Over the past few years, the term “receipts” has entered the pop culture lexicon to mean something broader than its traditional definition of a document that acknowledges either the receiving of a product or service, or money in exchange for a product or service.
These days, if you hear “receipts” mentioned in a song, television show, or movie, or see it on social media, there’s a good chance it is being used to mean proof that something is how a speaker claims it to be. For example, someone might claim to have the “receipts” that another person cheated on their spouse—perhaps in the form of screenshots of now-deleted social media posts or direct messages.
Well, when it comes to proving ownership of a closely held business, receipts—in the trendiest sense of the word—are a good thing. In fact, receipts are required.
A recent case out of the U.S. District Court for the Eastern District of Pennsylvania, Salvitti v. Lascelles, deals with this very issue. While the case doesn’t break any new legal ground, it serves as a reminder of the evidence a purported owner of a business must show to prove they are, in fact, an owner of the business.
Sharp knives, dull business planning?
Salvitti involves a dispute over who owns an LLC established to facilitate the management of Colonel Blades, a company that designs and sells knives. In 2013, Alfred Salvitti and Nico Salvitti patented and designed the Colonel Blade knife, and partnered with John-David Potynsky to produce it. At the end of 2013, Alfred, Nico, and John-David brought on Scott Lascelles to assist with the marketing and sales of the knives.
Since 2013, Scott has managed the day-to-day operations of marketing Colonel Blades, including overseeing internet sales, manufacturing, and distribution. He brought on his wife, Dana DiSabatino, to help develop a business plan.
In early 2014, Scott was advised by his accountant that it would be beneficial to form an LLC to better manage Colonel Blades.
In March 2014, Alfred, Nico, John-David, Scott, and Dana agreed to form an LLC. Soon after, Scott registered The Colonel, LLC with the Pennsylvania Department of State and listed himself on the registration documents as the sole member. He managed the day-to-day operations of the LLC and maintained a bank account on behalf of it. The tax liability of the LLC flowed through his personal taxes. Dana continued to be involved in the LLC’s operations, including marketing and contracting with vendors.
In 2015, a draft agreement was circulated among the five individuals that proposed a new legal entity be established to sell Colonel Blades, with all five as members. They did not execute that agreement. Nor did they execute an agreement in 2018 that proposed that Alfred, Nico, and John-David would become members of The Colonel, LLC.
Nor did Alfred, Nico, John-David, Scott, and Dana ever agree in writing about how they would split the LLC’s profits. Instead, there was only an understanding of how the profits would be distributed: in equal thirds.
After roughly five years of not distributing profits and instead investing them back into the business, Scott distributed profits in Spring 2018. Alfred and John-David both received $10,000, and Dana received $15,500 that was, according to Scott, intended to cover his distribution and the work Dana did for the LLC.
In February 2019, Alfred, Nico, and John-David sued Scott and Dana alleging several causes of action centering on the fact that the three men believed they were co-owners of the LLC and that Scott and Dana had violated their legal rights as co-owners of the LLC.
The plaintiffs’ ownership claims are cut down to size
Unfortunately for Alfred, Nico, and John-David, U.S. District Judge Eduardo Robreno was not persuaded that they and Scott had ever actually agreed they would become equal co-owners of The Colonel, LLC. For that reason, he dismissed most of their legal claims.
Judge Robreno held that, despite Alfred, Nico, and John-David’s arguments, there was never a true agreement for they, Scott, and Dana to become co-owners of the LLC.
Alfred, Nico, and John-David claimed they came to such an agreement during a March 2014 conference call when they, Scott, and Dana decided to form the LLC for Colonel Blades. They argued that during that call, they, Scott, and Dana agreed to form the LLC—as co-owners.
In addition, Alfred, Nico, and John-David argued that four other pieces of evidence showed there was an agreement with Scott and Dana to be co-owners of the LLC:
- An unsigned meeting agenda prepared before a meeting with Scott that said he “need[s] to set up an LLC in all our names”;
- The unsigned ownership agreement from 2015 mentioned above;
- Scott’s deposition testimony during which he agreed the “ownership agreement should reflect equal ownership interest;” and
- A 2015 email from Scott to a potential business partner regarding an agreement involving Colonel Blades that noted he had to have a discussion with Alfred, Nico, and John-David as they had a vote regarding whether to move forward with the agreement.
Scott argued he, Alfred, Nico, and Jean-David never agreed to be co-owners of the LLC. In addition, he pointed to the fact that Jean-David testified he knew Scott was the sole member of the LLC according to the LLC’s registration documents as early as when the LLC was formed, and Alfred testified he knew this as early as 2015.
Based on the parties’ evidence and the factual record in the case, Judge Robreno ruled that none of the evidence in the case supported Alfred, Nico, and Jean-David’s claim that they, Scott, and Dana agreed or consented to the three being members of the LLC. For that reason, Judge Robreno ruled there was no evidence that could lead a reasonable jury to find the parties entered into a membership agreement in 2014 under which they’d be co-owners of the LLC.
As for a claim that Scott breached an oral agreement about how to distribute the LLC’s profits, Judge Robreno ruled that Alfred, Nico, and Jean-David could not point to any evidence in the case’s factual record that showed the four of them came to a specific agreement about what constituted “profits” and when they were to be distributed.
(Scott never disputed their argument that the four of them orally agreed to share the profits from the LLC at some point and in some manner. But he argued the four of them never agreed to the specifics of what that profit sharing would look like. He cited Jean-David’s deposition testimony in which Jean-David admitted there was no agreement on how the profits would be calculated or distributed.)
Therefore, Judge Robreno denied Alfred, Nico, and Jean-David’s motions for summary judgment regarding all but one of their legal claims.
As for that claim, Judge Robreno held there was evidence that supported a legal claim, and thus a reasonable jury could find, that Scott and Dana unjustly benefitted from being the sole members of the LLC. The benefits came in the form of commingling company and personal funds, failing to maintain books and records for the LLC, and failing to observe customary LLC formalities when operating the LLC.
Any way you slice it, receipts matter for LLC co-ownership
Judge Robreno did not exactly break new legal ground. But his decision is a reminder of the relatively high bar someone claiming co-ownership of an LLC must clear before a court will rule they were a co-owner. Although oral and implied operating agreements are permissible under the Pennsylvania LLC statute, courts and especially juries will often demand that a putative plaintiff-owner show the receipts in the form of a signed operating agreement to establish ownership.