Vol. 78, No. 9, September
The First LLC Case
In Gottsacker v. Monnier, the first
limited liability company case to reach the Wisconsin Supreme Court, the
court included in its decision a lengthy discussion of how LLCs work,
touching on the technical details and policies behind the law. The
decision offers guidance and practical advice to attorneys drafting LLC
agreements for their business clients.
by Joseph W. Boucher
& George R. Kamperschroer
t long last, the Wisconsin Supreme Court
issued its first decision directly dealing with Wis. Stat. chapter 183,
the Wisconsin Limited Liability Company Law (WLLCL).1 Gottsacker v. Monnier was decided on June
8, 2005,2 more than 13 years after the WLLCL
first became effective on Jan. 1, 1994. Since its effective date, more
than 100,000 limited liability companies (LLCs) have been created in
Wisconsin; LLCs make up about 80 percent of all new legal entities
formed each year by a filing with the Wisconsin Department of Financial
Institutions (DFI).3 The popularity of LLCs
results from their two basic features: limited liability for the
entity's members (LLC parlance for owners), and treatment as a
partnership for income tax purposes. LLCs also offer minimal filing
requirements (filing of articles of organization can be done either on
paper or online through the DFI's Web site) and a flexible management
The issues in Gottsacker focused on whether the petitioners,
two members of an LLC, possessed the majority votes necessary under a
written "Member's Agreement" to authorize a transfer of the LLC's sole
asset and whether a conflict of interest prohibited them from voting to
transfer the property. Regarding the first issue, the supreme court
interpreted ambiguous language in the Member's Agreement and found that
the petitioners did possess the necessary majority. Second, the court
held that the petitioners' material conflict of interest in the
transaction did not prevent them from approving the transfer, but that
an issue arose as to whether they dealt "fairly" with the LLC and the
other member. The supreme court remanded the case to the circuit court
to resolve this factual issue.
Factually, Gottsacker is a fairly simple case. Julie Monnier
formed New Jersey LLC (the company) in September 1998 as a
member-managed LLC. Shortly thereafter, the company purchased for
$510,000 a commercial rental property located at 2005 New Jersey Avenue
in Sheboygan. A limited appraisal conducted at the time of purchase
valued the property at $703,000. In January 1999, brothers Gregory and
Paul Gottsacker became members of the company. Julie owned 50 percent,
and a Member's Agreement signed by all of the members stated that Paul
and Gregory "collectively" owned 50 percent and had 50 percent of the
voting rights. The company later acquired a second property, which
subsequently was sold, and the proceeds were distributed to the members
pro rata - 50 percent to Julie and 25 percent each to Paul and
Boucher, U.W. 1978, is a CPA and a shareholder in Neider &
Boucher S.C., Madison, where he practices in business law, with an
emphasis in emerging companies. He chaired the State Bar committee that
originally drafted Wisconsin's LLC law. He also coauthored the LLC
and LLP Handbook, published by State Bar CLE Books.
|George R. Kamperschroer,
U.W. 1975, is a CPA and shareholder in the firm, practicing in the area
of business organizations, mergers and acquisitions, and other business
At some point, Gregory and Paul became estranged and Gregory ceased
participating in the company's affairs. In 2001 the company, through the
actions of Julie and Paul, sold the New Jersey Avenue property to a new
LLC named 2005 New Jersey LLC (Newco). Julie owned 60 percent of Newco
and Paul owned 40 percent. The formation of Newco and the transfer of
the property took place without Gregory's knowledge or involvement.
There was no formal meeting approving the sale nor was there an
appraisal of the property. The property was sold by the company for
$510,000, the same price that the company originally paid almost three
years earlier, and considerably less than the earlier limited appraisal
of $703,000. After the transfer to Newco, Julie sent Gregory a check for
$22,000, presumably representing a distribution of 25 percent of the
equity received from the sale of the property.
Gregory never cashed the check. Instead, he sued Paul, Julie, and
Newco in Sheboygan County Circuit Court demanding that the transfer be
voided and the property returned to the company. Gregory argued that the
sale was an improper transfer, because there was an inherent conflict of
interest in that Julie and Paul were on both sides of the
In a detailed memorandum decision,4 the
circuit court ruled that due to the conflict of interest, Julie and Paul
were precluded by law from voting on the transaction and that Gregory
was correct - the property should be returned to the company. The
circuit court concluded that because there was no notice to Gregory of
the sale and because the only remaining asset of the company was sold,
the purpose of the conveyance was to terminate Gregory's interest in the
company. The transfer did not benefit the company nor was it "an
exercise of prudent business judgment on behalf of the LLC." The circuit
court went on to state that the actions of Julie and Paul contravened
the letter and spirit of the WLLCL.
The circuit court focused on Wis. Stat. section 183.0402(1)(a), which
provides that unless an operating agreement states otherwise, no member
may act or fail to act in a manner that constitutes "a willful failure
to deal fairly with the limited liability company or its members in a
connection with a matter in which the member ... has a material
conflict of interest." In the view of the court, this statute
"proscribes a member of a[n] LLC from taking action in the face of a
material conflict of interest." Under this analysis, because Julie and
Paul were not entitled to vote, the transaction had not been approved by
a majority vote of disinterested members. The only "disinterested"
member was Gregory, and he clearly did not approve the transaction.
Since the sale was not and could not be properly approved, the circuit
court ordered Newco to return the property to the company. Under this
analysis, the court did not have to address whether Paul had the
authority to vote all or part of the interest he held "collectively"
with Gregory. Nevertheless, the circuit court did state, in dictum, that
even if Paul were not precluded from voting by a conflict of interest,
he did not have the right to vote the collective interest without
Court of Appeals
The circuit court judgment was appealed by Julie and Paul to the
District II Court of Appeals, which affirmed the lower court decision
but applied different reasoning.5 The court
of appeals focused on Wis. Stat. section 183.0402(1)(a) and agreed with
the circuit court that there was a conflict of interest. The court of
appeals stated that LLC members are fiduciaries, and that by selling the
property to themselves, Julie and Paul were in a position in which their
personal interests were "pitted" against their fiduciary duties to the
company.6 However, the court of appeals
disagreed with the lower court's conclusion that the conflict of
interest precluded Julie and Paul from voting. Instead, the court of
appeals concluded that Wis. Stat. section 183.0402(1)(a) only prohibits
a member from dealing unfairly with the LLC or its members. The
question, then, was not whether Julie and Paul could vote, but whether
they voted their interests "fairly."7
The court of appeals concluded that the transaction was "unfair" for
two reasons. First, the transaction was not at arm's length. Second, the
sale of the property made it impractical for the company to carry on
with its intended business. As a result of this unfairness, the
transaction was unlawful.8 As a result of
this conclusion the court of appeals did not have to address the issue
of whether Paul had the authority to vote the shares he owned
collectively with Gregory. The court of appeals upheld the circuit
court's decision returning the property to the company. Julie, Paul, and
Newco appealed the decision to the Wisconsin Supreme Court.9
Supreme Court Opinion
In an opinion written by Justice Bradley, the Wisconsin Supreme Court
reversed the court of appeals' decision and remanded the case to the
circuit court.10 After reciting the facts
in detail, the court engaged in a lengthy discussion of the intent of
the WLLCL and how LLCs work.11 The court's
discussion touches on many of the technical details and policies behind
the law and evidences a solid understanding of the nature of this
relatively new business form.
In the opinion, the supreme court addressed several issues. The first
issue was whether Julie and Paul possessed the majority necessary to
authorize the sale. The court focused on the meaning of the language
referring to Paul and Gregory collectively owning a 50 percent interest.
The court thought the provision was ambiguous and construed
"collectively" to mean the sum of the brothers' two separate 25 percent
interests and not a single 50 percent interest that would require both
Gregory and Paul to consent to any action.12 Therefore, Paul and Julie, as the owners of 75
percent of the total interests, possessed the majority necessary to
authorize the transaction.
The second question was whether Paul and Julie were prohibited from
voting to transfer the property. With very little discussion, the court
quickly agreed with both lower courts that the transaction involved a
material conflict of interest on behalf of Julie and Paul.13 The real question was the effect of this
conflict of interest. The supreme court analyzed Wis. Stat. sections
183.0402 and 183.0404 and concluded that members with a conflict of
interest can vote if their actions do not constitute a willful failure
to treat the LLC or the other members "fairly":
"[T]he WLLCL ... prohibits members with a material conflict of
interest from acting in a manner that constitutes a willful failure to
deal fairly with the LLC or its other members. We interpret this
requirement to mean that members with a material conflict of interest
may not willfully act or fail to act in a manner that will have the
effect of injuring the LLC or its other members."14
The issue of "fairness" requires a factual determination, and under
the circuit court's analysis that Julie and Paul could not vote at all,
that court did not have to make any findings of fact on the fairness
issue. Although the court of appeals did decide that the actions of
Julie and Paul were not fair, the supreme court held that those
conclusions were findings of fact and that the court of appeals did not
have the authority to make them. The supreme court therefore remanded
the case to the circuit court for further findings on this issue,
summarizing its holding as follows:
"In sum, we conclude that ... [Julie and Paul] possessed the
majority necessary to authorize the transfer in question. Furthermore,
we determine that ... [their] material conflict of interest did not
prohibit them from voting to make the transfer so long as they dealt
fairly. However, because there was no express determination by the
circuit court as to whether the petitioners willfully failed to deal
fairly with ... [the company] or its other member, we reverse the
decision of the court of appeals and remand the case for further
What Did "Collectively" Mean?
The supreme court's opinion is based in part on its interpretation of
the language that the Gottsacker brothers' "collectively" own a 50
percent interest. The Member's Agreement provides for this collective
interest but fails to clarify what it means. The supreme court
ultimately concluded that "collectively" means the sum of the brothers'
individual 25 percent interests. Essentially, the court came to this
conclusion to avoid the outcome of one minority member being able to
deadlock the LLC in a voting situation in the absence of express
language requiring unanimity.16
One commentator has suggested that the issue of Paul's authority to
vote the ownership interest could be resolved by resorting to
partnership law, an approach in which the justices had expressed
interest at the oral argument.17 Under Wis.
Stat. chapter 178, a general partnership needs no formal organizational
structure, but is simply an association of two or more persons to carry
on as co-owners of a business for profit.18
On the facts presented, the supreme court could have decided that there
was a general partnership between Paul and Gregory as to their 50
percent interest. Under that approach, the case would have revolved more
around the relationship between Paul and Gregory, with the outcome of
the case turning on issues such as the power of general partners to act
on behalf of a partnership and the fiduciary duties owed by a general
partner to the partnership and the other partners. By construing the
language as it did, the supreme court declined to take this path and did
not address it at all in its decision. As a result, the court provided
more guidance on the WLLCL than it otherwise might have.
What is "Fair"?
Although the court of appeals clearly stated that LLC members have a
fiduciary duty to the LLC and other members,19 the supreme court's opinion is silent on this
issue. In the supreme court's view, the only standard necessary to
determine whether the transfer was appropriate is the statutory
standard: whether the members willfully acted or failed to act in a
manner that "will have the effect of injuring the LLC or its other
members."20 Further, the supreme court
stated that this inquiry contemplates "both the conduct along with the
end result, which we view as intertwined," a reference to the
distinction between procedural fairness and substantive fairness. In
Gottsacker, Gregory had no knowledge of the property transfer
until after the fact (procedural), there was no new appraisal
(procedural and substantive), and the price for which the property was
sold was less than the earlier appraisal (substantive).
How the circuit court will treat these and related facts and the
"intertwined" nature of procedural and substantive fairness remains to
be seen. It is worth noting that the Wisconsin statute on business
corporations deals more specifically with conflicts of interest,
specifying tests for director action that require either
procedural fairness, or substantive fairness, but not both.21
Gottsacker v. Monnier provides practical guidelines for
attorneys. First, and most important, the safest route is for attorneys
to advise their clients that in an appropriate case the courts will
likely decide that LLC members have a fiduciary duty to the LLC and
other members and that clients should act accordingly. Although the
supreme court did not discuss this issue, the court of appeals stated
this conclusion directly.
Second, attorneys should counsel their LLC clients that regardless of
whether they are fiduciaries, as LLC members they have a clear statutory
duty to act "fairly" when they have a conflict of interest. All proposed
actions involving self dealing should be closely scrutinized using this
standard, and until further clarification, the test for fairness should
be both procedural and substantive. That is, both the process followed
and the resulting actions must be fair. Further, when a self-dealing
transaction involves an asset that can be appraised, it is always
advisable to appraise the asset.
Moreover, when drafting operating agreements, attorneys should be
careful to clearly define the voting rights of all the members. Of
course, this principle should be applied to drafting all provisions of
any operating agreement (or any other written document). Finally, as is
usually true in closely held businesses, more documentation, discussion,
and communication are better than less to avoid lengthy and expensive
Gottsacker provides Wisconsin the first glimpse of the
supreme court's treatment of limited liability companies. Because LLCs
are a relatively new form of business entity, attorneys can look forward
to more cases in this developing area.
1The WLLCL was drafted in 1992 and
1993 by the State Bar Business Law Committee, consisting of Joseph W.
Boucher, chair, and members Leonard Sosnowski, Mark Christopher, Mike
Reinecke, Michael Klinker, Robert Fahrenbach, and the Legislative
Reference Bureau staff.
2Gottsacker v. Monnier,
2005 WI 69, __ Wis. 2d __, 697 N.W.2d 436.
3Joseph W. Boucher et al., LLCs
and LLPs: A Wisconsin Handbook § 2.27a (table "Summary of New
Entities Created") (rev. ed. 1999). An update is expected in autumn
4Gottsacker v. Monnier,
No. 01-CV-636 (Sheboygan Cir. Ct. Nov. 20, 2002).
5Gottsacker v. Monnier,
2004 WI App 25, 269 Wis. 2d 667, 676 N.W.2d 533.
6Id. ¶ 15.
7Id. ¶ 19.
8Id. ¶ 27.
9It is rare for the Wisconsin
Supreme Court to hear a case dealing with business entities. Since 1990,
there have been about three cases each year concerning the application
and interpretation of either Wis. Stat. chapter 178 (general
partnerships and LLPs), chapter 179 (limited partnerships), chapter 180
(corporations), or chapter 181 (nonstock corporations). Many of those
decisions deal with procedural and tax issues. Very few of those
decisions address the substantive governance provisions of those
10Gottsacker v. Monnier,
2005 WI 69, __ Wis. 2d __, 697 N.W.2d 436. Justice Roggensack filed a
concurring opinion that was joined by Justice Wilcox. Justice Butler
filed a dissent.
11Id. ¶ ¶
12Id. ¶ 25.
13Id. ¶ 26
14Id. ¶ 31.
15Id. ¶ 37.
16Id. ¶ 25.
17Richard A. Latta, Supreme Court
Action May Dramatically Impact Duties of LLC Members, Bus. L. News,
March 2005, at 1-5.
18Wis. Stat. §
Monnier, 2004 WI App 25, 269 Wis. 2d 667, 676 N.W.2d 533.
Monnier, 2005 WI 69, __ Wis. 2d __, 697 N.W.2d 436.
21Wis. Stat. § 180.0831.