Suppose you represent a minority member of a limited liability company who believes that the majority member (who is also the managing member) had the company enter into a series of transactions that enriched herself at the expense of your client. Your client also tells you that he sustained the damages earlier this year, even though the transactions at issue took place over three years ago. Assuming that your client’s claim appears to be reasonably meritorious, you could file a lawsuit alleging oppression under MCL 450.4515 of the Michigan Limited Liability Act.
Before marching into Business Court, you call the attorney who represents the company to explore the possibility of settlement. The company’s attorney tells you that there is a three-year limitations period under MCL 450.4515 that bars your client’s claims. When you look up the statute, you discover that MCL 450.4515(1)(e) states: “An action seeking an award of damages [under the Michigan Limited Liability Act] 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.” Will your proposed complaint be barred as untimely?
The Court of Appeals answered that question last month in the published decision Frank v. Linkner, __ Mich App April 7, 2015 (Docket No. 318751). In Frank, the plaintiffs were former employees of ePrize, LLC and some had held minority interests in it. All of the defendants were either members of ePrize or had interests in one of its corporate members. Substantially all of the assets of ePrize were sold in August 2012, leading to a dispute between the plaintiffs and the defendants over the distributions of the sale proceeds. The defendants were also creditors of ePrize, having loaned or guaranteed millions of dollars of loans to the company in 2007 and 2009. The sale proceeds were distributed in accordance with the “waterfall” provision of the ePrize membership agreement, but were sufficient only to pay off most of the defendants’ loans.
The plaintiffs brought suit for oppression, claiming that the defendants had used the 2007 and 2009 recapitalizations to expropriate ePrize’s economic value for themselves by realizing “excessive returns on investment.” However, since the distributions occurred more than 3 years after the last loan transaction that was the subject of the complaint, the defendants successfully sought dismissal of the complaint on the ground that MCL 450.4515(1)(e) was a statute of repose and that the plaintiffs had failed to file within the limitations period. The trial court granted the defendants’ motion, dismissing the claim.
The Court of Appeals reversed the trial court, holding that MCL 450.4515(1)(e) was a statute of limitation, not one of repose. The distinction was critical, because the latter “prevents a cause of action from ever accruing when the injury is sustained after the designated statutory period has elapsed. A statute of limitation, however, prescribes the time limits in which a party may bring an action that has already accrued.” This means that in contrast to a statute of limitation, a statute of repose can bar a claim before damages are incurred.
The panel examined other statutes of limitation, such as MCL 600.5829, MCL 600.5831 and MCL 600.5833, and noted that they “all contain similar ‘accrual’ language.” It further stated that “in contrast, statutes of repose [e.g., MCL 600.5839(1)] do not pertain to a claim’s accrual; rather, they prevent a claim from ever accruing if a lawsuit is not brought within a certain time after the injury is sustained.” Id. The Court of Appeals held that MCL 450.4515(1)(e)’s 3-year limitations period “functions as a statute of limitations because it does not prevent a cause of action from accruing a certain time period after an event. Instead it provides that the time limit begins to run once the claim for damages accruesThe panel then found that it would have been impossible for the plaintiffs to establish their damages claims when the second recapitalization occurred, because the “plaintiffs did not suffer harm until 2012, when ePrize’s sale occurred and the proceeds were distributed … [A]ltough defendants’ alleged wrongdoing occurred in 2009, plaintiffs had no claim for damages to enforce in 2009 since they had incurred none. At best, their damages were speculative at that time …” Accordingly, the complaint was timely because it was filed less than 3 years after the plaintiffs’ damages accrued.
In sum, not only does Frank instruct the bench and bar about when LLC member oppression claims have to be brought, it also provides much needed guidance regarding whether other statutes containing limitations periods are statutes of limitation or repose.
To learn more, contact Leif Anderson directly at email@example.com