A shareholder suppression claim is not all about the money. In Frank v. Linkner, No. 151888, the Michigan Supreme Court held that a cause of action for LLC member oppression accrues when an LLC manager substantially interferes with the interests of a member as a member—even if that member has not yet incurred a calculable financial injury.
This member oppression case stems from former employees of ePrize, a Michigan LLC, acquiring common shares in the company. The employees alleged that the LLC manager orally promised not to dilute or subordinate their shares in the company. However, in 2007, ePrize ran into financial difficulties. In turn, ePrize obtained loans from various investors and provided those investors ownership units in exchange for their financial assistance. In March 2009, ePrize amended its operating agreement to provide its investors distribution priority over the employees. Then, in August 2012, ePrize sold substantially all of its assets and, in accordance with the amended operating agreement, ePrize’s investors received nearly $100 million in net proceeds. The employees received nothing for their common shares. As a result, the former employees brought various claims against ePrize officials in April 2013, including claims for LLC member oppression. The defendants moved for summary disposition, alleging plaintiffs’ claims were untimely. The trial court agreed and granted the motion.
The Court of Appeals reversed. After determining that the gravamen of plaintiffs’ claim was for member oppression under MCL 450.4515, the Court of Appeals held that the three-year limitation period under the statute constitutes a statute of limitation, rather than repose, because the limitation period refers to the duration of time within which a plaintiff may bring a claim after the cause of action has accrued. The Court of Appeals further held that plaintiffs’ claim did not accrue until 2012 when ePrize sold substantially all of its assets because, until that time, plaintiffs had not incurred a calculable financial injury and any damage claim before that time would have been speculative. By this logic, plaintiffs timely filed their complaint.
The Michigan Supreme Court agreed that MCL 450.4515 was a statute of limitation not repose but disagreed with the date of accrual. The Court noted that a statute of limitation is generally measured from the date a claim accrues, while a statute of repose is generally measured from the date of the defendant’s last wrongdoing. Against this principle, the Court found that the plain language of MCL 450.4515—which allows for a member oppression action to commence “within three years after the cause of action ... has accrued”—indicates the Legislature’s intent that the period to be a statute of limitation.
Under MCL 600.5827, however, a claim accrues at the time the “wrong” upon which the claim is based was done. Relying on precedent, the Court noted that the date of the “wrong” refers to the date the defendant’s misconduct harms the plaintiff. In this case, the Court concluded that the “harm” actionable under MCL 450.4515 is the “substantial interference with the interests of the member as a member.” The alleged interference took place in 2009 when the plaintiffs’ shares were subordinated, not when ePrize sold its assets in 2012. Thus, the Court of Appeals’ focus on monetary damages was misplaced, as monetary damages is just a remedy of plaintiffs’ harm from the subordination. Because plaintiffs brought their action in 2013, long after the three-year statute of limitations period expired, the Court held that plaintiffs’ action was barred, absent evidence of fraudulent concealment.
A special thanks to DeAndre Harris for his contributions to this blog post.