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K-1s Alone Do Not Establish Ownership Under State Law says Ohio Court

01 / 22 / 2020

North Hill Holdings, L.L.C. v. Concheck, 2019 Ohio 5119 (Ohio Ct. App. 12-12-2019)

Practitioners may wonder how the issuance of a K-1 impacts state law litigation, when determining whether or not someone or some entity is or is not a member of a LLC under state law.  

In this Ohio case, a court examined Buckeye Hoya, L.L.C. ("Buckeye"), a transactional advisory business.  The LLC was formed on September 7, 2010, when Anthony Calabrese prepared and filed articles of organization with the Ohio Secretary of State.  The articles were signed by Joseph E. Concheck, with no other signatures indicated nor any indication if he did so as a member,  manager or representative.  The parties did not dispute that in fact, Concheck was a 50 percent managing member of Buckeye, which had no operating agreement.

North Hill Holdings, L.L.C. ("North Hill") is a LLC wholly owned by Maria Calabrese, Anthony's wife.  She claims that North Hill was the other 50% member of Buckeye since inception.

At issue were the fees Buckeye earned in this advisory role, earned in a 2012 transaction involving Brown Gibbons Long ("BGL"), an investment banking firm, and National Entertainment Network ("NEN"), which was looking for refinancing capital.  Anthony Calabrese is alleged to have introduced Concheck to two principals in the investment banking firm, and under the consulting agreement, the investment banking firm would pay Buckeye 20% of fees earned from business opportunities brought by Buckeye. Buckeye alleges it earned a fee of $231,000 from the NEN recapitalization transaction.  Thus, North Hill claims that it was the "other" 50% member entitled to its share of this fee, and that Concheck violated a fiduciary duty as the managing company member of Buckeye owed to North Hill, and failed to maintain proper records and provide the same to the members, and was unjustly enriched.  

Concheck and the LLC moved for summary judgment, claiming that North Hill lacked standing to bring the suit because it was NOT a member of Buckeye.  It alleges that Anthony Calabrese is the other 50% member, not North Hill.  In moving for summary judgment, various agreements were relied upon showing Anthony Calabrese signing as a member.  Also attached was Maria Calabrese's deposition testimony in which she was uncertain as to who the "other" 50% member of Buckeye was.

North Hill opposes the motion for summary judgment, claiming that North Hill was a member of Buckeye since inception.  In support, North Hill attaches a 2011 K-1 issued directly to Maria Calabrese, and showing a 2011 distribution to her of $14,000 as a 50% individual partner of Buckeye.  A check for $14,000 from Buckeye to her dated January 18, 2011, payable to Maria L. Calabrese. The 2012 and 2013 K-1s also were issued by Buckeye, this time listing North Hill Holdings, L.L.C. as a 50% partner in the LLC.

The trial court noted that there was no documentary evidence or testimonial evidence showing WHEN or HOW North Hill became a member in accordance with state law.  In other words, in concluding that Anthony Calabrese and Concheck were each a 50% member of Buckeye at the time of formation, there was no evidence that North Hill later became a member under state law.  For these reasons, the court was unwilling to find that the mere issuance of K-1s amounted to a "written consent" of all of the members, and this did not qualify as being on the LLC written records.