Wednesday, July 5, 2017

An Amendment Too Far

An Amendment Too Far

      The Florida State University Business Review has released the volume containing An Amendment Too Far?: Limits on the Ability of Less Than All Members to Amend the Operating Agreement, co-authored by myself and Katharine Sagan, also of Stoll Keenon Ogden. This article focuses upon the question of what limits exist when a partnership or operating agreement allows it to be amended by less than unanimous consent. Put another way, if less than unanimity is required, what are the outer limits of the modification of the deal that the permitted threshold for amendment may impose upon those who vote against the amendment? After reviewing the case law and the clear trends of no limitations, we consider a number of principles including fiduciary duties and the implied covenant of good faith and fair dealing to see if they impose any limits. We conclude they do not.
      We hope you find this piece of interesting. It can be accessed on the SKO website;  HERE IS A LINK to the article.

Sixth Circuit Court of Appeals Considers Ohio Standard for Piercing the Veil and Finds the Claims Lacking

Sixth Circuit Court of Appeals Considers Ohio Standard for Piercing the Veil

and Finds the Claims Lacking


      In a recent decision, the Sixth Circuit Court of Appeals considered an effort to pierce the veil of a corporation in an effort to hold its officers liable on its breach of a contract with respect to a point-of-sale system. The Sixth Circuit would reject that effort. Rutherlan Enterprises, Inc. v. Zettler Hardware, No. 16-4147, 2017 WL 2684109 (Sixth Cir. June 21, 2017).
      This appeal was in response to the District Court's grant of summary judgment dismissing the complaint in its entirety. After affirming the dismissal of certain counts alleging fraudulent misrepresentations on the basis of the statute of limitations, it turned to the argument that there was a breach of contract for which the various individual defendants could be hold personally liable under a theory of piercing the veil. Applying Taylor Steele, Inc. v. Keeton, 417 F.3d 598, 605 (Sixth Cir. 2005), the court found that the elements of piercing were not adequately demonstrated on the record.
      With respect to the failure to observe corporate formalities and hold meetings, the court rejected a suggestion that the mere failure to produce records of the meetings gives rise to an inference that they did not take place.
      With respect to a suggestion that the corporation was insolvent at the time it incurred its obligation, the court reviewed financial documents and tax returns which demonstrated that in fact the company had never been insolvent.
      With respect to an argument of inadequate capitalization, the court found that the mere fact that it began with minimal capitalization did not compel the conclusion that it was inadequately capitalized.
Giving the facts in the light most favorable to Rutherlan, like the District Court, we find no evidence in the record that supports an assertion of fraud, bad faith, or illegality. While it is true that ordinarily factual disputes should be decided by a jury rather than dismissed on summary judgment, that supposes that there is some factual evidence for a jury to consider in the first place. Ruthrtlan pointed to no factual evidence to prove fraud, bad faith, or even legality and its opposition to summary judgment and, likewise, fails to point to any such factual evidence on appeal. (citation omitted)

Thursday, June 29, 2017

Kentucky Now Has Public Benefit Corporations

Kentucky Now Has Public Benefit Corporations

      As of today, public benefit corporations may be organized in the Commonwealth of Kentucky. This new organizational form, essentially a special form of a business corporation, will afford corporations, their owners and their management greater flexibility with respect to the application of corporate assets to purposes that may not directly benefit the bottom line and shareholder wealth, but which provide benefits to of the broader community.
      With this new legislation, Kentucky joins the majority of the states (including Delaware) that have statutes to this effect.

Court of Appeals Confirms that Corporate Directors Owe Their Duties to the Corporation

Court of Appeals Confirms that Corporate Directors Owe Their Duties to the Corporation

In a decision rendered last week, the Kentucky Court of Appeals has affirmed the rule, previously laid down in Ballard v. 1400 Willow Council of Co-owners, Inc., it relying upon KRS § 273.215, that the directors of a corporation owe their fiduciary obligations to the corporation, not to the individual members thereof. Flint v. Jacobs, No. 2015-CA-000489-MR, 2017 WL 2713456 (Ky. App. June 23, 2017).

Ed Flint, brought this action against Fred Jacobs, the latter having been the president of the Board of Directors of Coach House, Inc., a condominium association organizes as a nonprofit corporation. Flint has previously sued Coach House not less than four times, with each of those suits dismissed and those dismissals affirmed on appeal. In this instance, amongst other claims including conspiracy and discrimination, Flint alleged that Jacobs breached a fiduciary obligation owed by Jacobs to Flint.

In affirming the dismissal of Flint’s lawsuit generally and in particular this claim, in reliance upon the Ballard v. 1400 Willow, decision, the Court of Appeals wrote:

Directors of a condominium association's non-profit corporation owe a fiduciary duty only to the corporation, not to the individual condominium association members.

Friday, June 23, 2017

Kentucky Court of Appeals Clarifies Statute of Limitations for Claims of Breach of Fiduciary Duty

Kentucky Court of Appeals Clarifies Statute of Limitations for

Claims of Breach of Fiduciary Duty


      In a decision rendered last Friday, the Kentucky Court of Appeals clarified how the statute of limitations for allegations of the breach of fiduciary duty is to be applied. Most importantly, the Court held that a discovery rule does not apply with respect to allegations of breach of fiduciary duty. Middleton v. Sampey, No. 2015-CA-001029-MR, 2017 WL 2605224 (Ky. App. June 16, 2017).
      This dispute arose out of the operation and management of Hardscuffle, Inc. and its subsidiary, American Life and Accident Insurance Company of Kentucky.  In August, 1999, American Life and Hardscuffle entered into a share exchange agreement consequent to which American Life became a wholly-owned subsidiary of Hardscuffle. Thereafter, in January, 2000, Nancy Lampton and James Sampey (Sampey being the then trustee of certain trust to which the plaintiff is a remaindermen beneficiary) entered into an agreement pursuant to which they would vote all of their shares as a block.
      Sometime thereafter (the exact date is not detailed in the opinion), the plaintiffs filed a derivative action against Lampton and the other board members alleging mismanagement of the companies. That derivative complaint was dismissed without prejudice in July, 2013 for failure to establish they made a pre-suit demand on the board or that a demand would have been futile.” Another suit was then filed in December, 2014. Those suits were as well dismissed on grounds of standing and collateral estoppel.
      The Court of Appeals would affirm the dismissals on the basis of on the statute of limitations, never reaching the questions of standing and collateral estoppel upon which the trial court relied.
      Specifically, the Court found that all of the claims for breach of fiduciary duty were barred by the five-year statute of limitations set forth in KRS § 413.120(6). In support of the application of this statute, the Court cited Ingram v. Cates, 74 S.W.3d 783, 787 (Ky. App. 2010). As the lawsuit was brought 15 years after the voting agreement was entered into, and seven years after the expiration of certain stock options that were included therein, dismissal on the basis of the five-year statute of limitations was held to be appropriate.
      Responding to that argument, the plaintiffs had alleged that they did not become aware of the existence of that voting agreement until June, 2010, and that a December, 2014 filing was within the statue limitations if a discovery rule were applied. While noting that certain statutes of limitation do contain a discovery rule, such as those for medical malpractice or claims of professional negligence, the Court of Appeals observed as well that the courts are reluctant to apply a discovery rule outside of the General Assembly doing so. On that basis, no discovery rule was applied to the statute of limitations set forth in KRS § 413.120(6).
      As claims against Sampey arose as well in his capacity as a trustee, the Court considered the application of the statute of limitations under the Kentucky Uniform Trust Code and under prior law, holding that the prior law applied to these claims and finding them likewise to be time-barred.
      The Court as well rejected a suggestion that the “continuing violation doctrineshould toll the statute of limitations, finding it to be limited to claims under the Kentucky Civil Rights Act.
      The Court of Appeals did not address the doctrine of adverse domination and its impact upon any statute of limitations defense.

Wednesday, June 14, 2017

Fear and Loathing and Warning Labels

Fear and Loathing and Warning Labels

      Recently I came across the enclosed “warninglabel on, of all things, a doormat. It provides:

Important things you should know about your new doormat.  Warning:  Do not use mat as a projectile.  Sudden acceleration to dangerous speeds may cause injury.  When using mat follow directions: Put your right foot in, put your right foot out, put your right foot in and shake it all about.  This mat is not designed to sustain gross weight exceeding 12,000 lbs.  If mat begins to smoke, immediately seek shelter and cover head.  Caution: If coffee spills on mat, assume that it is very hot.  This mat is not intended to be used as a placemat.  Small food particles trapped in fibers may attract rodents and other vermin.  Do not glue mat to porous surfaces, such as pregnant women, pets and heavy machinery.  When not in use, mat should be kept out of reach of children diagnosed with CFED (Compulsive Fiber Eating Disorder).  Do not taunt mat.  Failure to comply relieves the makers of this doormat, Simply Precious Home D├ęcor, and its parent company, High Cotton, Inc., of any and all liability.

Thursday, June 1, 2017

LLC Allowed to Intervene in Action for Charging Order Against Member’s Interest in That LLC

LLC Allowed to Intervene in Action for Charging Order Against Member’s Interest in That LLC
      In a recent (and questionable) decision out of Iowa, an LLC was allowed to intervene in an action in which a charging order was sought against the interest of one of the LLC’s members. DuTrac Community Credit Union v. Hefel, No. 15-1379, 2017 WL 461211 (Iowa Feb. 3, 2017).
      This decision reviews and largely rejects a number of challenges made to the entry of charging orders in support of the collection of certain bank debts for a real estate development project that never happened. On the upside, the court easily disposed of the argument that, as the LLC’s operating agreement prohibited, without consent, the transfer of an ownership interest, a charging order would violate the operating agreement. The court correctly noted that the charging order attaches only the distributions, and does not vest in the holder of the charging order any rights of a member.
      However, the court did allow the LLC to intervene in the action seeking the charging order against the member’s interest in the company. On this argument, the court found that the LLC, Westgate, had standing, it writing:
Westgate has a specific interest in the outcome of the litigation - namely, the amount of proceeds that would be dispersed to DuTrac under the terms of the charging order. The alleged injury is specific to Westgate, as it deals with Westgate's disbursements and is not one that is the same for the population in general. Second, the potential injury is not conjectural or hypothetical because it deals with concrete, monetary amounts. Westgate has standing. 2017 WL 461211,*4 (citations omitted).
      This determination is at best questionable. The distributions, to which the charging order would attached, are those funds that the company has already determined will be distributed to the members. It is only at the time that a distribution is declared that the charging order attaches to any funds. That attachment takes place only after the LLC has determined that it does not need those funds for its operations or to satisfy the claims of its creditors. Here, in effect, the court allowed the LLC to have standing as to the disbursement of funds it has, in application, already determined to give away. For that reason, this is a questionable decision.