Business Associations, Pages 1007–1011

Spurlock v. Begley

Kentucky Supreme Court, 2010

Facts:

Griffin formed Caribou Coal, an LLC for the purpose of acquiring and operating a coal tipple to load coal into railroad cars. He then convinced Begley to invest in the business. Begley borrowed $75,000 and loaned it to Caribou Coal. Caribou Coal executed a promissory note but never made any payments.

Griffin had exchanged with Spurlock a 25% ownership interest in Caribou Coal for a 25% ownership interest in Spurlock's LLC. In a meeting with Begley, Spurlock also suggested to give him a 25% ownership interest to pay off the debt to him. Griffin agreed, but no writings were made.

Spurlock then went to Begley and offered to buy his 25% ownership interest for $70,000, with $5,000 as earnest. Spurlock then informed Griffin of this, who told him that he Begley did not have a 25% ownership interest, only a promissory note. Spurlock then told Begley he would not pay the outstanding debt.

Caribou Coal eventually became insolvent, and Begley sued Spurlock seeking judgment on the promissory note. Spurlock counterclaimed for the $5,000.

Defendant's Argument:

Begley misrepresented himself as owning a 25% ownership interest in Caribou Coal, and thus there was no consideration.

Procedural History:

  • The trial court only submitted to the jury whether or not Griffin transferred a 25% ownership interest to Begley. The jury found in the affirmative.

  • The court of appeals affirmed, stating that an ownership interest in an LLC was different than being a member.

Issue:

Did Begley possess an ownership interest in Caribou Coal?

Rule:

Reasoning:

While Begley purported to transfer a "25 percent ownership interest" in Caribou Coal, the law does not speak of "owners" of LLCs. Instead such people are members. As no evidence of the LLC's operating agreement was presented, Begley would have had to show that all members had consented in writing to his membership. Without this consent, only an economic interest can be transferred.

Begley does not claim to have received written consent to become a member. Therefore he could have only an economic interest in the LLC at most. As his contract purported to transfer an ownership interest, it lacked consideration.

Holding:

No, there is insufficient evidence to show that Begley possessed an ownership interest in Caribou Coal. Reversed and Spurlock entitled to a judgment notwithstanding the verdict.

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