Manere v. Collins
(To be published) Conn. App. ___, ___ A.3d ___ (2020) (2020)
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Rule of Law:
Under Connecticut's LLC dissolution statute, § 34-267(a)(5), a majority member's conduct constitutes oppression if it substantially defeats the minority member's objectively reasonable expectations that were central to their decision to join the venture or that developed over time. The analysis focuses on the minority member's perspective, not solely on whether the majority member's actions served a legitimate business purpose.
Facts:
- In 2011, Robert Manere and Peter Collins formed BAHR, LLC to purchase and operate the Seagrape Cafe, with Collins holding a 60% interest and Manere holding a 40% interest.
- Manere was the on-site manager responsible for daily operations and finances, receiving a weekly salary.
- In 2012, after Hurricane Sandy damaged the cafe, Manere and Collins orally agreed that neither would take guaranteed payments for 52 weeks to aid recovery.
- Despite this agreement, Manere continued to take cash payments from BAHR, unilaterally increased his salary, and used company funds for personal expenses such as car payments and health insurance.
- In 2017, Collins conducted an inquiry into BAHR's finances and discovered that Manere had misappropriated approximately $190,000 of company funds.
- Following this discovery, Collins unilaterally amended BAHR's operating agreement, terminated Manere as a manager, terminated Manere's son as an employee, stopped payment on checks issued to Manere, and changed the locks on the cafe.
- Collins subsequently stopped providing Manere with any of BAHR's financial information, other than what was provided through the discovery process of the ensuing litigation.
- Since 2017, BAHR has not made any distributions to either Manere or Collins.
Procedural Posture:
- Robert Manere filed an action against Peter Collins and BAHR, LLC in the Superior Court in the judicial district of Fairfield, seeking damages and the dissolution of BAHR on the ground of oppressive conduct.
- BAHR, LLC filed a counterclaim against Manere for breach of fiduciary duty.
- After a bench trial, the judge trial referee rendered judgment in favor of Collins and BAHR on all counts of Manere's complaint.
- The trial court also rendered judgment in favor of BAHR on its counterclaim, awarding it $190,463.03 in damages.
- Manere, as the plaintiff, appealed the judgment to the Appellate Court of Connecticut.
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Issue:
Does a majority member's conduct constitute 'oppression' sufficient for judicial dissolution of an LLC under General Statutes § 34-267(a)(5) if it substantially defeats the minority member's reasonable expectations, even if the conduct serves a legitimate business purpose?
Opinions:
Majority - Elgo, J.
Yes, a majority member's conduct is oppressive under § 34-267(a)(5) when it substantially defeats the reasonable expectations of the minority member. The trial court erred by applying an incorrect legal standard that focused on the reasonableness of the majority member's actions in light of the minority member's misconduct, rather than analyzing whether the conduct frustrated the minority member's reasonable expectations. As a matter of first impression, this court adopts the 'reasonable expectations' standard, which is the majority approach and is consistent with the commentary to the Revised Uniform Limited Liability Company Act (RULLCA). This standard recognizes the unique vulnerabilities of minority members in closely held entities who often invest with expectations of employment and a role in management. While a minority member's own misconduct can render certain expectations, such as continued employment, unreasonable, it does not extinguish all expectations, such as the right to a return on investment or access to company information. The case is remanded for a new trial on the oppression claim using the 'reasonable expectations' standard.
Analysis:
This case establishes a significant precedent in Connecticut corporate law by formally adopting the 'reasonable expectations' standard for determining oppression in LLC dissolution cases. This decision aligns Connecticut with the majority of jurisdictions and shifts the judicial inquiry from the majority member's business justifications to the perspective and expectations of the minority member. It provides stronger protections for minority investors in closely held LLCs whose initial investment may have been predicated on expectations beyond just a financial return, such as employment or management participation. Future cases will require a more fact-intensive analysis of the parties' understandings at the inception of the venture and throughout their relationship.
