Opinion ID: 1103461
Heading Depth: 3
Heading Rank: 1

Heading: Was the raising of additional equity valid?

Text: ¶ 10. The call for additional capital contributions was valid. Summary judgment in favor of Bellin on this issue was improperly granted. ¶ 11. The March 6, 2003, resolution was not a mandatory capital call, but was a legitimate request for additional equity that Bellin could have agreed or declined to contribute. Bellin was given equal opportunity to invest with Kalian and Lane, but he chose not to do so. The transcript of the March 6, 2003 meeting, demonstrates that Bellin was given a fair opportunity to consider whether to invest additional equity, and that Bellin himself understood this: MR. BELLIN: How about if I say this, because I want to study this stuff and come back and tell you. Let me say this to you because you'll have my words on the transcript. I'm all for putting money in. And the amounts of money that we're discussing are fair and reasonable provided the deals make sense. . . . So I am interested in putting that participating in this group. But in terms of actually voting on this resolution, you'll have to put me down as abstaining until I can actually evaluate the business opportunities and figure out if this is a smart thing to do . . . And as I understand it, I have until March 14th to sign your subscription agreement and 17th to fund it . . . MR. LANE: Right. MR. BELLIN: Okay. ¶ 12. As Kalian and KBL point out, the resolution authorizing the raising of additional equity entitled, rather than required, members to invest, and it expressly informed each member that the decision not to invest would cause a reduction in his equity interest under Section 1.1(n) of the LLC's operating agreement. [10] Additionally, any member choosing to invest was required to execute a Subscription Agreement, which repeatedly stated that members were not required to invest; the agreement uses the terms entitled, agrees, and decision, and provided for sanctions only in the event that a member signed the subscription agreement but then breached it. ¶ 13. Furthermore, the LLC operating agreement provided that each member's financial interest was his own contributed capital divided by the aggregate contributed capital for all members. [11] When Bellin did not contribute more capital, his financial interest was legitimately reduced under the operating agreement. Bellin, as a party to the LLC agreement, knew that this would occur. Bellin argues that the capital call was mandatory because he was punished for failing to contribute additional equity by the mandatory dilution of his interest to virtually zero and Lane's ability to acquire his interest for $6.30. However, the provisions of the operating agreement to which Bellin agreed upon formation of the LLC, provided that this would occur. The legitimate reduction of his financial interest as a result of his choice not to contribute additional capital does not make the resolution mandatory. ¶ 14. As the parties agree, the LLC operating agreement has no specific provision on raising additional equity. However, the fact that the operating agreement does not affirmatively provide for raising additional equity does not mean that doing so is prohibited. Miss.Code Ann. § 79-29-108(1) provides that an LLC may carry on any lawful business, purpose or activity, subject to the provisions of its certificate of formation and other laws of this state. [12] KBL's operating agreement does not prohibit raising additional equity, and neither is there is any legal prohibition on such. Under Section 79-29-108(1), KBL could lawfully raise additional equity. ¶ 15. Bellin argues unsuccessfully that the capital call resolution was void under the Mississippi Limited Liability Act. Bellin points out that Miss.Code Ann. § 79-29-502(3) states: Unless otherwise provided in the Certificate of Formation or Limited Liability Company Agreement, the obligation of a member to make a contribution . . . may be compromised only by specific consent of all the members. Bellin contends that this resolution is void because there was unanimous consent of the members was not obtained. Bellin attempts to liken this case to In re Estate of Fitzner, 881 So.2d 164 (Miss.2003), which dealt with the obligations of limited partners to make capital contributions in a limited partnership. This Court held that a limited partner had no duty to make capital contributions to the partnership, and cited Miss.Code Ann. § 79-14-502(a). Bellin asserts that the limited partnership statute is virtually identical to the LLC statute: compare Miss.Code Ann. § 79-29-502(1) with Miss.Code Ann. § 79-14-502(a). [13] Bellin is correct that the statutes are similar. However, Bellin cites these statutes and Fitzner out of context. Fitzner and these statutes dealt with the statute of frauds, which is not at issue here. Bellin never promised to contribute to the LLC in writing or otherwise. As stated supra, the capital call was not an obligation but a choice. We find this argument unpersuasive. ¶ 16. Bellin also argues that the capital call and the dilution of his interest constituted amendments to the LLC operating agreement, which require unanimous consent of all members under the operating agreement. Section 12.7 of the operating agreement provides that any amendment, modification, or change to Articles III or IV ... must be by a unanimous vote of the Members. Bellin argues that any provision providing for additional capital contributions from members, if one existed, would be contained in Article III of the operating agreement, which is entitled Capital and sets forth the rights and obligations of members regarding contributed capital. Bellin maintains that because there is no provision in Article III or elsewhere in the operating agreement providing for additional capital contributions or dilution of a member's interest, the March 6, 2003, resolution constituted an amendment which was void because it did not receive the necessary unanimous approval when Bellin abstained from the vote. ¶ 17. We are unpersuaded by Bellin's argument. This resolution makes no change or modification to the operating agreement and, therefore, cannot be called an amendment. Thus, the operating agreement's default provision on voting applies, and this resolution could properly be approved by a vote of members holding an aggregate governance interest of at least 51 percent. Kalian and Lane together held 70 percent, and, therefore, properly approved the resolution without Bellin's vote. ¶ 18. Several provisions of the LLC operating agreement imply that the agreement anticipated that additional capital could be raised. Section 1.1(n) defined financial interests formulaically as a function of each member's relative contributed capital. This provision suggests a possibility of disproportionate capital contributions. Additionally, Section 1.1(k) states that contributed capital means, with respect to any Member as of any particular time, the cumulative amount of all cash, notes, and other property, tangible or intangible, made by such Member to the Company, less all distributions of Sale or Refinancing Proceeds made by the Company to such Member. The agreement defines contributed capital this way because it anticipated that additional capital could be raised; at the time of the formation of the LLC, each member had contributed one (1) dollar, but this definition refers to cumulative amount[s] of [] cash ... and other property. Finally, Section 3.1 refers to members' initial capital contributions, which suggests the possibility of subsequent contributions. ¶ 19. Bellin's financial interest was properly reduced as a result of the other members' capital contributions in a valid call for the raising of additional equity. Bellin essentially argues that what is not specifically permitted is prohibited, but that is not the law of this state. Summary judgment was improperly granted on this issue.