Gottsacker v. Monnier

2005 WI 69, 697 N.W.2d 436, 281 Wis. 2d 361, 2005 Wisc. LEXIS 183

• Court: Wisconsin Supreme Court
• Decided: June 8, 2005
• Docket: 2003AP457
• Status: Published

Opinions

ANN WALSH BRADLEY, J.

¶ 1. The petitioners, Julie Monnier, Paul Gottsacker, and their limited liability company, 2005 New Jersey LLC, seek review of a published decision of the court of appeals affirming a circuit court judgment, which determined that they were precluded from transferring real estate owned by New Jersey LLC to 2005 New Jersey LLC.¹ The petitioners assert that they were not precluded from voting to make the transfer of property under Wis. Stat. §§ 183.0402 and 183.0404 (2001-02), the limited liability company statutes governing duties of managers/members and voting.²

¶ 2. We conclude that the petitioners possessed the majority necessary to authorize the transfer in question. Furthermore, we determine that the petitioners' material conflict of interest did not prohibit them from voting to make the transfer so long as they dealt fairly. However, because there was no express determination by the circuit court as to whether the petitioners willfully failed to deal fairly with New Jersey LLC or its other member, we reverse the decision of the court of appeals and remand the cause for further proceedings.

HH

¶ 3. On September 4, 1998, Julie Monnier (hereinafter Monnier) formed New Jersey LLC as a vehicle to own investment real estate. Ten days later, the company acquired a 40,000- square-foot warehouse located at 2005 New Jersey Avenue in Sheboygan, Wisconsin. The warehouse had a single tenant on a year-to-year lease. New Jersey LLC purchased the property for $510,000, with the financing arranged for and guaranteed by Monnier.

¶ 4. Brothers Paul Gottsacker (hereinafter Paul) and Gregory Gottsacker (hereinafter Gregory) became members of New Jersey LLC in January 1999. They entered into a Member's Agreement, which expressed their intent to operate under Wisconsin's limited liability company laws. That document stated in relevant part:

(4) Julie A. Monnier shall own a 50% interest in the capital, profits and losses of Company and shall have 50% of the voting rights of Company.

(5) Paul Gottsacker and Gregory Gottsacker, collectively, shall own a 50% interest in the capital, profits and losses of Company and shall have 50% of the voting rights of Company.

¶ 5. New Jersey LLC later purchased additional property in Sheboygan on Wilson Avenue. When it was sold, the proceeds were distributed to the members as follows: 50% to Julie, 25% to Paul, and 25% to Gregory. After the sale of the Wilson Avenue property, the only remaining asset of New Jersey LLC was the warehouse on New Jersey Avenue.

¶ 6. Relationships among the members of New Jersey LLC subsequently became strained. In May 2000, Paul and Gregory had a falling-out, allegedly due to Gregory's lack of contribution to the enterprise. Thereafter, communication between the brothers was virtually nonexistent. Monnier also testified that she had not spoken with Gregory since 1998.

¶ 7. On June 7, 2001, Monnier executed a warranty deed transferring the warehouse property owned by New Jersey LLC to a new limited liability company called 2005 New Jersey LLC for $510,000, the same amount as the original purchase price. The new limited liability company consisted of two members: Monnier with a 60% ownership interest and Paul with a 40% ownership interest. Neither one had discussed the transfer with Gregory before it occurred.

¶ 8. Following the transfer, Monnier sent a check to Gregory for $22,000, which purportedly represented his 25% interest in the warehouse property previously owned by New Jersey LLC. Gregory did not cash the check. Monnier and Paul, meanwhile, did not receive any cash payment but instead left their equity in the recently created 2005 New Jersey LLC.

¶ 9. Gregory commenced suit against Monnier, Paul, and 2005 New Jersey LLC, alleging that they had engaged in an illegal transaction under Wis. Stat. Ch. 183. After a bench trial, the circuit court agreed, noting that the sole purpose of the transfer of the warehouse property was to eliminate Gregory's ownership interest in the asset.

¶ 10. Because the transfer served no legitimate business purpose, and because Monnier and Paul both profited from it, the circuit court determined that Monnier and Paul were precluded by the conflict of interest rules under Wis. Stat. Ch. 183 from voting to authorize the transfer. In the alternative, it concluded that Paul did not have authority to act without the assent of Gregory because the two brothers held a "collective" interest in the ownership. Ultimately, the circuit court ordered that 2005 New Jersey LLC return the warehouse property to New Jersey LLC. Monnier, Paul, and 2005 New Jersey LLC appealed.

¶ 11. The court of appeals affirmed the decision of the circuit court on different grounds. Contrary to the circuit court, the court of appeals reasoned that the provisions of Wis. Stat. Ch. 183, specifically Wis. Stat. §§ 183.0402 and 183.0404, do not prevent a member who has a material conflict of interest from dealing with matters of the LLC. Gottsacker v. Monnier, 2004 WI App 25, ¶ 19, 269 Wis. 2d 667, 676 N.W.2d 533. Rather, those statutes prohibit a member who has a material conflict of interest from dealing unfairly with the LLC or its members. Id. Thus, a member with a material conflict of interest can vote to transfer property but is required to do so fairly. Id.

¶ 12. Applying this standard to the present case, the court of appeals held that the transfer of property was unfair in two respects. First, the conveyance was not an "arm's length transaction" because it did not occur on the open market. Id., ¶ 21.³ Second, the sale made it impracticable for New Jersey LLC to carry on with its intended business (i.e., to hold the commercial property as a long-term investment). Id., ¶ 22. Accordingly, the court of appeals did not reach the issue of whether Paul and Gregory each held a 25% ownership interest or whether the term "collectively" in the Member's Agreement required both brothers to jointly vote the entire 50%. Id., ¶ 24.

II

¶ 13. This case provides us with our first opportunity to examine limited liability companies in Wisconsin. The issues presented involve matters of contractual and statutory interpretation. We will initially examine the Member Agreement to determine whether the petitioners possessed the majority necessary to authorize the transfer in question. Next we will construe statutory provisions in Wis. Stat. Ch. 183 to determine whether the petitioners were nonetheless prohibited from voting to transfer the property because of a material conflict of interest. Both inquiries are questions of law subject to independent appellate review. DeWitt Ross & Stevens v. Galaxy Gaming & Racing, 2004 WI 92, ¶¶ 19, 20, 273 Wis. 2d 577, 682 N.W.2d 839 (citing N. States Power Co. v. Nat'l Gas Co., 2000 WI App 30, ¶ 7, 232 Wis. 2d 541, 606 N.W.2d 613; Meyer v. Sch. Dist. of Colby, 226 Wis. 2d 704, 708, 595 N.W.2d 339 (1999)).

f — 1 i — I

¶ 14. We begin our discussion with a brief overview and history of limited liability companies. A limited liability company (LLC) has been described as "an unincorporated association of investors, called members in LLC parlance, whose personal liability for obligations of the venture are limited to the amount invested." Joseph W. Boucher et al., LLCs and LLPs: A Wisconsin Handbook § 1.4 (rev. ed. 1999).⁴ It is a distinct business entity that adopts and combines features of both partnership and corporate forms. Id.

¶ 15. From the partnership form, the LLC borrows characteristics of informality of organization and operation, internal governance by contract, direct participation by members in the company, and no taxation at the entity level. Id. From the corporate form, the LLC borrows the characteristic of protection of members from investor-level liability. Id. Flexible in nature, the LLC allows direct involvement and control by its members yet also permits a corporate representative form of governance if the entity elects to be governed by managers. Id.

¶ 16. The first LLC statute was enacted by Wyoming in 1977 as special interest legislation for an oil and gas exploration company. William Callison & Maureen A. Sullivan, Limited Liability Companies: A State-by-State Guide to Law and Practice § 1.5 (2004). Florida adopted a similar provision five years later. Id. Initially, there was relatively little interest in these acts because of the uncertainty surrounding the LLC's ability to be taxed as a partnership. Susan Pace Hamill, The Origins Behind The Limited Liability Company, 59 Ohio St. L.J. 1459, 1469 (1998). However, that would eventually change.

¶ 17. In 1988, the IRS issued Revenue Ruling 88-76, allowing the Wyoming LLC to secure partnership classification for income tax purposes, despite the presence of limited liability. Id. at 1469-70. After this landmark decision, states began passing legislation allowing for the formation of LLCs. Id. at 1470. By the end of 1996, every U.S. jurisdiction had enacted its own LLC statute. Id. at 1477. This development has prompted some commentators to hail the LLC as "[t]he legal phenomenon of the 1990s, at least for business practitioners." Boucher et al, LLCs and LLPs, at § 1.1. See also Larry E. Ribstein, LLCs: Is The Future Here?, 13 Business Law Today 11 (November/December 2003).

¶ 18. Wisconsin enacted its own LLC law in 1993 with the passage of the Wisconsin Limited Liability Company Law (WLLCL), Wis. Stat. Ch. 183. The WLLCL was drafted by members of the State Bar Business Committee with assistance from the Legislative Reference Bureau and the Office of the Secretary of State. See Drafting Records of 1993 A.B. 820. Although the business entity it created was new and distinct, the WLLCL borrowed concepts from a number of sources, including the Wisconsin Uniform Limited Partnership Act, Wis. Stat. Ch. 179, the Wisconsin Business Corporation Law, Wis. Stat. Ch. 180, and the 1992 Prototype Limited Liability Company Act, drafted by the Subcommittee on Limited Liability Companies of the Committee on Partnerships and Unincorporated Business Organizations of the ABA Section of Business Law. Id.5

¶ 19. The overriding goal of the WLLCL was "to create a business entity providing limited liability, flow-through taxation, and simplicity." Boucher et al., LLCs and LLPs, at Preface.⁶ The drafters believed it critical that a Wisconsin LLC readily be treated as a partnership for tax purposes. Id. at § 1.11. Additionally they emphasized the importance of flexibility and freedom of contract, which is reflected throughout the provisions of the WLLCL. Finally, they hoped that the LLC would provide an inexpensive vehicle that did not require legal counsel at every step. Id. With this background in mind, we turn now to the facts of this case.

IV

¶ 20. The first issue we address is whether the petitioners possessed the majority necessary to authorize the transfer in question. Gregory submits that they did not. He notes that under the Member's Agreement for New Jersey LLC, Monnier had 50% of the voting rights, while he and his brother "collectively" had the other 50%. Thus, Gregory asserts, Monnier needed the approval of both brothers in order to transfer the commercial real estate.⁷

¶ 21. The petitioners, meanwhile, maintain that Paul and Gregory each possessed 25% of the voting rights. They argue that there is nothing in the Member's Agreement to indicate that the brothers could not vote independently. Furthermore, they contend that the term "collectively" simply refers to the sum of the brothers' individual interests, which are 25% each. According to the petitioners, such an understanding is consistent with the practice and past experience of the company.

¶ 22. Resolution of this dispute involves interpretation of a contract. When the terms of a contract are plain and unambiguous, we will construe it as it stands. Borchardt v. Wilk, 156 Wis. 2d 420, 427, 456 N.W.2d 653 (Ct. App. 1990) (citing Ford Motor Co. v. Lyons, 137 Wis. 2d 397, 460, 405 N.W.2d 354 (Ct. App. 1987)). However, a contract is ambiguous when its terms are reasonably susceptible to more than one construction. Id. (citing Just v. Land Reclamation, Ltd., 151 Wis. 2d 593, 600, 445 N.W.2d 683 (Ct. App. 1989)).

¶ 23. We conclude that the Member's Agreement here is ambiguous as to the voting rights of Paul and Gregory. To begin, the term "collectively" is not defined in the document. Moreover, the dictionary definition relied upon by the circuit court in its decision is reasonably susceptible of more than one construction.⁸ That definition provided: "formed by collecting; gathered into a whole ... designating or any enterprise in which people work together as a group, especially under a system of collectivism . .. ." Although the definition supports an interpretation that the brothers, together, have a 50% voting interest, it fails to conclusively answer whether they have to act in concert.

¶ 24. When interpreting an ambiguous contract provision, we must reject a construction that renders an unfair or unreasonable result. Id. at 428 (citing Wausau Joint Venture v. Redevelopment Auth., 118 Wis. 2d 50, 58, 347 N.W.2d 604, 608 (Ct. App. 1984)). Likewise, we should adopt a construction that will render the contract a rational business instrument so far as reasonably practicable. Id. at 427-28 (citing Bruns v. Rennebohm Drug Stores, Inc., 151 Wis. 2d 88, 94, 442 N.W.2d 591 (Ct. App. 1989)).

¶ 25. Applying these principles to the case at hand, we are satisfied that the term "collectively" refers to the sum of the brothers' individual 25% interests. To conclude otherwise would require unanimous approval by the members in order to perform any act that concerns the business of the company. Here, there is no express language indicating that the parties intended such a result. Construing the Member's Agreement to allow one minority member to effectively deadlock the LLC is unreasonable absent express language.

V

¶ 26. Having determined that the petitioners possessed the majority necessary to authorize the transaction, we consider next whether they were nonetheless prohibited from voting to transfer the property because of a material conflict of interest. Here, the circuit court found that "[t]he conveyance of the property by Julie Monnier and Paul Gottsacker to themselves in the guise of a newly created LLC, unquestionably, represents a material conflict of interest." This finding is supported by the facts of the case. Not only did Monnier and Paul engage in self-dealing, but in doing so they also increased their individual interests in the new LLC which received the property. Monnier's ownership improved from 50% to 60%, while Paul's interest improved from 25% to 40%.

¶ 27. The question therefore becomes what, if any, impact did this conflict of interest have on Monnier and Paul's ability to vote to transfer the property. Wisconsin Stat. § 183.0404 governs voting in LLCs and contemplates situations that would prevent a member from exercising that voting power. Subsection (3) of the statute explicitly states that members can be "precluded from voting." However, that subsection does not address how or when that preclusion would occur. Wisconsin Stat. § 183.0404 provides in relevant part:

(1) Unless otherwise provided in an operating agreement or this chapter ... an affirmative vote, approval or consent as follows shall be required to decide any matter connected with the business of a limited liability company:

(a) If management of a limited liability company is reserved to the members, an affirmative vote, approval or consent by members whose interests in the limited liability company represent contributions to the limited liability company of more than 50% of the value ....

(3) Unless otherwise provided in an operating agreement, if any member is precluded from voting with respect to a given matter, then the value of the contribution represented by the interest in the limited liability company with respect to which the member would otherwise have been entitled to vote shall be excluded from the total contributions made to the limited liability company for purposes of determining the 50% threshold under sub. (l)(a) for that matter.

(Emphasis added.)

¶ 28. Because Wis. Stat. § 183.0404 does not address how or when a member is precluded from voting, Gregory asks that we look to Wis. Stat. § 183.1101 for guidance. Wisconsin Stat. § 183.1101 pertains to the authority to sue on behalf of an LLC. It states that, "the vote of any member who has an interest in the outcome of the action that is adverse to the interest of the limited liability company shall be excluded." Wis. Stat. § 183.1101(1). According to Gregory, if one wishes to harmonize this section with Wis. Stat. § 183.0404, then it must follow that a member who has an interest adverse to the interest of the LLC is precluded from voting.

¶ 29. The petitioners, however, contend that members are not precluded from voting on a matter affecting the LLC, even if they have a material conflict of interest. For support, the petitioners rely upon Wis. Stat. § 183.0402, the statute defining duties of managers and members.⁹ That statute anticipates members having a material conflict of interest and requires them to "deal fairly" with the LLC and its other members. Wisconsin Stat. § 183.0402(1)(a) provides:

Duties of managers and members. Unless otherwise provided in an operating agreement:

(1) No member or manager shall act or fail to act in a manner that constitutes any of the following:

(a) A willful failure to deal fairly with the limited liability company or its members in connection with a matter in which the member or manager has a material conflict of interest.¹⁰

¶ 30. We have previously recognized that statutes relating to the same subject matter should be read together and harmonized when possible. State v. Cole, 2003 WI 59, 262 Wis. 2d 167, ¶ 13, 663 N.W.2d 700 (citing State v. Leitner, 2002 WI 77, ¶ 30, 253 Wis. 2d 449, 646 N.W.2d 341). Like the court of appeals, we discern a stronger relationship between Wis. Stat. §§183.0404 and 183.0402 than §§ 183.0404 and 183.1101. Gottsacker, 269 Wis. 2d 667, ¶ 18. Here, Wis. Stat. §§ 183.0404 and 183.0402 appear in the same subchapter entitled "Rights and Duties of Members and Managers." The position of a statutory subsection is significant when construing the statute. State v. Fouse, 120 Wis. 2d 471, 477, 355 N.W.2d 366 (Ct. App. 1984) (citing State v. Consolidated Freightways Corp., 72 Wis. 2d 727, 737, 242 N.W.2d 192 (1976)).

¶ 31. Reading Wis. Stat. §§ 183.0404 and 183.0402 together in harmony, we determine that the WLLCL does not preclude members with a material conflict of interest from voting their ownership interest with respect to a given matter. Rather, it prohibits members with a material conflict of interest from acting in a manner that constitutes a willful failure to deal fairly with the LLC or its other members. We interpret this requirement to mean that members with a material conflict of interest may not willfully act or fail to act in a manner that will have the effect of injuring the LLC or its other members. This inquiry contemplates both the conduct along with the end result, which we view as intertwined. The inquiry also contemplates a determination of the purpose of the LLC and the justified expectations of the parties.

¶ 32. Here, the circuit court made no express determination as to whether the petitioners willfully failed to deal fairly in spite of the conflict of interest. Under the circuit court's analysis, there was no need to reach this issue because the court reasoned that a material conflict of interest precluded any vote to transfer the property.

¶ 33. The court of appeals did address the question of whether the petitioners dealt fairly. In doing so, it found that the transfer was unfair in two respects. First, the conveyance was not an "arm's length transaction" because it did not occur on the open market. Gottsacker, 269 Wis. 2d 667, ¶ 21. Second, the sale made it impracticable for New Jersey LLC to carry on with its intended business (i.e., to hold the commercial property as a long-term investment). Id,., ¶ 22.

¶ 34. The petitioners complain that the court of appeals exceeded its constitutional authority by making such findings. Specifically, they challenge the court of appeals' determination that Monnier and Paul's actions made it impracticable for New Jersey LLC to carry on its intended business of long-term investment. According to the petitioners, no such intention is found in either the Articles of Organization or Member's Agreement. Moreover, such an alleged purpose is contrary to the fact that the Wilson Avenue property was purchased and sold by New Jersey LLC on a short-term basis. Additionally, the petitioners assert that there has been no determination that Gregory received less than fair value for his share of the equity of the property. At oral argument, they noted that the purchase price exceeded the assessed value.

¶ 35. We agree with the petitioners that the court of appeals improperly made findings of fact in this case. As we explained in Wurtz v. Fleischman, 97 Wis. 2d 100, 107, n. 3, 293 N.W.2d 155 (1980), the court of appeals is not empowered to make such determinations:

The court of appeals is by Constitution limited to appellate jurisdiction. Art. VII, sec. 5(3), Wis. Const. This precludes it from making any factual determination where the evidence is in dispute. This is a power reserved to trial courts or to the supreme court under appropriate procedures in the exercise of its constitutional grant of original jurisdiction. The court of appeals has, of course, additional constitutional jurisdiction in respect to its supervisory authority over actions and proceedings in the trial court. This grant of jurisdiction does not confer the right to make findings of fact where the evidence is controverted.

¶ 36. Accordingly, we remand the cause to the circuit court for further findings and application of the foregoing standard. Consistent with Wis. Stat. § 183.0402(2), Monnier and Paul on remand shall also "account to the limited liability company and hold as trustee ... any improper personal profit derived by that member ... without the consent of a majority of the disinterested members" for the transfer in question. If it is determined by the court that this statute was violated, then the court will determine the appropriate remedy under the circumstances.

VI

¶ 37. In sum, we conclude that the petitioners possessed the majority necessary to authorize the transfer in question. Furthermore, we determine that the petitioners' material conflict of interest did not prohibit them from voting to make the transfer so long as they dealt fairly. However, because there was no express determination by the circuit court as to whether the petitioners willfully failed to deal fairly with New Jersey LLC or its other member, we reverse the decision of the court of appeals and remand the cause for further proceedings.

By the Court — The decision of the court of appeals is reversed and the cause is remanded to the circuit court.

1 Gottsacker v. Monnier, 2004 WI App 25, 269 Wis. 2d 667, 676 N.W.2d 533 (affirming a decision of the circuit court for Sheboygan County, Gary Langhoff, Judge).

2 All references to the Wisconsin Statutes are to the 2001-02 version unless otherwise noted.

3 This court has previously defined an "arm's length transaction" as "a sale in the open market between an owner willing but not obliged to sell and a buyer willing but not obliged to buy." Flood v. Lomira Bd. of Review, 153 Wis. 2d 428, 436, 451 N.W.2d 422 (1990) (citing Darcel, Inc. v. Manitowoc Review Bd., 137 Wis. 2d 623, 628, 405 N.W.2d 344 (1987)),

4 We find this handbook instructive as its authors helped draft the Wisconsin Limited Liability Company Law (WLLCL), Wis. Stat. Ch. 183, and were active in the legislative process.

5 Although drafts of the Uniform Limited Liability Company Act were circulating at the time, the drafters of the ■WLLCL found the Prototype Act more helpful. Joseph W Boucher et al., LLCs and LLPs: A Wisconsin Handbook § 1.10 (rev. ed. 1999). The official Uniform Limited Liability Company Act was approved by the National Conference of Commissioners on Uniform State Laws in 1995, after the passage of the WLLCL.

To date, only nine jurisdictions in the United States have substantially adopted the Uniform Act: Alabama, Hawaii, Illinois, Montana, South Carolina, South Dakota, Vermont, the Virgin Islands, and West Virginia. See Uniform Limited Liability Company Act Annotated. For a discussion of the Uniform Act, see Larry E. Ribstein, A Critique of the Uniform Limited Liability Company Act, 25 Stetson L. Rev. 311 (Winter 1995).

6 This is also evident from the WLLCL's legislative history. The first paragraph in the Analysis by the Legislative Reference Bureau provides:

This bill authorizes the organization and operation of limited liability companies in this state. A limited liability company (LLC) is a business entity that possesses both corporate characteristics and characteristics associated with a partnership. The most significant of these features is the concept of limited liability for LLC owners, or members, a corporation attribute, and the potential treatment of an LLC as a partnership for state and federal income tax purposes.

See Drafting Records of 1993 Wis. Act 112.

7 Both parties agree that an affirmative vote of more than 50% was required to decide any matter connected with the business of New Jersey LLC.

8 The circuit court relied upon Webster's New World Dictionary, Second College Edition.

9 We emphasize that these statutory duties may be modified, limited, or expanded by the Member's Agreement. See Wis. Stat. § 183.0402. Parties may wish to impose greater protections to obviate future problems.

10 This language closely follows Wis. Stat. § 180.0828(l)(a), the statute governing limited liability of directors of corporations. That statute is found in Chapter 180, also known as the "Wisconsin business corporation law," which was one of the three primary sources used as a model for the WLLCL. Wisconsin Stat. § 180.0828(l)(a) provides:

(1) Except as provided in sub. (2), a director is not liable to the corporation, its shareholders, or any person asserting rights on behalf of the corporation or its shareholders, for damages, settlements, fees, fines, penalties or other monetary liabilities arising from a breach of, or failure to perform, any duty resulting solely from his or her status as a director, unless the person asserting liability proves that the breach or failure to perform constitutes any of the following:

(a) A willful failure to deal fairly with the corporation or its shareholders in connection with a matter in which the director has a material conflict of interest.