2020 IL App (1st) 192385
Ill. App. Ct.2020Background
- Country Faire Conversion, LLC (CFC) was formed to convert and sell an apartment complex; original members contributed capital giving Smagala Trust 45%, McGlynn Trust 25%, Grayslake 25%, and Kelly 5%.
- An amended operating agreement (retroactive to 2005) converted membership interests into "economic interests" (Smagala 69.75%; McGlynn 13.75%; Grayslake 13.75%; Kelly 2.75%) and expressly denied Economic Interest Holders rights to manage or inspect company records.
- Grayslake financed its contribution with a Founders Bank loan secured by a security agreement that consented to the lender becoming a member upon default; Founders failed and Private Bank acquired the loan and renewed the UCC-1.
- Private Bank foreclosed and sold Grayslake’s interest at a UCC auction; Mary Doherty purchased the bank’s interest for $20,000 and sought member rights and records; CFC/Smagala rejected her claim to membership and withheld distributions.
- CFC sold its sole asset, realized roughly $4.7 million in net proceeds, distributed to members but withheld Doherty’s share pending litigation; Doherty sued seeking declaratory relief, inspection/accounting, breach of fiduciary duty, and distributions.
- Trial court and appellate rulings: Doherty was an economic interest holder (not a member), lacked standing to pursue fiduciary, inspection, or accounting claims; after a bench trial she received a 13.75% distribution ($600,477.42 after deducting manager fees/costs); indemnification of manager and denial of plaintiff’s attorney fees were affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to sue for breach of fiduciary duty / duties of loyalty, care, good faith | Doherty: as purchaser of Grayslake’s interest she is entitled to bring fiduciary and related claims | CFC/Smagala: Doherty is only an economic interest holder (not a member) and lacks standing under the LLC Act and operating agreement | Held: Doherty lacks standing; summary judgment for defendants on fiduciary claims affirmed |
| Right to inspect books and obtain an accounting | Doherty: purchaser is entitled to inspect records and obtain accounting | Defendants: Economic Interest Holders are excluded from inspection/accounting by the amended operating agreement and Section 30-10 of the LLC Act | Held: No right to inspect or accounting; summary judgment for defendants affirmed |
| Proper distributional share (25% capital-contribution vs. 13.75% under amended agreement) | Doherty: she succeeded to Grayslake’s 25% capital contribution and should receive ~25% of proceeds | Defendants: Amended operating agreement governs distributions by percentage interests (13.75% for Grayslake successor) | Held: Trial court credited evidence that the amended agreement controlled; Doherty’s distribution fixed at 13.75% and award affirmed |
| Manager indemnification and attorney fees; plaintiff’s fee award | Doherty: manager should not be indemnified without formal counterclaim and plaintiff should recover fees for litigating to enforce her rights | Defendants: Operating agreement authorizes manager to hire counsel and be indemnified; no contractual or statutory basis for plaintiff’s fee recovery | Held: Manager indemnification (payment of legal costs) upheld under operating agreement; trial court did not abuse discretion in denying plaintiff fees |
Key Cases Cited
- Lawlor v. North American Corp. of Illinois, 2012 IL 112530 (defining elements of fiduciary-duty claim)
- Adams v. Northern Illinois Gas Co., 211 Ill. 2d 32 (2004) (standard for granting summary judgment)
- Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871 (bench-trial findings reviewed for manifest weight of the evidence)
- Bazydlo v. Volant, 164 Ill. 2d 207 (1995) (trial judge’s superior position to assess witness credibility)
- Krautsack v. Anderson, 223 Ill. 2d 541 (2006) (law of the case doctrine explained)
- Eychaner v. Gross, 202 Ill. 2d 228 (2002) (definition of when a decision is against the manifest weight of the evidence)