Posted by mike - November 20th, 2008
What's the best way to go about researching whether California or New
York law applies to a breach of fiduciary duty claim made by a
California resident who is a member of a limited liability company
which is organized under the laws of New York and has both NY and CA
offices? (I have access to law search engines, but am unsure how to
get started.)Do you have the documents used to form the company? It isn't unusual
for the incorporation papers (or the equivalent) to indicate which
state's laws apply. Also, what year was the LLC formed? Thanks!Interesting question! In the legal field the "choice of law" (also
known as "conflict of laws") questions can be among the toughest to
feret out the answer. It is in this area where it becomes most
apparent that law is an art, not a science.
Firstly, the advice given by others here is to be well taken.
As mvguy indicates - check the membership agreement (aka operating
agreement) for a choice of law provision governing disputes between
members (or alternatively members and managers, depending on the type
of LLC). I think that you will find that both states, New York and
California, as well as most other states, will tend (though not
blindly) to follow a contractual provision apertaining to choice of
law: "[w]hen a rational businessperson enters into an agreement
establishing a transaction or relationship and provides that disputes
arising from the agreement shall be governed by the law of an
identified jurisdiction, the logical conclusion is that he or she
intended that law to apply to all disputes arising out of the
transaction or relationship." Washington Mutual Bank, FA v. Superior
Court, 103 Cal.Rptr.2d 320 (Cal. 2001).
The more difficult issues arise when the operating agreement is silent
on the issue. The following is excerpted from the California decision
Washington Mutual Bank, FA v. Superior Court, 103 Cal.Rptr.2d 320
(Cal.2001):
"When there is no advance agreement on applicable law, but the action
involves the claims of residents from outside California, the trial
court may analyze the governmental interests of the various
jurisdictions involved to select the most appropriate law."
"California has adopted the Restatement, Second, of Conflict of Laws
position, specifically that of section 187. Under that approach, the
court must first determine: "(1) whether the chosen state has a
substantial relationship to the parties or their transaction, or (2)
whether there is any other reasonable basis for the parties' choice of
law. If neither of these tests is met, that is the end of the inquiry,
and the court need not enforce the parties' choice of law. If,
however, either test is met, the court must next determine whether the
chosen state's law is contrary to a fundamental policy of California.
If there is no such conflict, the court shall enforce the parties'
choice of law. If, however, there is a fundamental conflict with
California law, the court must then determine whether California has a
'materially greater interest than the chosen state in the
determination of the particular issue....' (Rest., 187, subd. (2).)
If California has a materially greater interest than the chosen state,
the choice of law shall not be enforced, for the obvious reason that
in such circumstance we will decline to enforce a law contrary to this
state's fundamental policy."
As you can see, this approach leaves the court with substantial
discretion to do what it believes is just and necessary to protect its
state's interest.
Why this issue becomes highly disputed is that offensive (vs.
defensive, not smelly :-) pleading will find that the plaintiff will
file in that forum state and venue where he/she has the greatest
advantage. An attorney would have to counsel you here, but you will
probably find, if the operating agreement is silent as to choice of
law, that you can file in either jurisdiction, and argue that the law
of that jurisdiction should apply. THEN, if the defendant wants to
argue for a change, its his dime (that's not to say that your
attorneys meter isn't running, but the other sides will be clicking a
lot faster than yours).
You have other interesting choices as well, for example whether to
file in Federal Court of State Court, and where. Many practitioners
would believe that Fed Court has its advantages what with smaller
dockets and the ability to focus more clearly on more complex
litigation.
A question for me to pose to you: Have you considered a "Shareholder
Derivative Suit"? This concept is equally applicable to LLC's and is
a terribly effective tool for seeking redress for minority member
oppression and the like. Nice thing is, if you prevail, you can almost
always get attorneys fees. And, the nasty insiders in some cases must
recuse themselves from the board deliberations concerning the
litigation. Just an idea to toss into the mix.
Here are a couple of sites that I think are very instructive in this
complex area - I think you will find that they are rich:
http://www.law.cornell.edu/topics/conflicts.html
http://www.willamette.edu/wucl/wlo/conflicts/index.htm
http://www.nvinc.com/california_approach.htm
ALSO, you mentioned that you have access to legal search engines (I
presume something like Lexis, Westlaw, or Loislaw). Find these cases
from the Delaware Chancery Courts and I believe that you will find
them very instructive:
Court of Chancery of Delaware.
In re BIGMAR, INC., SECTION 225 LITIGATION
No. CIV.A. 19289-NC.
Date Argued: March 1, 2002.
Post-Argument Submissions Completed: March 28, 2002.
Date Decided: April 5, 2002.
Court of Chancery of Delaware.
David B. CLARK, and United California Discount Corporation, a
California
corporation, Plaintiffs,
v.
Phillip KELLY and La Empresa De La Mar D'Oro, Inc., a California
corporation,
Defendants,
and
RIVIERA FINANCE LLC, a Delaware limited liability company, Nominal
Defendant.
No. C.A. 16780.
June 24, 1999.
Search Terms Used:
://www.google.com/search?sourceid=navclient&querytime=Fx2WjB&q=%22choice+of+law%22
://www.google.com/search?sourceid=navclient&q=%22choice+of+law%22+california+%22New+York%22
I hope that this will help you in answering your question. If you
require ANY need for clarification, please ask and I will be glad to
help some more.
Best of luck! And thanks again for a question on this fascinating
area of the law.
Tom
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