In Frank v. Linkner (Case No. 151888, May 15, 2017), the Michigan Supreme Court recently clarified when LLC member “oppression” claims accrue and the limitations periods applicable to those claims. The Court held (i) that the limitation periods in MCL 450.4515(1)(e), the LLC “oppression” statute, are statutes of limitation and not statutes of repose, (ii) an oppression claim must be brought within 3 years of when the claim accrues or 2 years after discovery of the claim, whichever occurs first, and (iii) an oppression claim accrues not when a plaintiff incurs a calculable financial injury, but when the plaintiff suffers the “actionable harm”, which is the interference with the plaintiff’s membership interest. The case offers important guidance to counsel that litigate oppression claims.
In Frank v. Linkner, the plaintiffs were former employees of ePrize LLC and minority members of the company. ePrize experienced financial difficulties in 2007–2009. During that time ePrize sold units of the company to various investors to generate cash. In March 2009, ePrize executed a new operating agreement which gave the later investors distribution priority over the interests held by the plaintiffs. In 2012, ePrize sold its assets generating more than $100 million dollars in net proceeds. All of the proceeds were distributed to the later investors in accordance with the March 2009 operating agreement, with the plaintiffs receiving nothing. As a result, in April 2013, the plaintiffs filed suit ePrize and the later investors alleging member “oppression” under MCL 450.4515.
The trial court dismissed the plaintiffs’ oppression claims, ruling that they were untimely. The Court of Appeals reversed. It held the three-year limitation period in MCL 450.4515(1)(e) is a statute of limitations and not a statute of repose; the plaintiffs’ claims did not accrue until 2012 when ePrize was sold, because until then there was no calculable “financial injury”; and the plaintiffs’ claims were timely as they were filed within three years of the 2012 sale. The Michigan Supreme Court affirmed in part, reversed in part and remanded the case to the trial court, clarifying various aspects of member oppression claims.
- The Statute of Limitations.
The Court first affirmed the Court of Appeals’ finding that the three-year limitation period in MCL 450.4515(1)(e) is a statute of limitations and not a statute of repose, as the defendants argued. The Court noted this was important because a statute of limitation can be tolled by fraudulent concealment while a statute of repose cannot. §4515(1)(e) provides:
“An action seeking an award of damages must be commenced within 3 years after the cause of action under this section has accrued or within 2 years after the member discovers or reasonably should have discovered the cause of action under this section, whichever occurs first.
In deciding this issue, the Court noted the key distinctions between a statute of limitation and a statute of repose, finding a statute of limitation is a “law that bars claims after a specified period . . . based on the date when the claim accrued.” In contrast, a statute of repose is a “statute barring any suit brought after a specified time since the defendant acted . . . . “ The Court further noted that a statute of repose “cuts off the liability of a defendant, and it may thereby prevent a cause of action from ever accruing.” Generally, a statute of repose would provide greater protection against claims to the LLC, its managers, members, etc.
Ultimately, the Court held that the “accrued” language in MCL 450.4515(1)(e) made clear that the 3-year period was a statute of limitation and not a statute of repose, finding “because the three-year limitation period . . . runs from the date the cause of action accrues, it is properly understood as a statute of limitations.” As such, the Court affirmed the Court of Appeals’ ruling that this provision “contains two alternative statutes of limitations, one predicated upon discovery of the cause of action and the other predicated on the accrual of the cause of action.”
- Accrual of Plaintiffs’ Oppression Claims.
While the Supreme Court affirmed the Court of Appeals’ finding MCL 450.4515 contains statutes of limitations, it reversed the Court of Appeals’ holding as to when the plaintiffs’ claims accrued and the limitations period began to run. The Court of Appeals held the plaintiffs’ claims did not accrue until 2012, when the sale occurred and the plaintiffs incurred a “calculable financial injury”. Using this date the Court of Appeals found the plaintiffs’ claims filed in April 2013 were timely. The Supreme Court disagreed with this analysis.
The Court found that under MCL 600.5827 a “claim accrues at the time the wrong upon which the claim is based was done regardless of the time when damage results.” The Court further found that the actionable wrong or “harm” alleged in a claim under MCL 450.4515 is the “substantial interference with the interests of the member as a member.” Here, the Court found this wrong or “harm” occurred in March 2009, when the new ePrize operating agreement that subordinated the plaintiffs’ interests was executed. Because the plaintiffs could have sought a remedy under the statute in 2009, including cancellation of the provisions of the operating agreement, the Court concluded that the statute of limitations ran on the plaintiffs’ claim in March 2012, prior to plaintiffs’ filing suit in April 2013. In so holding, the Court rejected the plaintiffs’ argument, finding it “conflates monetary damages with ‘harm.’”
- Tolling Under the Fraudulent Concealment Statute.
While the Court found the plaintiffs’ claims were untimely under MCL 450.4515’s three-year limitations period, the Court did not entirely foreclose the plaintiffs’ claims. The Court remanded the case to the trial court to determine whether the statute of limitations was tolled under the fraudulent concealment statute, MCL 600.5855. The Court found that it the plaintiffs could prove fraudulent concealment of their claims, MCL 600.5855 tolled the limitations period and their claims would be timely if filed “within 2 years after the person who is entitled to bring the action discovers, or should have discovered, the existence of the claim.” The Court left that determination to the trial court.
In sum, the Court’s decision in Frank v. Linkner addresses numerous issues pertinent to the prosecution and defense of oppression claims. Key among them is when an oppression claim accrues for limitations purposes, which is not necessarily when a member suffers financial harm. This determination is crucial as it directly affects when the statute of limitations for an oppression claim expires and whether a claim is timely. Corporate litigation practitioners would be wise to review the opinion in its entirety. It might just save (or defeat) an oppression claim.
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