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Tissue Technology LLC v. Tak Investments, LLC

United States District Court, E.D. Wisconsin

December 2, 2016

TISSUE TECHNOLOGY LLC., et al., Plaintiffs,
v.
TAK INVESTMENTS, LLC, Defendant.

          DECISION AND ORDER

          WILLIAM C. GRIESBACH, CHIEF JUDGE UNITED STATES DISTRICT COURT

         Plaintiffs brought the diversity action for breach of contract against Defendant seeking specific performance in the form of an order conveying a 27% interest in Defendant to Plaintiff. The case is before court on cross motions for summary judgment. For the reasons that follow, Plaintiffs' motion will be denied, and Defendant's motion will be granted but only in part.

         BACKGROUND

         This case is the second iteration of a dispute between the Plaintiffs, a group of entities controlled by Ronald Van den Heuvel, and Tak Investments, LLC, a Delaware company. The dispute arises out of Tak's purchase of an Oconto Falls, Wisconsin, paper mill from the Plaintiffs. In a previous action, Case No. 12-C-1305, the Plaintiffs (also known as the OFTI Group) sought to enforce a provision in the parties' agreement that would require the Defendant to turn over “an undiluted 27% ownership interest of the highest class in [Tak] Investments” because the Plaintiffs had deemed four promissory notes cancelled. Upon motions for summary judgment, this court found for the Defendant on the ground that one of the four notes had been assigned to another party, thus precluding the ability of the Plaintiffs to deem all four notes cancelled. As such, the Plaintiffs had not fulfilled a condition precedent to enforcing the provision of the contract upon which they relied. However, the court noted that because the assignee “could reassign the fourth note back to OFTI [i.e., the Plaintiffs] there is nothing in the record to suggest that OFTI is permanently foreclosed from cancelling all four notes and thereby fulfilling the condition precedent.” (No. 12-C-1305, ECF No. 42 at 5.)

         This is exactly what has now happened. The Plaintiffs, having received an assignment of the fourth note, are now payees of all four notes and thus have the ability they lacked in the previous action, which is to “deem” (as the contract puts it) the notes to be cancelled. Accordingly, they believe they are entitled to the remedy of specific performance, that is, an order requiring Defendant Tak Investments, LLC to transfer a 27% interest in itself over to the Plaintiffs. Both sides have moved for summary judgment.

         The operative language is contained within an agreement called “Final Business Terms Agreement, ” dated April 16, 2007. It provides as follows:

Through the third anniversary of the date of each Investment Note, the OFTI Group agrees to pay any payments due for interest or principal required per the terms of the Investment Notes. . . If such Investment Notes are deemed cancelled by the OFTI Group after the third anniversary of the date of the Investment Notes, the OFTI Group shall receive an undiluted 27% ownership interest of the highest class in [Tak] Investments . . .

(ECF No. 25-3 at ¶ 2.G.)

         ANALYSIS

         1. The LLC Does Not Own Itself.

         The Defendant's first argument is very simple: it argues that it does not have the ability to convey any interest in itself to the Plaintiffs, or anyone else for that matter. Only owners can convey interests, and Tak Investments, LLC - the only defendant in this action - does not own itself. Instead, the LLC is owned by Sharad Tak and his wife, and / or Tak Investments, Inc., none of whom are party to this action.

         The Plaintiffs protest that LLCs have, under state law, all kinds of rights to convey interests and dispose of property. That, of course, is true. But none of the statutory provisions Plaintiffs cite stands for the principle that an LLC may convey something it does not possess, namely, an ownership interest in itself. For example, the Plaintiffs cite a Maryland statute that provides an LLC may purchase, sell, hold, and pledge “stock or other interests in and obligations of other corporations . . .” Maryland Code §4A-203. But the key word, of course, is “other.” The Maryland code does not provide that an LLC may issue shares in itself, which is what the Plaintiffs want. (The Plaintiffs cited Maryland law because they had been unclear whether the LLC was a Delaware or Maryland LLC.) The Plaintiffs also argue that Delaware law allows for assignments of ownership interests as well. But the provision they cite, 6 Del. C. § 18-702, merely provides that LLC interests may be assigned, not that the LLC itself would do the assigning. In fact, the statute suggests that any assignment would be by the m ember (i.e., the owner), not the LLC itself.[1]

         This is not merely an academic problem or an elevation of form over function; it is a recognition of the realities of ownership. When part of a company-or anything else, for that matter-transfers to someone, it is also necessarily transferred from someone. The percentage of ownership must always add up to 100%. And so if the company itself purported to transfer 27% of itself to the Plaintiffs, from whom would it be taking that share? And on whose authority? These questions demonstrate the essence of the problem, which may be summarized succinctly: “A corporation does not own itself.” Hanley v. Kusper, 61 Ill.2d 452, 462, 337 N.E.2d 1, 7 (Ill. 1975).

         It is true enough that more traditional corporations have the ability to issue shares in themselves, for example, as part of employee stock incentive plans. It is also conceivable that an LLC in some circumstances could transfer part of its ownership. But those abilities would be products of specific contractual arrangements (for example, an ESOP, a convertible bond, or the LLC operating agreement) providing for the company to issue new shares, shares that would dilute the existing owners' interests. If the Plaintiffs here had expected the Defendant to issue new shares in itself, one would expect their agreement to say so. Instead, the contract simply provides, in a single sentence, that the Plaintiffs “shall receive an undiluted 27% ownership interest.” (ECF No. 25-3 at ¶ 2.G.) Since LLCs normally do not have “shares” in the same way corporations do-they function more like partnerships-any agreement to issue new ownership interests would have been more specific than the vague “shall receive” language the parties used. This is confirmed by the fact that Sharad Tak, the LLC's owner, signed the agreement on his own behalf. A more reasonable reading of the agreement is that the parties intended that Sharad Tak would be obligated to convey any ownership interest, since he was the only owner of Tak Investments, LLC to sign that agreement. He was the only party with the ability to convey a 27% share of his company. Thus, even if an LLC had a theoretical ability to issue an ownership interest in itself, I ...


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