Testimony Regarding Timeliness of Election to Continue an LLC Found to be Untrustworthy, Resulting in LLC Dissolution

Jul 06 2017

In Delaware Acceptance Corporation, CACV of Colorado, LLC and 202 Investments, Inc., v. Estate of Frank C. Metzner, the Court of Chancery removed the executrix of an estate for breaching her fiduciary duty to a creditor of the estate. The case hinged on the authenticity of several documents, which if found to be forged would lead to the dissolution of an LLC and a distribution of its assets. The Court of Chancery found that the executrix was not a credible witness, and, therefore, it could not trust the authenticity of documents that she presented in support of the continued existence of the LLC.

The plaintiff was a creditor of Frank C. Metzner, Sr. and Lona C. Metzner, a couple who deeded their home in Lewes, Delaware to the their own LLC, the Metzner Family Limited Liability Company (the “LLC”). Plaintiff previously filed a complaint which resulted in a charging order (the “Charging Order”) being issued in December 2010. Pursuant to the Charging Order, the couple was to remit distributions from the LLC to the creditor until all the amounts owed were paid. However, the only asset of the LLC was the home in which the couple resided, and no distributions were ever made to either of them.

Frank Sr. and Lona were the original members of the LLC, each owning a 50% interest. However, they made their son, Frank Jr., a third member by giving him a 2% membership interest in the LLC. Frank Sr. died in October 2012, and Lona was appointed as executrix of his Frank Sr.’s estate (the “Estate”). The plaintiff timely filed a claim against the Estate, but the Estate’s attorney denied the claim and argued that the Charging Order was not dissolved by Frank Sr.’s death. If so, the terms of the Charging Order, requiring remission only in the event of distributions from the LLC to the creditor, would still control.

In the present action, the plaintiff alleged that following the death of Frank Sr., the remaining members of the LLC did not consent in writing to the continuance of the LLC within the 90-day period required under the LLC’s operating agreement. As such, the plaintiff argued that the LLC should have been dissolved and the assets of the LLC should have been distributed to the members. Under the terms of the Charging Order, the distributions must then be remitted to the plaintiff until all the amounts owed were paid.

The defendants alleged that the remaining members did consent in writing to the continuance of the LLC within the 90-day period following Frank Sr.’s death. As evidence, the defendants presented a document entitled “Metzner Family LLC” “Election of Remaining to Continue LLC” (the “Election”). The document was signed by Lona and Frank Jr., but the signature line for a witness was not signed, and Lona testified that she handwrote the date in the blank spaces provided on the typewritten document. The court had previously entered an order requesting relevant metadata from the computer of the Estate’s attorney to verify Defendant’s claims as to the authenticity of the Election. Defendants failed to produce the metadata within 60 days of the order. As such, the Court of Chancery drew the adverse inference, namely that the Election had been both created after the 90-day period following Frank Sr.’s death and backdated to appear as if it were timely.

The Court of Chancery stated that the authenticity of the Election depended upon the credibility of several witnesses, including Lona, and found that Lona was not a credible witness. Absent any metadata or independent verification as to the authenticity of the Election, the Court continued with the adverse inference that the Election had been backdated. As such, pursuant to the LLC operating agreement, the LLC should be dissolved. As Lona had “revealed herself as a person willing to go to great lengths, including backdating documents and offering false testimony at trial,” the Court of Chancery recommended her removal as executrix of the Estate and the appointment of a neutral third-party as the successor. The Court of Chancery’s recommendation also included a direction for the successor to dissolve the LLC, distribute the assets, and pay the Plaintiff’s claim.