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Purported Assignment of Limited Liability Company Interest Impacts Jurisdiction Under Conspiracy Theory of Jurisdiction

In Perry v. Neupert, the Delaware Court of Chancery found that it could exercise personal jurisdiction over a Liechtenstein entity under the conspiracy theory of jurisdiction.  In reaching this conclusion, the Court analyzed the effects of an assignment by a sole member of a Delaware limited liability company of its entire limited liability company interest to a single assignee under the Delaware Limited Liability Company Act currently in effect and in effect prior to the 2016 amendments thereto.

In Neupert, the parties disputed who owned the equity of Côte D’Azur Estate Corporation, a Delaware corporation (the “Corporation”).  The Corporation came into existence in 2001 in the form of a single-member, member-managed Delaware limited liability company named Côte D’Azur Estate LLC (the “LLC”).  Israel Igo Perry (“Israel”) was the sole member of the LLC.  On May 1, 2013, Israel executed a Deed of Assignment (the “Deed”), which documented Israel’s intent to gift the sole limited liability company interest in the LLC (the “Interest”) to The BGO Foundation, a Liechtenstein entity (the “Foundation”).  Ultimately, Israel never transferred the Interest to the Foundation and died in 2015.  Nonetheless, in an effort to usurp the Interest from Israel’s estate, Dieter Walter Neupert (“Neupert”), acting with the support and consent of the Foundation, converted the LLC into the Corporation and caused the Corporation to issue all of the outstanding shares of the Corporation to the Foundation.  Israel’s wife, Lilly Lea Perry (“Lilly”), brought a suit in the Delaware Court of Chancery against Neupert, the Corporation, and the Foundation (collectively, the “Defendants”) challenging the conversion and the share issuance claiming that, as Israel’s sole heir, she was entitled to the Interest.  The Foundation moved to dismiss Lilly’s complaint against it for lack of personal jurisdiction.

The Delaware Court of Chancery found that it could exercise personal jurisdiction over the Foundation under the conspiracy theory of jurisdiction.  Under this theory, a conspirator who is absent from the forum state is subject to the jurisdiction of a Delaware court, assuming it is properly served under Delaware law, if the plaintiff can make a factual showing that: (i) a tortious conspiracy existed; (ii) the defendant was a member of that conspiracy; (iii) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (iv) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (v) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.

Lilly satisfied the first two prongs of this test by showing that the Foundation was a part of a conspiracy with Neupert to commit the tort of conversion.  Conversion is any distinct act of dominion wrongfully exerted over the property of another in denial of, or inconsistent with, the other’s right.  The Court agreed with Lilly and found that the Deed, while expressing an intent to transfer the Interest to the Foundation as a gift, did not effectuate the transfer with immediate effect.  Ultimately, Israel never completely and unconditionally delivered the Interest to the Foundation, thus never effectuating the transfer.  As such, upon Israel’s death, the Interest passed to Lilly.  The Defendants’ actions to convert the LLC to the Corporation and issue shares of the Corporation to the Foundation were acts of dominion wrongfully exerted over the Interest.

Had the Deed effectuated an immediate transfer of the Interest, the Court stated that, while the Foundation would have been an assignee of the Interest, it would not have been a member of the LLC.  At the time the Deed was entered into, Section 18-702(b) of the LLC Act provided, among other things, that unless otherwise provided in a limited liability company agreement (an “LLC Agreement”), (i) an assignment of a limited liability company interest (an “LLC Interest”) does not entitle the assignee to become or to exercise any rights or powers of a member and (ii) a member ceases to be a member of a limited liability company upon the assignment of all of its LLC Interest.  In order for such an assignee to be admitted as a member, it must comply with Section 18-301(b) of the LLC Act, which provided that such assignee would be admitted as a member as provided in Section 18-704(a) and “at the time provided in and upon compliance with the limited liability company agreement or, if the limited liability company agreement does not so provide, when any such person’s permitted admission is reflected in the records of the limited liability company.”  Section 18-704(a) provided that the assignee may become a member as provided in the LLC Agreement or, unless otherwise provided in the LLC Agreement, upon the affirmative vote or written consent of all of the members of the limited liability company.  The LLC Agreement of the LLC did not alter any of these default rules.  As such, had the Deed effectuated the transfer of the Interest to the Foundation immediately, (i) Israel would have ceased to be a member of the LLC causing the LLC to have no members, and (ii) the Foundation would not have been admitted as a member of the LLC because there were no members of the LLC to consent to its admission. 

Further, since the LLC had no members, the LLC would have dissolved under Section 18-801(a)(4) of the LLC Act.  The Defendants argued, however, that the LLC would not have dissolved because the LLC Agreement of the LLC provided that no event, other than the election of the member or a judicial dissolution, would cause the LLC to dissolve.  The Court rejected this argument.  Section 18-801(a)(4), unlike other provisions of the LLC Act, does not provide that it can be modified by an LLC Agreement.  So, despite the dissolution provision in the LLC Agreement, the LLC would have dissolved as soon as it had no members. 

The Foundation then argued that the 2016 amendments to Section 18-704(a) should have been applied retroactively and would have prevented an event of dissolution and caused the Foundation to be admitted as a member.  As a result of the 2016 amendments to the LLC Act, Section 18-704(a) provides that, unless otherwise provided in an LLC Agreement, if a sole member of a limited liability company voluntarily assigns all of its LLC interests to a single assignee, such assignee would be admitted as the sole member of the LLC.  The Court held that the revised Section 18-704(a) did not apply retroactively.  Even if it did, the Court stated that the Foundation was not yet admitted as the sole member of the LLC because the Foundation’s admission was not reflected in the records of the LLC, as required by Section 18-301(b)(2) of the LLC Act.

Lastly, the Court held that  Lilly satisfied the third, fourth, and fifth prongs of the conspiracy theory of jurisdiction test because the Foundation supported and consented to Neupert’s filing of the conversion documents with the Delaware Secretary of State, which were substantial acts in Delaware in furtherance of the conspiracy. 

Copyright 2019 K & L Gates

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About this Author

Scott Waxman, Limited Liability Companies, Corporate, Attorney, KL Gates Law FIrm
Administrative Partner

Scott Waxman is a founding partner in the firm’s Wilmington, Delaware office and a member of the firm’s global Management Committee. His practice focuses on organizational and operational issues related to limited liability companies, limited and general partnerships, statutory trusts, and special purpose corporations, as well as general commercial and financial transactions, including structured financings, securitizations, mergers and acquisitions, joint ventures, private equity and hedge funds, preferred securities transactions, insurance premium financing transactions, life settlement...

302-416-7070
Zachary Sanger, KL Gates Law Firm, Corporate Law Attorney
Associate

Zack Sager is an associate in the firm’s Wilmington office. He practices in the areas of alternative entities and general business, focusing primarily on issues relating to the utilization of Delaware alternative entities, such as limited liability companies, general and limited partnerships, statutory trusts and special purpose corporations, in all types of commercial transactions.

302-416-7073