Business owners who are part of limited liability companies (LLCs) in Wisconsin should be aware of ongoing litigation in the state’s court system that will likely impact how such entities operate and how they are structured in the future.
The Wisconsin Supreme Court provided its opinion on the case in December, but sent it back to the trial court for further ruling, and issues are still being litigated currently in the Court of Appeals. It marked the first time the state’s Supreme Court issued a ruling on disputes between LLC members since the origin of the LLC business form in 1993, and offers a glimpse of how the courts will handle such disputes in the future.
The case, Gottsacker v. Monnier, involves an LLC formed in 1998 that grew to three members. In 2001, two members of the LLC decided to transfer the company’s sole asset, a warehouse in Sheboygan, to a new LLC they had formed.
The third member was unaware of the transfer prior to its execution. He did receive a check for $22,000 that represented what the two other members believed was his share of the warehouse’s value. He filed a lawsuit against his former partners in 2005, alleging they engaged in an illegal transaction and violated statutes regulating LLCs.
Both the Circuit Court and Court of Appeals ruled in favor of the plaintiff and ordered return of the wharehouse property to the original LLC. A majority opinion from the state’s Supreme Court overturned those rulings, but sent the case back to the trial court for clarification on several points.
Those interested in the specifics of the case can read the Supreme Court’s opinions on it at www.wicourts.gov/opinions. The case illustrates why it’s important to know the legal ground you stand on when entering into an LLC – one of the most popular and easiest ways to set up a business entity these days.
For example, in its opinion, the Supreme Court notes that not every member of an LLC has the right to sue in the name of the company, as the plaintiff did in this case.
Additionally, even when two partners have an equal share in the capital, profits and losses of a company, it is possible for a transfer of property to be valid without consent of a partner, as the Supreme Court ruled in this case.
Finally, if such transfers take place, profits must be divided fairly among all members of the LLC, something the Circuit Court is deciding in this case.
Forming an LLC is a great business strategy, in part because of the relative ease and efficiency involved in setting it up. However, such businesses should be aware that these are still relatively new entities in Wisconsin (less than 20 years old), and as this particular case shows, the legal landscape around them continues to evolve. Take care when forming an LLC to help ensure that a Gottsacker-type situation does not arise.
Lydia Chartre practices business law and litigation at Petrie & Stocking S.C. in Milwaukee.
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