Monday, November 19, 2018

Death and Conversion of a General Partner


Death and Conversion of a General Partner

      A recent decision from California addresses two changes with respect to general partners in limited partnerships. One of those situations was the death of a natural person, and the other was the conversion of the corporation into an LLC. Wong v. California Forefront, Inc., B281939, 2018 WL 4404148 (Ca. Ct. App. Second Dist. Sept. 17, 2018).
       Lily Wong was one of the two original general partners in Park Center Partnership. The other original general partner was California Forefront, Inc. An individual, Wyman Ip was the only limited partner. When Lily Wong died, her husband, as trustee of the Lily Y. Wong Family Trust, asserted that he was the successor general partner. In the alternative, it was asserted that when CFI, in 2010, converted from a corporation to a limited liability company, it was in effect disassociated as a general partner. Both of these assertions were rejected.
      While it was acknowledged that, upon the death of Lily Wong, her trust became the assignee of her economic interest in the partnership, applying the terms of this particular limited partnership agreement, which imposed specific limitations upon affiliates of existing partners, it was found that the trust could not be a successor general partner.
      With respect to the conversion of CFI from a corporation into a LLC, the court cited the applicable provision of the statute, it providing that upon conversion the converted entity is “the same entity that existed before the conversion.” That being the case, it was held that the conversion of a corporate general partner into the form of an LLC did not effect that corporation’s disassociation from the limited partnership or the alteration of its status as a general partner.

Saturday, November 17, 2018

So Begins Gloriana


So Begins Gloriana

       On this day in 1558 Mary Tudor, who would later have foisted upon her the moniker “Bloody,” died, leaving the English throne to her half-sister Elizabeth. Where Mary's reign of just over 5 years was one of tumult at the highest political levels, for at least a significant and perhaps a majority of the population it was a return to the preferred old ways, a view put forth expertly by Professor Scarisbrick in his The Reformation and the English People. Still, her marriage to Philip of Spain was never popular.  Elizabeth's reign would by contrast be seen as one of peace and growth, later dubbed the Gloriana.
 
Elizabeth would rule until 1603.
 
Today is as well the anniversary of the death of Reginald  Cardinal Pole, who under Mary had been named Archibishop of Canterbury.  He was the last Catholic to hold that post.

Friday, November 16, 2018

Action on Beneficial Ownership?


Action on Beneficial Ownership?


      At today’s Federal Regulation of Securities luncheon at the ABA’s Fall Meeting, the Keynote speaker was Joe Carapiet, Chief Counsel at the U.S. Senate Committee on Banking, Housing, and Urban Affairs.  During his remarks, he alluded to a hearing the Committee will be holding the week after Thanksgiving and said that beneficial ownership will one of the topics addressed.  He characterized the topic as “challenging."

 
      Best guess is that these are those hearings –

 

Tuesday, November 13, 2018

Court Will Enforce Agreements As Written, Even If Poorly Written


Court Will Enforce Agreements As Written, Even If Poorly Written

 

In his blog New York business divorce, Peter Mahler has reviewed a recent decision from the New York trial court enforcing, as written, the quorum requirements under an operating agreement.  Casilli v. Natan, 2018 NY Slip Op 32621(U) [Sup Ct NY County Oct. 12, 2018].


In a blog entry titled Think Twice Before Putting 100% Quorum Requirements in By-Laws or LLC Agreements (Nov. 12, 2018), Peter explained that, in this particular LLC, there were three managers, and the quorum requirement for a meeting of the managers was all of the managers. Not surprisingly, one of them refused to attend the meetings. While there was no unanimity requirement with respect to meetings of the members, the operating agreement provided, inter alia, that members could consider matters only after they were considered and recommended by the managers. In effect there was a “two-house rule,“ and the members were precluded from acting outside of a recommendation from the managers.  When the two of the three members sought to call a meeting of the members to consider the filing of the bankruptcy petition, a topic that had not been considered and recommended by the board of managers, that effort was enjoined.


The court rejected the suggestion that the operating agreement be reformed to require only a majority to constitute a quorum.  I’m with Peter in viewing that determination as not surprising.  As a general proposition, courts should enforce agreements and not question the wisdom of what was agreed to. 


      HERE IS A LINK to Peter’s review of this case.

Monday, November 12, 2018

Political Contributions Through LLCs – Not in Cincinnati


Political Contributions Through LLCs – Not in Cincinnati

      Last week, voters in Cincinnati Ohio approved an amendment to the City Council Charter (Issue 13) that forbids the making of political contributions through LLCs. Previously, the donation limit for an individual was $1,100. However, LLCs likewise were subject to that $1,100 limit, and an individual controlling multiple LLCs could, through each, make that same maximum contribution.
      The amendment received the approval of 86% of the votes cast.

Friday, November 9, 2018

Don’t Hold Your Breath on the Series Classification Regulations


Don’t Hold Your Breath on the Series Classification Regulations

      There were published, in September, 2010, proposed regulations with respect to the classification of a series. Since then no action has been taken, but for a number of years those regulations remained on the Priority Guidance Plan. But then they fell off. Yesterday, November 8, the 2018-2019 Priority Guidance Plan of the Department of the Treasury was released. The series classification regulations are notably absent therefrom.

Wednesday, November 7, 2018

LLC’s Members are not Clients of the LLC’s Attorney


LLC’s Members are not Clients of the LLC’s Attorney

       In a recent decision from the Seventh Circuit Court of Appeals, it affirming the holding of the trial court, it was confirmed that an attorney to an LLC is not, consequent to that role, the attorney for the LLC’s members. Reynolds v. Henderson & Lyman, __ F.3d __, 2018 WL 4348013 (7th Cir. Sept. 12, 2018).
      Reynolds was a member of several LLCs that had retained Henderson & Lyman (“H&L”) as its legal counsel. Reynolds would allege that H&L gave advice, ultimately incorrect or incomplete, that led him to violate certain federal securities disclosure laws in the preparation of the LLC’s financial statements. Reynolds, for himself, brought suit against H&L. The trial court rejected that suit on the basis that Reynolds could not bring a malpractice suit for himself when he did not have a personal attorney-client relationship with Henderson & Lyman. It was that determination that was appealed to the Seventh Circuit Court of Appeals.
      As recounted by the Seventh Circuit, in the course of upholding the trial court’s dismissal, it was observed that:
Reynolds admits that he never asked H&L to represent him and that H&L never said anything that suggested it thought it was representing him.  In other words, the parties never entered into any agreement that would have created an attorney-client relationship between them.  H&L did have an attorney-client relationship with the LLCs that Reynolds co-owned and managed, but that is different.  It was in his capacity as a managing member of these LLCs that Reynolds communicated with, and was advised by, H&L.  Reynolds’s primary argument on appeal is that H&L owed him something akin to a third-party duty of care arising out of its representation of the LLCs, because his personal interest were so closely bound with the interest of the LLCs as to be functionally indistinguishable.  This theory might sound plausible on its face, but unfortunately for Reynolds it is foreclosed by decades of Illinois law.
Illinois courts consistently have held that neither shared interest nor shared liability gives rise to third-party liability.  For third-party liability in Illinois, Reynolds must have been a direct and intended beneficiary, and “[s]imply because the [officers of a business entity] were at risk of personal liability does not transform the incidental benefits of [the law firm’s] representation of [the business entity] into direct and intended benefits for [the officers]. In fact, the only time an Illinois attorney owes a duty of care to third party is when the attorney was hired for the primary purpose of benefitting that third party.  Illinois courts have emphasized that the primary purpose of a retainer agreement between a business entity and a lawyer is to benefit the business entity, not to benefit that entity’s owners or officers, however closely aligned their interests might be. (citations omitted)
      The court went on to observe that any “contrary rule would undermine the integrity of the attorney-client relationship by forcing attorneys to assume competing duties of care to non-clients.” and that:
In addition, the rule that Reynolds asks us to adopt would chip away at the legal distinction between entities and individuals-a distinction that serves as the basis for the existence of many business structures, including that of the LLC. It would be bizarre indeed if a business’s owners or officers could cloak themselves in the protections provided by the limited-liability corporate structure when they entered contracts or defend against a lawsuit, yet cast that structure aside when seeking to recover as plaintiffs for injuries sustained by the business. In law, as in life, double standards are frowned upon.