Court Opinion

ID: 1040829
Source: CourtListenerOpinion
Date Created: 2013-09-14 10:18:25.362291+00
Date Added: 2024-06-11T12:05:16.391852
License: Public Domain

In 2005, the district court ruled in respondents favor,
                imposing a constructive trust on Kaufman's interest. In 2008, this court
                reversed the district court's order and remanded with instructions that the
                proper remedy was a charging order. On remand in 2011, the district
                court instead concluded that Kaufman lacked an ownership interest in
                HLK, thus avoiding the remedial issue. The district court also awarded
                attorney fees and costs to respondents and dismissed all remaining claims
                between the parties. 2
                            On appeal, we must determine whether a member of a limited
                liability company (LLC) loses his membership interest by failing to make
                an initial capital contribution. NRS 86.321 provides that the contribution
                to capital may be in a form other than cash, such as a promise to perform,
                and that the failure to make a contribution only creates a liability for that
                amount to the LLC under NRS 86.391. Accordingly, the district court
                erred in finding that Kaufman did not have an interest in the proceeds of
                the dissolution of HLK. We also conclude that the district court abused its
                discretion in awarding attorney fees and that the respondents waived
                their right to appeal the district court's dismissal of their counterclaim.
                Standard of review
                            This court reviews issues of law de novo and issues of fact for
                substantial evidence on the record. Keife v. Logan, 119 Nev. 372, 374, 75
                P.3d 357, 359 (2003). This court reviews a district court's award of
                attorney fees for an abuse of discretion.    Thomas v. City of N. Las Vegas,
                122 Nev. 82, 90, 127 P.3d 1057, 1063 (2006).

                      2As the parties are familiar with the facts, we do not recount them
                further except as necessary to our disposition.

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                The district court erred by concluding that Kaufman had no ownership
                interest in HLK
                            Kaufman argues that the district court erred by ruling that
                Kaufman had no ownership interest in HLK upon dissolution because he
                did not make an initial capital contribution. We agree, as Kaufman's
                failure to make his initial contribution only creates a liability to the LLC
                for the amount owed, while the remaining assets of the LLC should be
                divided based on the members' percentage interest in the LLC as stated in
                the operating agreement.
                      A promise to perform is sufficient to create a membership interest in
                      an LLC
                            NRS 86.321 broadly provides that "contributions to capital of a
                member to a limited-liability company may be in cash, property or services
                rendered, or a promissory note or other binding obligation to contribute
                cash or property or to perform services." (Emphasis added). If an
                expected contribution is not satisfied, NRS 86.391(1)(a) makes a member
                liable to an LLC "[f]or a difference between the member's contributions to
                capital as actually made and as stated in the articles of organization or
                operating agreement as having been made." In other words, these
                provisions plainly provide that Nevada treats a promise to perform (i.e.,
                make a capital contribution) as sufficient to create a membership interest,
                NRS 86.321, and failure to perform the promise creates a liability to the
                LLC, not a forfeiture of the breaching member's interest, NRS
                86.391(1)(a).
                            Here, the district court found that Kaufman breached his
                fiduciary duties to Restaurant Facilities, LTD (RFL), by improperly taking
                $24,600 from the company to satisfy his contribution, and imposed a

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                judgment against Kaufman to repay RFL. 3 Hawley has never requested
                that Kaufman repay the remaining $30,000 portion of his contribution and
                Kaufman has not done so. However, under NRS 86.391(1)(a), Kaufman's
                failure to make a contribution contemplated by the operating agreement
                or articles of incorporation only creates a liability to HLK or to those from
                whom Kaufman received the money used to satisfy an obligation to the
                LLC (i.e., RFL and Hawley). Thus, Kaufman did not necessarily have to
                satisfy his initial contribution in order to retain a membership interest.
                As we have previously instructed, the exclusive remedy against the
                member's interest is a charging order.     See Hawley v. Kaufman, Docket
                No. 46634 (Order Granting Rehearing and Affirming in Part, Reversing in
                Part, and Remanding with Instructions, May 8, 2008) (holding that NRS
                86.401 provides the exclusive remedy for a judgment creditor against an
                LLC member's interest).
                      Kaufman's failure to make a required contribution created a liability
                      to HLK
                            NRS 86.521(1)(c) provides that upon dissolution, payments go
                to the members in respect to their capital contributions. However, NRS
                86.521(2) conditions such apportionment on the terms of the operating
                agreement. In other words, once each member's initial contribution is
                repaid, the remaining assets should be divided by the interest defined in
                the operating agreement, not the percentage of each member's actual
                capital contribution.
                            The district court concluded that Kaufman was not entitled to
                any proceeds upon HLK's dissolution because "the ownership percentage

                      3 Kaufman   has since repaid RFL and satisfied this judgment.

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                of prospective members of HLK was determined by the contributions made
                by each member." However, the operating agreement (which trumps NRS
                86.521(1)(c)'s default rule) sets forth the respective ownership interests
                and leaves the amount of initial contributions blank. Subsequent to
                signing the operating agreement, the parties divided the purchase price of
                RFL's facility by their respective interests. Therefore, Kaufman's
                predetermined interest, as stated in the operating agreement, defined the
                amount of his contribution, not vice versa. By paying less than his share
                of the purchase price, Kaufman only created a liability to HLK, not a
                diminished interest upon dissolution. See NRS 86.391, NRS 86.321.
                            Accordingly, the district court erred by concluding that
                Kaufman's failure to make an initial contribution eliminated his
                membership interest in the LLC upon dissolution.
                The district court abused its discretion by awarding attorney fees and costs
                              Kaufman argues that the district court's fee award was
                premature because it had yet to address his claims against HLK for
                dissolution and for a determination of his interest. 4 We conclude that
                Kaufman's argument has merit.

                      4 HLK   contends that all of Kaufman's claims were dismissed on their
                merits prior to the 2005 judgment, such that they were not revived by this
                court's 2008 reversal. This argument fails, however. The record reflects
                that the district court dismissed Kaufman's claims against Hawley and
                Mello as individuals because they were not proper parties under NRS
                86.371. However, the record does not support that any of Kaufman's
                claims against HLK as a separate defendant were similarly dismissed.
                Instead, Kaufman's claims against HLK for dissolution and his rights
                thereof survived summary judgment and were not resolved until after the
                district court's award of attorney fees.

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            This court reviews a district court's award of attorney fees for
an abuse of discretion.   Thomas, 122 Nev. at 90, 127 P.3d at 1063. To
support an award of attorney fees to a prevailing party under NRS
18.010(2)(b), "there must be evidence in the record supporting the
proposition that the complaint was brought without reasonable grounds or
to harass the other party." Kahn v. Morse & Mowbray, 121 Nev. 464, 479,
117 P.3d 227, 238 (2005) (internal quotations omitted).
            Because the crux of Kaufman's initial complaint appears to
revolve around his ownership interest in HLK and his rights upon
dissolution, the fee award was premature because the district court had
yet to revisit these claims in the wake of this court's remand. Although
this court affirmed that Kaufman was liable to HLK as a prevailing party
(albeit through a different remedy), the district court subsequently
granted Kaufman partial summary judgment with regard to his
dissolution claim. Thus, it was an abuse of discretion for the district court
to award attorney fees to HLK for "all of the billings incurred" in defense
of Kaufman's complaint, as the record reflects that the dissolution claim
was brought on reasonable grounds. Moreover, the district court's 2008
award fails to include any discussion on whether the full amount of fees
and costs is reasonable. See Brunzell v. Golden Gate Nat'l Bank, 85 Nev.
345, 349, 455 P.2d 31, 33 (1969) (directing the district court to consider
four factors in calculating the reasonableness of attorney fees: (1) the
qualities of the attorney, (2) the character of the work to be done, (3) the
actual work performed by the attorney, and (4) the case's result).
            Accordingly, we conclude that the district court erred in
awarding the full amount of HLK's requested attorney fees and costs

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                     because the record reflects that Kaufman's claim for dissolution was
                     reasonable. 5 Kahn, 121 Nev. at 479, 117 P.3d at 238.
                     The district court did not err by dismissing HLK and Hawley's
                     counterclaim for accounting and judgment
                                 In its 2005 judgment, the district court dismissed all claims
                     not expressly granted, summarily dismissing by implication HLK and
                     Hawley's counterclaim for an accounting. HLK and Hawley contend that
                     the district court erred because the dismissal failed to comply with NRCP
                     52(a), which requires the district court to set forth findings of facts and
                     conclusions of law to support its decision.
                                 NRCP 52(b) gives the parties 10 days to submit a motion to
                     amend the findings. A party does not preserve their argument for appeal
                     where the party does not move to amend the findings, even where the
                     district court fails to satisfy NRCP 52(a). Solar, Inc. v. Elec. Smith Constr.
                     and Equip. Co., 88 Nev. 457, 459, 499 P.2d 649, 649-50 (1972).
                                 Because HLK and Hawley's counterclaim was dismissed in the
                     district court's 2005 judgment, and since this court's remand did not
                     revive that claim, the 2005 judgment was a final judgment in regard to the
                     counterclaim. By failing to make a motion to amend or make additional
                     findings pursuant to NRCP 52(b), HLK and Hawley have not preserved
                     their right to challenge the sufficiency of the district court's findings. As

                           5 Kaufman   also argues on appeal that this court should remand with
                     explicit instructions that the district court address his claim that HLK
                     converted his ownership interest and to award damages. Because the
                     district court dismissed Kaufman's conversion claim on its merits in its
                     2005 judgment, and because Kaufman did not raise this argument in the
                     previous appeal, the argument is waived. Molino v. Asher, 96 Nev. 814,
                     818, 618 P.2d 878, 880 (1980) (precluding relitigation on remand issues for
                     which final judgment was given).

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such, Hawley and HLK waived their NRCP 52(a) argument by failing to
timely raise it.
             Accordingly, we
             ORDER the judgment of the district court AFFIRMED IN
PART AND REVERSED IN PART AND REMAND this matter to the
district court for proceedings consistent with this order.

                                                             C.J.

                                    Gibbons

                                                              J.
                                    Parraguirre

                                                              J.

                                                              J.

                                                              J.
                                     Saitta

cc: Hon. Brent T. Adams, District Judge
     Molof & Vohl
     Jack I. McAuliffe, Chtd.
     Washoe District Court Clerk

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