Mathes Brierre Architects, a Professional Corporation v. karlton/isg Enterprises, LLC, International Sales Group, LLC, and J.S. Karlton Company, Inc.Mathes Brierre Architects, a Professional Corporation v. karlton/isg Enterprises, LLC, International Sales Group, LLC, and J.S. Karlton Company, Inc.
LOBRANO, J., CONCURS IN PART, DISSENTS IN PART, AND ASSIGNS REASONS.
JCL I respectfully concur
In this contract case, appellee, Mathes Brierre Architects, a Professional Corporation (“Mathes“), filed its
After Hurricane Katrina, John
John Karlton had a prior relationship with Ed Mathes and hired his architectural firm to design and perform other services associated with the Project. With the full knowledge of Ed Mathes, Karlton/ISG was formed on January 31, 2006 to carry out the Project to completion. Substantial capital contributions were initially made to Karlton/ISG as evidenced by the undisputed fact that Mathes was paid over a million dollars2 for services rendered on the Project during the first three years of the joint business venture between Karlton Corp. and ISG Co.
The initial business transactions began in May 2006 and involved Karlton/ISG entering into an agreement with certain entities affiliated with various individuals, including Blaine and Barry Kern (collectively “Kern Entities“) to obtain options to purchase four tracts of property in Algiers with the intent to develop the Project in multiple phases (“Option Agreement“). Tract I was the site of Phase 1 of the Project.
Mathes began working on Phase 1 of the Project in February 2006. Initially, Mathes invoiced Karlton Corp. from March 7, 2006 through March 1, 2007 for services rendered. On February 26, 2007, Karlton/ISG and Mathes entered into the Agreement, a formal written agreement to provide architectural services for various phases of the Project. Thereafter, Mathes invoiced Karlton/ISG.
The Agreement was drafted by Mathes and provided that Karlton/ISG was to make payments to Mathes for work performed under “Basic Services” and “Additional Services.”3 The Agreement also provided that Mathes was to be compensated $2,000,000.00 for Basic Services and that the payment for “Master Planning Services” such as conceptual design, preliminary sketches and building designs shall be made upon the successful sale of the condominium units in Phases 1 and 2 of the extended project in proportion to the number of units included in Phases 1 and 2. Mathes agreed to provide “Basic Services“, including “Schematic Dеsign,” “Design Development,” “Construction Documents,” “Negotiation or Bidding,” and “Construction Administration.” The Agreement for “Basic Services” was for a period of one year and if “Basic Services” were not completed within one year of the Agreement, through no fault of Mathes, Mathes was entitled to be compensated for its services beyond that time as “Additional Services.”4
Mathes further agreed to provide “Additional Services” on an as needed basis. Under the Agreement, Karlton/ISG was to make payments to Mathes for worked performed under “Basic Services” and “Additional Services.” Payments for “Additional Services” were due monthly upon presentment of the architect‘s statement of services rendered or expenses incurred. The Agreement specifically acknowledged that Mathes had already performed Master Planning Services for the Project in the amount of $329,087.50 and further provided that the
Karlton/ISG and the Kern entities subsequently executed four (4) amendments to the Option Agreement. On June 1, 2007, the “Fourth amendment” stated that Karlton/ISG has exercised its option to acquire Tract I, which was the site of Phase 1. A deposit in the amount of $600,000.00 was required and Spiegelman had requested security. John Karlton refused to assist in the deposit and Spiegelman arranged for an ISG affiliated company to pay the $600,000.00 deposit to Algiers Ventures, L.L.C. (“Algiers Ventures“), an entity associated with the Kerns. The deposit was evidenced by a promissory note dated June 1, 2007 granted by Algiers Ventures (“Note“) to Karlton/ISG and secured by a Multiple Indebtedness Mortgage in the maximum sum of $1,000,000.00 encumbering Tract I (“Mortgage“).5
John Karlton eventually ceased making additional capital contributions to Karlton/ISG, the Project stalled after 2008, and Mathes performed minimal work thereafter. The parties did not exercise any rights under the Note and Mortgage and the Note allegedly prescribed in June 2012. On August 11, 2015, Karlton/ISG executed a “Release by Obligee of Record” for the Mortgage.
There was an outstanding balance totaling $555,689.23 with respect to invoices forwarded to Karlton/ISG between March 7, 2006 and September 19, 2008 for services mostly rendered in 2007. The outstanding balance of $555,689.23 was for payment for services rendered as follows: (1) in 2006 and 2007, prior to the Agreement, the balance totaled $12,101.61; (2) in 2007, under the Agreement, the balance totaled $524,375.06; and (3) in 2008, under the Agreement, the balance totaled $19,212.56 (“Outstanding Balance“).6
On December 26, 2012, Mathes demanded payment on the Outstanding Balance. On July 10, 2013, Mathes sent a new invoice to Karlton/ISG in the amount of $478,737.50 for services rendered under the Agreement as follows: invoices in 2008 totaled $412,660.00; invoices in 2009 totaled $10,232.50; invoices in 2010 totaled $830; invoices in 2011 totaled $10,715.00; and invoices in 2012 totaled $44,300.00 (“2013 Invoice“).
Karlton/ISG eventually filed abandonment losses in 2006 and 2007 and did not
Ed Mathes alleges that Ambrosio and Lipkins assured Mathes that “the money [is] coming, the money [is] coming.” Ed Mathes was not concerned about Karlton‘s financial wherewithal to complete the Project as he knew and respected John Karlton
In May 2015, Mathes filed a petition praying for a judgment against Karlton/ISG for amounts owed under the Agreement and unpaid invoices as reflected in the Outstanding Balance ($555,689.23) and 2013 Invoice ($478,737.50).
Mathes also named Members as additional defendants in an attempt to collect on any judgments against Karlton/ISG and to obtain a judgment finding Members solidary liable for the aforementioned debts of Karlton/ISG. In its brief, Karlton/ISG and Members argue that, applying the general rule of limited liability found in
Karlton/ISG and Members further argue that courts are bound to follow Ogea v. Merritt, 13-1085 (La. 12/10/13), 130 So.3d 888, the seminal case interpreting
Mathes claims that the Statutory Exceptions are not exclusive and instead based its claim in equity under the judicially-created limited liability exception for corporations established in Riggins v. Dixie Shoring Co., Inc., (La. 12/2/91), 590 So.2d 1164, and its progeny of LLC cases (collectively “Riggins Exception“). The Riggins Exception is often referred to as “Piercing the Corporate Veil” and includes the following two distinct set of circumstances: (1) where fraudulent or wrongful acts exist usually when a shareholder acting through the corporation practices fraud or deceit (“Alter Ego Doctrine“) and (2) “when the shareholders disregard the requisite corporate formalities to the extent that the corporation ceases to be distinguishable
Mathes further claims that courts, in determining whether to invoke equity and the Riggins Exception, must employ the methodology used in Riggins based on a “totality of the circumstances” review of the following factors, which favor the application of the Riggins Exception: 1) commingling of corporate and shareholder funds; 2) failure to follow statutory formalities for incorporating and transacting corporate affairs; 3) undercapitalization; 4) failure to provide separate bank accounts and bookkeeping records; and 5) failure to hold regular shareholder and director meetings; and 6) any other relevant factors. Id. at 1168-69 (citations omitted) (“Riggins Methodology“).
Mathes particularly alleges in its petition that Members are “jointly and severally liable”12 with Karlton/ISG for all amounts awarded against Karlton/ISG. Mathes’ allegations against Members are аs follows: (1) Karlton/ISG was “a mere instrumentality and the alter ego” of Members, which completely dominated and controlled Karlton/ISG; (2) Karlton/ISG was formed for the sole and improper purpose of shielding Members from liability and lacked the ability to perform its obligations under the Agreement; and (3) when Karlton/ISG no longer served Members’ needs, Members drained any and all assets and corporate opportunities from Karlton/ISG in an effort to shield those assets from creditors and avoid Karlton/ISG‘s contractual obligations. Mathes claimed that “the fiction of corporate separateness must be disregarded” and Members must be held “jointly and severally liable” to Mathes for the debts of Karlton/ISG.
Mathes did not use the word “fraud” or “wrongful act” in its petition but used the words “misrepresentations” and “misled” and its allegations have fraudulent, deceit, and wrongful act underpinnings against Karlton/ISG and Members. Basically, Mathes claims that misrepresentations and suppressions of the truth were made with respect to the nature of the joint business activities, the Project, and the interrelationship of limited liability entities either formed for the joint venture (Karlton/ISG), utilized by Studnicky, Spiegelman, and Karlton for the joint venture (ISG Co. and Karlton Corp.), or newly formed by Studnicky, Spiegelman, and Ambrosio (River Street). Mathes also showed at trial that Ambrosia, acting on behalf of Karlton/ISG and ISG Co., and Lipkins, acting on behalf of Karlton Corp., made misrepresentations and/or suppressions of the truth relating to payment of money owed under the Agreement.
Mathes’ claims against Members are basically fraud and wrongful act claims under the equitable Riggins Exception as prayed for in its petition but I find thаt they are also found under the statutory Fraud and Negligent or Wrongful Act Exceptions. Thus, I agree with the majority‘s statement in footnote 10 that “[a]lthough Mathes pled the alter ego theory of piercing, ‘[p]iercing the corporate veil is not itself an independent [] cause of action, but rather is a means of imposing liability on an underlying cause of action.‘” Peacock v. Thomas, 516 U.S. 349, 354, (1996) (citation omitted). However, I disagree with the majority‘s finding of significance that “Mathes neither cited nor relied upon the statutory theory for finding a limited liability
I agree with Mathes’ assertion that the district court properly permitted it to present evidence of fraud at trial without objection. A party may be granted any relief to which it is entitled under the fact pleadings and evidence as long as the facts constituting the claim or defense have been alleged and proved, and the due process requirement of adequate notice to the parties of the matters to be adjudicated has been satisfied. Miller v. Thibeaux, 14-1107 (La. 1/28/15), 159 So.3d 426;
At the bench trial, Mathes’ expert described four indicators of fraud as follows: (1) an improper diversion of a company asset (the $600,000.00 Note and Mortgage) to the detriment of creditors and not for the benefit of Karlton/ISG but for the benefit of Karlton/ISG‘s principals; (2) Karlton/ISG improperly took a tax loss (abandonment loss) in 2006 and 2007; (3) in 2008, Karlton/ISG stopped operating as an independent еntity as it had no financial statements, no tax returns, and no funding; and (4) Karlton/ISG failed to notify creditors or other parties of interest in the Project that the business activities had been abandoned and that Karlton/ISG no longer operated as an independent entity.
On September 26, 2018, after a bench trial, the district court ruled in favor of Mathes and against Karlton/ISG and awarded damages of $944,669.23, plus interest13 for breach of contract, unpaid invoices, and costs associated with the litigation. The district court also found Members solidarily liable with Karlton/ISG for all amounts awarded to Mathes. On January 11, 2019, the district court awarded Mathes $61,366.34 in costs, similarly finding Members solidarily liable with Karlton/ISG for costs. The district court found that Mathes provided sufficient evidence to prove that Karlton/ISG owed the Outstanding Balance in the amount of $555,689.23 and (2) the 2013 Invoice in the amount of $478,737.50. The court found that Karlton/ISG was allowed a deduction of $89,757.50.14 The district court, in its Reasons for Judgment, cited Riggins.15
The district court did not specifically make a finding based on the Fraud Exception and/or the Negligent or Wrongful Act Exception and noted that “Mathes did not pray for a finding of fraud.” The district
In its Reasons for Judgment, the district court in support of its ruling identified the following four factors, which trackеd the four indicators of fraud identified by Mathes’ expert: (1) an “improper diversion of the $600,000.00 Note and Mortgage” for the benefit of Karlton/ISG‘s principals, members and affiliated entities and other evidence of co-mingling of assets; (2) an “improper tax treatment” of Karlton/ISG by its members and principals; (3) Karlton/ISG‘s members “failed to conduct business on a separate footing to such an extent that the company became indistinguishable” from its members; and (4) the conduct of Karlton/ISG‘s principals and Members misled Mathes and other creditors to their detriment.
Karlton/ISG and Members filed a timely appeal, setting forth the following assigned errors:
- The trial court erred in finding that ISG and Karlton are solidarily liable with Karlton/ISG for all amounts awarded to Mathes pursuant to the Judgment under the alter ego/piercing the corporate veil theory of liability.
- The trial court erred in awarding plaintiff, Mathes, a judgment in its favor against defendant Karlton/ISG in the amount of $944,669.23.
- The trial court erred in awarding Mathes the total of $61,366.34 for costs incurred in connection with the trial of the captioned matter.
I will not address the assignments of error in the above-referenced order. I will initially discuss the second and third assignments of error, and thereafter, assignment of error one.
STANDARD OF REVIEW
The
When findings of fact are based on determinations regarding the credibility of witnesses, the manifest error or clearly wrong standard demands great deference to the trier of fact‘s findings; “for only the factfinder can be aware of the variations in demeanor and tone of voice that bear so heavily on the listener‘s understanding and belief in what is said.” Sassone, 96 So.3d at 1246 (quoting Rosell v. ESCO, 549 So.2d 840, 844-45 (La. 1989)). To reverse a factfinder‘s factual determinations, the appellate court (1) must find from the record
When findings are based on determinations regarding the credibility of witnesses, the manifest error-clearly wrong standard demands great deference to the trier of fact‘s findings; for only the factfinder can be aware of the variations in demeanor and tone of voice that bear so heavily on the listener‘s understanding and belief in what is said. Where doсuments or objective evidence so contradict the witness‘s story, or the story itself is so internally inconsistent or implausible on its face, that a reasonable fact finder would not credit the witness‘s story, the court of appeal may well find manifest error or clear wrongness even in a finding purportedly based upon a credibility determination. But where such factors are present, and a factfinder‘s finding is based on its decision to credit the testimony of one of two or more witnesses, that finding can virtually never be manifestly erroneous or clearly wrong. (citations omitted).
As to questions of law, “the standard of review of appellate courts in reviewing a question of law is simply whether the court‘s interpretive decision is legally correct.” Glass v. Alton Ochsner Medical Foundation, 02-0412, p. 3 (La.App. 4 Cir. 11/6/02), 832 So.2d 403, 405 (citation omitted). “[W]hen the court of appeal finds that a reversible error of law or manifest error of material fact was made in the trial court, it is required, whenever possible, to redetermine the facts de novo from the entire record and render a judgment on the merits.” Ferrell v. Fireman‘s Fund Ins. Co., 94-1252, pp. 3-4 (La. 2/20/95), 650 So.2d 742, 745 (citations omitted).
In Wegener v. Lafayette Ins. Co., 10-0810, 10-0811, pp. 19-20 (La. 3/15/11), 60 So.3d 1220, 1233-34, the Supreme Court explained:
Typically where such legal errors have interdicted the fact finding process, if the record is otherwise complete, the appellate court should make its own independent de novo review of the record. Landry v. Bellanger, 2002-1443 (La. 5/20/03), 851 So.2d 943, 954; Ferrell v. Fireman‘s Fund Ins. Co., 94-1252 (La. 2/20/95), 650 So.2d 742, 745; Ragas v. Argonaut Southwest Insurance Co., 388 So.2d 707, 708 (La. 1980). However, we have also recognized that de novo review is not the best course of action in every case. Ragas, 388 So.2d at 708. This Court explained in Ragas:
This is not to say, and Gonzales [v. Xerox Corp., 320 So.2d 163 (La. 1975),], should not be read to require, that the appellate court must find its own facts in every such case. There are cases where the weight of the evidence is so nearly equal that a first-hand view of witnesses is essential to a fair resolution of the issues. The appellate court must itself decide whether the record is such that the court can fairly find a preponderance of the evidencе from the cold record. Where a view of the witnesses is essential to a fair resolution of conflicting evidence, the case should be remanded for a new trial. Id. at 708. [footnote omitted.]
The authority for an appellate court to remand a case to the trial court for proper consideration, where it is necessary to reach a just decision and to prevent a miscarriage of justice, is conferred by
DISCUSSION
I first address the district court‘s finding of breach of contract and unpaid invoices as well as the court‘s awards of damages and costs against Karlton/ISG.
The district court awarded Mathes the amount of $555,689.23 of the Outstanding Balance plus the amount of $478,737.50 from the 2013 Invoice, subject to a deduction of $89,757.50, for a total award of $944,669.23.
Karlton/ISG argues that “[t]he district court erred in ruling in favor of Mathes and against Karlton/ISG” because Mathes failed to prove the amounts owed and to mitigate damages by unreasonably accruing an outstanding balance. I disagree.
After reviewing the record and applicable law, I agree with the majority and I would also affirm the district court‘s award for breach of contract and unpaid invoices against Karlton/ISG in the amount of $944,669.23, representing the 2013 Invoice of $478,737.50, the outstanding balance of $555,689.23, and a deduction of $89,757.50. I find that the district court did not err in holding that Mathes provided sufficient evidence to prove that these amounts were owed.
Karlton/ISG further contends that Mathes was required to take steps to mitigаte its damages but failed to do so by waiting five years to invoice for services rendered and to demand payment on outstanding balances, which allowed the balance to unreasonably accrue. This court has long recognized the well settled doctrine of mitigation as codified in
While an injured party has a duty to mitigate his damages, this duty exists only if it is reasonable to do so.16 “In mitigating damages, an injured party should exercise the degree of care such as would be taken
In the present case, the record reveals that evidence from both parties was introduced and considered by the district court concerning mitigation of damages. There is nothing in the record to support the conclusion that Mathes had a duty to mitigate under Article 2002 with respect to the breach of contract and unpaid invoices claims. Mathes did not have a duty to expeditiously seek legal recourse and pursue collection proceedings as a judgment creditor. Nonetheless, as to Mathes, there are risks and legal consequences of not pursuing actions against Karlton/ISG until after the Project stalled and the Note prescribed; thus, diminishing options are available to Mathes as a judgment creditor аnd an impoverished obligee against an obligor.17 Likewise, Mathes could pursue River Street for recovery of assets if in fact River Street used Mathes’ architectural work product. However, Article 2002 duty to mitigate does not apply under these circumstances.
To reverse a factfinder‘s determinations, the appellate court must find a reasonable factual basis in the record to support the finding of the district court and determine that the record establishes that the finding is clearly wrong (manifest error). Kaltenbaugh, 282 So.3d at 1138-39 (citation omitted). A review of the record reveals that the district court was not clearly or manifestly erroneous. I find no abuse of the district court‘s discretion and, thus, assignment of error two has no merit.
Karlton/ISG next argues in assignment of error three that “[t]he district court erred in ruling in favor of Mathes and against Karlton/ISG awarding Mathes the amount of $61,366.34 for costs incurred in connection with the trial of the captioned matter.” I concur in the results of the majority opinion that the district court did not abuse its discretion in awarding costs of the trial.
I next address assignment of error one relative to the finding of solidary liability against Members for the above-mentioned debts of Karlton/ISG. Karlton/ISG argues that the district court erred in finding Members solidarily liable with Karlton/ISG reasoning that the district court erroneously applied only Riggins Methodology as opposed to the Statutory Exceptions. I agree. I find that the district court erred, as a matter of law, by failing to recognize that the Statutory Exceptions in
Karlton/ISG and Members further argue that the court erred in applying the Riggins Methodology and was bound to employ the Ogea Methodology. I agree. I therefore find that the district court erred as a matter of law and a de novo review is warranted. After my de novo review of the record and applicable law, I would reverse those portions of the judgments that find Members solidarily liable for the following reasons:
I will first address a choice of law issue because the majority finds that the result in this case does not differ depending on which state‘s law applies and both Florida and Louisiana courts similarly invoke the same jurisprudential limited liability exception for LLCs.18 I find that Louisiana
Louisiana Revised Statute 12:1342 states the “laws of the state or other jurisdiction under which a foreign limited liability company is organized shall govern its organization, its internal affairs, and the liability of its managers and members that arise solely out of their positions as managers and members.” Karlton/ISG was organized in Florida; thus, Florida law would normally apply with respect to liability of Members pursuant to
Without doubt, an appellate court has the authority to raise an issue sua sponte on appeal. The state constitution authorizes the appellate jurisdiction of a court of appeal in civil matters to еxtend to law and facts.
La. Const. art. 5, § 10(A) and (B).La. C.C.P. art. 2129 specifically provides: “[a]n assignment of error is not necessary in any appeal.”La. C.C.P. art. 2164 provides an appellate court “shall render any judgment which is just, legal, and proper upon the record on appeal.” Likewise, the uniform rules of the appellate courts require that an issue be submitted in an assignment of error, after first being raised in the district court, “unless the interest of justice clearly requires otherwise.” Uniform Rules Courts of Appeal, Rule 1-3 (emphasis added).
“Determining the proper choice-of-law law to be applied to an issue is a question of law for which this court has the plenary and unlimited constitutional power and authority to review de novo.” Id. at 562 (footnote omitted). I find that the parties acquiesced in the application of Louisiana law. The parties argued Louisiana law throughout this lawsuit, and the district court applied Louisiana law with respect to the liability of Members. Moreover, the Contract between Mathes and Karlton/ISG states that Louisiana law applies.20
Applying Louisiana law, which includes “statutory, jurisprudential, or [any law] arising from general principles of fault,”21 I find that the district court erred, as a matter of law, by failing to recognize that the Statutory Exceptions supersede and inсorporate the Riggins Exception and by failing to follow the Ogea case which provided the following method of discerning the law with respect to the Statutory Exceptions (“Ogea Methodology“): (1) an analysis on the Fraud Exception should be based on the longstanding definition of fraud found in
include a Tort Factor, Criminal Factor, Contract Factor, and Capacity Factor explaining that a court is to evaluate each situation on a case-by-case basis and consider each of the above factors when determining whether the general rule of limited liability must yield to the exception for a member’s negligent or wrongful act. Ogea, 130 So. 3d at 898-905.
Although Mathes correctly points out
I note that this court has employed the Riggins Methodology prior to the Louisiana Supreme Court‘s development and explanation of the methodology set forth in Ogea for determining limited liability exceptions of LLCs under the Negligent or Wrongful Act Exception.26 In fact, our court, prior to Ogea, had difficulty reconciling
Questions of law are reviewed de novo without deference to the legal conclusions of the courts below. Durio, 74 So.3d at 1168. As to questions of law, the standard of review of an appellate court is simply whether the court‘s interpretive decision is legally correct. Ohm Lounge, L.L.C. v. Royal St. Charles Hotel, L.L.C., 10-1303, p. 4 (La.App. 4 Cir. 9/21/11), 75 So.3d 471, 474 (citing Glass v. Alton Ochsner Medical Foundation, 02-0412, p. 3 (La.App. 4 Cir. 11/6/02), 832 So.2d at 405). [I]f the decision of the trial court is based upon an erroneous application of law rather than on a valid exercise of discretion, the decision is not entitled to deference by the reviewing court. Id. at 474 (citing Pelleteri v. Caspian Group Inc., 02-2141, pp. 6-7 (La.App. 4 Cir. 7/2/03), 851 So.2d 1230, 1235). Because the issue herein concerns an application of law, de novo review is appropriate.
After my de novo review, I would reverse the district court‘s finding of solidary liable against Members.28 I find that Mathes failed to prove that the circumstances in this case are exceptional as to allow for LLC member liability under either the Ogea Methodology in applying the Fraud Exception or the Negligent or Wrongful Act Exception or under the principles
The Civil Code establishes only two sources of law in Louisiana: legislation and custom. See
resort is made to justice, reason, and prevailing usages.
In Louisiana, courts must begin every legal analysis by examining primary sources of law: the State’s Constitution, codes, and statutes. Powell v. DeHyCo, Inc., 2001-1029 (La. App. 3 Cir. 2/13/02), 815 So. 2d 1032, 1034 (citing Prytania Park Hotel, Ltd. v. General Star Indem. Co., 97–30635 (5th Cir. 6/17/99), 179 F.3d 169). The courts then can look to persuasive or secondary sources of law, such as jurisprudence, doctrine, conventional usages, and equity, to guide them in reaching a decision in the absence of legislation and custom. The courts must then employ the appropriate methodology first looking to the Louisiana Supreme Court for guidance. The law is well settled that this appellate court is bound to follow the decisions of our Supreme Court. See Giarrusso v. New Orleans Book Mart, Inc., (La.App. 4 Cir. 12/10/74), 304 So.2d 734; D‘Antoni v. D‘Antoni, (La.App. 4 Cir. 5/16/83), 432 So.2d 926. Accordingly, I must rely on the Ogea Methodology.
In 1992, the Louisiana Legislature enacted Chapter 22, Limited Liability Companies, comprised of
A. The liability of members, managers, employees, or agents, as such, of a limited liability company organized and existing under this Chapter shall at all times be determined solely and exclusively by the provisions of this Chapter. B. Except as otherwise specifically set forth in this Chapter, no member, manager, employee, or agent of a limited liability company is liable in such capacity for a debt, obligation, or liability of the limited liability company.
C. A member, manager, employee, or agent of a limited liability company is not a proper party to a proceeding by or against a limited liability company, except when the object is to enforce such a person‘s rights against or liability to the limited liability company.
D. Nothing in this Chapter shall be construed as being in derogation of any rights which any person may by law have against a member, manager, employee, or agent of a limited liability company because of any fraud practiced upon him, because of any breach of professional duty or other negligent or wrongful act by such person, or in derogation of any right which the limited liability company may have against any such person because of any fraud practiced upon it by him.
I find that various legal options were available to Mathes30 and rules can be derived from legislation that applies to the particular circumstances in this case, particularly
Nonetheless, I recognize that while linguistic or conceptual distinctions exist between the equitable Riggins Exception and the statutory Fraud Exception and Negligent or Wrongful Act Exception, any such distinction among them lacks substantive practical effect and are based, inter alia, on fraudulent or wrongful acts. The district court erred in failing to recognize this distinction without a difference and basing its judgment solely on the Riggins Exception32 and by not following the Ogea Methodology.
As required by Ogea, an analysis as to the applicability of the Fraud Exception, which includes any claim of fraud such as those found in the Riggins Exception and as pled by Mathes, should be based on the longstanding definition of fraud found in
This court has applied a fraud analysis in a pre-Ogea case, such as in ORX Res., Inc. v. MBW Expl., L.L.C., 09-0662, p. 12 (La. App. 4 Cir. 2/10/10), 32 So. 3d 931, 938, and in a post-Ogea case, such as in Syzygy Const., LLC v. McKey, 14-0745, p. 6 (La. App. 4 Cir. 12/10/14), 156 So.3d 763, 768. In Orx, after a review of the Negligent or Wrongful Act Exception and application of the Riggins Methodology, this court found Mr. Washauer, a member of MBW, L.L.C. (MBW), liable under general principles of fault that prevent the use of the LLC form to defraud creditors. 32 So. 3d at 935. The court found that Mr. Washauer comingled MBW funds with member‘s funds; commingling occurred because MBW was undercapitalized and did not have a separate bank account to conduct its affairs; and at the time the member signed the operating agreement, MBW was not recognized as an LLC and did not exist. Id. at 937-38. The court explained, MBW did not exist until July 20, 2005, when said statutory formalities were met. Id. at 937. While Mr. Washauer signed the JOA [Joint Operating Agreement] (in January of 2003) and the Participation Agreement (in December of 2004), MBW did not exist, and this evidences that he did not observe statutory formalities in creating MBW. Id. The court concluded Mr. Washauer used MBW as a shell and tried to avoid paying a legitimate debt of the LLC. Id. at 935.
Orx is distinguishable from the case sub judice. Substantial capital contributions were initially made to Karlton/ISG as evidenced by the undisputed fact that Mathes was paid over a million dollars for services rendered on the Project during the first three years of the joint business venture between Karlton Corp. and ISG Co. This does not demonstrate undercapitalization to defraud creditors as found in Orx. Also, during this earlier time period pertinent to my analysis, Karlton/ISG operated as an independent entity as it had financial statements, tax returns, and funding. Mathes failed to prove that Members used Karlton/ISG as a shell entity, that they used Karlton/ISG to avoid paying a debt of Karlton/ISG, or that they used the LLC form to defraud Mathes as a creditor, as in Orx.
In Syzygy, this court held that an individual member of an LLC could not be held liable for fraud due to a lack of evidence of misrepresentation finding that the claimant failed to demonstrate that a member of an LLC fraudulently induced the creditor to contract or intentionally misrepresented or suppressed the truth regarding its ability to perform under the contract. Id.
Similar to Syzygy, Mathes failed to demonstrate that anyone fraudulently induced it to contract or intentionally misrepresented
A claimant must produce sufficient evidence of fraudulent intent. The requisite intent to defraud or a finding of no fraudulent intent may be inferred from the totality of the circumstances and from statements and conduct. Fraud may be predicated on promises made with the intention not to perform at the time the promise was made, but it cannot be predicated on unfilled promises or statements as to future events. Sun Drilling, 798 So. 2d at 1152.
Our Court in Sun Drilling provides the following fraud analysis under
The investors argue that the trial court erred by awarding Rayborn damages for breach of contract after finding the investors defrauded him. Rayborn argues on appeal that the investors defrauded him, since they never intended to pay him for his 1993 tax liability. However, the trial court specifically found that Rayborn failed to prove fraud in the inducement of the contract. A cause of action for intentional fraudulent misrepresentation as to present or past facts exists in Louisiana. A party who is injured by fraud and deceit of another has a cause of action for damages. Fraud, however, cannot be predicated on unfulfilled promises or statements as to future events. Fraud may be predicated on promises made with the intention not to perform at the time the promise is made. . . .
Two elements are necessary to prove fraud: (1) an intent to defraud and (2) actual or potential loss or damage. Federal courts applying Louisiana law indicate that reliance is an element of a claim for fraud. Moreover, for fraud or deceit to have caused plaintiff‘s damage, he must at least be able to say that had he known the truth, he would not have acted as he did to his detriment. Whether this element is labeled reliance, inducement, or causation, it is an element of a plaintiff‘s case for fraud. The party alleging fraud need only prove these elements by a preponderance of the evidence. Circumstantial evidence, including highly suspicious facts and circumstances surrounding a transaction, may be considered in determining whether fraud has been committed.
The trial court found that Rayborn failed to prove that the investors did not intend to perform at the time of the various agreements. However, the trial court concluded that the investors defrauded Rayborn and thus found them
personally liable. We agree with the trial court that the record does not contain sufficient evidence of the investors’ intent to defraud Rayborn. Moreover, Rayborn did not answer the appeal and challenge this finding. The record contains no evidence that Rayborn relied to his detriment on the investors’ misrepresentations or omissions in the performance of the contract. We do not disagree with the factual findings of the trial court. The investors, through Astugue, either intentionally or negligently misrepresented Sun‘s opinions regarding Rayborn‘s job performance. The investors did not fully disclose to Rayborn the facts of their attempts to sell Sun. However, Rayborn neither alleged nor proved how these misrepresentations or omissions caused him damage. Although the record convinces us that the investors did not disclose important information, including Sun‘s potential liability to Rayborn for the enormous royalty benefit to prospective buyers, the record contains no evidence that Rayborn relied on these misrepresentations or omissions to his detriment. Rayborn proved that the investors failed to disclose particular information to him and to other individuals. Moreover, he proved damages, but we find no evidence in the record that the investors’ omissions or misrepresentations caused his damages or his termination.
798 So. 2d at 1152-53 (citations omitted).
Ed Mathes testified that he was not made aware of Karlton/ISG‘s abandonment. Ambrosia testified that he assumed that Ed Mathes knew about the abandonment, as Mathes had not submitted an invoice for 2008 services, nor demanded payment on outstanding invoices for 2007 services for a period of almost five years, and other business ventures were being discussed to carry out some version or a revision of the Project to completion. The assurances made by Ambrosia and Lipkins to Ed Mathes that the money [is] coming, the money [is] coming must be viewed during the time periods that they were made, especially with respect to the intent of the parties throughout the various stages of the venture in this commercial setting, as our court explained in Sun Drilling. Ed Mathes testified that he was not concerned about Karlton‘s financial wherewithal to complete the Project and that he continued to work on the Project despite lack of payment because the project was too important as I‘ve tried to explain to the city, to us, to the people of the Westbank and . . . he wanted it to succeed and we kept getting at least verbal assurances that we would be paid. Separate negotiations with the Kerns are far removed in time from the pertinent circumstances33 and I find insufficient evidence in the record to conclude that the conduct of principals of Karlton/ISG or Members caused the resultant damage to Mathes for nonpayment of the Outstanding Balance and the 2013 Invoice.
Moreover, the release of the Mortgage and the Note was partially due to the fact that the Note prescribed. Mathes failed to produce any evidence to the contrary. The releases were executed after Mathes’ petition was filed; thus, frаud, if any exists as to the releases, is not pertinent to this case. Mathes made business decisions not to pursue actions against Karlton/ISG until after the Project stalled for years and the Note prescribed and further made the decision not to pursue a claim against River Street for allegedly unjust displacement of assets at the expense of Mathes for using
The circumstances in this case are not extraordinary and do not present an exceptional circumstance such that would allow for Members’ liability for Karlton/ISG‘s debts. The facts presented at trial weigh in favor of sustaining the general shield of limited liability of Members and not in the removal of such protection intended by our legislature. The conduct of the parties does not give rise to fraud. The inferences made by the district court from the totality of the circumstances were unreasonable to find that the LLC form was used to defraud a creditor. After a review of the record and applicable law, there is no evidence of fraud by which Members could be held liable notwithstanding that they are members of Karlton/ISG.
As required by Ogea, an analysis as to the applicability of the Negligent or Wrongful Act Exception, which includes, inter alia, any claim of a wrongful act such as those found in the Riggins Exception [T]he exception for a negligent or wrongful act does not define those terms and requires an еvaluation of where a cause of action may be established by law. ...Unlike the other exceptions, the negligent or wrongful act exception does not suggest a singular statutory definition. Indeed, the negligent or wrongful act exception differs from the other exceptions examined because the negligent or wrongful act exception contains two distinct concepts (i.e., the exception applies to an act that is negligent or an act that is wrongful). Ogea, 130 So.3d at 899. To determine the meaning of negligent or wrongful act, the Court examined many areas of the law, including tort and criminal, before coming to the following conclusions: Because these concepts appear with great frequency outside of tort law, we find that the terms negligent act and wrongful act as employed … are not limited to torts. We are, however, equally mindful that the terms negligent act and wrongful act are part of an exception… and that the general rule, and hence the general goal, of the limited liability provision… is to afford limited liability. Compare La. R.S. 12:1320(B) and (D); see also Deborah A. Wisnowski, Comment: The Louisiana Limited Liability Company Law: A Gumbo of Previously Existing Business Entities, 39 Loy. L. Rev. 185, 191 (Spring 1993) (noting the LLC’s objective is to offer its members liability exposure limited to each member’s capital contribution.). Therefore, to accord the terms negligent act and wrongful act their commonly understood meaning while also respecting the general limitation of liability, we find the following four factors assist our inquiry: 1) whether a member’s conduct could be fairly characterized as a traditionally recognized tort [tort factor]; 2) whether a member’s conduct could be fairly chаracterized as a crime, for which a natural person, not a juridical person, could be held culpable [criminal conduct factor]; 3) whether the conduct at issue was required by, or was in furtherance of, a contract between the claimant and the LLC [contract factor]; and 4) whether the conduct at issue was done outside the member’s capacity as a member [factor of acting inside or outside the LLC]. Id. at 900-01. The Court further explained that the concepts of negligent act and wrongful act are also employed synonymously outside tort law as follows: For example, these concepts can be found in prominent areas of the law, such as in criminal law. See La. R.S. 14:8(3) (Criminal conduct consists of: ... Criminal negligence that produces criminal consequences.). The concept of being negligent is embraced by this statute. Additionally, a wrongful act appears to be analogous to [a]n act ... that produces criminal consequences where there is either criminal intent or where there is no requirement for criminal intent. See La. R.S. 14:8(1) and (2); see also La. R.S. 14:10 (defining acts produced by specific and general intent under criminal law). The concepts of a negligent or wrongful act can also be found in more arcane areas of the law, such as the law governing bonds for court reporters and even in mineral law. See La. R.S. 13:961(B) (Any party litigant shall have a right to sue on said bond for any damages sustained by said party litigant by any wrongful act or neglect of duty committed or omitted by the official court reporters in the performance of the duties of official court reporters.); see also La. R.S. 31:12 (the owner of land may protect his rights in minerals against trespass, damage, and other wrongful acts of interference by all means available for the protection of ownership.). Id. at 900. The Tort Factor A court is to evaluate each situation on a case-by-case basis and consider each of the above factors when determining whether the general rule of limited liability must yield to the exception for a member‘s negligent or wrongful act. Ogea, 130 So.3d at 905. Because negligent act and wrongful act are common features of tort law, the tort factor may be dispositive in determining whether or not piercing of the company veil is required. Id. The duty owed and alleged breached under the tort factor must be a duty in the tort sense, not in the contractual sense. Id. at 901. Simply put, the inquiry is whether the plaintiff has any law-statutory, jurisprudential, or arising from general principles of fault-to support his claim. Id., at 905 (quoting Faucheaux v. Terrebonne Consol. Government, (La. 2/22/93), 615 So.2d 289, 292). Mathes established nothing at trial from which I can discern a tort duty owed to it by Karlton/ISG or Members; rather the duty breached was a contractual one.35 Therefore, I find that the tort factor is unmet. The Criminal Factor The second factor requires us to determine whether the conduct at issue violates a criminal statute intended to protect the claimant from the type of harm that ensued. Ogea, 130 So.3d at 904. In its petition, Mathes did not allege any type of criminal conduct.36 However, Mathes claims that Karlton/ISG made certain misrepresentations on its tax returns regarding capitalization and abandonment. I, however, find that such conduct cannot be characterized as a crime under the Criminal Factor.37 Any actions taken by Karlton/ISG related to the reporting positions taken on its tax returns is totally irrelevant to this case, as Mathes neither relied on those tax returns nor requested copies of the tax returns prior to filing suit. This evidence is pertinent only as to making reasonable inferences from the conduct of principals acting on behalf of Karlton/ISG and/or Members to show intent to defraud Mathes as a creditor as to its abandonment of Mathes’ work, which was earlier addressed under an analysis of the Fraud Exception. As Mathes did not become aware of the tax return classifications claimed by Karlton/ISG until after filing its petition, any “tax evasion“, if such exists, was not perpetrated against Mathes. See Brennan‘s Inc. v. Colbert, 11-1095, p. 8 (La.App. 4 Cir. 2/29/12), 85 So.3d 787, 792.38 The Contract Factor In the third factor, I examine whether the member‘s conduct at issue was required by, or was in furtherance of, a contract between Mathes and Karlton/ISG. Ogea, 130 So.3d at 906. In this case, a contract existed between Karlton/ISG and Mathes whereby Mathes was to provide architectural services and Karlton/ISG owed payment for those services. The suit centered on payments due and owed to Mathes by Karlton/ISG. The contract factor, therefore, weighs against holding Members solidarily liable for the debts of Karlton/ISG. The Capacity Factor Finally, [t]he fourth factor requires us to examine whether the conduct at issue was done outside the member‘s capacity as a member of an LLC. Id. I find evidence suggesting that principals, on behalf of ISG Co., acted outside Karlton/ISG‘s LLC structure when they created River Street and pursued other business ventures with the Kern Entities. However, these business activities occurred many years after the Agreement, after Karlton Corp. ceased making capital contributions to Karlton/ISG, the joint venture was abandoned, the Note presumably prescribed leaving it with little or no value, and the Project failed to be carried out to completion while at the same time Mathes did not avail itself of legal recourse against Karlton/ISG or River Street. Moreover, at trial, Ed Mathes testified that he was fully aware that Mathes was contracting with Karlton/ISG and that the contract was neither with Karlton Corp. nor ISG Co. Further, as the contract was between Mathes and Karlton/ISG, no issue of an undisclosed mandatary relationship existed for which Members could be held liable. During pertinent times and early in the business venture, Members acted inside rather than outside the structure of Karlton/ISG. The passage of a substantial amount of time and the peculiar circumstances of the Project, the business arrangements, and the capacities of the parties, weigh in favor of sustaining the general shield of limited liability of Members as to the Capacity Factor. In applying the four Ogea factors to the totality of the circumstances of this case, I find that the Negligent or Wrongful Act Exception does not apply. After a review of the record and applicable law, there is no evidence of a wrongful act by which Members could be held liable notwithstanding that they are members of Karlton/ISG. The application of both the Fraud Exception and Negligent or Wrongful Act Exception and the Ogea Methodology taking into account Riggins principles of fault reveals the fact-driven nature of classifying transfers of a business asset to another legal entity so that it may be held or used as a fraudulent or wrongful act that would allow for the removal of the general shield of protection and limited liability of LLC members. Even assuming that the cancelation of the Note and release of the Mortgage amounted to a transfer of an asset with value and caused or increased Karlton/ISG’s insolvency which caused nonpayment to Mathes (none of which were proved at trial with sufficient evidence or properly before us),39 such conduct under certain business circumstances will be allowed from a commercial perspective as Ogea does not attempt to establish a bright-line rule in analyzing business activities and differentiating between assets. Such a rule would prove unworkable given the fact-driven nature of business dealings in the commercial context. Louisiana Revised Statute 12:1320 and the Ogea Methodology provide a workable legal analysis and greater guidance than Riggins only. Ogea provides clarity to current and prospective business owners and limited liability entities that desire to engage in business in our state. The holding of the district court invoking only a judicially created exception and allocation of fault award40 exceeds the authority that has been bestowed by the Legislature and the citizenry of this State, especially given its failure to follow Ogea and legislatively created causes of action and allocation of fault laws. These statutes were carefully crafted to balance the requirement for businesses to operate with honesty in both form and substance while promoting business in the state by limiting personal liability for some debts incurred or acts performed on behalf of business entities . . . albeit with certain exceptions. Nunez, 180 So.3d at 289. To undo this balance from the bench is to reach beyond the authority of a judge. As explained in Hoag v. State, 04-0857, p. 4 (La. 12/1/04), 889 So.2d 1019, 1022: Our state constitution divides governmental power into separate legislative, executive and judicial branches and provides that no one branch shall exercise powers belonging to the others. La. Const., art. II, §§ 1, 2. This trichotomous branching of authority furnishes the basis for the existence of an inherent judicial power which the legislative and executive branches cannot abridge. Singer, Hutner, Levine, etc. v. LSBA, 378 So.2d 423 (La. 1979); Saucier v. Hayes Dairy Products, 373 So.2d 102, 109, 114 n. 3 (La. 1979). Likewise, the judicial branch is prohibited from infringing upon the inherent powers of the legislative and executive branches. LaBauve v. Louisiana Wildlife and Fisheries Comm‘n, 289 So.2d 150, 151 (1974). The district court disregarded the statutory scheme that businesses rely on and resulted in its failure to provide a clear legal analysis that would promote uniform results, development of the Ogea Methodology, and provide clear direction to current and prospective business owners and limited liability entities. In conclusion, the conduct of the parties and the peculiar circumstances of the case sub judice do not give rise to fraudulent or wrongful acts or solidary obligations as contemplated by the legislature in enacting La. R.S. 12:1320(D) and La. C.C. art. 2324(A) or pursuant to the Louisiana Supreme Court‘s legal analysis in Ogea that would allow for Members to be responsible for the debts of Karlton/ISG. The inferences made by the district court from the totality of the circumstances were unreasonable and it erred in its application of the law finding Members solidarily liable with Karlton/ISG based on either a manifest error41 or de novo review. Therefore, assignment of error one has merit and I would reverse those portions of the judgments holding Members solidarily liable with Karlton/ISG. Based on the foregoing, I would affirm the September 26, 2018 judgment that awards damages in favor of Mathes and against Karlton/ISG in the amount of $944,669.23 plus interest. I would also affirm the January 11, 2019 judgment that taxes costs in the amount of $61,366.34 against Karlton/ISG. I would reverse those portions of the September 26, 2018 and January 11, 2019 judgments holding ISG Co. and Karlton Corp. solidarily liable with Karlton/ISG.
Notes
Riggins is limited when analyzing the limited liability protections of LLCs. In pre-Ogea cases from this court, such as ORX Res., Inc. v. MBW Expl., L.L.C., 09-0662 (La.App. 4 Cir. 2/10/10), 32 So.3d 931 and Breaux v. Vieux Carre’ Mortgage, L.L.C., 07-1443, 2008 (La. App. 4 Cir. 2008) WL 8922922, *3, we recognized that the nature of LLCs, as closely held entities, limit the applicability of the Riggins Methodology. For example, [u]nder Louisiana LLC law, members or managers of LLCs do not have to hold meetings, keep minutes or act through formal resolutions. ORX Res., Inc. v. MBW Expl., L.L.C., 09-0662, p.11 (La.App. 4 Cir. 2/10/10), 32 So.3d 931, 937. In Breaux, we stated:
Louisiana‘s LLC laws do not recognize the alter ego doctrine. An LLC need not follow the formalities required of corporations in order to maintain its separate legal existence. Unless the LLC‘s articles of organization or a written operating agreement provides otherwise, the members or managers take action by a majority vote.
La. R.S. 12:1316 ;La. R.S. 12:1318 . Furthermore, Louisiana LLC law specifically prohibits imposing membership liability for failure to follow corporate formalities. SeeLa. R.S. 12:1320 ; See also, In Re Provenza, 316 B.R. 225, 230 (Bankr.E.D.La.2003).
- Breach of Contract;
- Suit on Open Account;
- Unjust Enrichment;
- Declaratory Relief;
- Contractual Termination Damages; and
- Alter ego liability
The district court found solidary liability without a review of the applicable statutory laws regarding allocation of fault. See e.g.