They Relied On Legal Zoom

An LLC that relied on forms found on Legal Zoom ended up in the Tennessee courts in litigation over inspection rights.

An order of inspection granted to a purported LLP member was vacated by the Tennessee Court of Appeals.

Mr. Carney paid Legal Zoom, an online legal services company, to form Off The Wagon Tours, LLC. Based on information from Mr. Carney, Legal Zoom drafted and filed Articles of Organization for the LLC with the Tennessee Secretary of State. The Articles, filed on February 24, 2016, specified that the LLC was manager-managed and had four members. Mr. Carney was listed as the manager. The four members were not specifically named in the Articles, but Mr. Carney later identified them as himself, Mr. Heatherly, Steven Reese, and Danny Cage.

The dispute

Mr. Heatherly claimed that he had been a member of the LLC from the beginning. In his words, “I already had five percent on day one.” Mr. Carney maintained that he never became a member because he did not fulfill the condition precedent for membership—$10,000 in sweat equity,

And

Legal Zoom also drafted an operating agreement for the LLC. At Mr. Carney’s request, the online company made multiple revisions to the operating agreement. Ultimately, Mr. Carney signed a version of the agreement that listed Mr. Carney and Mr. Heatherly as the only two members of the LLC. Although Mr. Carney repeatedly asked him to, Mr. Heatherly never signed the agreement. Mr. Heatherly claimed that, although he was willing to sign, the timing was never right.

Because of the evidence of membership at the outset

The evidence does not preponderate against the court’s finding that Mr. Heatherly was a member of the LLC at formation. But because the Tennessee Limited Liability Company Act was applied in error, we vacate the inspection order and the award of attorney’s fees and costs. We remand for the court to consider whether Mr. Heatherly’s membership interest was terminated and to what extent he is entitled to access the LLC’s records under the Tennessee Revised Limited Liability Company Act. On remand, the court should also consider whether an award of his attorney’s fees and costs in pursuing this action is appropriate under the Revised Act.

(Mike Frisch)