California limited liability company disputes | Courtroom war stories and lessons learned

LLC Membership Interests Are “Personal Property”

When LLC membership interests suffer harm at the hands of wrongful conduct by another member or the LLC’s manager, the litigation claims are usually based on fiduciary duties, including the duty of good faith and fair dealing owed by every California LLC member to the LLC itself and the other members.  (See Cal. Corp. Code §17704.09.)

But can a claim for conversion — i.e., theft of the LLC membership interest as “personal property” — also succeed?

A recent opinion published by California’s Second Appellate District — Holistic Supplements, LLC v. Stark — addressed the issue.

Facts: cannabis LLC ownership shenanigans

Cannabis LLCs are truly the “wild west” of LLC law.  See prior post: Cannabis LLCs Are Not All “Peace and Love”.  The Holistic Supplements case, centered on a medical cannabis dispensary in Los Angeles, fits this mold.

According to the complaint filed by the plaintiff (Jamie Kersey), Holistic Supplements LLC was a limited liability company formed in 2005 to operate a medical cannabis dispensary under California’s Medical Marijuana Program Act.  After some early changes in ownership, by 2014 the defendant (Christopher Stark) became the LLC’s sole member.

Kersey alleged that on April 23, 2015, Stark signed documents transferring his ownership in the LLC to Kersey, leaving her with both the debts and assets of the LLC.  Stark disputed that he had signed the transfer documents, and claimed his signatures were forged.  After that date, Stark had no further involvement in the dispensary operations at its existing location, and a few weeks later the LLC filed an updated Statement of Information with the Secretary of State identifying Kersey as the new sole member.

However, despite the transfer and unbeknownst to Kersey, Stark continued to exert control over the LLC.

In September 2015, Stark filed “Articles of Incorporation with Statement of Conversion” with the Secretary of State, listing Stark as the managing member of the LLC and purporting to convert the LLC to a corporation — Holistic Supplements, Inc. — with Stark as its sole shareholder.  The form also changed the entity’s address to Stark’s home address. Later that month, Stark converted the corporation to a mutual benefit corporation, still with him as the sole shareholder.  Stark also claimed rights to the entity’s Business Tax Registration Certificate (BTRC) — a city-issued tax document necessary for the dispensary to operate.

Kersey sued, alleging a claim for conversion among other claims.

Trial court: nonsuit for defendant

The case proceeded to a jury trial.  After Kersey’s opening statement, Stark moved for nonsuit.

A motion for nonsuit can be granted only where, as a matter of law, the evidence presented by plaintiff is insufficient to permit a jury to find in the plaintiff’s favor.  Stark’s motion argued that Kersey had suffered no harm in her individual capacity, and that Kersey lacked standing to pursue any derivative claims on behalf of the LLC.

The court eventually granted Stark’s motion after the close of evidence, and dismissed all of Kersey’s individual claims against Stark.

Kersey appealed.

Court of Appeal: reversed; an LLC membership interest is personal property and can support a claim for conversion

The Court of Appeal reversed, finding the trial court’s grant of nonsuit was improper.

The court held that Kersey’s individual claims were properly based on “the theft of her membership interest in the LLC as distinct from any derivative claim for injury to LLC assets.”  As stated by the court,

Kersey’s membership interest in the LLC was personal property belonging to her as an individual. … As personal property, Kersey’s membership interest could be subject to individual claims based on theft of that interest.

The court cited analogous cases treating corporate stock as personal property, and allowing individual shareholders to bring personal claims for conversion based on theft of their stock.

The court also noted that Kersey’s individual claims were not “derivative” in nature — i.e., they were not based on any alleged diminution in value of the LLC’s assets.  “Instead, Kersey claims Stark’s actions in reorganizing the LLC and naming himself as sole shareholder amounted to theft of her personal property membership interest in the LLC.”

Kersey was entitled to pursue those personal claims against Stark.  The court reversed the judgment for Stark and sent the case back to the trial court for a new trial.

Lesson

Under the holding of Holistic Supplements, LLC membership interests constitute personal property.  As such, a claim for conversion might be appropriate to remedy the wrongful theft or destruction of a membership interest.