[00:00:02] Speaker 00:
Case number 19-7108, et al.

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John N. Exarius, a balance, versus Marjorie A. Heiss, et al.

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Mr. Ahalt for the balance, Mr. O'Neill for the appellees.

[00:00:16] Speaker 05:
Good morning.

[00:00:16] Speaker 05:
May it please the court that Ahalt, on behalf of the appellant, John Zarias.

[00:00:23] Speaker 05:
Your Honor, this is going to be quite a switch from the prior cases.

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This case is about a partnership.

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It's about a partnership that developed back in 2010 and eventually resulted in the formation of an LLC.

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And the duties that flow from that partnership and the formation of the LLC, which include the duty of loyalty, the duty to account, the duty not to engage in self-dealing.

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Plaintiff alleged all of those things in his complaint, in his second amended complaint.

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And he alleged that there were breaches of all of those duties and did so very specifically and in numerous counts, numerous paragraphs.

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The trial court disagreed.

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The trial court essentially sought to limit greatly those claims, both at the summary judgment motion to dismiss stage and a trial.

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In doing so, however, the trial court committed numerous errors.

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The first error that the trial court committed was in the dismissal of the breach of fiduciary duty count.

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I'll ask you a question about that.

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When, what time period does your complaint allege that those breaches of fiduciary duty occurred?

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Throughout the entirety of the partnership.

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So that would be from 2010 all the way up through.

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What specific act happened before January 1 of 2012 that was a breach of fiduciary duty as alleged in the complaint?

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before January of 2012?

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Yes.

[00:02:06] Speaker 05:
Okay, so at that time, there was, they had already fired, I believe, some of my clients, associates that he had appointed in management positions at the club.

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And as a result of that, there was certainly a,

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A breach in that they had not consulted him and doing those things that the duty of loyalty requires the member managers of the LLC to consult the other members when they are in fact conducting business.

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They didn't do that.

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And as a result of that, the duty was breached at that point, but the duties go well beyond that and well beyond that timeframe.

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including the removal of my client as a member manager shortly after that.

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And then the subsequent duties that were breached in terms of the self-dealing that occurred, once they did remove him as a member manager, there's clear evidence of self-dealing.

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The plaintiff's expert testified as to that self-dealing to the tune of nearly, or I think

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just in excess of $1.5 million.

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The district court found that there was no, I think it was put, special relationship that would rise to the level of creating fiduciary duties

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What's your response to that?

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I guess the statute would seem to incorporate some, but the statute's only effective from January 1, 2012 on, right?

[00:04:01] Speaker 05:
Well, I think the statute's effective upon the formation of the partnership or the LLC, excuse me.

[00:04:08] Speaker 03:
The statute only went into effect in January of, so your argument is that even if the statute didn't come into being as an effective law until January of 2012,

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it applies, it sets forth what the standard of conduct is for actions prior to that?

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Absolutely.

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Prior to its effective date?

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Yes, I believe it's a full statement of the common law duties as well.

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I believe there may be duties in addition to those stated by the statute, and I think the statute contemplates that.

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So those duties were owed at the formation of the LLC, really at the formation of the partnership, like I said earlier.

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Once these parties agreed to be partners in business, they're sharing confidential information.

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They are giving each other access to bank accounts to make decisions on behalf of one another that affect the business in its entirety.

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They owe special duty of loyalty.

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This case went through full discovery.

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I recognize the district court chose to dismiss the fiduciary duty claim on

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the pleadings, but there had been, that had happened after there was full discovery, right?

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And in fact, the briefing, this motion for summary judgment briefing was addressed for the fiduciary duty claim as well as other claims.

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And what you pointed to there was that Heiss was brought into the Riot Act so that Dawson and Heiss together would be able to control the business.

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Whatever decision of bringing her in, that was before

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the partnership was formed, right?

[00:05:57] Speaker 05:
Well, I believe a common law partnership was formed prior to that between Mr. Dawson and Mr. Zarias, but Heist was then brought into that partnership.

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I don't recall anything in the case about that.

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Yeah, well, I mean, you know,

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there may not be a specific allegation of a partnership at that point.

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But there is.

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What I'm trying to get at is what you pointed to in summary judgment briefing in the district court.

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You also referred to Heiss's deposition where she says she had a romantic relationship with Dawson.

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And she had a financial interest in some of his other businesses.

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But I'm trying to really pinpoint that that itself is not evidence on which a jury could find

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a breach of fiduciary duty.

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No, I don't believe so.

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Yeah.

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So I'm trying to identify what is it in the evidence as a matter of summary judgment standard, if the district court had not applied 12b6 and gotten rid of the claim on that ground, what is the evidence that you're pointing to that you claim

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shows a breach of fiduciary duty.

[00:07:05] Speaker 05:
Yeah, well, there's the things I described earlier, the removal.

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Those are very general.

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I want you to be concrete.

[00:07:12] Speaker 05:
OK, well, the testimony of James Morrissey, the expert, details it very specifically in terms of the self-dealing claim.

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There was, I think, an excess of $4.5 million in unaccounted for funds that the expert testified to.

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those damaged my client because they were unaccounted for the LLC, his portion of those funds, he was damaged to that extent.

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And if they are self-dealing in that amount, then that would be sufficient to have that claim go to the jury.

[00:07:49] Speaker 01:
When I looked at the summary judgment briefing, the part of the summary judgment briefing defending the fiduciary duty claim did not cite any of those expert exhibits.

[00:08:01] Speaker 05:
I believe the expert testimony was incorporated, the expert report was incorporated into the summary judgment.

[00:08:08] Speaker 01:
But I'm just saying, in looking at what you claimed on the fiduciary duty portion, stock at 152, 27 to 28, defending against dismissal of the fiduciary duty claim, that wasn't what you were relying on.

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Well, I mean, we are relying on it in our brief now.

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as it was dismissed, which was under a dismissal standard, not under a summary judgment standard.

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The reason why I also noted for the court, and the court's questions are directed at that, that it wouldn't have even been appropriate under a motion for summary judgment is because of that additional evidence.

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So we didn't brief that additional evidence because the case was in fact dismissed under a motion to dismiss standard.

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And when the court looks at it from that aspect, the complaint certainly meets the elements

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of the cause of action.

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We weren't asked to argue it as a summary judgment, and the court dismissed it as a 12b6 motion.

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So therefore, we didn't brief it in that manner either.

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So before us today, you're saying that the violation of fiduciary duties is evidenced by lack of documentation of expenses?

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Yes, and the expert's opinion that that is missing funds from the

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from the LLC.

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If they are unable to account for funds and unable to answer questions about where those funds were, which they were unable to do, and the expert found they were unable to do, then that is in itself certainly a breach of fiduciary duty.

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The fiduciary duty also includes the duty to account.

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So the lack of

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information about where those funds went is part of that duty to account.

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Now, whether or not the jury makes the leap that we asked them to, which is that that means that those funds were self-dealt, that they were either spent on other businesses that were the plaintiffs or they simply put it into their own pockets, that's for us to persuade the jury of that.

[00:10:22] Speaker 05:
But that's not for a decision on a motion for summary judgment or motion to dismiss, certainly.

[00:10:31] Speaker 01:
What do you make of the fact that the, I mean, the district court said that this doesn't create a fiduciary duty, that only the ordinary duties of contracting parties apply.

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And in fact, I believe that this DC code provision was amended to take out the term fiduciary, or that it had been a proposal to have that.

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It was not included.

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So shouldn't we, shouldn't we,

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take from that, that they don't intend to create a fiduciary duty?

[00:11:00] Speaker 05:
Certainly not, Your Honor.

[00:11:01] Speaker 05:
I mean, it's a duty of loyalty, OK?

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So even if they decide to call it something else, it is still a higher duty than normal contracting parties.

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As I said, the very nature of going into business with someone is a confidential, special relationship.

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It is not an ordinary contract.

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All of the case law cited by the appellees here are ordinary contracts.

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That is not what this is.

[00:11:29] Speaker 01:
I mean, we're a federal court, and it's very difficult when we're being asked to interpret DC law.

[00:11:36] Speaker 01:
But I'm also not aware of any case law that applies 29-804.09 as

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supporting fiduciary duty between members of an LLC?

[00:11:51] Speaker 05:
But again, Your Honor, and I didn't cite to any case hall that would say that exactly either.

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However, I don't know how else you interpret the statute other than to create a special duty, okay?

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Whether we call that a fiduciary duty, a duty of loyalty, a duty of additional care, whatever it is.

[00:12:12] Speaker 01:
A complex of interest.

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I mean, there's a lot of duties that are lesser than a fiduciary duty.

[00:12:19] Speaker 05:
Right, but it's still a special duty.

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And if the court views this in that technical of a manner that the label on the count is what is alleged only,

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then I could see that.

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However, the statute is specifically cited as a violation of the statute and the duties encompassed by the statute.

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So even if the court were to want to call this something else other than a fiduciary duty, there's still an allegation of breach of the statutory duties that is alleged in the complaint and therefore dismissal is wholly inappropriate and should not have been granted here.

[00:13:03] Speaker 03:
And you point out that the district court allowed the defendant some counterclaim for breach of fiduciary duty to go to the jury.

[00:13:15] Speaker 05:
Exactly, Your Honor.

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I mean, it's just there are a number of issues that we raise in the case where the sides were treated completely differently.

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And I know there's all sorts of reasons for that, and some of which make sense and some of which don't.

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But I think that's just indicative of the error in this case.

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If there is a fiduciary duty for one side in a partnership, how is there not a fiduciary duty for the other side in the partnership?

[00:13:51] Speaker 04:
All right, thank you.

[00:13:52] Speaker 04:
Oh, I'm sorry.

[00:13:54] Speaker 05:
That's fine.

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Unless one of my colleagues has a question, you're well over time.

[00:14:00] Speaker 04:
OK.

[00:14:01] Speaker 04:
Thank you.

[00:14:02] Speaker 04:
Thank you.

[00:14:08] Speaker 02:
May it please the court, William O'Neill for the Penn Social defendants.

[00:14:14] Speaker 02:
With respect to the fiduciary duty claims, the court was quite correct to note that the pleading by Mr. Zourais did not contain any allegation of a special confidential relationship that transcends the contract.

[00:14:30] Speaker 02:
That is the test applied throughout DC in numerous cases that we cited, and he simply failed to plead that.

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Instead, he relies on the statute.

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The statute does not create

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a fiduciary relationship between all members of an LLC.

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If it made such a radical step, it should have stated that directly.

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What does it mean when it says that the member of an LLC owes the other members the duties of loyalty and care and then sets forth what those duties are as far as what the duty of loyalty is and what the duty of care is?

[00:15:13] Speaker 02:
Yes, that's true, Your Honor.

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And those duties are very precisely prescribed in the statute.

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Certain duties with respect to in the conduct or winding up of the company's activities, use of the

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used by a member of the company's property or for the appropriation of a limited liability company opportunity.

[00:15:38] Speaker 03:
I mean, aren't those all the same things that you would see if you were to call it a breach of fiduciary duty?

[00:15:44] Speaker 03:
I mean, isn't that what a fiduciary duty is, a duty to exercise loyalty and care?

[00:15:54] Speaker 02:
I think Mr. Zaraez here is

[00:15:57] Speaker 02:
is attempting to apply a general fiduciary duty.

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If he had alleged very specific facts fitting within this statute, then whether you call them statutory duties or fiduciary duties, you can call them either one.

[00:16:11] Speaker 02:
But if you compare the statute to the pleading on page 170 of the appendix, which is where he pleads his fiduciary duty obligation or his fiduciary duty claim,

[00:16:25] Speaker 02:
The allegations in the complaint are far broader than the very prescribed duties announced in or detailed in the statute.

[00:16:33] Speaker 04:
Well, go back to the statute for just a minute.

[00:16:38] Speaker 04:
What about Section Little I-5, which distinguishes manager-managed LLC from a member-managed one like this one?

[00:16:48] Speaker 04:
And it says quite specifically, manager-managed LLCs

[00:16:56] Speaker 04:
in a management, a member shall not have any fiduciary duties to the company.

[00:17:03] Speaker 04:
Doesn't that suggest that in a member managed LLC, there is a fiduciary duty?

[00:17:12] Speaker 04:
Why else would that be there?

[00:17:13] Speaker 02:
Well, I think what they're saying is there are duties that are described in the statute.

[00:17:17] Speaker 02:
There is not a general fiduciary duty created just between the members of a member managed LLC.

[00:17:23] Speaker 04:
But if this provision for

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manager managed LLCs expressly says that the member will not have any fiduciary duty to the company.

[00:17:40] Speaker 04:
Obviously, they said that to make sure that it would be treated differently from a member managed LLC, which does have a fiduciary duty to its members.

[00:17:49] Speaker 02:
Well, it has the duties that are described in this statute.

[00:17:53] Speaker 02:
And if he had pled facts within the restrictions?

[00:17:57] Speaker 02:
That's a different question.

[00:17:59] Speaker 02:
That's a different question.

[00:18:02] Speaker 04:
We can get on to that, about whether he's pleaded enough for this.

[00:18:05] Speaker 04:
But it seems to me the statute is pretty clear that members of a member-managed LLC owe a fiduciary duty to the other members.

[00:18:15] Speaker 01:
And I would just add to that, before you respond, Mr. Neal, that duties of care and loyalty

[00:18:22] Speaker 01:
Those are very familiar terms of art that denote fiduciary duties.

[00:18:28] Speaker 02:
Right.

[00:18:28] Speaker 02:
I don't disagree that the duties outlined in the statute are, in fact, fiduciary duties.

[00:18:35] Speaker 02:
But the statute does not create a general fiduciary duty between the members, the managing members of the LLC.

[00:18:43] Speaker 02:
It creates very specific duties of loyalty and care.

[00:18:46] Speaker 04:
Let's assume we disagree with you about that.

[00:18:49] Speaker 04:
Count 21 of the complaint.

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Breach of fiduciary duty of loyalty and care.

[00:18:58] Speaker 04:
There's your allegation right there.

[00:19:01] Speaker 02:
But then the specifics that they're talking about aren't the specifics that are covered by this statute.

[00:19:10] Speaker 02:
In B1, the duty of loyalty only applies to accounting to the company for

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property profit in the conduct or winding up of the company's activities, use of the company's property, appropriation of a limited liability company opportunity.

[00:19:30] Speaker 02:
The allegations in Count 21 of the complaint go far beyond anything like that.

[00:19:36] Speaker 02:
And if they- Things like that, don't they?

[00:19:39] Speaker 02:
I'm sorry?

[00:19:39] Speaker 01:
Don't they include things like that?

[00:19:45] Speaker 02:
I don't believe they do, because there was no winding up of the company's activities.

[00:19:49] Speaker 03:
So paragraph 368 that says that defendants breach their duty to provide an accounting to plaintiff and to give him access to corporate records.

[00:20:01] Speaker 03:
You're saying that that's not encompassed within the statute?

[00:20:07] Speaker 02:
No, because the question was whether the accounting has to be within one of those three subsets and the allegations

[00:20:18] Speaker 02:
In the complaint didn't fall within those three subsets.

[00:20:23] Speaker 03:
So, so be one that says that the duty of loyalty includes a duty to account to the company and to hold as trustee for it any property profit or benefit derived by the member that that

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that's not encompassed here.

[00:20:42] Speaker 02:
But that's further restricted then in subsets A, B, and C about the conduct or winding up of the company's activities, the use by the member of the company's property, and the appropriation of opportunity.

[00:20:55] Speaker 02:
And those were not the allegations that were stated in Count 21 of the complaint.

[00:21:10] Speaker 02:
Clearly the standard in the District of Columbia still requires a search into a contractual relationship being transcended and a special confidential relationship being created.

[00:21:25] Speaker 02:
And the statute doesn't do anything to abrogate that substantial line of cases that are still holding that test applicable today.

[00:21:34] Speaker 02:
If they were meaning to

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eliminate that test from the law.

[00:21:40] Speaker 02:
They should have done that specifically.

[00:21:42] Speaker 02:
Instead, they specifically stated there are certain duties of loyalty and care, but the pleadings here go far beyond what was contained in the statute.

[00:21:55] Speaker 03:
What did the district court mean when it said that there was no special relationship here that arose to the level of creating a fiduciary duty?

[00:22:08] Speaker 02:
Yes, that's correct.

[00:22:09] Speaker 02:
The three members of the LLC each had different areas of expertise, and they came together to create a single venture.

[00:22:19] Speaker 02:
But they weren't creating a fiduciary relationship amongst themselves in creating that LLC.

[00:22:26] Speaker 02:
You still have to have something that goes beyond the contract, some sort of confidential relationship between the parties.

[00:22:34] Speaker 02:
And that simply wasn't present here.

[00:22:36] Speaker 02:
It wasn't pled.

[00:22:38] Speaker 02:
And the district court was quite correct to note that the failure to plead a general fiduciary duty was fatal to a claim that's labeled breach of fiduciary duties.

[00:22:49] Speaker 03:
So how do you plead?

[00:22:51] Speaker 03:
What do you say to properly plead it?

[00:22:56] Speaker 02:
Of violation of the statute?

[00:22:59] Speaker 02:
For a general fiduciary duty, you have to plead some sort of special relationship where one person is putting their trust in the other.

[00:23:10] Speaker 02:
An attorney-client relationship is a common example, but the trust trustee is another example.

[00:23:24] Speaker 02:
But the default is that members of an LLC are not fiduciaries to each other.

[00:23:30] Speaker 02:
And there's nothing in the statute, I believe, that supports the test employed by District of Columbia courts.

[00:23:37] Speaker 02:
And this is also a part of the uniform

[00:23:41] Speaker 02:
Limited Liability Corporation Act that's enacted across the country.

[00:23:48] Speaker 02:
And Mr. Zarias doesn't cite any cases anywhere in the country, much less DC, that this statute has supplanted the test for when a fiduciary relationship is created.

[00:23:59] Speaker 02:
So I think the district court was quite correct in stating that his pleadings fell far short of establishing a general fiduciary relationship, which is what he was relying on in his Count 21.

[00:24:11] Speaker 04:
If neither of my colleagues have any questions, you've just used up your time.

[00:24:24] Speaker 04:
Thank you.

[00:24:25] Speaker 02:
Thank you very much.

[00:24:26] Speaker 04:
Um, uh, uh, I think council, I think you used up your time, but you can take one minute.

[00:24:34] Speaker 05:
I did your honor, but thank you.

[00:24:36] Speaker 05:
Um, so I, I just wanted to go back to, uh, one point that was made in the interpretation of a 29, 804.09.

[00:24:43] Speaker 05:
Um, and that is that it, it section B six states that the duty of loyalty of a member and a member managed limited liability company, which we have here,

[00:24:54] Speaker 05:
shall include the duties and then list the duties.

[00:24:58] Speaker 05:
Okay, so this is not a limiting statute.

[00:25:02] Speaker 05:
It is a clarifying statute noting that further duties could be owed.

[00:25:10] Speaker 05:
These are just what we know are included.

[00:25:12] Speaker 05:
So it's a very broad duty.

[00:25:14] Speaker 05:
that is owed between these members, member managers.

[00:25:18] Speaker 05:
It's a duty that was clearly breached.

[00:25:20] Speaker 05:
The breach was properly alleged numerous times throughout the complaint, including the predicate facts that aren't directly in count number 21.

[00:25:29] Speaker 05:
There are numerous references to all the different breaches of the duty of loyalty and the fiduciary duty.

[00:25:37] Speaker 05:
It was clear error for the district court to dismiss count 21.

[00:25:42] Speaker 05:
And we believe that there were other clear errors in the case that this court can overturn the decision on and we respectfully request that this court reverse and remain for a new trial.

[00:25:54] Speaker 04:
Thank you both.

[00:25:55] Speaker 04:
The case is submitted.