Benjamin v. Island Mgmt., LLC

• Decision Date: 02 November 2021
• Docket Number: SC 20501
• Citation: 267 A.3d 19,341 Conn. 189
• Parties: Helen Ziegler BENJAMIN, Trustee v. ISLAND MANAGEMENT, LLC
• Court: Connecticut Supreme Court

341 Conn. 189

267 A.3d 19

Helen Ziegler BENJAMIN, Trustee

v.ISLAND MANAGEMENT, LLC

SC 20501

Supreme Court of Connecticut.

Argued December 9, 2020

Officially released November 2, 2021^*

Lynn K. Neuner, with whom were Charles W. Pieterse, Wyatt R. Jansen, Greenwich, and Sara A. Ricciardi, pro hac vice, for the appellant (defendant).

Steven M. Frederick, Stamford, with whom were David G. Keyko, pro hac vice, and, on the brief, Christopher Fennell, pro hac vice, and Gessi Giarratana, for the appellees (substitute plaintiffs).

Robinson, C. J., and McDonald, D'Auria, Mullins, Kahn, Ecker and Keller, Js.

MULLINS, J.

The principal issue in this appeal is one of first impression regarding the conditions under which a member of a manager-managed limited liability company (LLC) is permitted to inspect the LLC's books and records pursuant to General Statutes § 34-255i,¹ a provision of the Connecticut Uniform Limited Liability Company Act (CULLCA), General Statutes § 34-243 et seq. Specifically, we consider whether such a member seeking information for the stated purpose of ascertaining whether mismanagement has occurred must produce credible proof that mismanagement may have occurred as a precondition for exercising the member's statutory inspection right. The defendant, Island Management, LLC, appeals from the judgment of the trial court holding that the defendant's refusal to disclose certain information to the substitute plaintiffs, cotrustees of the Helen Benjamin 2002 Trust,² a member of the defendant LLC, violated both § 34-255i and the defendant's operating agreement.³ The defendant contends that the trial court (1) incorrectly concluded that there is no requirement under § 34-255i that the requesting member produce credible proof of mismanagement, and (2) improperly failed to apply other statutory requirements. It further contends that the alleged violation of its operating agreement is merely derivative of the alleged statutory violation, not an independent basis for relief, and, therefore, the former fails for the same reasons that the latter fails. We affirm the trial court's judgment.

The record reveals the following undisputed facts and procedural history. In 2002, William Ziegler III created trusts for the benefit of each of his six children: Helen Ziegler Benjamin, William (Bill) T. Ziegler, Cynthia Ziegler Brighton, Karl H. Ziegler, Melissa J. Ziegler, and Peter M. Ziegler.⁴ These trusts own, directly or indirectly, several family businesses from which the siblings receive dividends. In 2015, Forbes Magazine estimated the collective value of the Ziegler family entities to be in excess of $2.8 billion.

The defendant, a manager-managed LLC headquartered in Darien, was created to oversee and build the family's assets. Those assets are held by Hay Island Holding Corporation (Hay Island). Hay Island's primary assets are two wholly owned subsidiaries: Swisher International, Inc., a major supplier of cigars, and Ned's Island Investment Corporation, an investment vehicle that manages a substantial portfolio. The defendant provides management services relating to both of these subsidiaries, providing advice on investment of capital, acquisitions, and day-to-day operations, among other things. The defendant derives income from two management services agreements, one with Hay Island and one with Swisher.

Each of the six siblings’ trusts are members and equal one-sixth owners of the defendant. The defendant is governed by an operating agreement executed by all six siblings as trustees of their respective trusts. The sibling trustees contemporaneously executed a document consenting to the appointment of two of the siblings, Bill and Cynthia, as comanagers of the defendant. As comanagers, they were authorized under the operating agreement to hire officers and to set officer salaries. The sibling trustees subsequently consented to the appointment of Bill and Cynthia to serve as copresidents of the defendant. During the relevant period, in addition to Bill and Cynthia, the defendant had four officers, including one person acting as chief operating officer and chief finance officer, and six nonofficer employees.

Bill and Cynthia also have significant roles in family enterprises from which the defendant receives income. Bill is Hay Island's chief executive officer and chairman. Cynthia is Hay Island's president and treasurer. Bill and Cynthia sit on Swisher's compensation committee.

Sometime after the death of the siblings’ father in 2008, a disagreement arose among some of the siblings regarding the amount of the annual distributions. The net return of the distributions to each sibling's trust was well under 1 percent of the Forbes estimate of the total value of the family enterprises. Helen, who has no children, believed that the family businesses should be making larger distributions to benefit present trust beneficiaries. Bill, Cynthia, and Karl, some of whom have children, took the position that the present distribution levels were satisfactory and that more earnings should be retained to preserve the family's wealth for future generations.⁵ Neither the instrument creating the siblings’ trusts nor the defendant's operating agreement contained a statement of purpose regarding the father's intent on this matter.

As a result of this ongoing disagreement, in early 2016, Helen was approached by the other Ziegler trustees about a potential buyout offer for her interests in the family businesses. That offer was well below the value her one-sixth interest would have yielded if the Forbes estimate were accurate. Helen made an informal request for financial and related information about the defendant and other family enterprises, which was denied.⁶

Thereafter, the original plaintiff, Helen, in her capacity as cotrustee of her trust, made a series of four written demands for inspection of the defendant's books and records—respectively dated June 20 and July 7, 2016, April 11, 2017, and June 29, 2018—each of which cited § 34-255i (or its predecessor) as authority for the demand.⁷ Section 34-255i (b) (2) permits members of a manager-managed LLC to obtain "information regarding the activities, affairs, financial condition and other circumstances of the company" if certain conditions are met. See footnote 1 of this opinion. The defendant produced many records in response to each of the successive demands but refused to produce others, claiming that the information was unnecessary (irrelevant or already provided through prior disclosures) or the request was improper.

Helen received incomplete information about the compensation Bill and Cynthia received as managers and copresidents. This information revealed that their collective annual compensation significantly increased from 2011 to 2016, while annual distributions to members remained roughly flat or decreased during this same period.⁸

The final demand requested twenty-seven categories of information, including financial statements, income tax returns, descriptions of cash and assets, manager and officer compensation/procedure for setting compensation, and information relating to management arrangements and fees. The stated purposes of the demand were (1) to "determine the value of the Benjamin 2002 Trust's membership interest in the [defendant]"⁹ and (2) to "ascertain the condition and affairs of such entities so that the Benjamin 2002 Trust may exercise its rights as a member of the [defendant] in an informed manner." Regarding this second purpose, Helen's demand letter, which was addressed to Bill and Cynthia, further explained: "I have concerns because of the inherent conflict [of interest] that you have as a result of your personal financial interests as copresidents and managers of the [defendant], the interests of trusts for your benefit in the [defendant] and related businesses, your roles in the businesses to which the [defendant] provides management services, and your roles as trustees of trusts having interests in such related businesses. I have requested documents concerning the management arrangements and compensation of the [defendant's] managers and officers ... because I wish to evaluate whether such arrangements and payments are proper. In particular, I wish to investigate the appropriateness of fees paid to the [defendant] from other family owned entities. I believe those fees may be inflated in order to increase revenue for the [defendant]. I also believe that the fees paid to the managers of the [defendant], who determine their own compensation and benefits without consulting or even advising the members of the [defendant], may be excessive. The refusal to provide information to the members of the [defendant] concerning such payments raises questions about the propriety of the management arrangements and fees. I therefore have a reasonable basis to suspect possible irregularities. The requested information and documents are necessary to investigate whether the payments were, in fact, improper."

In response to the final demand, the defendant agreed to produce reasonable updates to certain information previously provided but refused to produce any other information. The defendant's written reply to the demand asserted that the request for information was unreasonable and/or that the production of additional information was unnecessary as to the stated valuation purpose because the defendant had already disclosed sufficient records to achieve that purpose. The reply also asserted that the request was improper as to the stated mismanagement purpose because the statutory inspection right requires credible proof of mismanagement, of which there was none.

Helen, in her capacity as trustee of her trust, thereafter commenced the present action by way of a two count complaint seeking to compel the defendant to comply with her inspection demands. The first count alleged that the member trust's right to inspection under § 34-255i had been violated. The second count alleged th...