Friday, November 17, 2017

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. Elizabeth's reign would by contrast be seen as one of peace and growth, later dubbed the Gloriana. Elizabeth would rule until 1603.

Tuesday, November 14, 2017

The Importance of the “Purpose” Clause of the LLC’s Operating Agreement

The Importance of the “Purpose” Clause of the LLC’s Operating Agreement

       In an article recently published in the Journal of Passthrough Entities, I considered the importance of a customized “purpose” clause in an LLC’s operating agreement (guidance which is equally applicable to partnership agreements) and the consequences of a generic “any lawful purpose” provision. That article is Purpose: If You Do Not Know Where You Are Going, How Will You Know If You Have Arrived, 20 J. Passthrough Entities 37 (Nov./Dec./2017).

       HERE IS A LINK to the article.

Monday, November 13, 2017

Asking a Court to Enforce an Illegal Agreement is at Best a Waste of Time

Asking a Court to Enforce an Illegal Agreement is at Best a Waste of Time
      In a recent case from New York, the court rejected efforts by a divorcing spouse to enforce claims on professional LLCs in which he, the husband, was precluded by law from owning. Specifically, the suit dealt with a number of dental practices which the husband served as the business manager. In turn, his wife was the dentist. Under New York law, only a dentist may own a dental practice. Essentially, he wanted the court to say that he had a contractual right to one half of the practices. The court rejected that notion. Savel v. Savel, short form order, index No. 006375-15 (Sup. Ct. Nassau County May 19, 2017).
      Peter Mahler, in his blog New York Business Divorce, reviewed this decision in a posting on November 6 titled Divorcing Husband not Smiling Over Court’s Rejection of Ownership Interest in Wife’'s Dental Practice HERE IS A LINK to that post.

IRS Addresses Tax Treatment of Conversion of LLC into Limited Partnership

IRS Addresses Tax Treatment of Conversion of LLC into Limited Partnership

      In a private letter ruling released on November 9, 2017, the IRS addressed the tax consequences of the conversion under state law of a limited liability company into a limited partnership. Private Letter Ruling 201745005 (August 4, 2017; released November 9, 2017).
      In this instance, a state law limited liability company taxed as a partnership desired to convert into a limited partnership. The LLC had as its members another LLC, it being taxed as a corporation, and an LLC taxed as a disregarded entity. In the course of the reorganization, those member entities, or their ultimate owners, would become the partners in the limited partnership.
      In reliance upon a Revenue Ruling 84-52 and Revenue Ruling 95-37, as well as application of Section 708 of the Internal Revenue Code, the IRS found that this transaction would not result in the termination of the LLC or any of its members recognizing taxable income.

Tuesday, November 7, 2017

Kentucky Court of Appeals Interprets and Applies “Or”

Kentucky Court of Appeals Interprets and Applies Or”

      In a decision rendered at the end of September, the Kentucky Court of Appeals was called upon to interpret and apply or” in an LLC’s operating agreement. In this instance, the reading of the plaintiff, whose expulsion and redemption from the LLC was sought, was rejected, and a more commonsense interpretation of the operating agreement was adopted. Rogers v Family Practice Properties of Lexington, LLC, No. 2015-CA-001557-MR, 2017 WL 4334111 (Ky. App. Sept. 29, 2017).
      The plaintiff, Rogers, practiced medicine with and was a shareholder in Family Practice Associates of Lexington, PSC (Associates). The Associates operated from property owned by Family Practice Properties of Lexington, LLC (“Properties), an entity which had overlapping, but not entirely contiguous, ownership with Associates. The operating agreement of Properties, at Article 16.6, provided a mechanism under which the interest of a member could be redeemed, including:
In the event that (a) a Member is no longer employed by [Associates], or (b) in the case of any Members who are shareholders in [Associates], such Member is no longer a shareholder in [Associates].
      This dispute would turn upon the orbetween subsections (a) and (b) quoted above.
      In November, 2012, Rogers was advised by Associates that it was terminated his employment effective January 18, 2013. Thereafter, the members of Properties (except Rogers) held a meeting in which they elected to exercise the option to redeem his interest therein. While there was some back-and-forth with respect to the selection of appraisers, Rogers ultimately took the position that Properties had no right to redeem his interest because, while he was no longer employed by Associates, he remained a shareholder in Associates. On that basis, he asserted no right of redemption could take place. Rather:
Dr. Rogers argued that the Operating Agreement is plain and unambiguous and that the word oras used in Article 16.6 of the Operating Agreement is disjunctive. Accordingly, Dr. Rogers argued that the correct interpretation of Article 16.6 is that a member of Properties who is not a shareholder of Associates could be involuntarily bought-out of Properties once that member’s employment with Associates was terminated, but a member of Properties was/is also a shareholder of Associates could only be involuntary bought-out when that member ceased to be a shareholder of Associates.
      Finding that the contract was not ambiguous, a position adopted by all the parties hereto, the court began by noting our interpretation of the Operating Agreement is limited to the plain meaning of its express terms.From there it determined that:
As used in Article 16.6, the word ordenotes that there are two alternatives, either which will give Properties the option to purchase a Member’s  interest. Dr. Rogers is undisputedly a Member of Properties, as defined in the recitals of the Operating Agreement. Therefore, Properties has the option to purchase his membership interest from him when either his employment with Associates or his ownership interest in Associates is terminated. Dr. Rogers was terminated from Associates effective January 18, 2013, triggering Properties’ right to exercise its option under Article 16.6(a). 2017 WL 4334111,*4 (emphasis in original).
      As such, the redemption of Rogers’ interest from Properties may proceed.

Friday, November 3, 2017

Day 2 of the 2017 LLC Institute

Day 2 of the 2017 LLC Institute

Today, at the second day of the 2017 LLC Institute, we started the day with a case law review addressing Delaware decisions handed down in the last year and as well a review of the cases coming out of the bankruptcy courts addressing LLCs and especially ex post facto limitations and bankruptcy-remoteness.  This panel was chaired by Tarik Haskins, a new face to our Institute panels.  

One of the goals of the LLC Institute is and has been to hear new voices, new perspectives, and this year we had a significant number of presenters who were new to the panels.  One of the great strengths of the Institute is  this bringing together of “old hands” and “new faces.”  The resulting vigorous exchanges of views (including as well the experts the audience) are one of the great strengths of the Institute.  

The morning was completed with a program, chaired by by Professor Carter Bishop, addressing recent developments in fiduciary duty including the ability of creditors to bring a derivative action on behalf of an LLC and the treatment of contractual-fiduciary obligations and the availability of aiding and abetting claims upon breach.  

We then had a working Committee lunch at which ongoing Committee projects were reviewed and upcoming programs at the next two BLS meetings were summarized. This is our last year in the Waterview Conference Center; the facility is no longer going to be available to outside groups.  We are looking at alternative facilities in DC and elsewhere. A survey of the people in DC revealed a general consensus that DC is a good location; there may have been a sampling error in that survey.  Christina Houston discussed a parallel list-serv that in addition to the one we have in place, it being devoted to Committee announcements and materials.  The parallel list-serv would exist for the Committee members who want to exchange questions and thoughts.      If you think that would be useful (or not) in your practice, please let Garth know your thoughts.

 As always, this is your Committee - what would you like to hear about, and what programs would you like to organize?  Send ideas to Garth Jacobson. 

After lunch, under the moderation of Srini Raju, there was a panel on Good Faith (including the implied covenant of good faith and fair dealing), one which featured Justice Collins Seitz of the Delaware Supreme Court and former Vice-Chancellor Parsons; Lisa Jacobs was the last person on the panel.    

From there we had a panel, moderated by Erica Horn, on tax issues including state and local taxes involving partnerships and LLCs, the new tax reform bill and the partnership audit rules.  One highlight of this program was a review of a draft statute for the states addressing how, from the state tax perspective, the partnership audit rules.  

Over the last two days we have at the LLC Institute, by means exceptional panels, considered and informed the participants on the broadest range of issues materially important to our shared area of interest and practice.  That is the mission of the LLC Institute, and hopefully it has again delivered on its objective.  The materials are posted and available for anyone, and in a few weeks the audio recordings will as well be posted.  While we recommend them to you, if you did not attend you missed out on the opportunity to ask questions as the programs were in progress and perhaps even more importantly the opportunity to meet new and liaison with old friends.  Those relationships are one of the great values of our Committee, the means by which we lean on and assist one another.  If you were here, we hope you think the LLC Institute was a great addition to your practice and will sing its praises to others with a recommendation to attend next year.  If you were not here, well, I submit you should have been.

Please be looking for an email from the ABA containing a survey dealing with planning for future LLC Institutes.  Your responses are needed so that we can plan the LLC Institute that best serves your needs.  

Thursday, November 2, 2017



      Earlier today at the LLC Institute we had our luncheon at which Bill Callison presented the keynote address on the topic of efforts to develop, through the United Nations, a model business organizations code.  The aim of this project is to enhance capital formation and business activities in lower tiers (micro, small and medium businesses) of developing nations and regions, thereby facilitating entry into the formal economy.

       At the same luncheon, there was announced the efforts that are underway to create a new Committee award, this to be presented to persons who have contributed to the development of the our content.  Even as the efforts to create this award continue, its provisional name is the Professor Beth Miller Committee Content Award.  Even as we continue those efforts, the Professor Beth Miller Committee Content {Recognition} was presented to Beth Miller.  The efforts  and contributions Beth has made to our collective interests are too numerous to recite, a fact that justifies her receipt of this {Recognition}.  

      Otherwise, over the course of the day we have had four substantive programs. First, Beth Miller led a program reviewing case for developments other than from Delaware.  Then, under the guiding hand of Lou Conti, there was a detailed consideration of what the new tax law might do to tax planning and choice of entity.  After lunch a program organized by Walter Schwidetzky reviewed the substantial economic effect rules and as well layer-cake and targeted allocations.  As to that program, adopting a line I learned from Allan Donn, "I'm still confused, but at a higher level."  Last, Mohsen Manesh, Carmen Fonda and Joshua Fershee {all new faces to panels at the LLC Institute} discussed veil piercing, the (some of) the problems with USACafes, and drafting around that decision.

      Tonight we will present to Steve Frost the Martin I. Lubaroff Award.

      Thanks to CT Corporation and DLA Piper for their generous sponsorship of the LLC Institute.