MARX v. Morris
| Decision Date | 02 April 2019 |
| Docket Number | No. 2017AP146,2017AP146 |
| Citation | 386 Wis.2d 122,2019 WI 34,925 N.W.2d 112 |
| Parties | Daniel MARX, Fracsand, LLC, Michael Murray and R&R Management Funds, LLC, Plaintiffs-Respondents, v. Richard L. MORRIS and R.L. Co., LLC, Defendants-Appellants. |
| Court | Wisconsin Supreme Court |
For the defendants-appellants, there were briefs filed by Eric J. Magnuson and Robins Kaplan, LLP, Minneapolis, Minnesota, with whom on the briefs were J. Drew Ryberg and Ryberg Law Firm, Eau Claire, and Scott A. Johnson and Johnson & Johnson Law, LLP, Minnetonka, Minnesota. There was an oral argument by Eric J. Magnuson.
For the plaintiffs-respondents, there was a brief filed by Patrick G. Heaney, James A. Pelish, and Thrasher, Pelish & Heaney, Ltd., Rice Lake. There was an oral argument by Patrick G. Heaney.
¶1 This appeal comes before us on certification from the court of appeals1 pursuant to Wis. Stat. § (Rule) 809.61 (2015-16).2 Two members of a limited liability company (LLC), Fracsand, LLC by Daniel Marx (Marx) and Management Funds, LLC by Michael Murray (Murray), brought an action against another member, Richard Morris (Morris) and his LLC, R.L. Co., LLC, after North Star Sand, LLC (North Star) sold valuable assets to a company owned by Morris. At the time of the sale, Morris was a manager of North Star.
¶2 Marx and Murray alleged that Morris willfully failed to deal fairly with them while having a material conflict of interest in the transaction, in violation of Wis. Stat. § 183.0402(1). They also alleged a number of common-law claims involving improper self-dealing. Marx and Murray brought all their claims in their individual LLC and personal capacities rather than in the name of North Star.
¶3 Morris moved for summary judgment. The circuit court denied Morris's motion,3 and the court of appeals certified the appeal to this court to answer two questions:
Marx v. Morris, No. 2017AP146, unpublished certification, 2018 WL 3325899 (Wis. Ct. App. Mar. 6, 2018).
¶4 We accepted certification of the appeal and now conclude the following: first, the members of an LLC have standing to assert individual claims against other members and managers of the LLC based on harm to the members or harm to the LLC. Corporate principles of derivative standing do not apply to the distinct business form of an LLC.
¶5 Second, Marx and Murray's common law claims survive because they have not been displaced at this point in the litigation by particular provisions of North Star's Operating Agreement or by Wis. Stat. ch. 183. Third, there are genuine issues of material fact as to whether Morris violated Wis. Stat. § 183.0402(1) by dealing unfairly with Marx and Murray, and potentially with regard to the common law claims. For these reasons, we affirm the decision of the circuit court and remand for further proceedings consistent with this opinion.
¶6 North Star is a limited liability company formed under Wisconsin law in November 2011. The company's goal was to own and mine land containing silica sand, a type of sand used in fracking operations.
¶7 North Star's membership consisted of six limited liability companies, which in turn were owned by six individuals. Fracsand, LLC was owned by Marx; R&R Management Funds, LLC owned by Murray; R.L. Co., LLC owned by Morris; Hub Investments, LLC owned by Brian Johnson (Johnson); Glorvigen Investment Group, LLC owned by Rick Glorvigen (Glorvigen); and C&T Sand, LLC owned by R. Thomas Toy (Toy).4 Morris, an attorney, had previously represented both Murray and Johnson. Glorvigen, an accountant, had prepared Morris's personal taxes for at least 20 years.
¶8 Morris assisted in drafting North Star's Operating Agreement, and drafted two of the Amendments to the Operating Agreement. According to Marx and Murray, Morris was North Star's attorney. They allege that he was paid by North Star for his legal work on behalf of the company, and some of his equity in North Star was received in compensation for his legal work. Morris disputes this. However, it is undisputed that he was a manager of North Star in his capacity as a North Star director.5
¶9 North Star's Operating Agreement reflected an understanding that the members would be free to pursue outside business opportunities. Transacting business with companies who had business relationships with North Star was permitted:
The individuals serving as Directors, as well as the Members and their respective officers, board of directors, directors, shareholders, partners, and affiliates, may engage independently or with others in other business ventures of every nature and description. Nothing in this Agreement shall be deemed to prohibit any Director, or the Members or their respective officers, board of directors, directors, shareholders, partners, and affiliates, from dealing or otherwise engaging in business with Persons transacting business with the Company. Neither the Company, any Director, or any Member shall have any right by virtue of this Agreement, or the relationship created by this Agreement, in or to such other ventures or activities, or to the income or proceeds derived from such other ventures or activities, and the pursuit of such ventures shall not be deemed wrongful or improper.[6 ]
¶10 The Operating Agreement also required that members have prior notice of any vote that may occur during a meeting of members:
No matter shall be voted upon at a meeting of Members unless at least 5 days' notice of the matter to be voted on is given or such notice is waived by any Member who is entitled to vote and who has not received notice.[7 ]
Further, it required that prior notice be given of any matter to be voted upon at a directors' meeting:
No matter shall be voted upon at a meeting of the Directors unless at least 24 hours' notice of the matter to be voted on is given or such notice is waived by any Director not receiving it.[8 ]
However, directors did not have the authority to: "Possess Company property, or assign rights in specific Company property, for other than a purpose of the Company."9
¶11 North Star eventually hired an engineering firm to help it identify potential silica sand reserves, and entered into a number of option agreements for the purchase of land in Jackson County, Wisconsin. North Star also entered into a lease for a property that could be used as a railhead to transport silica sand from the Jackson County properties. The members decided to create a separate entity to control the purchase agreements for certain properties, called the Pine Creek Reserves, that contained substantial silica sand reserves. This entity became Westar Proppants, LLC (Westar), a wholly owned subsidiary of North Star. North Star assigned its Pine Creek purchase options to Westar on the same day Westar was formed.
¶12 Many of Westar's purchase options were set to expire on December 31, 2013. Concern was expressed that North Star and Westar had too much land under option contracts. The members began to discuss the possible cancellation of some of their options. On December 31, 2013, the same day Westar's purchase options were set to expire, the members of North Star met by telephone to discuss Westar's future.
¶13 During this meeting, Morris informed the other members that he and two other people, Gerald Green (Green) and Scott Wesch (Wesch), had formed an entity called DSJ Holdings, LLC (DSJ). Morris also informed the group that he had an ownership interest in DSJ. He stated that DSJ was interested in purchasing Westar and was willing to pay $70,000. At this time, Glorvigen made a motion for North Star to keep Westar. Marx seconded the motion, and it passed by vote of 4-2. Marx, Murray, Glorvigen, and Toy all voted in favor of the motion to keep Westar, while Morris and Johnson voted against it.
¶14 Immediately after the vote, Morris indicated that he may withdraw from North Star. Marx and Murray allege that Morris became "very aggressive" and told Toy that "you're going to lose your million bucks." After a brief discussion, Morris made a motion for North Star to sell Westar to DSJ for $70,000. Murray immediately objected to Morris's motion, arguing that there had been insufficient notice, that a vote had already occurred, and that Morris was conflicted. Despite these objections, a second vote occurred, and Morris's motion passed 4-2. Morris, Johnson, Glorvigen, and Toy voted for North Star to sell Westar to DSJ, while Marx and Murray voted against the sale.
¶15 DSJ subsequently assigned Westar's membership units to R.L. Co., LLC (Morris's LLC) and to Wesch. Morris and Green then formed Hixton Trans-load Facility, LLC (Hixton Trans-load) for the purpose of securing purchase agreements for a new rail head site specifically for the Pine Creek Reserves property. Westar, along with Hixton Trans-load, was sold to Unimin Corporation in early 2015 for what has been alleged to be a substantial sum.10
¶16 In August 2014, North Star unanimously voted to sell its remaining silica sand land assets to Badger Silica. The members signed a "Member Distribution Receipt and Acknowledgement" as part of this transaction, which memorialized the amount each member would receive from the transaction. The receipt also contained the following language:
As of the date hereof, none of the undersigned members have a claim against North Star or against any of the other members of the Company other than for the amount of the distribution set forth on Exhibit A. or for their pro rata share of any retained amounts.
Morris later asked Marx and...
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