Jack Stauber 1

BLAW 308-4575

March 29, 2022

Ch. 40 Case Briefs

1. Hecht v. Andover Assoc. Mgmt. Co.

Issue: Should Ivy Asset Management, an investment advisor along with Andover Management

Co. be held personally liable for a breach of duty that was committed under an LLC?

Rule: Under RULLCA, “a manager or member who manages an LLC owes fiduciary duties to the

LLC and to its members and can be liable for torts that they intentionally commit”. The business

judgment rule “bars judicial inquiry into actions of corporate directors taken in good faith and in

the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes".

Application: Charles Hecht invested his money in Andover Associates LLC., an investment

company that sought funds from wealthy investors and invested the funds in a variety of

investment products. Hecht was a passive investor in Andover Associates. The LLC’s managing

member was Andover Associates Management Company. Andover Management retained Ivy

Asset Management Corporation as its investment consultant. Ivy recommended that Andover

Management utilize Bernard L. Madoff Investment Securities as its investment manager.

Madoff’s overall fees were much lower than what investment managers typically charged, and

Andover Management initially invested 100 percent of Andover Associates’s funds with Madoff.

For a number of years, Madoff’s firm paid generous returns to Andover Associates. However, in

December 2008, it became known that Madoff had been running a Ponzi scheme, whereby no

profits were actually being earned, but instead earlier investors were paid returns from the capital

invested by newer investors. At the time Madoff’s fraud was discovered, 25 percent of Andover

Associates’s assets were invested with Madoff.

On behalf of Andover Associates LLC, Hecht brought a legal action against Andover
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Management and Ivy on several grounds in a New York trial court. Hecht claimed that Ivy

breached the LLC’s administrative services agreement by failing to reconcile Madoff’s monthly

statements. Hecht alleges that had Ivy attempted to reconcile Madoff’s monthly statements

against the trade tickets, Ivy would have discovered that there were no trade tickets executed in

the first place & Madoff’s fraud would have been discovered earlier and Andover Associates

would have been able to withdraw its investment. Hecht claimed that, as a result of Ivy’s breach

of the administrative services agreement, Andover Associates sustained damages in the amount

of $14 million, the value of its Madoff investment. Hecht also alleged that Ivy was negligent in

recommending Madoff’s firm without conducting a sufficient “due diligence” investigation of

their operation. Andover Management asked the trial court to dismiss Hecht’s complaint by

citing the business judgment rule, a rule that protects from liability managers who make good-

faith business decisions.

Andover Management argues that the business judgment rule insulates their decisions to

utilize Ivy as their investment consultant and Madoff as their investment manager. “The business

judgment rule bars judicial inquiry into actions of corporate directors taken in good faith and in

the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes."

Usually it would be within Andover management’s right and sound judgment to retain Ivy as an

investment consultant and administrator but included within administrative services was

maintaining original books of entry for all of Madoff’s activities including his fictitious trades.

Hecht alleges that there were no trade tickets, or any other documentation, to substantiate the

trades. Giving Hecht the benefit of every possible favorable inference, Ivy’s preparing original

books of entry, without the benefit of back up documentation, may have furthered Madoff’s

scheme or helped to avoid its early detection. As such, Andover Management’s motion to
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dismiss based upon the business judgment rule is denied. A trustee who is hired to watch over

and manage a trust estate has a fiduciary duty to its partners to act with diligence and prudence

in managing their assets and estate.

Failure to meet these obligations by delegation to another is not an excuse for the failure

to fulfill it by the trustee. Also the trustee’s good faith and honesty of purpose does not relieve

Ivy from his fiduciary duties towards Hecht & Andover Associates LLC. Hecht also claims that

Ivy & Andover Management committed gross negligence when it failed to conduct an adequate

investigation into Madoff’s operations. Gross negligence is the failure to exercise even the

slightest of care or diligence when conducting its activities, especially when their conduct leads

to a complete disregard for the rights & safety of others. While you could argue that Andover

Management did not know about Madoff’s pyramid scheme, and in-fact they denied that they

knew anything about Madoff’s fraud. You can’t disregard the fact that Andover Management

failed to exercise even the slightest care or fiduciary duty towards protecting Andover

Associates’ and the safety of its investment. The fact that regulators also failed to uncover the

fraud does not prevent Andover Management from being held liable for their conduct.

Conclusion: Andover Management’s motion to dismiss Hecht’s gross negligence claim for

failure to state a cause of action is denied and the court rules in favor of Hecht.
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2. McDonough v. McDonough

Issue: Were the two brothers, Matthew and Patrick Mcdonough, entitled to the continuation of

the LLC per the operating agreement or should the LLC have been dissolved when Mark

Mcdonough requested the dissolution of the LLC?

Rule: Under the RULLCA, “a partner has the power to dissociate by withdrawing from the LLC

at any time or by other externalities such as death, rule of law, by trial court, & bankruptcy”.

“Death and withdrawal of members do not by themselves cause dissolution of an LLC. Instead,

RULLCA mostly lets members decide the causes of dissolution through a partnership agreement

or equivalent."

Application: In 1992, brothers Mark, Matthew, and Patrick McDonough established TASC, a

corporation that provides technical engineering ser-vices. In September 1995, the brothers

converted TASC to a limited liability company (LLC). The brothers had a falling out, and as a

result, Mark sued the defendants seeking a declaration that TASC must dissolve by September

20, 2015, pursuant to its certificate of formation and operating agreement. TASC’s certificate of

formation states that “the latest date on which the limited liability company is to dissolve is by

September 30, 2015”. Section 5 of TASC’s operating agreement states that “The Company shall

have a term beginning on the date the Certificate of Formation is filed and shall continue in full

force and effect for a term of twenty (20) years, unless sooner terminated or continued pursuant

to the further terms of this Agreement”. Matthew and Patrick, on August 7, 2015, constituting a

majority of TASC’s members, voted to dissolve TASC and then immediately voted to revoke the

dissolution. Both parties moved for summary judgment, and after a hearing, the trial court ruled

that (1) “the August 7 dissolution and revocation had no effect on TASC’s governing documents
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and (2) TASC was not required to dissolve because its operating agreement permits a majority of

its members to continue the company”.

As a result, summary judgment was denied to Mark and granted to the defendants.

Consequently, an appeal was filed and Mark argued that (1) the trial court erred when it

determined that a majority of TASC’s members could continue TASC beyond September 30,

2015, and (2) permitting a majority of TASC’s members to continue the company causes him

substantial harm because under RULLCA, “a dissociated member is not entitled to receive the

value of their interest in the LLC until the company dissolves, and as such the company would

not be obligated to pay him any consideration if he withdrew from the LLC.

The first issue that Mark brings up in regards to this case is whether or not TASC’s

operating agreement and the Certificate of Formation set forth in the agreement required the

company to dissolve by September 30, 2015. An LLC shall be dissolved as provided in the

operating agreement or in the case that there is no definitive agreement, then we must look to

RULLCA for further explanation. According to section 5 of TASC’s operating agreement, “The

Company shall have a term beginning on the date the Certificate of Formation is filed and shall

continue in full force and effect for a term of twenty (20) years, unless sooner terminated or

continued pursuant to the further terms of this Agreement”. Mark contends that, unless amended,

the plain language of TASC’s operating agreement required dissolution by September 30, 2015.

However, this argument overlooks what was said in the agreement “unless sooner terminated or

continued pursuant to the further terms of this agreement”. So, although Mark is correct that the

members could unanimously amend section 5 of TASC’s operating agreement to remove or

change the dissolution clause, that does not preclude other means of continuing TASC.
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If TASC’s members had intended that the only means of continuing the company would

be an amendment of section 5, they could have explicitly said so. Instead, they chose to broadly

state that TASC would exist for 20 years unless the company was “continued pursuant to the

further terms of this agreement”. TASC’s operating agreement and RULLCA provide such a way

for TASC’s members to continue the company even after the withdrawal or disassociation of a

partner & in RULLCA it states that “disassociated members have no right after their dissociation

to force the LLC to dissolve or liquidate its assets”. According to section 4 of the operating

agreement it states that members can “exercise all powers now or hereafter conferred by

[RULLCA] & the provisions granted to them in the agreement”. This includes RSA 304-C: 130,

III (2015), which provides: “After the members have dissolved the limited liability company

under RSA 304-C:129, I, they may revoke the dissolution at any time before completing the

wind-up of the limited liability company”. Accordingly, TASC’s members have two means to

avoid the effects of the September 30, 2015 dissolution. First they can either revoke the

dissolution pursuant to RSA 304-C:130, III, or unanimously amend section 5 of TASC’s

operating agreement. Mark also argues that a decision to revoke dissolution pursuant to RSA

304-C: 130, III requires a unanimous vote but after further examination of TASC’s operating

agreement, section 5 does not specify whether TASC may be continued by unanimous vote or

majority vote and as such because it remains silent on how its members should revoke

dissolution, TASC in accordance with RSA 304-C: 67, allows partners to make decisions by

majority vote pursuant to RSA 304-C: 130.

Finally after looking at TASC’s certificate of formation, it states that “the latest date on

which the limited liability company is to dissolve is September, 30, 2015”. However, RULLCA

does not require an LLC’s members to dissolve the company when the duration listed in the
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certificate of formation expires and it leaves such decisions to be controlled by the operating

agreement of said business. There is also no requirement that TASC’s members have to dissolve

the company after the twenty-year duration stated in the certificate of formation. The Court thus

disagrees with Mark’s argument that this interpretation renders the certificate of formation

superfluous.Under the Act, an LLC’s certificate of formation and its operating agreement are two

distinct documents separately defined and as such serve different purposes. The primary purpose

of an LLC’s operating agreement is to govern how two or more parties will manage the internal

affairs of the LLC and its business operations as in where the primary purpose of the certificate

of formation is to serve as notice to the secretary of state and the public that the company is

operating as a New Hampshire LLC.

Conclusion: The appeal court affirmed the trial court’s judgment in favor of the defendants and

ruled that TASC’s operating agreement & RULLCA permit a majority of its members to

continue the company beyond September 30, 2015 because the operating agreement should be

consulted when deciding the dissolution of an LLC and not the certificate of formation.

3. Moser v. Moser

Issue: Should the partnership assets between Terrance and Barbara have been treated as marital

and are members of limited partnerships allowed to transfer their assets and or property to their

family members?

Rule: Initial partnership assets, if “deemed marital, are to be split up equally i.e. 50% between

the partners unless there’s an agreement stating otherwise” and under ULPA, “profits and losses

are generally shared based on the value of each partner’s capital contribution, unless there is a

written agreement to the contrary”. Under ULPA, “each partner in a limited partnership owns a
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transferable interest within the partnership that can be sold or transferred to family members,” so

long as it is purported within the federal gift tax returns.

Application: Terrance and Barbara Moser were married on October 11, 1980. Over the next 16

years, they had two children, Shannon and Joshua, and accumulated assets in excess of $2

million. On December 31, 1996, Terrance and Barbara signed a document creating the Moser

Family Limited Partnership. A family limited partnership is an estate planning device designed

to minimize tax liabilities. The Moser Family Limited Partnership was set up with Terrance, as

trustee of a revocable trust holding his assets, as general partner; Barbara, as trustee of a

revocable trust holding her assets, as a limited partner; and Shannon and Joshua as limited

partners, with Barbara as their custodian. Typically, a family partnership is funded with assets

having a high potential for appreciation. “Because most limited partnerships are tax shelters,

partnership agreements often provide for limited partners to take all the losses of the business, up

to the limit of their capital contributions”.

Parents will then give to their children a certain number of units or a percentage interest

in the limited partnership, without tax liability, taking advantage of the gift tax exclusion. At the

time the Moser Family Limited Partnership was created, the annual gift tax exclusion was

$10,000. In order to function properly as an estate planning device, the gifts of partnership

interest to the children had to be completed, irrevocable gifts. In this way, wealth could be

transferred to children during the parents’ lifetime, thus avoiding estate taxes, while the parents

would be able to maintain a certain amount of control of the wealth, by virtue of the general

partner’s control of the partnership. After its creation, the Moser Family Limited Partnership, in

conjunction with Moser Construction and other business entities previously owned and operated

by the Mosers, successfully oversaw several land development ventures.

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Unfortunately, Terrance and Barbara had marital problems. On January 17, 2003,

Barbara filed for divorce. In addition to naming Terrance as a defendant, she also named the

Moser Family Limited Partnership as an additional defendant, arguing that its assets were part of

the marital estate and that she should receive a portion of the limited partnership’s assets. The

trial court agreed with Barbara. The court determined the total value of the marital estate to be

$3,778,764, of which $1,507,663 represented the net value of the Moser Family Limited

Partnership. Terrance appealed the decision to an Ohio appellate court. The first issue that is

brought up in this case by Terrance is that the trial court erred by invalidating the gifts of

partnership interest to the Moser children & 2nd the trial court erred by treating the partnership

assets as marital property. As any initial assets of the Partnership were marital, Terrance and

Barbara were deemed to be equal partners, each owning 50 percent of the partnership shares.

Under ULPA, “each partner in a limited partnership owns a transferable interest within

the partnership that can be sold or transferred to family members” up to a certain amount every

year, so long as it is purported within the federal gift tax returns. However, the trial court found

that transfers of interest in the Moser Family Limited Partnership to the Moser children did not

occur on December 31, 1996, and January 1, 1997, as purported in the federal gift tax returns and

did not occur until April of 1997 so it would be invalidated. Terrance mostly operated the Moser

Family Limited partnership and its subsidiary companies as his own personal assets and

generally under the ULPA because a Family Limited Partnership is a business, “personal assets

cannot be transferred into a limited partnership without potentially endangering the ability to use

the annual gift tax exclusion to transfer partnership interest to heirs”. An example would be

indicated on his own tax returns and financial statements when he listed Rootstown Storage

Partnership as an asset which was owned 50% by Moser Family Limited and there was a free
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transfer of funds going between these different business entities. Terrance also received a

personal distribution of $55,000 from Rootstown Storage & as a result the trial court found that

Terrance and Barbara had not made valid claims of the inter vivos gifts of their interests in the

Family Limited Partnership to the Moser children. However, there was an attempt by Terrance to

gift his interests in the business regarding the Memoranda of gifts that he signed on December

31, 1997. The court also found that there was no delivery of the Memorandum of Gift letters to

the Moser children or to Barbara as their custodian.

Terrance had also not relinquished control over his ownership interest in the Partnership

in a manner consistent with the intent to make a gift. According to various testimonials, Terrance

exercised his powers freely as a “benevolent dictator” would and when the marital residence was

inadvertently transferred into the Partnership, Terrance transferred it out & he used Partnership

funds to meet the expenses of other businesses owned by him and there was considerable “cash

flow” existing between different entities with/without the Partnership.

Conclusion: As a result, the trial court had control over the Moser Family Partnership & ordered

Terrance to assign specific partnership properties to Barbara so as to provide a fair and equitable

division of property. Judgment for Barbara Moser affirmed by the Ohio appellate court.