Opinion
NO. 2015-CV-00382
11-14-2015
Mark E. McDonough v. Patrick M. McDonough, Matthew J. McDonough and TASC Technical Services, LLC
ORDER
Plaintiff Mark E. McDonough ("Mark") has brought an action against Patrick M. McDonough ("Patrick"), Matthew J. McDonough ("Matthew"), and TASC Technical Services, LLC ("TASC"), seeking a declaratory judgment and an order that TASC and its members, including Mark, Patrick, and Matthew, must begin the dissolution process of TASC no later than September 30, 2015, and complete its wind up as soon as practicable thereafter. Mark has moved for summary judgment. The Defendants object and have cross moved for summary judgment. For the reasons stated in this Order, the Plaintiff's Motion for Summary Judgment is DENIED, and the Defendant's Cross-Motion is GRANTED.
I
On Cross-Motions for Summary Judgment, the Court must consider the evidence in the light most favorable to each party in its capacity as the nonmoving party, and, if no genuine issue of material fact exists, determine whether the moving party is entitled to judgment as a matter of law. Granite State Management Resources v. City of Concord, 165 N.H. 277, 282 (2013).
The relevant facts do not appear to be in serious dispute. In the early 1990s, Mark, Patrick, and Matthew McDonough established TASC, a business that provided technical engineering services. TASC was established as a corporation in 1992, but changed its format to a Limited Liability Company ("LLC") in 1995 because the McDonough brothers were advised that an LLC would offer more favorable tax treatment.
There is no dispute about the documents relating to the LLC. The Certificate of Formation states that "the latest date on which the limited liability company is to dissolve is September 30, 2015." Paragraph 5 of the operating agreement gives the members the express option to dissolve the LLC earlier than its 20 year anniversary and to continue beyond that term. It specifically states:
5. Term. The Company shall have a term beginning on the date the Certificate of Formation is filed and received for recordation by the New Hampshire Secretary of State, and shall continue in full force and effect for a term of twenty (20) years, unless sooner terminated or continued pursuant to the further terms of this agreement. (Emphasis supplied).
The Operating Agreement provides in Paragraph 10.1 that "[t]he Members, acting by majority consent . . . shall have the exclusive right to manage the business of the Company, including, but not limited to . . . operating the company's business." Paragraph 10.2 provides that "[a] majority of the Members shall also have the full power to execute, for and on behalf of the Company, any and all documents and instruments which may be necessary or desirable to carry on the business of the Company."
Apparently, the parties have had a falling out. Mark seeks to liquidate TASC, and the two other shareholders of the LLC, Patrick and Matthew, assert that the business is a successful one and seek to continue it. Relying on these provisions of the Operating Agreement, on August 7, 2015, Matthew and Mark, the majority of the shareholders executed a written consent under Paragraphs 10.1 and 10.5 of the operating agreement and under the New Hampshire Limited Liability Act, voted to dissolve TASC before September 30, 2015, and then immediately voted to revoke the dissolution. Mark asserts that the Certificate of Formation of the LLC nonetheless requires that the LLC be dissolved on September 30, 2015.
II
The interpretation of the operating agreement of a limited liability corporation is a matter of contract interpretation. Lakes Region Gambling Assocs. v. Miller, 164 N.H. 558, 561 (2013). When a court interprets a contract, it must apply an objective standard and consider what the terms would mean to an ordinary reasonable person. Extrinsic evidence can only be considered if the agreement is ambiguous. Birch Broad., Inc. v. Capital Broad. Corp., 161 N.H. 192, 196-97 (2010). All parts of the agreement must be given effect. Id.
Plaintiff Mark claims that the agreement is not ambiguous. He argues that the Certificate of Formation specifically provides that the LLC will be dissolved on September 30, 2015. However, a latent ambiguity clearly exists because under Paragraph 5 of the operating agreement, the LLC "shall continue in full force and effect for a term of 20 years, unless sooner terminated or continued pursuant to the further terms of this agreement," and Paragraphs 10.4 and 10.5 of the Operating Agreement provide that the business shall be conducted by majority vote, which is consistent with statute RSA 304-C:67, I. See Flanagan v. Prudhomme, 138 N.H. 561, 566 (1994) (stating that a latent ambiguity exists when the language is clear but is "rendered unclear by reference to another document").
Defendants Patrick and Matthew seek to introduce evidence that the September 30, 2015 for dissolution date was added because the parties believed at the time that the LLC was created that the LLC could not exist for more than 20 years without losing its tax benefits. They argue that the provision is the result of a mutual mistake of law and should be reformed. However, the Court need not reach this issue to resolve the case.
A
Parties may create an LLC to carry out their business in accordance with the principle of freedom of contract. Nonetheless, the rights and obligations as members of an LLC are governed by statute, RSA chapter 304-C, which contains certain mandatory requirements. Patrick and Matthew concede as much and rely upon RSA 304-C:129, II, which provides in relevant part:
Unless the operating agreement provides otherwise, a limited liability company shall be dissolved by majority vote of the members. The vote shall be in writing, and shall specify the effective date of the dissolution. If there is no such writing, the effective date of the dissolution shall be the date of the vote. (Emphasis supplied).
Defendants Patrick and Matthew argue that under the operating agreement, "[t]he Members, acting by majority consent as provided in Sections 10.4 and 10.5, shall have exclusive right to manage the business of the Company including, but not limited to . . . operating the Company's business". (TASC's Memo. 7.) By dissolving the corporation and then immediately voting to revoke the dissolution pursuant to RSA 304-C: 130, III, they argue that they complied with the requirements in the Certificate of Formation that the LLC be dissolved by September 30, 2015.
The flaw in Matthew and Patrick's argument is that by dissolving and revoking the dissolution, all they accomplished is causing the business to operate as it had before. RSA 304-C:130, IV(a) provides, "When a revocation of a dissolution becomes effective under paragraph I . . . the limited liability company shall be deemed to have carried on its business as if the dissolution had never occurred."
If the "dissolution had never occurred," then the LLC's Certificate of Formation would still be extant and would still provide that the LLC shall continue for a term of 20 years "unless sooner or terminated or continued pursuant to the further terms of this agreement." Defendants Patrick and Matthew tacitly concede that the current Certificate of Formation required some action by September 30, 2015, because they took the extraordinary steps on August 7, 2015, of voting for dissolution and then revoking the dissolution.
While it is true that a LLC may be dissolved by a majority of the members, the dissolution and revocation of dissolution does not alter the Certificate of Formation. RSA 304-C: 67, II specifically states that unless the operating agreement provides otherwise, "the affirmative vote of all members shall be required to amend a Certificate of Formation." Therefore, the remaining issue to be decided is simple: does the Certificate of Formation trump the Operating Agreement?
B
The statute governing certificate of formation is brief, and simply relates to general requirements. Under RSA 304-C:31, II(a)-(d) there are only four mandatory content requirements of a Certificate of Formation: (a) the name of the LLC; (b) the address of the registered office and the address of the registered agent for service of process; (c) the nature of the primary business for purpose of the LLC; and (d) whether the LLC is to be managed by its members or by persons who may also be members or appointed as managers under its operating agreement. The statute states that the Certificate of Formation may set forth any other matters the members or managers decide to include. RSA 304-C: 31, II(c). Significantly, RSA 304-C: 31 II(c) specifically provides that while the Certificate of Formation shall set forth the nature of the primary business purpose of the LLC, if, after its formation, the LLC engages in any other purpose permitted by law, by the statute and by its operating agreement "the limited liability company's actions in pursuing that other purpose shall not be deemed invalid merely because the other purpose was not set forth in the certificate of formation." (Emphasis supplied.)
In contrast, the operating agreement of an LLC is generally detailed and lengthy. While a certificate of formation can only be amended by a vote of all shareholders, RSA 304-C: 67, II, unless the operating agreement provides otherwise, most business decisions may be decided by majority vote of the members. RSA 304-C: 67, I. In fact, the decision to dissolve may be made by majority vote. TASC's operating agreement is consistent with the statute.
Indeed, the Certificate of Formation does not state how the LLC is to be dissolved and when winding up will occur. Interpreted literally, as Mark proposes, it would require dissolution at this time in violation of the operating agreement and the statute, because the majority of shareholders do not seek dissolution, and a majority of shareholders is required for dissolution unless the operating agreement provides otherwise. RSA 304-C:129, II.
The Delaware Supreme Court recently noted, in considering the role of a Certificate of Formation under the Delaware LLC statute:
The certificate of formation is a relatively brief and formal document that is the first statutory step in creating the LLC as a separate legal entity. The certificate does not contain a comprehensive agreement among the parties, and the statute contemplates that the certificate of formation is to be complemented by the terms of the agreement.Elf Atochem North America v. Jaffari, 727 A.2d 286, 288 (Del. 1998). Like the Delaware statute, the New Hampshire Limited liability act makes clear that the Certificate of Formation is merely the first step in creating the LLC. RSA 304-C:31-34 clearly establishes that the purpose of a Certificate of Formation is not to govern the operation of a LLC, but rather to give notice that the entity exists.
While few cases have dealt with the issue of whether the operating agreement or certificate of formation should control governance of the LLC, at least one commentator, after reviewing the statutes, has concluded that if the enabling statute states a preference for one document over another, that preference prevails. C. Bishop & D. Kleinberger, Limited Liability Companies: Tax and Business Law ¶ 5.06[2][c] (1994-2009). Here, based in part upon the provisions of RSA 304-C:31, which provides that an LLC may engage in any purpose permitted by law even though the business purpose set forth in the certificate of formation is different, the Court concludes that the New Hampshire statutory scheme creates a preference for the Operating Agreement rather than the Certificate of Formation.
More importantly, regardless of the hierarchy of the operating agreement and the certificate of formation expressed by the statute, the Court is persuaded by the principle that:
If the enabling statute does not express a general preference [as to whether the operating agreement or the certificate of formation should control], if a particular subject matter is not reserved to the articles, and if no hierarchy is stated in the constituent to documents, then the operating agreement should govern. Absent statutory commands to the contrary, the articles of organization are a mere outward looking formalities, while the operating agreement is the member's fundamental document.Bishop & Kleinberger, supra. ¶ 5.06 [2][c].
There is no unfairness in requiring Mark to comply with the operating agreement that the parties agreed would govern their relationship inter se. Operating Agreement ¶ 14; RSA 304-C:100, I. Mark, or for that matter any dissatisfied member, can withdraw from the LLC and obtain his share of the LLCs assets.
It follows that Mark's Motion for Summary Judgment must be DENIED, and Matthew and Patrick's Cross-Motion for Summary Judgment must be GRANTED.
SO ORDERED.
11/14/15
DATE
s/Richard B . McNamara
Richard B. McNamara,
Presiding Justice
RBM/