This blog frequently laments the lack of Washington case law across a number of LLC and corporate topics. One such topic includes records requests in both a corporate and LLC context. The scant authority makes every new case on the subject worthy of discussion—enter Lott on behalf of Blue Mountain Farms, L.L.C. v. Lott, No. 38712-7-III, 2023 WL 2320443 (Wn. App. Mar. 2, 2023), a recent opinion addressing the requirements of a records request under Washington’s LLC Act. Practitioners should take note as the Court includes several helpful points for consideration when drafting records requests.
The Dispute
Lott begins like so many family business disputes: business is going well and the family is getting along. Shirley Mason (formerly Shirley Lott) had three children with her husband, one of which was Jeremy Lott. Mason and her husband owned Applegate Orchards, Inc. (“Applegate”), the parent company for two subsidiaries: Blue Mountain Farms, LLC (“BM Farms”) and Blue Mountain Packaging, LLC (“BM Packaging”). BM Farms owned and operated a blueberry farm, while BM Packaging managed the packaging of the blueberries. Shirley served as the manager of BM Farms starting in 2010.
Applegate provided start-up funds for BM Farms in 2005, but the characterization of those funds became the breeding ground for the dispute. As with so many closely held family businesses, Mason and her husband did a poor job of keeping the books in order. Therefore, it was unclear as to whether Applegate’s contribution to BM Farms was a loan or a capital contribution. It was not until 2011 that Mason drafted a promissory note indicating that Applegate’s funds paid to BM Farms were a loan.
Prior to 2013, Mason and her husband gifted 12 percents interests in BM Farms to their three kids. In 2013 following a divorce, Mason retained the remaining 64 percent interest in BM Farms.
The opinion does not address the cause of Lott’s dispute with his mother. However, something clearly unsettled the relationship, and Lott ultimately requested financial records for BM Farms in 2020 from Mason. Specifically, the request (in an email) asked for “all of the accurate financial statements to ALL of the company partners on an annual and quarterly basis.” Lott commenced a derivative action after the lack of response from Mason. Lott also included claims related to the characterization of Applegate’s contribution to BM Farms.
Court Rejects Lott’s Records Request
Lott took the position that his email to Mason qualified as a request for LLC records under RCW 25.15.136. Generally, members have a right to request records from the manager, subject to certain procedural requirements in the request. However, the Court readily dismissed Lott’s arguments for two reasons.
First, Lott failed to comply with the procedural requirements contained in RCW 25.15.136. RCW 25.15.136(2) requires member give ten days’ notice in a “record received by the limited liability company” prior to inspection. Critically, Lott’s email did not provide the requisite ten-day notice. Also, the email may not have qualified as a “record received by the limited liability company.” While the Court did not expound on this issue (and there is no Washington case law of which I am aware that does address this issue), it is likely that a simple email to the manager does not qualify as a “record received by the limited liability company.” LLCs have registered agents authorized to accept service on behalf of the LLC—it is likely the Court hinted at the fact that records requests must be sent to the registered agent, rather than sent via email to the manager.
Second, Lott’s records request failed because it sought future records, rather than present records. The Court noted that RCW 25.15.136(1) only “allows for a member to inspect and obtain copies of records already in existence because it pertains to records from the three most recent years.” Lott, 2023 WL 2320443 at *7. Lott’s request, however, was forward-looking as it sought records in the future—“all of the accurate financial statements…on an annual and quarterly basis.”
Considerations
Records requests are tricky in that practitioners must comply with every procedural element set forth in the statute. The limited amount of authority interpreting Washington’s records request statute creates further challenges for practitioners who are largely left to their own devices as to the form of a proper request. Fortunately, Lott provides some helpful insight for practitioners—(1) send a letter to the LLC’s registered agent and (2) make sure the letter requests current records.
To learn more about LLC Records Requests Under Washington Law, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-410