California Legal Brief

The Rule of NNN Capital Fund I, LLC v. Mikles is that lack of standing is a jurisdictional defect that can be raised for the first time on appeal and requires vacation of an arbitration award and remand for factual determination of standing, under circumstances where purported liquidating trustees may not have been properly elected under the company's operating agreement.

Appeal from judgment after arbitration award in Superior Court, Orange County.

Defendant Appellants were Todd A. Mikles, SCMG Liquidation, LLC, and SSMF Liquidation, LLC — former managers of the LLC who allegedly breached fiduciary duties in selling nonperforming notes at discount.

Plaintiff Respondent was NNN Capital Fund I, LLC — a Delaware LLC formed to provide short-term real estate financing, represented by purported liquidating trustees.

The suit sounded in breach of fiduciary duty and fraud. The key substantive facts leading to the suit were Cap Fund was formed in 2008 to provide short-term real estate financing, three notes became nonperforming by 2011, Mikles as president of Cap Fund's manager proposed that his controlled entity SSMF purchase the notes at discount with 77% member approval, SCMG dissolved Cap Fund in December 2015 with final distributions to members, but members Wynfield and Weiss conducted a purported vote in December 2015 to appoint themselves liquidating trustees to pursue claims against appellants, though this vote allegedly counted ballots from members not qualified to vote under the operating agreement and neither sought required court appointment as liquidating trustees.

The procedural result leading to the Appeal: The trial court ordered the case to arbitration, the arbitrator denied appellants' motion to dismiss for lack of standing, issued an award of $20,972,601 in favor of Cap Fund, and the trial court confirmed the final award, ruling that the arbitration award was not reviewable on the merits under Moncharsh v. Heily & Blase.

The key question(s) on Appeal: 1. Whether purported liquidating trustees Wynfield and Saul had standing to sue on Cap Fund's behalf where they may not have been properly elected under the operating agreement. 2. Whether an arbitration award is subject to vacation when the arbitrator lacked subject matter jurisdiction due to plaintiffs' lack of standing.

The Appellate Court held that factual disputes regarding whether the purported liquidating trustees had standing remain unresolved, requiring vacation of the judgment and remand for the trial court to make factual findings on standing, since lack of standing is a jurisdictional defect that can be raised at any time and an arbitrator exceeds his powers when acting without subject matter jurisdiction.

The case is inapplicable when the purported representatives were properly elected as liquidating trustees under the company's operating agreement, obtained required court approval for appointment, or when an authorized manager exists and retains litigation authority under the operating agreement.

The case leaves open whether different facts regarding the vote tallies or member qualifications would establish proper standing, the scope of arbitrator authority to determine jurisdictional issues in other contractual contexts, and the procedures for substituting proper plaintiffs after a standing defect is identified.