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. What a fine article, thank you! I can testify firsthand and by detailed legal reports (at end of this note) as to the dire consequences of rejecting this truth from the fine article above: "The inclusion and expansion of this right [to jury] in Indiana’s Constitution is a clear reflection of our state’s intention to emphasize the importance of every Hoosier’s right to make their case in front of a jury of their peers." Over $20? Every Hoosier? Well then how about when your very vocation is on the line? How about instead of a jury of peers, one faces a bevy of political appointees, mini-czars, who care less about due process of the law than the real czars did? Instead of trial by jury, trial by ideological ordeal run by Orwellian agents? Well that is built into more than a few administrative law committees of the Ind S.Ct., and it is now being weaponized, as is revealed in articles posted at this ezine, to root out post moderns heresies like refusal to stand and pledge allegiance to all things politically correct. My career was burned at the stake for not so saluting, but I think I was just one of the early logs. Due, at least in part, to the removal of the jury from bar admission and bar discipline cases, many more fires will soon be lit. Perhaps one awaits you, dear heretic? Oh, at that Ind. article 12 plank about a remedy at law for every damage done ... ah, well, the founders evidently meant only for those damages done not by the government itself, rabid statists that they were. (Yes, that was sarcasm.) My written reports available here: Denied petition for cert (this time around): http://tinyurl.com/zdmawmw Denied petition for cert (from the 2009 denial and five year banishment): http://tinyurl.com/zcypybh Related, not written by me: Amicus brief: http://tinyurl.com/hvh7qgp

  2. Justice has finally been served. So glad that Dr. Ley can finally sleep peacefully at night knowing the truth has finally come to the surface.

  3. While this right is guaranteed by our Constitution, it has in recent years been hampered by insurance companies, i.e.; the practice of the plaintiff's own insurance company intervening in an action and filing a lien against any proceeds paid to their insured. In essence, causing an additional financial hurdle for a plaintiff to overcome at trial in terms of overall award. In a very real sense an injured party in exercise of their right to trial by jury may be the only party in a cause that would end up with zero compensation.

  4. Why in the world would someone need a person to correct a transcript when a realtime court reporter could provide them with a transcript (rough draft) immediately?

  5. This article proved very enlightening. Right ahead of sitting the LSAT for the first time, I felt a sense of relief that a score of 141 was admitted to an Indiana Law School and did well under unique circumstances. While my GPA is currently 3.91 I fear standardized testing and hope that I too will get a good enough grade for acceptance here at home. Thanks so much for this informative post.

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