Gowin v. Granite Depot, LLC

Present: All The Justices

PATRICK J. GOWIN

v. Record No. 052240 OPINION BY JUSTICE ELIZABETH B. LACY
September 15, 2006
GRANITE DEPOT, LLC, ET AL.

FROM THE CIRCUIT COURT OF LOUDOUN COUNTY
Thomas D. Horne, Judge

In this appeal, Patrick J. Gowin asks that we reverse the

judgment of the trial court dismissing his derivative suit

based on the trial court's conclusion that, because he failed

to make payments that he was obligated to make on a promissory

note securing his capital contribution to Granite Depot, LLC,

he had been properly terminated as a member of the company,

and therefore could not maintain this action. For the reasons

stated below, we conclude that the promissory note was a

demand note and because no demand for payment was made,

Gowin's obligation to make payment on the promissory note had

not yet arisen. Therefore, termination of Gowin's membership

in the company by the manager and majority member of the

company, John Stathis, was improper and Gowin remains a member

of Granite Depot, LLC.

FACTS

In November 1998, John Stathis began operating a granite

countertop business. He filed Articles of Organization

(Articles) in 1999 and was issued a certificate of
organization for Granite Depot, LLC. Stathis and his mother

were members of the LLC, and Stathis acted as the manager.

Shortly thereafter, Stathis offered Gowin employment and

promised that after two years, Gowin would receive either 20%

of the company or $250,000. Gowin accepted the employment

offer and began working at Granite Depot in June 1999.

On November 9, 2000, Gowin became a member of Granite

Depot, by amendment and restatement of the company's Operating

Agreement (the Agreement). Stathis remained both a member and

the manager of the company, but his mother's membership was

terminated. Exhibit A to the Agreement set Stathis'

percentage of membership interest in the LLC at 80% and his

capital contribution at $50,000, while Gowin's percentage of

membership interest was 20% and his capital contribution was

$12,500. In conjunction with the amendment of the Agreement,

Gowin signed a promissory note (the Note) payable to Granite

Depot, LLC, in the amount of $12,500. However, at the time

Gowin executed the Note, Stathis told him that the Note was

" 'something [the company's lawyer] said had to be done' and

that he was '. . . not to worry about it, the company would

take care of it.' " Gowin made no payments on the Note, and

Granite Depot made no demands for payment.

In 2001, the relationship between Stathis and Gowin began

to deteriorate. Gowin left his employment position on May 31,

2
2002, but he did not resign his membership in the company.

Stathis, acting as "Manager/Member," amended the Articles on

November 30, 2002, to allow the members by majority vote to

eliminate any other member who "fails to make any contribution

or promise to contribute that he is obligated to make." See

Code § 13.1-1027(D). On that same date, Stathis as the

majority member, executed a written consent of members

eliminating Gowin as a member of the LLC for failing "to make

his required contribution to the Company by defaulting on the

promissory note he executed."

After receiving notice that his membership in the LLC had

been eliminated, Gowin filed this action entitled "Derivative

Suit by a Member of Granite Depot, L.L.C.," alleging, that

Stathis, as manager and 80% owner, had inflicted upon Granite

Depot "irreparable harm" by

a) act[ing] in bad faith, and in a manner that is
illegal, oppressive and fraudulent in that he has
operated the Company for his personal benefit; b)
fail[ing] to discharge his duties in accordance
with good faith business judgment for the best
interests of the Company; and c) pa[ying] himself
directly, and indirectly, grossly excessive
compensation; and d) engag[ing] in acts of self-
dealing.

Gowin requested an accounting, judicial expulsion of Stathis

as a member of the LLC, and costs and attorneys fees.

Following a hearing, the trial court issued an opinion

letter holding that amending the Articles to allow termination

3
of membership for failure to meet the capital contribution

requirement was not a breach of fiduciary duty but that

Stathis' "unwillingness to recognize the waiver of payment"

was a breach of that duty. Based on these findings, the Court

concluded it was unnecessary to consider other arguments made

by the parties.

Stathis and Granite Depot filed a motion for

reconsideration arguing that Stathis' waiver of payment on the

Note was insufficient to bind Granite Depot. The trial court,

commenting that "[a]bsent a finding of waiver" it "would

conclude" that Gowin's membership was properly terminated thus

leaving Gowin without standing to prosecute this derivative

action, granted the motion for reconsideration only on the

waiver issue.

After further briefing and argument of counsel, the trial

court dismissed Gowin's derivative action, holding that,

although Stathis waived payment of the Note,

[a]bsent from the record is any evidence that
the corporation affirmed the actions of Mr.
Stathis, or that his actions affected third
parties. Any informality in the way in which
the business affairs of Granite Depot were
conducted does not . . . trump the formal
requirements necessary to afford the
Complainant relief in this derivative action.

4
Accordingly, the trial court held that Gowin's membership

interest had been properly eliminated and dismissed Gowin's

derivative action. We awarded Gowin an appeal.

DISCUSSION

Gowin assigns six errors to the trial court's rulings:

one contends Stathis could and did bind the LLC with his

waiver, two argue Stathis acted unlawfully in eliminating

Gowin's membership interest based on Gowin's failure to pay

the Note, two allege Stathis violated his fiduciary duties by

adopting an amendment allowing termination of membership for

failure to pay a required capital contribution and using that

amendment to eliminate Gowin's membership, and the final

assignment of error asserts that the trial court erred in not

holding that Stathis was equitably estopped from eliminating

Gowin's membership.1

Payment Waiver

We begin with Gowin's claim that the trial court erred in

holding that Granite Depot was not bound by Stathis' waiver of

1
We reject Stathis' claim that Gowin is procedurally
barred from pursuing this appeal because he did not challenge
the trial court's factual finding that he was not a member of
the company and because he conceded throughout his brief that
he was not a member of the company when he instituted this
action as required by Code § 13.1-1043. Gowin continually
argued in the trial court and on appeal that Stathis'
"elimination" of Gowin's membership was invalid because
Stathis' actions were illegal or in violation of his fiduciary

5
Gowin's liability on the Note. If Gowin is correct, his

capital contribution obligation would have been satisfied,

leaving no basis for termination of Gowin's membership in the

company under the amendment Stathis adopted.

Code § 13.1-1027(C) provides that a member's obligation

to make a contribution "may be compromised only by consent of

all the members" unless the operating agreement or articles of

organization provide otherwise. Furthermore, Code § 13.1-

1022(E) allows corporate actions to be taken outside the

context of a meeting only when the requisite number of members

sign a document reflecting the action taken and their consent

to it. In this case, neither the Articles nor the Agreement

contains any provision addressing the compromise of a member's

obligation to make a capital contribution. The Articles

authorize action by written consent in the absence of a

meeting in the same manner as set out in Code § 13.1-1022(E).

Therefore, all the members of Granite Depot had to consent to

any waiver of Gowin's capital contribution and if such consent

did not occur at a meeting of the members, it was valid only

if reflected in a written document signed by all the members.

Gowin argues that the consent requirements of Code

§ 13.1-1027(C) were met because the only two members of the

duties. Therefore, Gowin has preserved the issue of his
membership status for consideration in this appeal.

6
LLC, Gowin and Stathis, were present at the November 2000

meeting when Gowin executed the Note and when Stathis stated

that Gowin did not have to pay the Note and the company "would

take care of it." Gowin asserts that this "meeting" fulfilled

the consent requirement of Code § 13.1-1027(C), and, because

there was such a "meeting," the written consent requirements

of Code § 13.1-1022(E) are not applicable. Furthermore, Gowin

asserts that the lack of written minutes or notice of the

November 2000 meeting does not defeat Stathis' waiver of

Gowin's obligation on the Note because Stathis managed Granite

Depot's affairs in an informal manner and this closely held

limited liability company should be bound by its informal

actions.2

Gowin relies on the principle that, while formal

corporate action is generally required to establish a valid

corporate act, when stockholders, directors, and officers of

close corporations ignore requirements of statutes and

corporate by-laws and conduct business in an informal manner,

their actions may nevertheless be binding on the corporation.

Curley v. Dahlgren Chrysler-Plymouth Dodge, Inc., 245 Va. 429,

433-34, 429 S.E.2d 221, 224 (1993); Brewer v. First National

2
Gowin alternatively argues that he was not a member of
Granite Depot until he signed the Note and Agreement and
therefore only Stathis' consent was needed to waive payment of

7
Bank of Danville, 202 Va. 807, 812-13, 120 S.E.2d 273, 278

(1961); Moore v. Aetna Cas. & Surety Co., 155 Va. 556, 568-70,

155 S.E. 707, 710-11 (1930). We have not previously applied

this principle, sometimes called the "closed corporation" or

"corporate formalities" rule, to limited liability companies,

but we see no distinction in its application to corporations

or limited liability companies.

A limited liability company is an entity that, like a

corporation, shields its members from personal liability based

on actions of the entity. Cheatle v. Rudd's Swimming Pool

Supply Co., 234 Va. 207, 212, 360 S.E.2d 828, 831 (1987) ("The

proposition is elementary that a corporation is a legal entity

entirely separate and distinct from the shareholders or

members who compose it. This immunity of stockholders is a

basic provision of statutory and common law and supports a

vital economic policy underlying the whole corporate

concept."); Code § 13.1-1019 (limiting liability of members

and managers of LLCs to third parties). We find no difference

between the two entity forms that would justify applying the

protection of the rule to actions of closely held corporations

but not to actions of limited liability companies. To apply

the principle, however, requires demonstration that the

the Note. We do not address this argument because it is made
for the first time on appeal. Rule 5:25.

8
members and managers of the limited liability company

conducted its business in an informal manner, ignoring

statutory requirements or requirements set out in the articles

of organization or operating agreement. See e.g., Curley, 245

Va. at 433-34, 429 S.E.2d at 224; Moore, 155 Va. at 567-68,

155 S.E. at 710-11.

Gowin cites a number of instances which he characterizes

as informal corporate decisionmaking: (1) Stathis' oral

agreement to award Gowin a 20% stake in the company; (2) a

lack of notices or minutes of meetings; (3) Stathis'

"substantial loans" to himself and other businesses without

compliance with Section 4.02(a)(vi) of the Agreement which

requires approval of members for company loans to members in

excess of $25,000 or a term of one year; (4) Stathis'

"recategoriz[ation of] numerous substantial financial

transactions that enhanced his personal finances"; and (5)

"[a]mbiguity" in Stathis' decision making process because

although he fully controlled the business by virtue of his 80%

interest and his status as manager, he still signed written

consents and other documents as "Member/Manager." We reject

Gowin's argument that these examples evidence a disregard for

compliance with corporate formalities.

First, the original promise of employment and ambiguity

in decision making do not involve violations of a statute or a

9
provision of the Agreement pertaining to company formalities.

While the original promise may have been oral, the "members"

approved the transfer of a 20% membership interest in Granite

Depot, LLC, by written document dated January 10, 2002 for

Fiscal Year 2000, and Gowin's 20% membership interest appears

in Exhibit A to the Amended and Restated Operating Agreement.

Also, the fact that Stathis signed company documents as a

"Member/Manager" was not improper as he held both positions

and was entitled to take such company actions as manager.

Second, while the loans and recategorization of financial

transactions implicate certain provisions of the Agreement,

the record does not support Gowin's contention that Stathis

violated those provisions. Stathis and Granite Depot's

accountant explained that both Gowin and Stathis charged

company and personal expenses to company credit cards, the

latter of which they had to reclassify for income tax

purposes. Some of these personal expenses Stathis

reclassified as loans, but according to his testimony, in each

case the "loan" was for a sum of $25,000 or below for which he

did not need consent under Section 4.02(a)(vi) of the

Agreement.

Stathis also made a loan of $70,000 to Plan-It

Construction, a business in which he was part owner. He later

reclassified the loan as additional compensation. At trial,

10
he testified that this additional compensation was justified

because Plan-It Construction was a "complementary business"

that increased Granite Depot's sales. Gowin did not provide

evidence to refute this allegation, nor did he allege that

this compensation violated Section 5.08 of the Agreement,

which mandates "reasonable" salaries. Stathis also testified

that he repaid all loans from the company and that he never

excluded Gowin from company distributions, as the only

compensation he and Gowin received was their salary. The

company's accountant testified that the accounting practices

he employed at Granite Depot of adjusting journal entries to

correct accounting mistakes was "pretty standard procedure

. . . with all [his] clients." Though Granite Depot's

accounting practices may have been in some respects ill-

advised, they do not implicate a disregard for company

formalities.

Finally, the record contains the Articles, amended

Articles, the Agreement, minutes of company actions and

documents showing waivers of notice and consent to company

actions for fiscal years 2000 and 2001, as well as other

written amendments to the Articles. These documents reflect

consistent compliance with company formalities regarding the

conduct of company business, including consent to and

authorization of company actions.

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 Other than the purported waiver of Gowin's obligation

under the promissory note, nothing in this record indicates

that Stathis acted beyond the authority vested in him as

manager or controlling member of Granite Depot or that the

company otherwise conducted its business in an informal

manner, ignoring the requirements of the statutes, Articles,

or Agreement. Thus, even if the events of November 2000 took

place at a meeting of the members of the company, as contended

by Gowin, we cannot say that the trial court erred in

concluding that Stathis' oral waiver of Gowin's Note

obligation to the company was insufficient to bind Granite

Depot in the absence of written documentation reflecting

consent of the members.3

Termination

In two other assignments of error, Gowin argues that even

if Stathis' waiver was not effective to bind the company,

Stathis could not terminate Gowin's membership in the company

for failure to meet his capital contribution obligation.

First, Gowin asserts that delivery of the Note satisfied his

3
The record does contain a "Written Consent in Lieu of
the Joint Meeting of the Members and Managing Members of
Granite Depot, LLC, For Fiscal Year 2000" signed by John
Stathis which "ratified, confirmed and approved . . . all of
these acts and the other acts and actions of the Members and
Managing Members" for the year 2000. Gowin did not, however,
rely on this document as written evidence of consent to the

12
capital contribution obligation to the company. Implicit in

Gowin's argument is the notion that delivery of the Note alone

makes him a member of the LLC and satisfies the contribution

requirement without further payment on the Note. We agree

that delivery of the Note qualified Gowin for membership but

reject the proposition that such delivery eliminated his

liability under the Note as a condition of membership.

A provision in an operating agreement allowing a member's

promissory note to satisfy the capital contribution

requirement is an accommodation that allows a person to become

a member before paying the full amount of the required capital

contribution to the company at the moment of membership. The

failure to pay the promissory note in accord with its terms,

however, would be a failure to meet the capital contribution

requirements. As stated in Code § 13.1-1027(D), discussed

above, a member may be removed for failure to make "any

contribution that he is obligated to make." This provision

applies to both initial and subsequent capital contribution

requirements. Thus, if a person becomes a member by

delivering a promissory note as allowed by an operating

agreement, his failure to make payment on such note is a

failure to make a contribution he "is obligated to make." Cf.

waiver of the Note before the trial court, and thus we do not
consider it for this proposition. Rule 5:25.

13
Morriss v. Harveys & Williams, 75 Va. 726, 730-31 (1881)

(debtor's note not payment of antecedent debt, only

conditional payment and debt extinguished when actually paid).

The delivery of the Note did not relieve Gowin of his

obligation to pay the capital contribution he was required to

make.

Next Gowin asserts that the Note was a demand note and,

because no demand for payment had been made, he had not failed

to make a contribution he was obligated to make and therefore,

under the terms of the termination amendment, his membership

could not be terminated.

Code § 8.3A-108(a) defines a demand note as a note that

"(i) states that it is payable on demand or at sight, or

otherwise indicates that it is payable at the will of the

holder, or (ii) does not state any time of payment." A note

payable at a definite time, in contrast, "is payable on elapse

of a definite period of time . . . or at a fixed date or

dates." Code § 8.3A-108(b).

The Note in this case is dated January 15, 2000 in the

amount of $12,500 at 9% annual interest "payable in twenty-

four (24) monthly installments . . . commencing on February 1,

2000, [with] each successive payment due on the first (1st)

day of each and every month thereafter until fully paid." It

purports to be a note payable at a definite time because it

14
states the first payment is due February 1, 2000, while

remaining payments are due "on the first (1st) day of each and

every month thereafter until fully paid." Nevertheless, the

stated execution and initial payment dates precede the actual

execution date of the Note, November 9, 2000, making

compliance with the stated dates impossible.

The parties in this case agree that the dates appearing

on the face of the Note are incorrect, but neither asserts

that such mistakes invalidate the Note. Although we have held

that a note with no stated time for payment is a demand note,

Guth v. Hamlet Associates, 230 Va. 64, 71, 334 S.E.2d 558, 563

(1985), we have not previously considered whether a note with

incorrect or impossible dates of issue or payment is a demand

or an installment note. Because of the error in the payment

dates in this Note, the Note is effectively a note that states

no date of payment and is, therefore, a demand note under the

provisions of Code § 8.3A-108(a)(ii). Cf. Ranieri v. Terzano,

457 N.E.2d 906, 909-10 (Ohio App. 1983) (construing promissory

note with blank line after printed word "Due" as demand note

rather than determining note was incomplete and unenforceable

because parties "evidently regarded the note as a binding

obligation"); see also Citibank v. Pitassi, 432 N.Y.S.2d 389,

390 (N.Y. App. Div. 1980).

15
 As relevant here, a demand note does not become overdue

until the day after demand is made or the instrument has

remained outstanding for an "unreasonably long [time] under

the circumstances," whichever occurs first. Code §§ 8.3A-

304(a)(1), (3). This demand note never became overdue because

neither Stathis nor Granite Depot ever demanded payment, and

the record does not contain evidence of an unreasonable delay

in nonpayment under the circumstances. Thus, though the Note

"mature[d] and [became] payable at once," Guth, 230 Va. at 72,

334 S.E.2d at 564, it never became overdue and Gowin never

failed to make a payment "he was obligated to make." As a

result, Stathis' termination of Gowin's membership based on

nonpayment of the Note representing Gowin's capital

contribution was improper and Gowin remains a member of

Granite Depot, LLC.

Breach of Fiduciary Duty

Gowin asserts that the trial court erred in holding that

Stathis did not violate his fiduciary duty to Granite Depot by

amending the Articles to allow elimination of a member for

nonpayment of capital contribution and second by eliminating

Gowin's membership without seeking to enforce the Note.

Gowin acknowledges that Subsection D of Code § 13.1-1027

authorizes an LLC to provide that a member's interest in the

LLC can be terminated if he or she "fails to make any

16
contribution that he is obligated to make;" nevertheless,

relying on Flippo v. CSC Assocs., 262 Va. 48, 57, 547 S.E.2d

216, 222 (2001), Gowin argues that by adding this provision to

the Articles, Stathis breached his fiduciary duty because

Stathis' sole purpose in making the amendment was to eliminate

Gowin's membership interest.

Whether an act constitutes a breach of fiduciary duty

will depend on the circumstances of each case. See Feddeman &

Co. v. Langan Assocs., 260 Va. 35, 42, 530 S.E.2d 668, 672

(2000). Based on the record in this case, however, we cannot

say that the trial court erred in holding that Stathis did not

breach his fiduciary duty to the company when he adopted the

amendment at issue.

The purpose of the amendment at issue is to ensure that

the company receives capital contributions to which it is

entitled under the terms of the Agreement and to preclude a

member from realizing a benefit from membership without

satisfying his financial obligations to the company. Stathis

testified that he adopted the amendment both for the benefit

of the company and to make elimination of Gowin's membership

interest possible. There is no evidence that adoption of the

amendment alone had any impact on the company or was otherwise

a breach of fiduciary duty to the company.

CONCLUSION

17
 In summary, we hold that there was no error in the trial

court's judgment that Stathis' waiver of Gowin's obligation on

the Note did not bind Granite Depot, LLC, and that amendment

of the Articles of Organization to provide for termination of

a member's interest in the LLC upon failure to make a required

capital contribution was not a breach of fiduciary duty.

However, because we conclude that the Note was a demand note

and no demand was made for payment, Gowin's membership in

Granite Depot could not be terminated based on a failure to

make a capital contribution pursuant to the terms of that

amendment and, therefore, Gowin remains a member of Granite

Depot, LLC.4 Accordingly, we will remand the case for further

proceedings consistent with this opinion.

Affirmed in part,
reversed in part,
and remanded.

4
In light of these holdings, we need not address Gowin's
other assignment of error.

18