Misappropriation Is Not a Distribution: Nebraska Supreme Court Clarifies LLC Membership, Transferable Interests, and Derivative Standing

Misappropriation Is Not a Distribution: Nebraska Supreme Court Clarifies LLC Membership, Transferable Interests, and Derivative Standing

Introduction

In Kellogg v. Mathiesen, 320 Neb. 223 (Neb. Oct. 31, 2025), the Nebraska Supreme Court addressed a knot of governance, standing, and appellate procedure issues arising from a bitter dispute between two 50/50 members of Apostle Nursing Home Health Care, LLC (Apostle), a home health care company. After a bench trial, the district court denied both parties’ derivative claims on unclean-hands grounds, but granted Kristi Kellogg’s application to judicially dissolve Apostle and appointed a receiver to wind up the company. Christopher Mathiesen appealed both the merits judgment and the subsequent receiver appointment.

Because Mathiesen’s brief failed to include a dedicated “Assignments of Error” section as required by Nebraska appellate rules, the Supreme Court confined its merits review to plain error. Before doing so, the Court—consistent with its independent obligation to ensure jurisdiction—resolved whether it had appellate jurisdiction over two interlaced proceedings (the derivative “action” and the dissolution “special proceeding”), and whether Kellogg had standing to bring a derivative suit under the Nebraska Uniform Limited Liability Company Act (LLC Act).

The Court’s central legal contribution is twofold:

  • It clarifies that misuse or misappropriation of LLC funds by a member is not a “distribution” within the meaning of the LLC Act and therefore does not automatically alter a member’s transferable interest or strip membership status; and
  • It reinforces the doctrinal separation between membership (governance) rights and transferable (economic) interests for purposes of derivative standing under §§ 21-165 and 21-166 of the LLC Act.

Summary of the Opinion

  • Appellate jurisdiction:
    • The July 19, 2024 order was a final “judgment” as to the derivative action and counterclaims; Mathiesen’s appeal from that judgment conferred jurisdiction over those issues (No. S-24-564).
    • The dissolution component of the July 19 order remained interlocutory because the appointment of a receiver was reserved; upon the actual appointment of a receiver on August 13, 2024, the resulting order was a final, appealable order (No. S-24-665).
    • Both appeals were properly before the Court.
  • Briefing deficiency and scope of review:
    • Because Mathiesen failed to include an Assignments of Error section in his brief as required by Neb. Ct. R. App. P. § 2-109(D)(1), the Court limited merits review to plain error.
    • Jurisdictional questions were analyzed under the standard ordinarily applicable to jurisdiction—not through the lens of plain error.
  • Standing and core LLC law holding:
    • Standing is jurisdictional; a derivative plaintiff must be a member at the commencement of suit and remain a member while the action continues (§ 21-166(a)).
    • The Court rejected Mathiesen’s theory that Kellogg lost her membership by using LLC funds to pay a personal bill—i.e., that such use effected a “distribution” that wiped out her “$1 transferable interest,” extinguishing membership and derivative standing.
    • Under the LLC Act’s definitions, a “distribution” is a transfer made “on account of” a transferable interest; misappropriation is not a distribution. A person may be and remain a member without a transferable interest and without having made a contribution (§ 21-130(d)).
    • Kellogg remained a member and had standing.
  • No plain error:
    • Aside from the standing challenge, nothing in the record rose to the level of plain error. The district court’s judgment denying all derivative claims (based on unclean hands) and granting dissolution and receiver appointment was affirmed.

Analysis

Precedents Cited and Their Influence

  • Mathiesen v. Kellogg, 315 Neb. 840, 1 N.W.3d 888 (2024): The same parties’ prior appeal featured the same briefing defect—no Assignments of Error section. There, the Court dismissed for lack of jurisdiction but warned that failure to comply with § 2-109(D)(1) could limit review to plain error. That caution materialized here, narrowing the scope of review.
  • State ex rel. Hilgers v. Evnen, 318 Neb. 803, 19 N.W.3d 244 (2025): Cited for the principle that parties who fail to follow the appellate briefing rules do so at their peril, and for the contours of plain error review—error plainly evident from the record, whose correction is necessary to preserve the integrity or fairness of the judicial process.
  • Johnson v. City of Omaha, 319 Neb. 402, 23 N.W.3d 420 (2025): Jurisdictional issues that do not involve factual disputes present questions of law; the Court applied ordinary jurisdictional standards notwithstanding the plain-error posture.
  • Khaitov v. Greater Omaha Packing Co., 319 Neb. 932, 25 N.W.3d 739 (2025): Reinforces the Court’s duty to confirm its jurisdiction and explains Nebraska’s final-order framework under §§ 25-1911 and 25-1912.
  • Tegra Corp. v. Boeshart, 311 Neb. 783, 976 N.W.2d 165 (2022): Defines an “action” as a proceeding culminating in final judgment; used to characterize the derivative claims and counterclaims as an action resolved by the July 19, 2024 judgment.
  • Schreiber Bros. Hog Co. v. Schreiber, 312 Neb. 707, 980 N.W.2d 890 (2022): Judicial dissolution of an LLC and receiver appointment is a “special proceeding,” distinct from the ordinary action.
  • Evert v. Srb, 308 Neb. 895, 957 N.W.2d 475 (2021): A cause “retained for further action” (here, actual receiver appointment) is interlocutory and nonappealable, explaining why the July dissolution ruling was not final until the receiver was appointed.
  • Robertson v. Southwood, 233 Neb. 685, 447 N.W.2d 616 (1989); § 25-1090: Appointment of a receiver is a final order; supported appellate jurisdiction over the August 13, 2024 receiver appointment.
  • Nebraska Firearms Owners Assn. v. City of Lincoln, 319 Neb. 723, 24 N.W.3d 891 (2025): Standing is jurisdictional; only those with a legal/equitable interest can invoke judicial power.
  • Secondary authorities and persuasive cases:
    • 54 C.J.S. Limited Liability Companies §§ 44, 46: Explains the division between governance (membership) and economic (transferable) rights; misappropriation is not a distribution.
    • Zokaites v. Pittsburgh Irish Pubs, LLC, 962 A.2d 1220 (Pa. Super. 2008): Persuasive authority on the separability of membership and transferable interests.
    • In re Young, 384 B.R. 94 (D.N.J. 2008): Bankruptcy decision emphasizing that misappropriation of LLC funds is not a distribution “on account of” a transferable interest.

Legal Reasoning

1) Appellate Compliance and the Scope of Review

The Court enforced Neb. Ct. R. App. P. § 2-109(D)(1)’s command that an appellant include a distinct Assignments of Error section. Mathiesen listed errors in his table of contents but omitted the required section. Echoing its warning in the parties’ prior appeal, the Court opted to review only for plain error—an exceptional safety valve reserved for obvious errors whose correction is necessary to safeguard the judicial process. This threshold choice shaped the rest of the opinion: the Court addressed only jurisdiction in the ordinary way and reviewed the merits for plain error.

2) Jurisdiction: Unpacking “Action” vs. “Special Proceeding” and Final Orders

The case blended two procedural tracks:

  • An “action” (the derivative claims and counterclaims) culminating in a final judgment on July 19, 2024; and
  • A “special proceeding” (judicial dissolution and receivership) that remained interlocutory until the court actually appointed a receiver.

The Court held:

  • It had jurisdiction over the July 19, 2024 judgment disposing of the action (No. S-24-564).
  • It obtained jurisdiction over the dissolution track only upon the August 13, 2024 appointment of a receiver, a final, appealable order (No. S-24-665). The July dissolution grant, standing alone, was not final because the court “retained” the case to appoint a receiver and provide instructions.

3) Standing Under the LLC Act: Membership vs. Transferable Interest; Misappropriation ≠ Distribution

The defendant’s standing challenge rested on a technical—and, in the Court’s view, flawed—reading of the LLC Act. He argued that:

  • The 2019 asset purchase agreement gave Kellogg only a “$1 transferable interest” in Apostle; and
  • When Kellogg used $401 of LLC funds to pay a personal utility bill, that transfer functioned as a “distribution” that extinguished her $1 economic interest, thereby erasing her membership and derivative standing.

The Court rejected that argument in several steps:

  • Statutory definitions matter. A “transferable interest” is the right to receive distributions “on account of” that interest (§ 21-102(24)). A “distribution” is a transfer made on that account (§ 21-102(6), subject to § 21-134(g)).
  • Misappropriation of LLC funds by a member is not a distribution because it is not a transfer made “on account of” the member’s economic interest; it is, rather, a misuse of entity funds—remediable through fiduciary and conversion claims, not automatic forfeiture of rights (54 C.J.S. § 46; In re Young).
  • Membership does not hinge on possessing an economic interest or making a contribution. The Act expressly provides that a person may become a member without acquiring a transferable interest and without making (or being obligated to make) a contribution (§ 21-130(d)); contributions may also be in the form of services (§ 21-131).
  • Consequently, even accepting the premise of a de minimis $1 transferable interest, the alleged misuse of funds would not erase membership, and membership—not the amount of economic interest—is what matters for derivative standing (§§ 21-165, 21-166(a)).
  • The Court also flagged the implausibility of asserting that 50% of all tangible and intangible LLC assets—including goodwill—was worth $1, further undermining the defendant’s framing of the economic interest.

Bottom line: Kellogg remained a member when she filed and throughout the litigation; she had standing to maintain a derivative action under the LLC Act.

4) No Plain Error on the Record

The Court declined to roam beyond plain error and found none. It left intact:

  • The district court’s denial of all derivative claims due to both parties’ unclean hands—particularly their contractual maneuvers “subverting Mathiesen’s ineligibility” for Medicaid waiver participation and other conduct; and
  • The court’s dissolution order and receiver appointment, supported by findings of oppressive and fraudulent conduct, including the misuse of company funds, payments to a nonqualifying worker, and serious misconduct with a vulnerable client that drove liability and settlement costs.

Impact

  • LLC governance and litigation:
    • The opinion clarifies that membership status—and thus derivative standing—cannot be unilaterally “switched off” by labeling a misuse of funds as a “distribution.” The proper remedies for misuse are fiduciary and conversion claims, not automatic disenfranchisement.
    • It underscores the conceptual split between governance rights (membership) and economic rights (transferable interests), a central design feature of modern LLC statutes that affects voting, standing, and remedies.
  • Drafting and evidence:
    • The saga of the “moldy operating agreement” and conflicting contracts (2017 and 2019) illustrates the risks of informal formation and loose documentation. Courts will not rescue parties from vague, self-serving after-the-fact narratives, especially when credibility is compromised.
  • Appellate practice:
    • Noncompliance with § 2-109(D)(1) invites a plain-error-only review—often outcome determinative. Practitioners must include a separate, clearly labeled Assignments of Error section.
    • The opinion offers a clean roadmap for mixed-proceeding appeals: when derivative claims (action) and dissolution/receivership (special proceeding) travel together, the merits judgment is appealable when entered, but dissolution is not final until the court actually appoints a receiver and issues operative instructions.
  • Regulated-service businesses:
    • For health-care related LLCs, the case shows how regulatory disqualifications (e.g., Medicaid waiver eligibility) and workplace misconduct can feed directly into dissolution findings for oppression or illegality. Governance decisions must be aligned with compliance obligations.

Complex Concepts Simplified

  • Member vs. Transferable Interest:
    • Member: Holds governance rights (e.g., vote, sue derivatively), whether or not they have an economic stake.
    • Transferable Interest: The economic right to receive distributions; can often be transferred without transferring membership.
  • Distribution:
    • A lawful payment by the LLC to a person because of that person’s economic interest. It is not the same as a member’s misappropriation of funds.
  • Derivative Action:
    • A lawsuit brought by a member on the LLC’s behalf to enforce the LLC’s rights. The plaintiff must be (and remain) a member during the suit (§§ 21-165, 21-166(a)).
  • Unclean Hands:
    • An equitable doctrine barring relief to a party who has engaged in misconduct related to the subject of the suit. Here, both sides’ conduct led the court to deny all derivative claims.
  • Action vs. Special Proceeding:
    • Action: Ordinary civil suit ending in a final judgment (e.g., derivative claims and counterclaims).
    • Special Proceeding: A statutorily defined process outside ordinary actions (e.g., judicial dissolution and receivership).
  • Final Order and Receivership:
    • A ruling is appealable when it finally decides the case or affects a substantial right. Appointment of a receiver is a final, appealable order.
  • Plain Error Review:
    • A narrow appellate review reserved for obvious errors that threaten the justice system’s integrity. It is not a second chance to relitigate ordinary errors.

Conclusion

Kellogg v. Mathiesen delivers a clear message on three fronts. First, for LLC law, it crystallizes the distinction between membership and transferable interests and adopts the sensible rule that misappropriation of LLC funds is not a “distribution” that automatically alters economic rights or extinguishes membership. This preserves the proper channeling of disputes into fiduciary-duty and equitable-remedy frameworks rather than improvised forfeitures. Second, for appellate practice, it underscores that compliance with briefing rules is not optional; missing an Assignments of Error section can relegate an appeal to plain-error purgatory. Third, it provides a jurisdictional roadmap when an “action” and a “special proceeding” run in tandem: a merits judgment is immediately appealable, while dissolution becomes appealable upon the receiver’s appointment.

The Court affirmed across the board: it had jurisdiction over both appeals; Kellogg had standing as a member to sue derivatively; and no plain error infected the district court’s denial of derivative claims and grant of dissolution with a receiver. The opinion will guide future Nebraska LLC disputes—particularly those involving allegations of misuse of funds, disputed membership status, and derivative standing—and will remind appellate litigants that form and substance both matter on review.

Case Details

Year: 2025
Court: Supreme Court of Nebraska

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