ILNews

Court rules on LLC matter of first impression

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The Indiana Court of Appeals had to decide for the first time whether a company owes a continuing fiduciary duty to a former shareholder or member to accurately report the company's fiscal results to the IRS for a year in which the former member held stock or was still a member of the limited liability company.

In Mike A. Abdalla, et al. v. Raed I. and Hani I. Qadorh-Zadin, No. 49A04-0812-CV-707, the appellate court noted LLCs weren't available in Indiana until 1993, so there is little caselaw regarding them and even less caselaw concerning fiduciary duties in the LLC context.

The Qadorh-Zadins sold in August 2006 their membership interest in various LLCs and their shares in Q Realty, which they owned with the Abdallas. In 2007, the Qadorh-Zadins received their Schedule K-1s and wanted the companies' former accountant to review them because they believed there were discrepancies. The Qadorh-Zidans also requested to see the companies' books for the year in question. The Abdallas refused, which led to the Qadorh-Zidans filing a complaint alleging breach of fiduciary duty, negligence, and request for declaratory relief to inspect the books.

The trial court denied the Abdallas' motion for summary judgment and certified the case for interlocutory appeal.

The Abdallas claimed because the Qadorh-Zadins were no longer members or stockholders of the companies, they can't be allowed to see the books and they owe no fiduciary duty to the Qadohr-Zadins.

The Court of Appeals found Thompson v. Central Ohio Cellular, Inc. f.k.a. Cellwave, Inc., et al., 639 N.E.2d 462 (Ohio Ct. App. 1994), to be instructive. The Ohio court ruled Cellwave owed a fiduciary duty to Thompson for the time when Thompson was still a stockholder in the company.

In the instant case, the appellate court ruled that because the tax incurring actions happened during the existence of the fiduciary relationship, a fiduciary duty is owed regardless as to when the tax returns were actually completed, wrote Judge Patricia Riley.

"To hold otherwise would give the Abdallas the freedom to allocate tax burdens to the Zidans and retain tax benefits for themselves without allowing the Zidans any recourse to verify or rectify this allocation," she wrote.

The Court of Appeals agreed with the Abdallas that when the Qadorh-Zidans asked to review the companies' records, they were no longer members or shareholders; however, the Qadorh-Zidans wanted financial information covering only the period when they were still members or shareholders.

"Although the Zidans' request might inconvenience the Abdallas, this inspection is to the greater benefit of the companies and all parties. Accordingly, we conclude that the Zidans should be allowed limited access to the records, as this request covers a time while the Zidans had an interest in the companies," she wrote.

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  1. I gave tempparry guardship to a friend of my granddaughter in 2012. I went to prison. I had custody. My daughter went to prison to. We are out. My daughter gave me custody but can get her back. She was not order to give me custody . but now we want granddaughter back from friend. She's 14 now. What rights do we have

  2. This sure is not what most who value good governance consider the Rule of Law to entail: "In a letter dated March 2, which Brizzi forwarded to IBJ, the commission dismissed the grievance “on grounds that there is not reasonable cause to believe that you are guilty of misconduct.”" Yet two month later reasonable cause does exist? (Or is the commission forging ahead, the need for reasonable belief be damned? -- A seeming violation of the Rules of Profession Ethics on the part of the commission) Could the rule of law theory cause one to believe that an explanation is in order? Could it be that Hoosier attorneys live under Imperial Law (which is also a t-word that rhymes with infamy) in which the Platonic guardians can do no wrong and never owe the plebeian class any explanation for their powerful actions. (Might makes it right?) Could this be a case of politics directing the commission, as celebrated IU Mauer Professor (the late) Patrick Baude warned was happening 20 years ago in his controversial (whisteblowing) ethics lecture on a quite similar topic: http://www.repository.law.indiana.edu/cgi/viewcontent.cgi?article=1498&context=ilj

  3. I have a case presently pending cert review before the SCOTUS that reveals just how Indiana regulates the bar. I have been denied licensure for life for holding the wrong views and questioning the grand inquisitors as to their duties as to state and federal constitutional due process. True story: https://www.scribd.com/doc/299040839/2016Petitionforcert-to-SCOTUS Shorter, Amici brief serving to frame issue as misuse of govt licensure: https://www.scribd.com/doc/312841269/Thomas-More-Society-Amicus-Brown-v-Ind-Bd-of-Law-Examiners

  4. Here's an idea...how about we MORE heavily regulate the law schools to reduce the surplus of graduates, driving starting salaries up for those new grads, so that we can all pay our insane amount of student loans off in a reasonable amount of time and then be able to afford to do pro bono & low-fee work? I've got friends in other industries, radiology for example, and their schools accept a very limited number of students so there will never be a glut of new grads and everyone's pay stays high. For example, my radiologist friend's school accepted just six new students per year.

  5. I totally agree with John Smith.

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