Indiana Court of Appeals Affirms Defense Judgment in LLC Members' Claim for Breach of Fiduciary Duty

At a Glance

• The decision serves as a reminder that the best way to win an appeal is to win at trial. A party appealing an adverse trial decision faces an uphill battle.
• It is also a win for LLC decisionmakers. It is clear from the court’s opinion that the evidence fell far short of satisfying the statutory standard that an LLC member or manager is not liable for action or failure to act unless the act or omission “constitutes willful misconduct or recklessness.”

In Jarboe v. Moore, two LLC members sued each other for alleged breaches of fiduciary duties and fraud. The members tried their cases to a judge, who denied relief to both sides. The Indiana Court of Appeals affirmed and emphasized that the parties knew the risks of their venture.

Background

Two joint venturers, Jarboe and Moore, formed an LLC (the “First LLC”) for the purpose of selling real estate to home builders. The First LLC entered into an agreement for the sale of certain lots to builder Thompson Homes; Jarboe signed the agreement on the First LLC’s behalf. Thereafter, Jarboe and Moore dissolved the First LLC, formed a second LLC (the “Second LLC”), and assigned the Thompson Homes contract to the Second LLC. Although Jarboe and Moore executed an agreement for Moore to “buy [Jarboe] out” of the First LLC, Jarboe held a 15% membership interest in the Second LLC. Moore held the remaining 85%.

The Second LLC was unable to fulfill its obligations to Thompson Homes, who eventually sued the Second LLC, Jarboe and Moore, and alleged claims for breach of contract and fraud. Jarboe and Moore each alleged cross-claims against the other for breach of fiduciary duty. The cross-claims proceeded to a bench trial, and the court found that neither party met their burden to prevail on a breach of fiduciary duty claim. Jarboe filed a motion to correct error, which the trial court denied, holding that the testimony “was too vague and uncertain as to support any ultimate finding” in Jarboe’s favor. Jarboe appealed the trial court’s judgment.

The Indiana Court of Appeals Affirmed

Jarboe argued on appeal that there was ample evidence from which the trial court should have concluded that Moore breached his fiduciary duties to Jarboe. In Jarboe’s view, Moore exclusively negotiated with Thompson Homes and failed to keep Jarboe apprised of the company’s inability to deliver on the Thompson Homes contract.

The appellate court began its analysis by noting Jarboe’s high standard when appealing an adverse judgment after trial — which requires Jarboe to show that the evidence is without conflict and that all reasonable inferences to be drawn from the evidence lead to only one conclusion, but the trial court reached a different conclusion. The appellate court then explained that the evidence supported the trial court’s ruling: the Thompson Homes contract fell through not because of Moore’s misconduct, but because of the Second LLC’s inability to secure financing or an investor. More importantly, the appellate court noted that the trial court credited Moore’s testimony that the venture was “risky,” but Jarboe remained a 15% member of the LLC in hopes of a return on his investment. Finally, the court explained that Jarboe’s vague and uncertain testimony failed to carry his burden to show misconduct by Moore.

The Indiana Court of Appeals therefore affirmed the trial court’s judgment in Moore’s favor on Jarboe’s cross-claim.

Takeaway

While this is an unpublished appellate decision that cannot be cited as binding precedent, there are two important takeaways. First, the decision serves as a reminder that the best way to win an appeal is to win at trial. A party appealing an adverse trial decision faces an uphill battle. Second, it is a win for LLC decisionmakers. Under Indiana Code § 23-18-4-2, an LLC member or manager is not liable for action or failure to act unless the act or omission “constitutes willful misconduct or recklessness.” While the appellate court did not cite to or reference this standard, it is clear from the court’s opinion that the evidence fell far short of satisfying it. The evidence showed that the company’s failure to fulfill the Thompson Homes contract was the result of its failure to secure financing or an investor — which was a known risk among both LLC members.