SDIF Limited Partnership 2 v. Tentexkota, LLC et al

Filing 207

ORDER Certifying Questions to South Dakota Supreme Court. Signed by U.S. District Judge Charles B. Kornmann on 12/7/18. (KMH)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
NORTHERN DIVISION

SDIF LIMITED PARTNERSHIP 2, a South

1:17-CV-01002-CBK

Dakota Limited Partnership,
Plaintiff,

ORDER CERTIFYING QUESTIONS TO

vs.

SOUTH DAKOTA SUPREME COURT

TENTEXKOTA,LLC, a South Dakota Limited

Liability Company, W.KENNETH ALPHIN,
TIMOTHY J. CONRAD,MICHAEL R.

GUSTAFSON,GEORGE D. MITCHELL,
DALE MORRIS, MARC W.OSWALD,
RONALD W. WHEELER,and DWIGHT P.
WILES,
Defendants.

Pursuant to SDLRC 15-24A-3, this Court seeks to certify three questions sua sponte to
the Supreme Court of the State of South Dakota;

(1) Does SDCL 47-34A-303 invalidate personal guarantees signed
by members of an LLC in their capacity as members(a)if that LLC
has not amended its articles of organization to state that its members
are liable for the LLC debts, obligations, and/or liabilities in their

capacity as members and(b)members have not consented in writing
to the adoption of any such provision or to be bound by such a
provision?

(2) Does SDCL 53-9-1 apply so as to prohibit plaintiff from
recovering under the guarantees if the guarantees violate SDCL 4734A-303?

(3) What is the legal effect of the LLC's operating agreement
permitting members to personally guarantee corporate debts but
only by a "vote" of the majority of members when there is no
evidence of any such "vote"?

As required by SDLRC 15-24A-4(2), the factual basis for these questions is discussed below. A

copy of this Court's previous decision on September 5, 2017, denying plaintiff's request for
summary judgment is included with this order as it contains detailed facts and the procedural

backgroimd regarding this litigation. Copies of the legal opinions disputing the meaning of SDCL
47-34A-303 are also included.

BACKGROUND

Plaintiff SDIF Limited Partnership 2("SDIF LP 2") provided two loans to Tentexkota,
LLC ("Tentexkota") with a cumulative principal of $32,500,000 to develop a casino and resort in

Deadwood,South Dakota. Funds for the loans were generated from individual foreign investors
through the EB-5 Lawful Permanent Resident Visa Program, a program administered by USCIS
that allows alien entrepreneurs to receive permanent resident status if they fulfill certain

investment criteria. The execution and delivery of member guarantees was "an express condition

to the consummation of the transactions," i.e., the loans to Tentexkota, L.L.C. and plaintiff
would not have made the loans without personal guarantees from members. The loans were
personally guaranteed by members and non-members representing members of Tentexkota.

All guarantee agreements contain the recitation that "Guarantor, as member of Borrower"

was signing the guarantee. Each guarantee has an attachment entitled "Membership Units of
Guarantor" and below that is a statement calling for the number of membership units (interests)
in Tentexkota, L.L.C. Plaintiff filed suit seeking to collect the debts of Tentexkota based on the

personal guarantees. Tentexkota and its guarantor members filed a counterclaim against plaintiff
and claims against third party defendants seeking a declaratory judgment on matters of law that
do not directly bear on the questions being certified by this order. I have dismissed the claims
against third party defendants.

Tentexkota's articles of organization have at all times contained a provision which states

that "[n]o members of the company are to be liable for its debts and obligations pursuant to
SDCL 47-34A-303(c)." On June 5, 2017,this Court issued a memorandum letter requesting that

the parties provide briefs addressing the validity of the members' personal guarantees in light of

this provision. The Court specifically requested that the parties consider whether the personal
guarantees signed by members of Tentexkota for its debt could supersede the articles of

organization provision and the statutory provision protecting members of limited liability
companies. Copies of the briefs filed in response to the Court's memorandum letter are provided

along with this order. Both the plaintiff's and defendants' briefs also included a copy of
Tentexkota's operating agreement, which contains the following provision:
7.6 Mandatorv "Capital Calls" The Members acknowledge that
each Member shall contribute initial amounts to the Company and
further acknowledge that the nature of the Company's business

purpose will require significant additional contributions of capital.

. . . The Members may also be required by vote of the Majority to
personally guarantee the obligations of the Company.

There is no evidence of any "vote" requiring any member to personally guarantee the obligations
of the LLC.SDCL 47-34A-203(c)provides that, where there is inconsistency between the
articles of organization and the operating agreement, the operating agreement controls as to

members, but the articles of organization control as to other persons who reasonably rely on the
articles to their detriment.

DISCUSSION

A federal court "should determine all the issues before it" "absent a close question of
state law or a lack of state guidance." C'ty of Ramsev v. MERSCORP Holdings. Inc.. 776 F.3d

947,950(8th Cir. 2014). Where there is "no state law precedent on point and where the public
policy aims are conflicting" a legal question "may properly be certified to the state court."

Hatfield. by Hatfield v. Bishop Clarkson Memorial Hosp.. 701 F.2d 1266, 1267(8th Cir. 1983).
Whether a federal court certifies a question to a state court "is a matter of discretion." Tnhnsnn v

John Deere Co.. a Div. of Deere & Co., 935 F.2d 151, 153 (8th Cir. 1991). However,"[ujnsettled

questions of state law are best left to the states." Poage v. City of Rapid City. 431 F.Supp. 240,
246(D.S.D. 1977).

This Court knows of no controlling precedent directly on point, as to the questions
presented, in the decisions of the South Dakota Supreme Court. Moreover, there are public
policy concerns regarding SDCL 53-9-1 imder the facts of this case. As the issues raised here are

unsettled, this Court therefore determines that the questions should be certified for state court

determination. The ultimate decision is, of course, left to the South Dakota Supreme Court as to
whether to answer the questions posed.

ORDER

Now,therefore,
IT IS ORDERED:

This Court hereby certifies sua sponte to the Supreme Court of the
State of South Dakota the following questions of law: (1) Does

SDCL 47-34A-303 invalidate personal guarantees signed by
members of an LLC in their capacity as members(a)if that LLC has
not amended its articles of organization to state that its members are

liable for the LLC debts, obligations, and/or liabilities in their

capacity as members and(h)members have not consented in writing
to the adoption of any such provision or to be bound by such a
provision? (2) Does SDCL 53-9-1 apply so as to prohibit plaintiff
from recovering under the guarantees if the guarantees violate
SDCL 47-34A-303? (3) What is the legal effect of the LLC's
operating agreement permitting members to personally guarantee

corporate debts but only by a "vote" of the majority of members
when there is no evidence of any such "vote"?
Dated this

/ —dav of December,2018.
BY THE COURT:

CHARLES B. KORNMANN

United States District Judge