#24600-rev & rem-JKK
2008 SD 76
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
* * * *
LORRAINE E. KIRKSEY, f/k/a
Lorraine E. Bach, and
LUCILLE E. RUBY, Plaintiffs and Appellants,
v.
DOROTHY E. GROHMANN and
EILEEN C. RANDELL, Defendants and Appellees.
* * * *
APPEAL FROM THE CIRCUIT COURT OF
THE FOURTH JUDICIAL CIRCUIT
BUTTE COUNTY, SOUTH DAKOTA
* * * *
HONORABLE JOHN W. BASTIAN
Judge
* * * *
DWIGHT A. GUBBRUD of
Bennett, Main & Gubbrud, P.C. Attorneys for plaintiffs
Belle Fourche, South Dakota and appellants.
RONDA MILLER Attorney for defendant
Belle Fourche, South Dakota and appellees.
* * * *
ARGUED ON JANUARY 9, 2008
OPINION FILED 07/30/08
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KONENKAMP, Justice
[¶1.] Four sisters inherited equal ownership in their family’s land. They
formed a limited liability company, conveying their property interests to the
company in exchange for equal ownership in the LLC. One sister lives on the land
and manages the LLC, and another sister leases the land for livestock grazing. Two
other sisters live a great distance from the land. These sisters, who once agreed,
are now divided. They speak only through their lawyers. Two sought to terminate
the lease and dissolve the LLC; the other two opposed it. A majority vote is
required, but the sisters are deadlocked. Judicial dissolution was sought and the
circuit court granted summary judgment against it. On appeal, we conclude that it
is not reasonably practicable for the company to continue and the economic purpose
of the LLC is being unreasonably frustrated. We reverse and remand for an order
of judicial dissolution.
Background
[¶2.] On July 10, 2001, Grace Kirksey died. She had four daughters:
Lucille Ruby, Lorraine Kirksey, Dorothy Grohmann, and Eileen Randell. Grace left
her four daughters equal ownership interest in 2,769 acres of land in Butte County,
South Dakota, and 401 acres in Crook County, Wyoming. These tracts composing
the Kirksey land have been in the family for over 100 years. Grohmann lives on
and manages this land, and Randell lives in Rapid City, South Dakota. Kirksey
lives in California, and Ruby lives in Colorado.
[¶3.] On October 7, 2002, the four daughters formed a limited liability
company, Kirksey Family Ranch, LLC, to hold title to the land. Each sister
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conveyed her one-quarter interest in the property to the LLC in exchange for a 25%
ownership in the company. Grohmann would serve as the manager. They formed
the LLC (1) to avoid paying certain estate taxes by employing a special use
valuation, (2) to keep the land in the family, and (3) to keep ownership interest in
the real property with the sisters and not their spouses.
[¶4.] At the time of their mother’s death, the land was valued at $550,000.
With the special use valuation, it was reported to be valued at $215,000. To obtain
the benefit of this valuation certain family members were required, among other
things, to retain ownership in the land for ten years, and it was to be used for
agricultural purposes. The eldest sister, Grohmann, had lived on the Kirksey land
as a hired hand before their mother’s death. Grohmann, Kirksey, and Randell each
owned grazing livestock on the land. To continue the agricultural operation, the
sisters decided that the LLC would lease the land to Grohmann, Kirksey, and
Randell.
[¶5.] A lease agreement was executed in October 2002, effective September
1, 2002. It provided for an initial term of five years, to be automatically renewed for
another year unless either party gave written notice of intent to terminate within
ninety days before the termination of the lease. The annual rental rate was set at
$14,263.20. The LLC, as the landlord, was responsible for all the real estate taxes
and insurance.
[¶6.] Not long after the formation of the LLC, relations deteriorated.
According to Kirksey, Grohmann and Randell “failed or refused to share
information” with her on the operation of the ranch, on which she owned livestock
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as a tenant to the lease. She claimed that she wrote Grohmann “dozens of pages of
letters” to resolve disagreements and requested information about livestock and
other issues. She insisted that Grohmann did not provide the requested
information and, if she did, it was either inaccurate or unreliable. Also, according to
Kirksey, Grohmann and Randell subleased 401 acres of the land without notice to
the LLC, as required by the lease agreement.
[¶7.] Grohmann, on the other hand, said that she always gave Kirksey
necessary information. She further contended that the LLC was given notice of the
sublease because the members of the LLC, the sisters, were aware of the sublease
arrangement when Grohmann initially divided up the sublease payments equally
and attempted to share them with all the LLC members. Grohmann said that
Kirksey accepted the payment, but Ruby did not as she was not a tenant to the
lease.
[¶8.] Because of her continued frustrations with Grohmann and Randell,
Kirksey sold them her interest in the livestock in 2003. Grohmann and Randell
were then the only tenants on the lease agreement. This, however, did not end the
contentious relationship between the sisters. Kirksey and Ruby hired a real estate
agent to value the Kirksey land. It was estimated to be worth in excess of $3.2
million. Kirksey and Ruby then sought to terminate the lease agreement, dissolve
the LLC, and partition the land.
[¶9.] A meeting of the LLC was held on May 30, 2006. Ruby moved and
Kirksey seconded a motion to terminate the lease agreement. Grohmann and
Randell opposed, and the motion failed. Thereafter, Ruby moved and Kirksey
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seconded a motion to dissolve the LLC. This motion also failed when Grohmann
and Randell opposed. All major actions taken by the LLC required a majority vote
of its members. Because Grohmann and Randell had no desire to terminate the
lease or dissolve the LLC, the parties remained deadlocked.
[¶10.] Kirksey and Ruby petitioned the circuit court for relief. Citing SDCL
47-34A-801, Kirksey and Ruby requested that the court dissolve the LLC because
its economic purpose was unreasonably frustrated and it was not reasonably
practicable to carry on the company’s business in conformity with the articles of
organization and the operating agreement. According to Kirksey, the strained
relationship between the sisters made it impossible for any major decision making.
Moreover, Kirksey claimed that “Grohmann and Randell have a personal financial
interest in continuing the lease agreement and preventing dissolution of the LLC,”
all to her and Ruby’s detriment.
[¶11.] On cross motions for summary judgment, the circuit court denied
Kirksey and Ruby’s petition and granted Grohmann and Randell’s motion for
summary judgment. Kirksey and Ruby appeal, asserting that the court erred when
it granted summary judgment against judicial dissolution of the LLC.
Analysis and Decision
[¶12.] Summary judgment is proper when the law is correctly applied and
there are no genuine issues of material fact. Rush v. US Bancorp Equip. Fin., Inc.,
2007 SD 119, ¶7, 742 NW2d 266, 268 (quoting Heib v. Lehrkamp, 2005 SD 98, ¶19,
704 NW2d 875, 882 (citing SDCL 15-6-56(c); Keystone Plaza Condo. Ass’n v. Eastep,
2004 SD 28, ¶8, 676 NW2d 842, 846))). Several facts are undisputed. Kirksey
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Family Ranch, LLC is a family enterprise, created to keep title to land held in the
family for over a century and to maintain ranching operations. Each sister invested
in the company her one-quarter interest in the land with the understanding that
she would have an equal say in the company’s operations and equal ownership in its
assets. When the sisters formed the LLC, they provided no way to break a tie vote
between them and no way to end a deadlock. Today, the sisters are divided and
speak only through their legal counsel. There being no avenue for relief in the
operating agreement, two sisters ask the courts to intervene.
[¶13.] Through SDCL 47-34A-801, the Legislature provided courts with the
limited power to order dissolution of an LLC if certain statutory standards are met.
Under SDCL 47-34A-801(a)(4)(i) and SDCL 47-34A-801(a)(4)(iii), a court may
judicially dissolve an LLC if “the economic purpose of the company is likely to be
unreasonably frustrated” or “it is not otherwise reasonably practicable to carry on
the company’s business in conformity with the articles of organization and the
operating agreement[.]”
[¶14.] How these statutory standards may be satisfied has not yet been
detailed by this Court. A consistent view in other jurisdictions is that a limited
liability company is governed by its articles of organization and operating
agreement. See Horning v. Horning Const., LLC, 816 NYS2d 877, 881 (NYSupCt
2006); Historic Charleston Holdings, LLC v. Mallon, 617 SE2d 388, 393 (SCCtApp
2005); Dunbar Group, LLC v. Tignor, 593 SE2d 216, 219 (Va 2004). Beyond this,
however, there is no prevailing interpretation of the terms “not reasonably
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practicable” and “economic purpose . . . unreasonably frustrated” in relation to
dissolution of limited liability companies. See SDCL 47-34A-801.
[¶15.] Nevertheless, the cases interpreting language similar to our statutory
terminology, whether involving a partnership or a limited liability company, are
instructive. In defining what it means for it to “not be reasonably practicable” for a
company to continue, one court consulted a dictionary to apply a plain and ordinary
meaning. Taki v. Hami, 2001 WL 672399 (MichCtApp) (unpublished) (dissolution of
a partnership). The Taki court held that “‘reasonably practicable’ may properly be
defined as capable of being done logically and in a reasonable, feasible manner.” 1
Id. at 3. Another court emphasized that “[t]he standard set forth by the Legislature
is one of reasonable practicability, not impossibility.” PC Tower Ctr., Inc. v. Tower
Ctr. Dev. Assoc., L.P., 1989 WL 63901, 6 (DelCh) (unpublished) (dissolution of a
partnership). Under this view, the standard does not require that the purpose of
the company, as set out in the operating agreement, be completely frustrated to
warrant judicial dissolution. 2 Rather, the term “reasonably practicable” signifies a
company’s ability to continue the purpose identified in the operating agreement.
1. The court found that “it was not possible to complete the business of the
partnership in a logical, reasonable and feasible manner.” Taki, 2001 WL
672399, at 3. The members had not spoken to each other in years and filed
three lawsuits against each other. There were also allegations of violence
and attempted expulsion.
2. The purpose of the company was to use the property for profit and as an
investment. PC Tower Ctr., Inc., 1989 WL 63901, at 5. Because the company
was operating at a considerable loss and the prospect of future profits did not
exist, the court found that it was not reasonably practicable for the company
to continue. Id. at 6.
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[¶16.] One approach, taken by several courts, is to examine the
circumstances in light of the company’s purpose and then determine if it is
reasonably practicable to continue the business. Under this test, the Virginia
Supreme Court reversed a lower court’s order dissolving a limited liability company.
Dunbar Group, LLC, 593 SE2d at 219. According to the Dunbar court, only when a
business cannot continue “in accord with its articles of incorporation and any
operating agreement” can dissolution be ordered. Despite one member of a two-
member company being expelled, the court held that the company could continue,
and, therefore, dissolution was not warranted. 3
[¶17.] The Louisiana Court of Appeals similarly examined a company’s
operating agreement to determine if it was reasonably practicable for the business
to continue. Weinmann v. Duhon, 818 So2d 206, 208-09 (LaCtApp 2002). The
members of the company had no desire to continue their business relationship and
began making side agreements that, in the court’s view, made continued operation
of the company not reasonably practicable. Id. at 209.
[¶18.] A Massachusetts Superior Court required that “specific provisions of
the partnership agreement” be shown to establish “impracticability to carry on the
3. One member asserted that “‘serious differences of opinion as to company
management have arisen between the members and managers’ . . . and that
the company was ‘deadlocked’ in its ability to conduct its business affairs. . .
.” Dunbar Group, LLC, 593 SE2d at 218. A court order had been entered
finding that one member commingled the company’s funds. Nevertheless, the
court concluded that it was reasonably practicable for the company to
continue and denied dissolution. Id. at 219.
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business in conformity with the partnership agreement.” 4 Houser v. River Loft
Assocs. Ltd. P’ship, 1999 WL 33594570, 2 (MassSupCt) (unpublished) (dissolution of
a partnership). 5 In Houser, the plaintiff alleged that the members engaged in self
dealing. The court, nonetheless, found that the company operated for its stated
purpose and denied dissolution.
[¶19.] Finally, in Spires v. Casterline, a New York court engaged in a detailed
analysis of the company’s articles of organization and operating agreement. 778
NYS2d 259, 263 (NYSupCt 2004). It found no basis to dissolve the company based
on the terms of the articles of organization. Id. at 264. However, because the
operating agreement mandated that dissolution occur before withdrawal of a
member, and a member withdrew pre-dissolution, the court ordered that the
company be judicially dissolved. Id. at 266-67.
[¶20.] Another consideration, expressed by two courts, is the financial state of
the company. In Klein v. 599 Eleventh Ave. Co. LLC, the court dismissed a petition
for judicial dissolution because the plaintiff “failed to articulate facts establishing
why it was not reasonably practicable for [the company] to continue to carry on its
4. The plaintiff sought dissolution asserting “that the general partners have
carried out a systematic course of self-dealing in which they refuse to
liquidate the partnership in accordance with its investment objectives.”
Houser, 1999 WL 33594570, at 2. The court held that the partnership was
meeting its stated purpose, and therefore, denied dissolution.
5. A Massachusetts Superior Court ordered dissolution of an LLC when the
company was “not able to function in the manner intended and there is a
clear and total deadlock between the sole two manager members thereof.”
Rapoza v. Talamo, 2006 WL 3292632, 4 (MassSuperCt) (unpublished). The
company in Rapoza, however, did not have an operating agreement and the
members had ceased attempting to operate their businesses. Id.
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business [and] failed to demonstrate that [the company] is failing financially[.]”
2006 WL 3849059, 4 (NYSupCt) (unpublished). Similarly, a Delaware court
declined to order dissolution because the company was serving its stated purpose
from the operating agreement and producing returns for its investors. Cincinnati
Bell Cellular Sys. Co. v. Ameritech Mobile Phone Serv. of Cincinnati, Inc., 1996 WL
506906 (DelChCt) (unpublished) (regarding a partnership).
[¶21.] Two courts have held that a strict standard applies to judicial
dissolutions. In Dunbar Group, LLC, the Virginia Supreme Court ruled that a
strict standard reflects “legislative deference to the parties’ contractual agreement
to form and operate a limited liability company.” 593 SE2d at 219. Also holding to
an exacting standard, the court in Horning noted that this strictness might leave
some members at the mercy of other members, but a company cannot be dissolved
as long as it is thriving. 816 NYS2d at 883.
[¶22.] Yet another approach to interpreting the statutory language is to
analogize dissolution of a limited liability company to dissolution of a corporation or
partnership. One such instance occurred in Haley v. Talcott, 864 A2d 86, 94 (Del
2004). The court used its corporate dissolution law and required three prerequisites
to judicial dissolution of a limited liability company. According to the Haley court, if
(1) the company had “two 50% stockholders,” who (2) “engaged in a joint venture,”
and (3) were “unable to agree upon whether to discontinue the business or how to
dispose of its assets,” judicial dissolution was warranted. 6
6. The court ordered judicial dissolution. Haley, 864 A2d at 94-95. Although
“the LLC can and does continue to function for its intended purpose and in
(continued . . .)
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[¶23.] Also in Delaware, a chancery court distinguished Haley and instead
compared the statutory language to that of a limited partnership dissolution. In re
Silver Leaf, 2005 WL 2045641, 10 (DelChCt) (unpublished). The court ordered
dissolution, finding that the sole asset of the company no longer existed, and
therefore, continued operation of the company was not reasonably practicable. The
court also took into account that the members were deadlocked and the operating
agreement provided no means to end the deadlock. Id. at 11.
[¶24.] Another court, in dicta, noted that dissolution might be warranted
when “‘it clearly appears that the business for which the partnership was formed is
impracticable, or cannot be carried on except at a loss,’” and “where ‘all confidence
between the parties has been destroyed so that they cannot proceed together in
prosecuting the business for which it was formed.’” 7 Percontino v. Camporeale,
2005 WL 730234, 3 (NJSupCt) (unpublished).
[¶25.] Here, the operating agreement for the Kirksey Family Ranch, LLC
states:
The purpose for which this organization is created is to engage in
a general livestock and ranching business; to feed, range, graze,
herd, control, brand, care for, purchase, market and sell
__________________
(. . . continued)
conformity with the agreement,” the court held that “this operation is purely
a residual, inertial status quo that just happens to exclusively benefit one of
the 50% members. . . .” Id. at 96. The parties could not function together and
could not decide what to do with the LLC’s assets or take any important
actions that required a majority vote. Dissolution was further warranted
because without relief the dissociated member would still be personally liable
on the company’s mortgage.
7. Dissolution was not warranted in this case because the court ordered an
alternative form of relief. Percontino, 2005 WL 730234, at 4.
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livestock of every kind, both on its own account and as an agent
for other persons, organizations or corporations; to buy, lease,
cultivate, manage, operate and sell ranch properties and
products therefrom both on its own account and as an agent for
other persons, organizations or corporations; and, take, buy,
exchange, lease or manage and develop such property and
interests in any manner that may be necessary, useful or
advantageous for the purposes of this organization.
(Emphasis added). From this language, it is clear that the intended business was a
“livestock and ranching” operation.
[¶26.] There is no dispute that the ranching and livestock operation, as a
business, can continue despite the sisters’ dissension. However, the question is
whether it is reasonably practicable for the company to continue in accordance with
the operating agreement. The sole asset of the company is the Kirksey land. This
land is currently leased to only two sisters. Kirksey and Ruby contend that the
lease is no longer beneficial to the company. The rental rate was set when the land
was worth considerably less, and the company, no matter the extent of profits, is
required to pay the taxes and insurance. Grohmann and Randell, however, assert
that Kirksey and Ruby were aware of the nominal profit margin when the company
was formed and that nothing has changed to make it impracticable for the company
to continue.
[¶27.] The sisters created their company with the understanding that they
would have relatively equal say in its overall management and operation. Although
each sister has an equal vote, there no longer exists equality in the decision making.
Grohmann and Randell have all the power with no reason to change the terms of a
lease extremely favorable to them. Leaving two sisters, half the owners, with all
the power in the operation of the company cannot be a reasonable and practicable
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operation of a business. Moreover, their deadlock certainly impedes the continued
function of the business in conformity with its operating agreement. No procedure
exists in the company’s documentation to break a tie vote and protect the company
in the event of changed conditions. As long as the company remains in control of,
and favorable only to, half its members, it cannot be said to be reasonably
practicable for it to continue in accord with its operating agreement.
[¶28.] Another statutory standard Kirksey and Ruby rely on is found in
SDCL 47-34A-801(a)(4)(i): “[t]he economic purpose of the company is likely to be
unreasonably frustrated.” What it means for the economic purpose of a company to
be unreasonably frustrated has not been clearly delineated. There are few cases on
the subject. Two decisions have ordered judicial dissolution when extreme
dissension between the members was present. Navarro v. Perron, 19 CalRptr3d
198, 200-01 (CalCtApp 2004) (dissolution of a partnership); Pankratz Farms, Inc. v.
Pankratz, 95 P3d 671 (Mont 2004) (dissolution of a partnership). However, those
cases had other factors that led the court to dissolve the companies. Navarro, 19
CalRptr3d at 200-01 (in addition to the dissension the parties filed multiple
lawsuits and restraining orders); Pankratz, 95 P3d at 680-81 (the business of the
partnership was effectively transferred).
[¶29.] Here, we have two members of an LLC that hold all the power, with
the other two having no power to influence the company’s direction. We recognize
that forced dissolution is a drastic remedy and may produce financial repercussions
for the sisters, but how can one reasonably conclude that the economic purpose of
this company is not reasonably frustrated? The members cannot communicate
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regarding the LLC except through legal counsel. The company remains static,
serving the interests of only half its owners. They neither trust nor cooperate with
each other. The sisters formed their company contemplating equal ownership and
management, yet only an impenetrable deadlock prevails.
[¶30.] We conclude that the economic purpose of the Kirksey Family Ranch,
LLC is being unreasonably frustrated, and it is not reasonably practicable to carry
on the LLC’s business in conformity with its articles of organization and operating
agreement. The circuit court erred when it granted Grohmann and Randell
summary judgment. We remand for an order of judicial dissolution and winding up
of the company’s business under SDCL 47-34A-806.
[¶31.] Reversed and remanded.
[¶32.] GILBERTSON, Chief Justice, and SABERS and ZINTER, Justices,
concur.
[¶33.] MEIERHENRY, Justice, concurs with a writing.
MEIERHENRY, Justice (concurring).
[¶34.] I agree that under the circumstances of this case, the LLC should be
dissolved. Neither the legislation nor the LLC agreement provided a procedure or
remedy in the event of deadlock. Without such a provision, the LLC is at a
stalemate; and the court is left with few alternatives. As Justice Konenkamp points
out, other courts have faced this same issue with varying results depending on the
circumstances of each case. The undisputed facts of this case sufficiently meet the
statutory requirements for dissolution in SDCL 47-34A-801(a)(4)(i) or (iii).
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