation of profits, losses, and distributions.)
Fox argued that he should not be personally liable for the capital contributions because under the operating agreements the exclusive remedy for failure to meet a capital call was a reduction of his ownership interest.
Section 17-7691(a) of the Kansas LLC Act states that “[a] member who fails to perform in accordance with, or to comply with the terms and conditions of, the operating agreement shall be subject to specified penalties or specified consequences.” The court saw this as a suggestion that any remedy for damages should be specified in the operating agreements. The operating agreements did not specifically state that the LLC could recover damages from a member that failed to contribute capital when required to do so, and the court noted that the damages remedy was “conspicuously absent” from the operating agreements. Canyon Creek Dev., 2011 Kan. App. LEXIS 128, at *25.
The court concluded:
[I]n the absence of clear statutory authority for imposing personal liability on an LLC member who fails to meet a capital call for an ongoing venture, when the LLCs’ operating agreements specify a reduction in the defaulting member’s capital share as the sole consequence, the LLCs are not entitled to seek personal judgments for damages against the defaulting member.
Id. at *30-31.
Comments. It’s striking that the court relied on the lack of any statement in the operating agreements that a breaching member would be liable in damages, while at the same time ignoring the lack of any statement that limited the remedy to a reduction in the defaulting member’s capital share. One would generally expect damages to be available for a breach of contract absent clear language to the contrary.
The court quoted Section 17-7691(a) of the Kansas LLC Act, which authorizes “specified penalties or specified consequences,” and Section 17-76,100(c), which lists several penalties or consequences that an operating agreement may impose on members who fail to make required capital contributions. Those include reducing or subordinating the member’s interest, a forced sale, or even a forfeiture of the offending member’s interest.
The law of contract damages usually prevents the imposition of forfeitures or penalties for a breach of contract, so those statutory provisions are obviously intended to expand the ability of an operating agreement to penalize or impose forfeitures on members in breach for failing to contribute capital. For the court to interpret the statutory language on “penalties” and “consequences” to exclude a damages remedy unless explicitly referred to seems at variance with the remedy-expanding approach of the LLC Act.
The result in this case is probably not what most LLC organizers would have expected or intended. Lawyers representing an LLC and drafting the LLC agreement usually try to maximize the LLC’s flexibility in dealing with defaults, by providing alternative remedies. At least it’s not difficult to draft around this case – simply list the desired remedies and include something like “and any remedy at law or in equity against the Defaulting Member including specific performance and damages.”
LLC members have the right to receive allocations of profits, losses, and distributions (economic rights) and to participate in the LLC’s management. The specifics are determined by the state LLC statute and the LLC agreement. See, e.g., Del. Code ann. tit. 6, §§ 18-503, 18-504, 18-402. The member can also assign its interest in the LLC, unless the LLC agreement provides otherwise. Id. § 18-702. But even if an LLC member assigns its entire interest in the LLC to a third party, the assignee will not necessarily have all the rights of the assignor.
An assignee of an LLC interest will have the economic rights of the assigning member, but the assignee will not have the right to participate in the management of the LLC or to exercise any rights or powers of a member (other than the economic rights) unless the LLC agreement so provides. That is the rule in Delaware and in most other states. See, e.g., id.; Wash. Rev. Code § 25.15.250.
In Rowe v. Voyager HospiceCare Holdings, LLC, 231 P. 3d 1085, No. 101,661, Kan. App. Unpub. LEXIS 452 (Kan. Ct. App. June 18, 2010) (unpublished, mem., per curiam), the Kansas Court of Appeals dealt with a challenge to the validity of an assignment of a member’s interest in a Delaware LLC. Mark Rowe assigned all of his LLC member interest to his wife. The LLC refused to recognize the transfer because it did not consent to Rowe’s wife becoming a member, so Rowe filed a lawsuit for a declaration that he was entitled to make the transfer.
The court noted that Delaware law applied, although the opinion never discusses the Delaware LLC Act. The court treated the dispute as one purely of contract interpretation. Because the Delaware Act’s default rules on assignment of LLC interests can all be overridden by the terms of the LLC agreement, the ruling would have been unchanged even if the court had reviewed and analyzed the Act’s provisions.
Rowe’s LLC agreement barred members from assigning or transferring their interests in the LLC without the prior consent of the LLC’s Board, except for transfers within a Family Group. Rowe’s transfer to his wife was within his Family Group and his wife had agreed in writing to be bound by the LLC agreement, as it required, so the court found that the assignment was permitted by the LLC agreement.
The LLC agreement also provided that an assignee “shall become a substituted Member entitled to all the rights of a Member if and only if the assignor gives the assignee such right and the Board has granted its prior written consent to such assignment and substitution.” The court found the requirement of Board approval to admit the transferee as a substituted member to be a separate requirement that applied even for transfers within a Family Group. Since the Board had not approved of Rowe’s assignment to his wife, she did not become a substituted member. The transfer of the economic rights of Rowe’s LLC interest was valid but did not result in his wife being admitted as a member and having the governance and other rights of a member.
The Court of Appeals concluded by affirming the trial court, holding that Rowe’s assignment of his interest in the LLC was not barred by the LLC agreement, but that his wife only succeeded to the economic rights and was not admitted as a member.
It is an odd thing, this split between economic rights on the one hand and voting, management, and other rights on the other hand. Shares of stock are not treated that way – the buyer of a share will automatically be able to vote the share. Shares of stock are presumed to be fully alienable. Corporate articles or bylaws may limit the transferability of stock, but that is uncommon.
Of course an LLC agreement could make the member interests freely transferrable, including management and voting rights, but that is rarely done. Although courts often view LLCs as similar to corporations, in this one respect the partnership heritage of LLCs looms large. In partnerships the presumption historically was that partnerships were close relationships, where partners pick their co-partners and control the admission of new partners.
That approach is reflected in the state LLC statutes. In fact, the first LLC statute for many states was based on the state’s existing limited partnership statute. I know from lawyers who were involved in the process that that was true in the case of the Washington LLC Act, RCW Chapter 25.15.
Deadlocked Manager and Deadlocked Members Plus Threatened Irreparable Harm Equals Judicial Dissolution of Solvent LLC
The LLC in In re Metcalf Associates-2000, L.L.C. v. Chambers, 213 P.3d 751 (Kan. Ct. App. 2009), owned real estate encumbered by a loan that was coming due in the near future. The real estate needed to be sold or the loan refinanced, but the LLC’s manager could not act because it was deadlocked internally. The owners of the two 50% voting blocks in the LLC were deadlocked and could not agree on a course of action. Because the LLC was in effect frozen, one group of owners petitioned the court for the dissolution of the LLC and the sale of the real estate. The Kansas Court of Appeals upheld the trial court’s order for dissolution of the LLC.
Many state LLC statutes provide for judicially ordered dissolution if it is not reasonably practicable to carry on the LLC’s business in conformity with the LLC’s operating agreement. E.g., Del. Code Ann. tit. 6, § 18-802. Washington’s LLC Act is similar, but adds “or other circumstances render dissolution equitable.” Wash. Rev. Code § 25.15.275. These statutes emphasize the role of the operating agreement in evaluating whether judicially ordered dissolution is appropriate.
The Kansas statute, by contrast, uses an “irreparable injury” test. Any member owning at least 25% of the outstanding interests in the LLC’s capital or profits and losses may petition the court for dissolution and sale of the LLC’s assets
[i]f the business of the limited liability company is suffering or is threatened with irreparable injury because the members of a limited liability company, or the managers of a limited liability company having more than one manager, are so deadlocked respecting the management of the affairs of the limited liability company that the requisite vote for action cannot be obtained and the members are unable to terminate such deadlock ….
Kan. Stat. Ann. § 17-76,117(b). The approach of the Kansas statute, with its emphasis on deadlock and irreparable injury, comes straight out of the corporate statutes. E.g., Wash. Rev. Code § 23B.14.300(2)(a); Model Bus. Corp. Act § 14.30(2)(i) (2008).
The defendant Michael Chambers argued that a unanimity provision in the LLC’s operating agreement precluded a finding of deadlock. Chambers argued that (a) the LLC’s purpose was to buy office buildings and sell them for a profit; (b) the operating agreement required the unanimous agreement of the members to sell the LLC’s real estate; and (c) therefore there could not be a deadlock because the members had not fulfilled the requirement for unanimous agreement that it was time to sell.
The court, however, recognized that there was a fundamental dispute between Chambers and Patrick Hayes (who controlled the other 50% of the LLC). Hayes wanted to sell the building in a short period of time, and Chambers wanted to acquire the building for himself at a price substantially below its fair market value. The court opined that the LLC’s operating agreement could have been drafted to specifically limit the situations in which the court could declare a deadlock, but held that the unanimity requirement did not preclude a finding of deadlock and application of the statutory remedy for deadlock. Metcalf, 213 P.3d at 757-58.
Chambers also argued that the LLC was not facing irreparable harm because it was a solvent, profitable company with substantial rental income. But the court noted that the LLC had no management because its sole manager was itself deadlocked, and the LLC had no way to sell or refinance its real estate because of the members’ deadlock. The statute allows for judicial dissolution when the LLC is suffering or is threatened with irreparable injury. “By including both the actual suffering of irreparable injury and the mere threat of that injury, the legislature has implicitly rejected Chambers’ argument that a company can’t be dissolved so long as it’s still solvent.” Id. at 759.
So is there any difference in outcome between the approach of the Kansas statute (deadlock plus actual or threatened irreparable harm) and that of the Delaware statute (not reasonably practicable to carry on the LLC’s business in conformity with the LLC’s operating agreement)? The Delaware approach looks to the expectations of the parties under the LLC’s operating agreement, while the Kansas test is independent of the operating agreement. Also, the Delaware approach does not require either deadlock or irreparable harm in order for dissolution to result. All that Delaware requires is that it not be reasonably practicable to carry on the LLC’s business in conformity with the LLC’s operating agreement. The cause is not specified, although in many cases it is likely to be a deadlock between the members.
In Metcalf, the result would likely have been the same under the Delaware statute, since it’s hard to see how the LLC’s business could have been carried on in any manner, let alone in conformity with the operating agreement.