Superior Court Holds Majority Owners Of LLCs In Civil Contempt For Distributing Assets

| Nov 17, 2013 | Firm News

The Superior Court has held the majority owners of a limited liability corporation in civil contempt for distributing assets to themselves in violation of a temporary restraining order. The Court held the distributions were not in the ordinary course of business where the contemnors failed to follow the LLC’s operating agreement in making the distributions.

Plaintiff is a minority shareholder in several LLCs with defendants. The LLCs invested in several different kinds of real estate ventures. Plaintiff filed suit alleging the majority shareholders had engaged in various kinds of oppressive behavior, including distributions of assets to themselves and other businesses. He sought a temporary restraining order to stop the allegedly oppressive behavior. On July 30, 2013, the court issued a TRO that said: “Defendants are restrained and enjoined from distributing, transferring or alienating assets of the LLC in which Plaintiff has a minority interest other than in the ordinary course of business.”

In October 2013, plaintiff filed a motion to hold defendants in civil contempt based on three transactions: a $20,000 purchase of New England Patriots tickets on July 16, 2013; a distribution of $150,000 on July 10, 2013 and a distribution of $225,000 on September 13, 2013.

The Superior Court said it has the inherent power to find a party in contempt. The purpose of civil contempt is to coerce the contemnor into compliance with the court order and to compensate the complaining party for losses sustained. To find a party in civil contempt for violation of a court order, there must be clear and convincing evidence that (1) the alleged contemnor had notice that he was within the order’s ambit, (2) the order was clear and unambiguous, (3) the alleged contemnor had the ability to comply, and (4) the order was violated. The order must be “specific, clear and precise to that one need not resort to inference or implications to ascertain his duty or obligation thereunder.” The Court said the two transactions in July could not be violations of the TRO that entered subsequently.

With respect to the third transaction of $225,000, defendants argued it was similar to other quarterly distributions they had made previously. However, the Court said whether the distributions were made in the “ordinary course of business” would be determined by the LLC’s operating agreement. That agreement established certain procedures to be followed when making a distribution to members. These procedures included having a member meeting or following other procedures in the absence of a meeting, determining the appropriate amount of the distribution with the advice of the LLC’s certified public accountant, and obtaining the consent of the members. It was undisputed that the defendants did not follow these procedures. Instead, they simply determined there was available cash in the LLC bank account and made a phone call to their attorney who authorized the distribution.

The Court found that the TRO was clear and that defendants had violated it. It ordered defendants to redeposit the $225,000 back into the bank account of the LLC and to pay the plaintiff’s legal fees, costs and expenses. It has amended the TRO to include a provision restraining and enjoining any and all future distributions from the LLCs without prior approval from the court.

Kushner v. Suffolk Realty, LLC, W.B. 13-0335, slip op. (R.I.Super. Nov. 14, 2013)

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