Gottsacker v. Monnier
269 Wis. 2d 667, 676 N.W.2d 533 (2005)
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Rule of Law:
Under Wisconsin's Limited Liability Company Law, members with a material conflict of interest are not automatically precluded from voting on a transaction; however, they have a statutory duty to deal fairly with the limited liability company and its other members.
Facts:
- Julie Monnier formed New Jersey LLC to own investment real estate, and the company acquired a warehouse property.
- Brothers Paul Gottsacker and Gregory Gottsacker later became members under an agreement granting Monnier a 50% interest and the Gottsacker brothers 'collectively' a 50% interest.
- After the LLC sold another property, profits were distributed 50% to Monnier, 25% to Paul, and 25% to Gregory.
- Relationships among the members deteriorated, particularly between Paul and Gregory Gottsacker.
- Without consulting Gregory, Monnier and Paul formed a new entity, 2005 New Jersey LLC, in which their ownership percentages were increased (Monnier to 60%, Paul to 40%).
- Monnier and Paul then voted to have New Jersey LLC sell its sole remaining asset, the warehouse, to their new company, 2005 New Jersey LLC, for its original purchase price.
- Monnier and Paul left their equity in the new company and sent Gregory a check for his 25% interest, which he did not cash.
Procedural Posture:
- Gregory Gottsacker sued Julie Monnier, Paul Gottsacker, and 2005 New Jersey LLC in the Sheboygan County Circuit Court (trial court).
- Following a bench trial, the circuit court ruled in favor of Gregory Gottsacker, finding that the petitioners were precluded from voting by their conflict of interest and ordered the property returned to New Jersey LLC.
- Monnier, Paul, and 2005 New Jersey LLC, as appellants, appealed to the Wisconsin Court of Appeals.
- The court of appeals affirmed the circuit court's judgment but on the alternative ground that while members with a conflict can vote, the transaction here was unfair.
- The petitioners sought, and were granted, review by the Supreme Court of Wisconsin.
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Issue:
Does Wisconsin's Limited Liability Company Law prohibit members who have a material conflict of interest from voting to approve a transaction in which they have that interest?
Opinions:
Majority - Bradley, J.
No. Wisconsin's Limited Liability Company Law does not preclude members with a material conflict of interest from voting their ownership interest. Instead, the statute prohibits such members from willfully failing to deal fairly with the LLC or its other members. The court first determined that the Member's Agreement was ambiguous as to the brothers' voting rights and that interpreting 'collectively' to require unanimity would be unreasonable and lead to deadlock; therefore, Paul and Gregory each held a 25% voting interest, giving Monnier and Paul a 75% majority to approve the transfer. Reading Wis. Stat. §§ 183.0402 and 183.0404 together, the court concluded that the law addresses conflicts of interest not by disqualifying the vote, but by imposing a duty of fair dealing. Because the circuit court did not make a finding on whether Monnier and Paul willfully failed to deal fairly, the case is remanded for that determination.
Dissenting - Butler, Jr., J.
The transfer was not legally authorized because the petitioners lacked the required majority vote. The Member's Agreement is unambiguous; the term 'collectively' created a single 50% voting block for the two brothers that required them to act in concert. Since Gregory did not assent to the sale, the brothers' 50% voting block was not cast in favor of the transaction. Therefore, Monnier and Paul only controlled 50% of the vote, which does not meet the statutory requirement of 'more than 50%' to approve a business matter. The transfer was invalid from the outset, and the property should be returned to New Jersey LLC.
Concurring - Roggensack, J.
Yes, the transfer was validly approved by a 75% majority vote, but the case must be remanded to determine if the petitioners breached their statutory duty of fair dealing. The central issue on remand is not to rescind the sale but to conduct an accounting to determine the fair market value of the warehouse at the time of the sale. If Monnier and Paul obtained the property for less than fair market value, they derived an 'improper personal profit' which they hold in trust for Gregory. This approach respects the statutory framework of LLCs, which replaces common law fiduciary duties with specific statutory obligations, and focuses the remedy on compensating the injured member for any financial loss.
Analysis:
This case is the Wisconsin Supreme Court's first interpretation of the state's LLC statutes, establishing a crucial precedent for member-managed LLCs. The decision clarifies that a material conflict of interest does not automatically void a member's vote, rejecting a per se rule of disqualification. Instead, it shifts the judicial inquiry to a substantive review of the fairness of the transaction, focusing on whether the interested members willfully breached their statutory duty of fair dealing. This approach provides flexibility for closely-held companies but also opens the door to litigation over the factual question of what constitutes 'fair dealing,' impacting how self-dealing transactions are structured and challenged in the future.
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