Kriti Ripley, LLC v. Emerald Investments, LLC

746 S.E.2d 26, 404 S.C. 367, 2013 WL 3200596, 2013 S.C. LEXIS 160
CourtSupreme Court of South Carolina
DecidedJune 26, 2013
DocketAppellate Case No. 2011-201949; No. 27277
StatusPublished
Cited by3 cases

This text of 746 S.E.2d 26 (Kriti Ripley, LLC v. Emerald Investments, LLC) is published on Counsel Stack Legal Research, covering Supreme Court of South Carolina primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Kriti Ripley, LLC v. Emerald Investments, LLC, 746 S.E.2d 26, 404 S.C. 367, 2013 WL 3200596, 2013 S.C. LEXIS 160 (S.C. 2013).

Opinion

Justice HEARN.

This case is the culmination of a long and tortured dispute between two members of a limited liability company (LLC) and presents us with the novel issue of foreclosure on a member’s interest under the South Carolina Uniform Limited Liability Company Act.1 Kriti Ripley, LLC and Emerald Investments, LLC formed Ashley River Properties II, LLC (Ashley River II) for the purpose of developing a parcel of property. Emerald made in-kind contributions for its share in Ashley River II, and Kriti contributed $1.25 million. Immediately, Emerald and its sole member, Stuart Longman (collectively, Respondents), diverted and misappropriated those funds. Upon learning of Emerald and Longman’s wrongdoing, Kriti and Ashley River II (collectively, Appellants) procured a judgment against Emerald and Longman, and Emerald was stripped of its voting rights in and management of Ashley River II. Since that time, Emerald and Longman have refused to pay any amount towards the judgment and instead have engaged in a pattern of abusive litigation. Attempting to collect on the judgment, Kriti and Ashley River II obtained a charging order against Emerald’s interest and later moved to foreclose on that interest. The circuit court denied the motion for foreclosure, and this appeal followed.

[370]*370We hold the circuit court committed several errors of law in denying the motion to foreclose. Generally, we find the court improperly considered unavailable remedies as weighing against foreclosure and incorrectly characterized the seriousness of foreclosure. Furthermore, the court failed to consider the relevant factor of the likelihood of satisfaction of the judgment through distributions. Accordingly, we reverse and remand for foreclosure on and the sale of Emerald’s interest in Ashley River II.

FACTUAL/PROCEDURAL BACKGROUND

Emerald, a Connecticut LLC managed by Longman, undertook to develop condominiums and a marina on a piece of property in Charleston. The project experienced financial difficulties in 2003, and Emerald turned to Kriti as an outside investor. Kriti is a Delaware LLC of which Davidson Williams is the managing member. Emerald and Kriti entered into an operating agreement under which Emerald became a 70% member and Kriti became a 30% member in Ashley River II. Kriti contributed $1.25 million in capital for its interest, and Emerald contributed the property and permits, together valued at $2.5 million.

The operating agreement states that any dispute arising thereunder is subject to arbitration pursuant to the South Carolina Uniform Arbitration Act.2 It also provides that any dispute must be submitted to arbitration in New York and that the courts of the state of New York have “sole and exclusive jurisdiction.” The agreement prohibits the commingling of Ashley River II’s funds with other funds and provides that the LLC cannot make any expenditure outside the approved budget attached to the agreement or future budgets approved by the members. Emerald can default under the agreement by taking specified actions, and the remedies Kriti may elect to exercise when Emerald defaults are the forfeiture of Emerald’s voting rights, the termination of the project development agreement, and the purchase of Emerald’s membership interest for the price of its unreturned capital contribution. Dissolution is provided only upon the occurrence of one of several specified events. Finally, the [371]*371agreement provides that distributions are to be made by a vote of the members and prohibits distributions if they would cause the LLC to not be able to pay its debts or cause its debts to be greater than its assets.

Immediately upon formation of the LLC, Emerald and Longman diverted Kritfs capital contribution to Longman and other entities controlled by Longman, caused Ashley River II to make payments not on approved budgets, and commingled the contribution with other funds unrelated to Ashley River II. One of the wrongful diversions caused Ashley River II to incur an $84,000 penalty due to a delay in paying a vendor. Additionally, Emerald and Longman failed to disclose to Kriti contracts for the purchase of condominium units and marina slips and the bankruptcy of an entity owned by Longman that was involved in the development.

Emerald continued to manage Ashley River II until January 14, 2005, when Kriti, having discovered Emerald and Long-man’s wrongful conduct, terminated the development agreement and alleged default under the operating agreement. At that point, Kriti took control of Ashley River II. On March 23, 2005, Kriti and Ashley River II brought an arbitration action in New York (the 2005 Arbitration). They contended Emerald defaulted under the operating agreement and sought damages, forfeiture of Emerald’s voting rights, forfeiture of Emerald’s interest in the LLC, and alternatively, an order permitting Kriti to buy Emerald’s interest for its outstanding capital contributions.

Around the same time, Kriti issued a capital call and informed Emerald that to satisfy the capital call, Emerald would first have to pay Ashley River II the funds at issue in the 2005 Arbitration. Emerald refused to provide the requested capital, and Kriti purportedly reduced Emerald’s membership interest to 21.3% according to a formula provided in the operating agreement.

Emerald then counterclaimed in the 2005 Arbitration seeking dissolution of Ashley River II on the grounds Kriti engaged in oppressive conduct towards Emerald, including an improper capital call, frustration of a loan extension, encouragement of litigation against Ashley River II, and improperly refusing an offer to purchase the subject property.

[372]*372On October 31, 2005, the New York arbitration panel issued an award finding Emerald wrongfully diverted, commingled, and mishandled Ashley River II’s funds and failed to disclose material information. As a result, the panel found Emerald had forfeited all voting rights in Ashley River II, the development agreement was validly terminated, Kriti and Ashley River II were entitled to an award of $706,225 consisting of indemnification, legal fees, and arbitrator fees,3 and Kriti had the option to purchase Emerald’s interest in Ashley River II by paying Emerald $2.5 million — the amount of its unreturned capital contributions — within 120 days of the award.4 The panel concluded that forfeiture of Emerald’s membership interest in Ashley River II was not an available remedy because Emerald had probable cause to challenge the capital call.5 However, the arbitrators did not make any factual findings as to the propriety of the capital call, instead limiting their findings to the probable cause of challenging the capital call. Finally, the panel denied Emerald’s counterclaim for dissolution.

Emerald and Longman filed suit in the Charleston County Court of Common Pleas seeking to set aside the 2005 Arbitration award and dissolve Ashley River II (the 2005 Dissolution Suit).6 As the basis for their claims, the plaintiffs asserted Kriti engaged in the oppressive conduct of making the 2005 capital call, obstructing a loan closing, encouraging litigation [373]*373against Ashley River II, and declining an offer to purchase the subject property. Kriti and Ashley River II moved to dismiss, and the motion was granted in part and denied in part.

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Bluebook (online)
746 S.E.2d 26, 404 S.C. 367, 2013 WL 3200596, 2013 S.C. LEXIS 160, Counsel Stack Legal Research, https://law.counselstack.com/opinion/kriti-ripley-llc-v-emerald-investments-llc-sc-2013.