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Frank v. Linkner

Supreme Court of Michigan

May 15, 2017

IVAN FRANK, JEFFREY DWOSKIN, PHILLIP D. JACOKES, ROY KRAUTHAMER, BLAKE ATLER, MATT KOVALESKI, JAMES BRUNK, and IJF HOLDINGS, LLC, Plaintiffs-Appellees,
v.
JOSHUA LINKNER, BRIAN HERMELIN, CRACKERJACK, LLC, formerly known as EPRIZE, LLC, CRACKERJACK HOLDINGS, LLC, formerly known as EPRIZE HOLDINGS, LLC, DAVID KATZMAN, GARY SHIFFMAN, ARTHUR WEISS, CAMELOT-EPRIZE, LLC, BH ACQUISITIONS, LLC, DANIEL GILBERT, and JAY FARNER, Defendants-Appellants.

          Argued December 8, 2016

          Justices: Brian K. Zahra Bridget M. McCormack David F. Viviano Richard H. Bernstein Joan L. Larsen Kurtis T. Wilder.

         Syllabus

         Ivan Frank, Jeffrey Dwoskin, and others brought a shareholder-oppression action in the Oakland Circuit Court against Joshua Linkner, Brian Hermelin, and others, alleging that defendants had wrongfully distributed the proceeds from the sale of ePrize, LLC (ePrize) and ePrize Holdings, LLC, the limited liability companies in which the parties had varying interests. The operating agreement governing ePrize had been revised in March 2009 to prioritize the payment of company proceeds to those members who had acquired "Series C" membership units by loaning ePrize money in 2007 and 2008. Plaintiffs had not been offered the opportunity to acquire Series C membership units and, as a result, received nothing when ePrize was sold for more than $100 million in August 2012. Plaintiffs' complaint included claims alleging breach of fiduciary duty, breach of contract, and member oppression in violation of MCL 450.4515, a provision of the Limited Liability Company Act, MCL 450.4101 et seq. Defendants moved for summary disposition on several grounds, including that the time periods set forth in MCL 450.4515 and MCL 450.4404 for bringing actions alleging member oppression and breach of fiduciary duty were statutes of repose rather than statutes of limitations and, as such, barred plaintiffs' claims because none of the alleged wrongful acts occurred after the Series C units were issued in March 2009, more than three years before the complaint was filed. The court, Colleen A. O'Brien, J., agreed and granted defendants' motion under MCR 2.116(C)(7), dismissing all plaintiffs' claims as untimely under MCL 450.4404 and MCL 450.4515. Plaintiffs appealed. The Court of Appeals, Markey, P.J., and Murray and Borrello, JJ., reversed, holding that MCL 450.4404 did not apply, that the three-year limitation period in MCL 450.4515(1)(e) was a statute of limitations rather than a statute of repose, and that plaintiffs' claims were timely because their claims did not accrue until they suffered a calculable financial injury when ePrize was sold in August 2012. 310 Mich.App. 169 (2015). The Supreme Court granted defendants' application for leave to appeal. 499 Mich. 859 (2016).

         In a unanimous opinion by Chief Justice Markman, the Supreme Court held:

         MCL 450.4515(1)(e) provides alternative statutes of limitations, one based on the time of discovery of the cause of action and the other based on the time of accrual of the cause of action. A cause of action for member oppression within a limited liability company (LLC) accrues at the time an LLC manager has substantially interfered with the interests of a member as a member, even if that member has not yet incurred a calculable financial injury. In the instant case, plaintiffs' actions accrued when ePrize amended its operating agreement on March 1, 2009, to subordinate plaintiffs' common shares and not in 2012 when ePrize sold substantially all of its assets. As a result, plaintiffs' actions for damages under MCL 450.4515(1)(e) are barred by the three-year statute of limitations unless plaintiffs can establish on remand that they are entitled to tolling pursuant to a mechanism such as MCL 600.5855, the fraudulent-concealment statute.

         1. The three-year limitation period set forth in MCL 450.4515(1)(e) constitutes a statute of limitations, not a statute of repose. A statute of limitations is defined as a statute that establishes a time limit for suing in a civil case, and it is generally measured from the date the claim accrues. In contrast, a statute of repose is a statute barring any suit that is brought after a specified time that is measured from some other particular event, such as the date of the last culpable act or omission of the defendant. A statute of repose prevents a cause of action from ever accruing when the injury is sustained after the designated statutory period has elapsed, while a statute of limitations prescribes the time limits in which a party may bring an action that has already accrued. Given that the three-year limitation in MCL 450.4515(1)(e) clearly runs from the date the cause of action has accrued, absent any indication to the contrary, the Legislature is presumed to have intended the three-year limitation period to constitute a statute of limitations.

         2. MCL 450.4515(1)(e) provides that a plaintiff must bring a claim for damages within three years of accrual or two years after discovery of the cause of action, whichever occurs first. Read as a whole, MCL 450.4515(1)(e) provides alternative statutes of limitations. The two-year limitation period shortens the amount of time within which a plaintiff must bring a claim by providing only two years after discovery to bring a claim, even if that period terminates sooner than three years after accrual. Under this provision, a plaintiff cannot bring a claim three years after accrual of the cause of action, even if he or she did not discover and reasonably would not have discovered the cause of action during that period. But if the plaintiff can show fraudulent concealment, he or she will still have two years within which to bring the claim from the time he or she discovers or reasonably should have discovered the claim, even if that happens more than three years after accrual.

         3. An action for LLC member oppression accrues not when a plaintiff incurs a calculable financial injury, but when a plaintiff incurs the actionable harm under MCL 450.4515. Under MCL 600.5827, a period of limitations runs from the time the claim accrues, and the claim accrues at the time the wrong upon which the claim is based was done, regardless of the time when damage results. The date of the "wrong" referred to in MCL 600.5827 is the date on which the defendant's breach harmed the plaintiff, as opposed to the date on which the defendant breached his or her duty. Therefore, in order to determine when a plaintiff's cause of action for LLC member oppression accrued, a court must determine the date on which the plaintiff first incurred the harms asserted. Under MCL 450.4515, a court may grant relief to a member of an LLC if the member can show that the managers' actions are illegal or fraudulent or constitute willfully unfair and oppressive conduct toward the limited liability company or the member. "Willfully unfair and oppressive conduct" means a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the member as a member. Thus, the harm that is actionable under MCL 450.4515 is the substantial interference with the interests of the member as a member. Plaintiffs argue that their claims did not accrue until they first incurred a calculable financial injury after ePrize sold substantially all of its assets in 2012. However, plaintiffs' argument conflates monetary damages with harm. The actionable harm for a member-oppression claim under MCL 450.4515 consists of actions taken by the managers that substantially interfere with the interests of the member as a member, and monetary damages constitute just one of many potential remedies for that harm. Accordingly, even if plaintiffs did not incur a calculable financial injury until 2012, their actions could still have accrued at an earlier date if their interests as members had been the subject of substantial interference.

         4. The alleged substantial interference with plaintiffs' interests as members in this case took place when their shares were subordinated in 2009. At that point, plaintiffs could have sought a remedy under MCL 450.4515(1), including cancellation of provisions of the operating agreement, prohibition of enforcement of those provisions, or a buyout. The subsequent liquidation that occurred was only relevant to the extent plaintiffs could recover monetary damages. Additional damages resulting from the same harm do not reset the accrual date or give rise to a new cause of action. Because plaintiffs' actions accrued on March 1, 2009, the three-year limitation period in MCL 450.4515(1)(e) on claims for monetary damages expired before plaintiffs filed suit on April 19, 2013. Accordingly, plaintiffs' claims for monetary damages are barred unless they can show on remand under MCL 600.5855 that defendants fraudulently concealed the existence of the claim or the identity of any person who is liable for the claim. The trial court should determine on remand whether plaintiffs are entitled to tolling of their claims for damages under this provision.

         Court of Appeals judgment affirmed in part and reversed in part; case remanded to the trial court for further proceedings.

         BEFORE THE ENTIRE BENCH

          OPINION

          Markman, C.J.

         This case involves a cause of action for member oppression within a limited liability company (LLC) under MCL 450.4515. Specifically, this Court granted leave to appeal to consider: "(1) whether MCL 450.4515(1)(e) constitutes a statute of repose, a statute of limitations, or both; and (2) when the plaintiffs' cause of action accrued." Frank v Linkner, 499 Mich. 859 (2016). We hold that MCL 450.4515(1)(e) provides alternative statutes of limitations, one based on the time of discovery of the cause of action and the other based on the time of accrual of the cause of action. We further hold that a cause of action for LLC member oppression accrues at the time an LLC manager has substantially interfered with the interests of a member as a member, even if that member has not yet incurred a calculable financial injury. Accordingly, plaintiffs' actions accrued here when ePrize LLC (ePrize) amended its operating agreement on March 1, 2009, to subordinate plaintiffs' common shares and not in 2012 when ePrize sold substantially all of its assets. We affirm in part and reverse in part the judgment of the Court of Appeals and remand to the trial court for further proceedings consistent with this opinion.

         I. FACTS AND HISTORY

         Defendant ePrize was founded by defendant Joshua Linkner in 1999 as a Michigan LLC specializing in online sweepstakes and interactive promotions. Plaintiffs are former employees of ePrize who acquired ownership units in ePrize. Plaintiffs allege Linkner orally promised them that their interests in ePrize would never be diluted or subordinated. In 2005, plaintiffs' shares in ePrize were converted into shares in ePrize Holdings, LLC (ePrize Holdings), whose sole assets were its ownership units in ePrize.[1] In 2007, ePrize ran into financial difficulties and required an infusion of cash. To remedy this problem, ePrize obtained $28 million in loans in the form of "B Notes" from various defendant-members of ePrize and other investors; plaintiffs were not invited to participate in these investments. In 2009, ePrize remained struggling to meet its loan obligations and therefore issued new "Series C Units." These units were offered to various investors, including those who had obtained B Notes.[2] In exchange for the Series C Units, investors were required, among other things, to make capital contributions, guarantee a portion of a $14.5 million loan from Charter One Bank, and convert their B Notes into "Series B Units."

         On March 1, 2009, ePrize executed its fifth operating agreement (the Operating Agreement). Pursuant to the Operating Agreement, both the Series C and Series B Units carried distribution priority over the common units held by plaintiffs. The Operating Agreement further provided that if the company were ever sold, Series C Units would receive the first $68.25 million of any available distribution. On August 20, 2012, ePrize sold substantially all of its assets and, pursuant to the Operating Agreement, distributed nearly $100 million in net proceeds to the holders of Series C and Series B Units.[3]Plaintiffs received nothing for their common shares.

         On April 19, 2013, plaintiffs brought various claims against defendants, including claims for LLC member oppression, breach of contract, and breach of fiduciary duty. The trial court granted defendants' motion for summary disposition, concluding that plaintiffs' claims were untimely. The Court of Appeals reversed. Frank v Linkner, 310 Mich.App. 169; 871 N.W.2d 363 (2015). The Court of Appeals first determined that the "gravamen" of plaintiffs' claims was for member oppression under MCL 450.4515 and analyzed the timeliness of their claims accordingly.[4] Id. at 181-182. Next, the Court held that the three-year limitation period in MCL 450.4515(1)(e) constitutes a statute of limitations, rather than a statute of 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. Id. at 183-186. Finally, the Court held that plaintiffs' claims did not accrue until 2012, when ePrize sold substantially all of its assets, because until that sale plaintiffs had not incurred a calculable financial injury and any damage claim before that time would have been "speculative." Id. at 188-190. Accordingly, the Court concluded that plaintiffs' claims were timely filed before the expiration of the three-year limitation period. Id. at 172.

         II. STANDARD OF REVIEW

         Pursuant to MCR 2.116(C)(7), a party may move to dismiss a claim on the grounds that the claim is barred by the applicable statute of limitations. "The question whether a cause of action is barred by the applicable statute of limitations is one of law, which this Court reviews de novo. This Court also reviews de novo a trial court's decision regarding a summary disposition motion." Seyburn, Kahn, Ginn, Bess, Deitch and Serlin, PC v Bakshi, 483 Mich. 345, 354; 771 N.W.2d 411 (2009). "In reviewing whether a motion under MCR 2.116(C)(7) was properly decided, we consider all documentary evidence and accept the complaint as factually accurate unless affidavits or other appropriate documents specifically contradict it." Kuznar v Raksha Corp, 481 Mich. 169, 175-176; 750 N.W.2d 121 (2008). An issue of statutory interpretation is a question of law that is subject to review de novo. Putkamer v Transamerica Ins Corp, 454 Mich. 626, 631; 563 N.W.2d 683 (1997).

         III. ANALYSIS

         A. THREE-YEAR LIMITATION PERIOD

         The first issue presented is whether the three-year limitation period set forth in MCL 450.4515(1)(e) constitutes a statute of limitations or a statute of repose.[5] How it is properly characterized is relevant because the Court of Appeals has held that the latter, unlike the former, cannot be tolled pursuant to the fraudulent-concealment statute, MCL 600.5855. Baks v Moroun, 227 Mich.App. 472, 486-490; 576 N.W.2d 413 ...


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