In 2005, the district court ruled in respondents favor,
imposing a constructive trust on Kaufman's interest. In 2008, this court
reversed the district court's order and remanded with instructions that the
proper remedy was a charging order. On remand in 2011, the district
court instead concluded that Kaufman lacked an ownership interest in
HLK, thus avoiding the remedial issue. The district court also awarded
attorney fees and costs to respondents and dismissed all remaining claims
between the parties. 2
On appeal, we must determine whether a member of a limited
liability company (LLC) loses his membership interest by failing to make
an initial capital contribution. NRS 86.321 provides that the contribution
to capital may be in a form other than cash, such as a promise to perform,
and that the failure to make a contribution only creates a liability for that
amount to the LLC under NRS 86.391. Accordingly, the district court
erred in finding that Kaufman did not have an interest in the proceeds of
the dissolution of HLK. We also conclude that the district court abused its
discretion in awarding attorney fees and that the respondents waived
their right to appeal the district court's dismissal of their counterclaim.
Standard of review
This court reviews issues of law de novo and issues of fact for
substantial evidence on the record. Keife v. Logan, 119 Nev. 372, 374, 75
P.3d 357, 359 (2003). This court reviews a district court's award of
attorney fees for an abuse of discretion. Thomas v. City of N. Las Vegas,
122 Nev. 82, 90, 127 P.3d 1057, 1063 (2006).
2As the parties are familiar with the facts, we do not recount them
further except as necessary to our disposition.
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The district court erred by concluding that Kaufman had no ownership
interest in HLK
Kaufman argues that the district court erred by ruling that
Kaufman had no ownership interest in HLK upon dissolution because he
did not make an initial capital contribution. We agree, as Kaufman's
failure to make his initial contribution only creates a liability to the LLC
for the amount owed, while the remaining assets of the LLC should be
divided based on the members' percentage interest in the LLC as stated in
the operating agreement.
A promise to perform is sufficient to create a membership interest in
an LLC
NRS 86.321 broadly provides that "contributions to capital of a
member to a limited-liability company may be in cash, property or services
rendered, or a promissory note or other binding obligation to contribute
cash or property or to perform services." (Emphasis added). If an
expected contribution is not satisfied, NRS 86.391(1)(a) makes a member
liable to an LLC "[f]or a difference between the member's contributions to
capital as actually made and as stated in the articles of organization or
operating agreement as having been made." In other words, these
provisions plainly provide that Nevada treats a promise to perform (i.e.,
make a capital contribution) as sufficient to create a membership interest,
NRS 86.321, and failure to perform the promise creates a liability to the
LLC, not a forfeiture of the breaching member's interest, NRS
86.391(1)(a).
Here, the district court found that Kaufman breached his
fiduciary duties to Restaurant Facilities, LTD (RFL), by improperly taking
$24,600 from the company to satisfy his contribution, and imposed a
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judgment against Kaufman to repay RFL. 3 Hawley has never requested
that Kaufman repay the remaining $30,000 portion of his contribution and
Kaufman has not done so. However, under NRS 86.391(1)(a), Kaufman's
failure to make a contribution contemplated by the operating agreement
or articles of incorporation only creates a liability to HLK or to those from
whom Kaufman received the money used to satisfy an obligation to the
LLC (i.e., RFL and Hawley). Thus, Kaufman did not necessarily have to
satisfy his initial contribution in order to retain a membership interest.
As we have previously instructed, the exclusive remedy against the
member's interest is a charging order. See Hawley v. Kaufman, Docket
No. 46634 (Order Granting Rehearing and Affirming in Part, Reversing in
Part, and Remanding with Instructions, May 8, 2008) (holding that NRS
86.401 provides the exclusive remedy for a judgment creditor against an
LLC member's interest).
Kaufman's failure to make a required contribution created a liability
to HLK
NRS 86.521(1)(c) provides that upon dissolution, payments go
to the members in respect to their capital contributions. However, NRS
86.521(2) conditions such apportionment on the terms of the operating
agreement. In other words, once each member's initial contribution is
repaid, the remaining assets should be divided by the interest defined in
the operating agreement, not the percentage of each member's actual
capital contribution.
The district court concluded that Kaufman was not entitled to
any proceeds upon HLK's dissolution because "the ownership percentage
3 Kaufman has since repaid RFL and satisfied this judgment.
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of prospective members of HLK was determined by the contributions made
by each member." However, the operating agreement (which trumps NRS
86.521(1)(c)'s default rule) sets forth the respective ownership interests
and leaves the amount of initial contributions blank. Subsequent to
signing the operating agreement, the parties divided the purchase price of
RFL's facility by their respective interests. Therefore, Kaufman's
predetermined interest, as stated in the operating agreement, defined the
amount of his contribution, not vice versa. By paying less than his share
of the purchase price, Kaufman only created a liability to HLK, not a
diminished interest upon dissolution. See NRS 86.391, NRS 86.321.
Accordingly, the district court erred by concluding that
Kaufman's failure to make an initial contribution eliminated his
membership interest in the LLC upon dissolution.
The district court abused its discretion by awarding attorney fees and costs
Kaufman argues that the district court's fee award was
premature because it had yet to address his claims against HLK for
dissolution and for a determination of his interest. 4 We conclude that
Kaufman's argument has merit.
4 HLK contends that all of Kaufman's claims were dismissed on their
merits prior to the 2005 judgment, such that they were not revived by this
court's 2008 reversal. This argument fails, however. The record reflects
that the district court dismissed Kaufman's claims against Hawley and
Mello as individuals because they were not proper parties under NRS
86.371. However, the record does not support that any of Kaufman's
claims against HLK as a separate defendant were similarly dismissed.
Instead, Kaufman's claims against HLK for dissolution and his rights
thereof survived summary judgment and were not resolved until after the
district court's award of attorney fees.
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This court reviews a district court's award of attorney fees for
an abuse of discretion. Thomas, 122 Nev. at 90, 127 P.3d at 1063. To
support an award of attorney fees to a prevailing party under NRS
18.010(2)(b), "there must be evidence in the record supporting the
proposition that the complaint was brought without reasonable grounds or
to harass the other party." Kahn v. Morse & Mowbray, 121 Nev. 464, 479,
117 P.3d 227, 238 (2005) (internal quotations omitted).
Because the crux of Kaufman's initial complaint appears to
revolve around his ownership interest in HLK and his rights upon
dissolution, the fee award was premature because the district court had
yet to revisit these claims in the wake of this court's remand. Although
this court affirmed that Kaufman was liable to HLK as a prevailing party
(albeit through a different remedy), the district court subsequently
granted Kaufman partial summary judgment with regard to his
dissolution claim. Thus, it was an abuse of discretion for the district court
to award attorney fees to HLK for "all of the billings incurred" in defense
of Kaufman's complaint, as the record reflects that the dissolution claim
was brought on reasonable grounds. Moreover, the district court's 2008
award fails to include any discussion on whether the full amount of fees
and costs is reasonable. See Brunzell v. Golden Gate Nat'l Bank, 85 Nev.
345, 349, 455 P.2d 31, 33 (1969) (directing the district court to consider
four factors in calculating the reasonableness of attorney fees: (1) the
qualities of the attorney, (2) the character of the work to be done, (3) the
actual work performed by the attorney, and (4) the case's result).
Accordingly, we conclude that the district court erred in
awarding the full amount of HLK's requested attorney fees and costs
6
because the record reflects that Kaufman's claim for dissolution was
reasonable. 5 Kahn, 121 Nev. at 479, 117 P.3d at 238.
The district court did not err by dismissing HLK and Hawley's
counterclaim for accounting and judgment
In its 2005 judgment, the district court dismissed all claims
not expressly granted, summarily dismissing by implication HLK and
Hawley's counterclaim for an accounting. HLK and Hawley contend that
the district court erred because the dismissal failed to comply with NRCP
52(a), which requires the district court to set forth findings of facts and
conclusions of law to support its decision.
NRCP 52(b) gives the parties 10 days to submit a motion to
amend the findings. A party does not preserve their argument for appeal
where the party does not move to amend the findings, even where the
district court fails to satisfy NRCP 52(a). Solar, Inc. v. Elec. Smith Constr.
and Equip. Co., 88 Nev. 457, 459, 499 P.2d 649, 649-50 (1972).
Because HLK and Hawley's counterclaim was dismissed in the
district court's 2005 judgment, and since this court's remand did not
revive that claim, the 2005 judgment was a final judgment in regard to the
counterclaim. By failing to make a motion to amend or make additional
findings pursuant to NRCP 52(b), HLK and Hawley have not preserved
their right to challenge the sufficiency of the district court's findings. As
5 Kaufman also argues on appeal that this court should remand with
explicit instructions that the district court address his claim that HLK
converted his ownership interest and to award damages. Because the
district court dismissed Kaufman's conversion claim on its merits in its
2005 judgment, and because Kaufman did not raise this argument in the
previous appeal, the argument is waived. Molino v. Asher, 96 Nev. 814,
818, 618 P.2d 878, 880 (1980) (precluding relitigation on remand issues for
which final judgment was given).
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such, Hawley and HLK waived their NRCP 52(a) argument by failing to
timely raise it.
Accordingly, we
ORDER the judgment of the district court AFFIRMED IN
PART AND REVERSED IN PART AND REMAND this matter to the
district court for proceedings consistent with this order.
C.J.
Gibbons
J.
Parraguirre
J.
J.
J.
Saitta
cc: Hon. Brent T. Adams, District Judge
Molof & Vohl
Jack I. McAuliffe, Chtd.
Washoe District Court Clerk
8