District Court Defines Managerial Role in LLCs

District Court Defines Managerial Role in LLCs

An individual who performs some, but not all, of the managerial duties for a limited liability company and is not listed as a manager in the entity’s LLC agreement cannot be sued as a manager under Delaware’s LLC Act, the U.S. District Court for the District of Delaware has ruled. The federal court issued the opinion when it dismissed claims against two individuals who oversaw certain aspects of an LLC’s business but did not have managerial authority under the LLC agreement.

U.S. District Chief Judge Gregory M. Sleet applied precedent established by the Delaware Court of Chancery in Vichi v. Koninklijke Philips Electronics, a 2009 ruling, to reach his conclusion in Wakley Ltd. v. Ensotran LLC.

Elmer Yuen is the manager of Wakley Ltd., a Hong Kong company formed to invest in technology companies. In January 2012, Yuen agreed to pay $1.7 million for a one-third equity interest in Ensotran, a Delaware LLC and holding company for intellectual property, according to the court’s opinion. Under the transaction’s term sheet, Ensotran was managed by a three-person board. The board was composed of Ensotran CEO Primal Fernando, President Steven Fischer and Wakley.

The term sheet also required Yuen to appoint a vice president of business development and a financial controller to Ensotran, to be paid by Wakley. Yuen hired Roger Baar to serve as the vice president of business development and Donna Baar as the financial controller, according to court documents.

Yuen and Roger Baar became increasingly involved in Ensotran’s daily operations, and by April 2012, they began to differ with Ensotran’s management on a few technological development projects, according to court documents.

Ensotran alleged in court documents that Roger Baar began to assume control of the company’s operations and took the lead over a key technology project.

In May 2012, Donna Baar transferred $989,914 from Ensotran’s bank to Rosebank, a California corporation she controlled with Roger Baar. She also prepared a new balance sheet that listed Wakley as a creditor that loaned $722,070 to Ensotran instead of an equity partner, according to court documents.

Ensotran alleged that Roger Baar told Fischer in June 2012 that Wakley would bankrupt Ensotran unless the entity received a 55 percent interest in the company. Baar claimed that Wakley was an Ensotran creditor and not a partner because the equity agreement was never finalized, according to court documents. Ensotran’s management rejected Baar’s request, and eventually became insolvent.

Wakley then filed a June 2012 lawsuit alleging breach of contract, conversion, fraudulent misrepresentation, negligent misrepresentation and unjust enrichment against Ensotran. The defendants responded with counterclaims against Wakley, Yuen and the Baars. The Baars filed a motion asserting that they were not Ensotran’s managers, so the district court did not have personal jurisdiction over them regarding the counterclaims.

Sleet granted the Baars’ motion, ruling that the court does not have jurisdiction over the Baars.

“The court finds it doesn’t have a statutory basis for personal jurisdiction over Roger and Donna because they are not managers of Ensotran pursuant to 6 Del. C. Section 18-109(a),” Sleet said. “Ensotran’s averments fail to convince the court that Roger and Donna were not acting at the direction of, and as representatives for, Wakley and Yuen. Accordingly, the court finds that roles Roger and Donna performed at the request or direction of Wakley and Yuen did not transform them into a manager of Ensotran under 6 Del. C. Section 18-407.”

Sleet concluded that under Vichi, there is no evidence that Roger Baar “took over in all respects” Ensotran’s day-to-day operations or ran the company’s entire business.

Ensotran contended that in Phillips v. Hove, a 2011 Chancery Court ruling, the trial court held that a defendant consented to personal jurisdiction by assuming increasing control over the company’s daily operations. But Sleet said the cases were not similar because the defendant in Hove testified that his control over the company steadily increased.

“Ensotran’s allegations that Roger assumed management over one of its projects … does not equate to Roger effectively running Ensotran’s entire business or an assertion of authority over Ensotran analogous to the facts in Hove,” Sleet said. “Even accepting well-pleaded allegations as true, these facts fail to demonstrate the necessary control or decision-making role that has been found to satisfy the statutory standard for personal jurisdiction.”

Sleet also barred the defendant’s claims against Donna Baar. Although Ensotran claimed that Donna Baar was a manager because she maintained the company’s books and records, was the sole signatory on Ensotran’s bank account and managed its funds, the court held that she did not manage the company itself, only one aspect of it.

“Here, the court finds Donna’s authority was similarly constrained. Although the term sheet granted her broad authority over Ensotran’s finances, her power ‘was subject to the decisions and instructions of the board,’” Sleet said. “Therefore, the court finds Donna is not a ‘manager’ under Section 18-109(a)(ii) because she did not participate materially in the management of Ensotran.”

Thad J. Bracegirdle of Wilks, Lukoff & Bracegirdle represented Ensotran, and Michael P. Kelly of McCarter & English argued on behalf of the Baars and Wakley. Bracegirdle declined to comment on Sleet’s decision, while Kelly did not return calls seeking comment.

Jeff Mordock can be contacted at 215-557-2485 or jmordock@alm.com. Follow him on Twitter @JeffMordockTLI.

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