Kasten v. DORAL DENTAL USA, LLC
2007 WI 76, 301 Wis. 2d 598, 733 N.W.2d 300 (2007)
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Rule of Law:
An LLC's operating agreement can grant members inspection rights that are broader than the default provisions of state statutes, encompassing business-related electronic communications. The reasonableness of a member's inspection request is determined by balancing the member's right of access against the financial burden on the company.
Facts:
- Marie Kasten and her then-husband, Craig Kasten, were members of Doral Dental USA, LLC (Doral Dental).
- Following their divorce in early 2001, both Marie and Craig Kasten each held a 23.13% interest in the company.
- In February 2003, concerned that a potential sale of Doral Dental would harm her financial interests, Marie Kasten began requesting to inspect company documents.
- After reviewing initial documents, Marie Kasten came to suspect that company management was transferring valuable assets, including key software, to other entities owned by Craig Kasten in which she had no interest.
- In April 2004, Doral Dental sold some of its assets, including computer equipment, to DentaQuest Ventures (DQV).
- In July 2004, Marie Kasten specifically requested to inspect all e-mails from 2001 to the present sent by or to key executives, along with drafts of sales documents.
- Doral Dental refused the request, asserting that e-mails and drafts were not 'Company documents' under its operating agreement and that the computers containing the data had been sold.
Procedural Posture:
- Marie Kasten sued Doral Dental in Ozaukee County Circuit Court (trial court) to compel production of documents.
- Kasten filed a motion to compel inspection of specific electronic files and document drafts.
- The circuit court denied the motion to compel, ruling that e-mails and drafts were not 'Company documents' and were no longer in Doral Dental's possession.
- The circuit court subsequently granted summary judgment in favor of Doral Dental, dismissing Kasten's action.
- Marie Kasten (appellant) appealed the circuit court's orders to the Wisconsin Court of Appeals.
- The court of appeals certified the case to the Wisconsin Supreme Court for review.
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Issue:
Does a non-managing member of a Limited Liability Company have the right to inspect company e-mails and document drafts under an operating agreement that provides a right to inspect 'Company documents'?
Opinions:
Majority - Butler, Jr., J.
Yes. An LLC operating agreement providing a right to inspect 'Company documents' grants broader access than the default statutory right to inspect 'records,' and this broader right includes business-related e-mails and document drafts, subject to a reasonableness inquiry. The court reasoned that the Wisconsin Limited Liability Company Law (WLLCL) gives maximum effect to the principle of freedom of contract, allowing operating agreements to expand upon statutory default rules. The term 'Company documents' in Doral Dental's operating agreement is a broader category of stored information than 'records' under the statute. Acknowledging the ubiquity of e-mail in modern business, the court rejected a categorical rule that e-mails are mere communications and not documents. However, this right is limited by the modifier 'Company,' meaning the inspection right extends only to business-related documents and not to purely personal communications. The right to inspect is also conditioned 'upon reasonable request,' which requires a court to balance the member's right to information against the potential burdens, particularly financial, that the request imposes on the LLC.
Analysis:
This decision significantly modernizes corporate law in Wisconsin by recognizing electronic communications like e-mail as inspectable company documents, reflecting the realities of contemporary business practices. It reinforces the primacy of an LLC's operating agreement, confirming that members can contract for rights greater than those provided by default statutes. The court's establishment of a flexible, multi-factor balancing test for 'reasonableness' provides a nuanced framework for resolving inspection disputes, moving away from the more rigid 'proper purpose' test found in corporation law while still protecting companies from harassing or overly burdensome requests.
