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The Right to an Accounting in Disputes among Members or During Dissolution of LLCs

The right to an accounting by a partner during disputes or at the dissolution of a partnership had long been recognized. The right of a member of a limited liability company (LLC) to an accounting has not been as clear, even though LLCs have been widely used for more than two decades. Although many state statutes are silent as to the right of an accounting in disputes involving LLCs, recent case law seems to be trending towards similar rights of members for accountings in some circumstances.
The Indiana Business Flexibility Act, Burns Ind. Code Ann. § 23-18-1-1 et seq., which governs LLCs, is silent on the right to an accounting by a member. The Court of Appeals of Indiana ruled this year though in Perkins v. Brown, 901 N.E.2d 63 (Ind. Ct. App. 2009), that a trial court erred when it failed to order an accounting of an LLC's finances in order to determine the proper distribution to the LLC's creditors and the members upon dissolution of the LLC. The LLC was an executive search firm that was owned by two members. When defendant member proposed to change the compensation plan of the LLC so that the compensation was not spilt equally between the members, plaintiff member refused, and the plaintiff then began to receive less information as to the finances of the LLC. The plaintiff sought dissolution of the LLC, and the trial court granted the dissolution and awarded a distribution amount to the plaintiff from the LLC and the defendant based upon the plaintiff’s testimony. The defendant then appealed the failure of the trial court to order an accounting before approving the distribution. The court of appeals held that it was error for the trial court to determine the amount of the distribution that the plaintiff was due in the dissolution of the LLC without ordering an accounting of the LLC's finances.
Similarly, the Kentucky Limited Liability Company Act, KRS § 275.001, et seq., is also silent as to the power of a court to order an accounting. The Court of Appeals of Kentucky has very recently ruled in Gentry v. Cremeens, 2009 Ky. App. Unpub. Lexis 139 (Ky. Ct. App. 2009), that a trial court could grant a member’s request for an accounting and subsequent judicial dissolution of an LLC. The LLC was formed by the two members for the operation of a used car lot. After only two months though, the plaintiff member sought an accounting and dissolution. The trial court ordered an accounting, rejected defendant member’s proffered accounting, and then approved the dissolution of the LLC without approving any accounting. The court of appeals held that “The circuit court erred by entering summary judgment at this stage in the accounting. After rendering an order to account, the court must then conduct the accounting and render final judgment.”
In a very short two paragraph opinion earlier this year, Gottlieb v. Northriver Trading Co. LLC, 58 A.D.3d 550 (N.Y. App. Div. 1st Dep't 2009), the Supreme Court of New York, Appellate Division, ruled that “members of a limited liability company may seek an equitable accounting under common law.” The appellate division found that the right to an accounting existed even though no explicit right to an accounting exists in the New York Limited Liability Company Law, NY CLS LLC § 101 et seq. A year earlier, another department of the appellate division had stated without explanation in East Quogue Jet, LLC v. East Quogue Members, LLC, 50 A.D.3d 1089 (N.Y. App. Div. 2d Dep't 2008), that a member of an LLC had a right to demand an accounting.
A Pennsylvania court ruled last year that a member of an LLC had a right to an accounting if certain allegations were shown. In Baird v. Macklin, 2008 Pa. Dist. & Cnty. Dec. LEXIS 130 (Pa. County Ct. 2008), the court found that the plaintiff failed to sufficiently plead “any of required elements of the cause of action for an accounting.” The court initially stated that there was no case law specifically granting the right to an accounting. “Defendants argue that Count I of the Plaintiff's Complaint inappropriately asserts a separate cause of action for an ‘accounting’. Defendants' brief is devoid of any Pennsylvania case law to support their claim, and our research found no cases from this jurisdiction regarding members of an LLC alleging a cairn for accounting.” The court proceeded to rule, though, that a member could properly state a cause of action at law for an accounting if the member asserted a breach of contract claim or any other claim for assumpsit. Furthermore, a member could properly “assert a separate action for an accounting in equity, provided there is a sustainable underlying equity claim….Thus, Plaintiff must state another valid equitable cause of action in order to proceed with a claim for accounting.” The court granted the plaintiff leave of court for thirty days in which to file an amended complaint that stated a legally sufficient equity claim for an accounting.
Although it found that a full accounting was not the appropriate remedy in the case before it because “a full financial accounting would unnecessarily prolong this otherwise simple matter”, the Supreme Court of South Carolina has stated in Historic Charleston Holdings, LLC v. Mallon, 381 S.C. 417 (S.C. 2009), that an accounting of an LLC could be proper in some circumstances pursuant to S.C. Code Ann. § 33-44-410 of the South Carolina Limited Liability Company Act. Similarly, the Court of Appeals of Tennessee held in Braden v. Strong, 2009 Tenn. App. Lexis 54 (Tenn. Ct. App. 2009), that although a member was not entitled to an additional expanded accounting of the LLC, the court of appeals had earlier ruled that she had been entitled to an initial accounting, which was completed.
In states where the limited liability law is not clear as to the right to an accounting upon dissolution of an LLC, or when one member brings an action against an LLC and the other members, legal counsel should expect that trial courts will look favorably upon the right to an accounting. The case law for 2008 and 2009 shows that courts are inclined to approve the longtime remedy of an accounting for LLC disputes.