Nevada Supreme Court Reviews LLC Claims

This article by Neal A. Klegerman of Emmel & Klegerman PC, Las Vegas, NV is presented courtesy of Nevada Business Law Journal (nevadabusinesslawjournal.com)

©  Neal A. Klegerman

In an unpublished order (not regarded as precedent), JB Carter Props. II, LLC v. Gashtili, 2015 Nev. Unpub. LEXIS 935 (Nev.  July 24, 2015), the Nevada Supreme Court reviewed what was apparently a dispute among members of a Nevada LLC. The Court initially describes the matter as involving a partnership and partners but it appears to be an LLC which was at issue.

One of the members sued another member who counterclaimed.  The District Court found against both the claims and the counterclaims and ordered the LLC dissolved.

The District Court had ruled against the plaintiff on its contract claims and its claim that a withdrawal of funds by the other member was a breach of fiduciary duty. The Nevada Supreme Court affirmed.

As to the contract claim, the Nevada Supreme Court concluded that the District Court did not abuse its discretion in light of the conflicting evidence as to whether an operating agreement signed by all of the parties existed.  Each of the members testified that they had signed an operating agreement but none indicated that it was the versions provided by plaintiff.

As to the breach of fiduciary duty claim, the Nevada Supreme Court found that there was substantial evidence supporting the District Court’s finding.  The District Court had found that the withdrawal of funds was covered by NRS 86.291(1) which provides that: “Except as otherwise provided in this section or in the articles of organization or operating agreement, management of a limited-liability company is vested in its members in proportion to their contribution to its capital…”  There was also testimony that the funds were withdrawn for legitimate LLC expenses.

An obvious lesson of this case, as other cases, is for the parties to document the existence of the constituent documents, in this case the operating agreement, at the inception of their enterprise.

As to the claims, within certain limitations, NRS 86.286 (not at issue in the order in this case) allows the operating agreement to expand, restrict, or eliminate duties of a member or manager or to limit or eliminate liabilities for breach of contract or breach of duties.  Of course, to accomplish any of the foregoing and have it be effective in litigation, the actual operating agreement must be authenticated.

 

Nevada Supreme Court Reviews Partnership Dissolution

This article by Neal A. Klegerman of Emmel & Klegerman PC, Las Vegas, NV is presented courtesy of Nevada Business Law Journal (nevadabusinesslawjournal.com)

©  Neal A. Klegerman

In an unpublished order (not regarded as precedent), Ali v. Arif, 2015 Nev. Unpub. LEXIS 928 (Nev. July 23, 2015), the Nevada Supreme Court addressed the dissolution of Nevada general partnerships.

The case involved two Nevada general partnerships which owned two motel businesses. To resolve litigation concerning management of partnership affairs, the parties agreed to dissolve the partnerships but could not agree on how to wind up the businesses. The district court, apparently based on the conclusions of the court appointed receiver, ruled that one of the motels should be sold on the open market and one at auction.

On appeal, one of the partners raised bias of the receiver but the court based on absence of prejudicial error and waiver of the issue by not raising it in the lower court.

The court also addressed the argument that a provision of the partnership agreement should govern the dissolution. The court also rejected that argument because again it was not raised in the lower court, it was unclear the agreement remained in effect after a change in the partners, and finally because the relevant clause applied only to dissolutions by death or withdrawal.

Therefore, the Nevada Supreme Court found that the district court could order the dissolution pursuant to NRS 87.320 (Dissolution by decree of court) which gives the court the power to dissolve on application of a partner based on a number of different grounds. In this case subsection 1(c), conduct as tends to affect prejudicially the carrying on of the business. Moreover, the district court had the power to direct the winding up pursuant to 87.370 (Right to wind up) which authorizes the district court to wind up a dissolved partnership at the request of a partner who has not wrongfully the partnership.

As to the manner of disposition of the properties, the Nevada Supreme Court did not second guess the lower court which the Nevada Supreme Court determined had broad discretion in the dissolution and liquidation of partnerships. In particular, the Nevada Supreme Court found that sale by auction was appropriate pursuant to NRS 87.380 (Rights of partners to application of property of partnership). The Nevada Supreme Court discussed cases in other jurisdictions construing the same statutory language as favoring liquidation for purposes of discovering the fair market value, presumably as opposed to distributions in kind in which there would be no real market valuation.

Among the lessons which may be taken from this unpublished order are that if a general partner has specific notions concerning the dissolution and winding up of the partnership, the partner should negotiate for such provisions in the partnership agreement and make certain that the agreement remains in effect after changes in partners. Moreover, the broad powers and discretion of the lower court and court appointed receivers should be noted.