Dysaet v. Dragpipe Saloon, LLC
| Decision Date | 04 September 2019 |
| Docket Number | #28799 |
| Citation | 2019 S.D. 52 |
| Parties | TROY DYSAET and RICHARD HEINRICH, Plaintiffs and Appellees, v. DRAGPIPE SALOON, LLC, Defendant, and PATRICK KERWIN and RAYMOND MEYERS, Defendants and Appellants. |
| Court | South Dakota Supreme Court |
[¶1.] Two members of a limited liability company known as Dragpipe Saloon, LLC (Dragpipe) requested judicial dissolution ancillary to their efforts to sell their membership interests. Following a court trial, the circuit court ordered dissolution and the sale of Dragpipe's assets. The remaining members appeal, arguing the circuit court erred when it concluded that it was not reasonably practicable for Dragpipe to continue under the provisions of its operating agreement and that Dragpipe's economic purpose was unreasonably frustrated. We reverse.
[¶3.] The operating agreement also provides that Dragpipe may be dissolved and its affairs wound up with the unanimous vote of the members or by a decree of judicial dissolution pursuant to South Dakota's enactment of the Uniform Limited Liability Company Act. See SDCL ch. 47-34A. Individual members may also voluntarily resign their membership under the provisions of the operating agreement and obtain the "fair market value of [the member's] Ownership Interest,adjusted for profits and losses to the date of resignation." In the event of a resignation, the fair market value would be determined by a unanimous vote of the members or, failing that, by an independent appraiser.
[¶4.] The members purchased 74 acres of land off Highway 79 northeast of Sturgis for approximately $135,000 and built a bar that is open only during the Sturgis Motorcycle Rally (Rally), which runs for approximately ten days every year in August. Of the 74 acres purchased, 18 acres were used to operate the bar, and the remaining land was leased to a farmer. Dragpipe obtained a malt beverage license and opened for business during the 2004 Rally, selling beer, soft drinks, water, and t-shirts. The company also hosted food vendors and provided live entertainment.
[¶5.] In January 2005, Penney Weast sold her membership interest to Patrick Kerwin. Dragpipe later expanded by opening a campground on the property in 2009. Camping was free until 2013, when the company began to charge camping fees in an effort to improve revenue. Dragpipe had its first profitable year in 2015 and posted modest profits in 2016 and 2017.
[¶6.] Each member has invested approximately $80,000 in the company. The members also provide labor during the Rally without compensation—typically working over 12 hours each day. The members have not received income distributions. However, Dragpipe's net income from 2015 to 2017 did allow it to pay the mortgage expense previously contributed pro rata by the members. The profits also allowed Dragpipe to reimburse the members for their out-of-pocket expenses.
[¶7.] Following the 2015 Rally, Dysart and Heinrich (Appellees) advised Kerwin and Meyers (Appellants) that they wanted to sell their membership interests in Dragpipe. The Appellants expressed no objection, and the Appellees initially appeared to have found buyers for their combined one-half interest. However, one of the prospective buyers rescinded his offer, leaving the remaining purchaser to purchase one-quarter interest. The Appellees elected not to proceed with the sale based upon their inclination to sell their interests together.
[¶8.] In early 2017, the Appellees and Kerwin signed a six-month agency agreement with a real estate agent intending to offer to sell the Dragpipe property for $950,000. Meyers, however, would not sign the agreement. Despite the apparent effort to end their membership, the Appellees did not invoke their right under the operating agreement to voluntarily resign their interests. Nor did the members vote to dissolve Dragpipe under the authority provided in the operating agreement.
[¶9.] Instead, the Appellees commenced this action in June 2017, seeking judicial dissolution and an order authorizing the sale of Dragpipe's assets. Following a court trial, the circuit court granted the Appellees' request for dissolution. In its written findings of facts and conclusions of law, the circuit court found that "the profit made in [2015-2017] is insufficient to begin repaying the capital contributions made by the members." The court further found that the parties were "at a standstill" on whether to sell the property and determined that the only way for Dragpipe to make money was to sell its real estate. The court concluded that judicial dissolution was authorized under SDCL 47-34A-801(a)(4)(i)and (iii) because Dragpipe's economic purpose was unreasonably frustrated and because it was not reasonably practicable to carry on its business in conformity with the operating agreement.
[¶10.] The Appellants challenge the circuit court's decision to order dissolution and present one issue for our review, restated as follows: Whether the circuit court erred in its interpretation of Dragpipe's operating agreement and its determination to order judicial dissolution pursuant to SDCL 47-34A-801.
[¶11.] The circuit court's decision rests upon its interpretation of the operating agreement and the application of our statutes governing judicial dissolutions. Both implicate legal questions that are reviewed de novo.1 See Domson, Inc. v. Kadrmas Lee & Jackson, Inc., 2018 S.D. 67, ¶ 28, 918 N.W.2d 396, 405 (); see also McDonough v. McDonough, 153 A.3d 187, 190 (N.H. 2016) (); Mergen v. N. States Power Co., 2001 S.D. 14, ¶ 4, 621 N.W.2d 620, 622 .
[¶12.] A limited liability company, or LLC, is a distinct legal entity that offers, among other things, limited liability for its members from contract and tortclaims. See Smith v. Rustic Home Builders, LLC, 2013 S.D. 9, ¶¶ 7-8, 826 N.W.2d 357, 359-60 (). Among organized business associations, an LLC is considered a "hybrid entity which combines the benefits of corporations and partnerships . . . includ[ing] limited liability, taxation as a partnership, and a flexible management style." Patrick G. Goetzinger, Brian K. Kirby & Terrance A. Nemec, The South Dakota Limited Liability Company Act: The Next Generation Begins, 44 S.D. L. Rev. 207, 209 (1998).
[¶13.] Members of a limited liability company may choose to enter into an operating agreement "to regulate the affairs of the company and the conduct of its business, and to govern relations among the members, managers, and company." SDCL 47-34A-103. An LLC's operating agreement may specify the circumstances under which a limited liability company will be dissolved and its business wound up. SDCL 47-34A-801(a)(1)-(2). Beyond this authority provided by agreement, the Legislature has given courts "limited power to order dissolution of an LLC if certain statutory standards are met." Kirksey v. Grohmann, 2008 S.D. 76, ¶ 13, 754 N.W.2d 825, 827; see also SDCL 47-34A-801(a)(4).
SDCL 47-34A-801(a)(4).
[¶15.] An involuntary judicial dissolution represents an exceptional level of intervention into the otherwise private agreement of an LLC's members. See In re Involuntary Dissolution of Wiles Bros., Inc., 830 N.W.2d 474, 480 (Neb. 2013) (). It should be unavailable merely to resolve disagreements among owners or relieve an owner of an investment decision later regarded as improvident. Rather, judicial dissolution is permitted only in those instances where it is expressly authorized under our statutes.
[¶16.] For example, in Kirksey, we held that judicial dissolution was authorized where the economic purposes of the LLC were likely to be unreasonably frustrated and because continuing the LLC's business was no longer practicable. 2008 S.D. 76, ¶ 29, 754 N.W.2d at 831; see also SDCL 47-34A-801(a)(4)(i), (iii). The members in Kirksey were four sisters who had formed the LLC and contributed their equal interests in ranch land inherited from their mother. 2008 S.D. 76, ¶¶ 2-3, 754 N.W.2d at 826. Two sisters were also tenants who leased the ranch...
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