Today Is Not a Good Day in History

On this day in 1290 Edward I issued the Edict of Expulsion of all Jews from England; the deadline for leaving was November 1 of the same year.  It would not be undone until the middle of the seventeenth century. Edward said he was acting to protect the Christian (Catholic) community from the nefarious influence of the Jewish community as he endorsed the blood libel cult of (Little Saint) Hugh of Lincoln, all following Henry III’s 1253 Statute of Jewry. 

Then, on this day in 1925 a former Austrian army corporal and failed artist published a memoir laced with the hate that would embroil the world in a conflict that directly killed millions and reordered the international order.  

Sometimes history requires that we hang our heads and reflect.

"Miller and Rutledge are right"

 “Miller and Rutledge are right.”

In 2025 Professor Beth Miller and I wrote an article on whether and how the business judgment rule (the “BJR”) applies in the context of LLC, namely: Elizabeth S. Miller and Thomas E. Rutledge, The Duty of Finest Loyalty and Reasonable Decisions: The Business Judgment Rule in Unincorporated Business Organizations, 30 Delaware Journal of Corporate Law 343 (2005). Recently that article was cited by Judge Gall of the Nevada District Court (Clark County) in her July 3, 2025, decision in Silva v. Clay, Case No. A-25-909767-B, (District Ct. Clark Cnty. Nev., July 3, 2025) At this time it does not appear the decision is available on any of Westlaw, Lexis or Google Scholar.

The dispute is a classic falling out between the members following allegations of diversion of company funds with the typical panoply of allegations of breach of the duties of care and loyalty, the obligation of good fait and fair dealing (which in this operating agreement is set forth as a fiduciary duty), conversion, oppression, deceptive trade practices, etc. See Slip op at 3-4.

The point at issue in this aspect of the decision is whether the presumption of the BJR applies in the context of an LLC. In Nevada the BJR has been reduced to statute in the business corporation act (NV Stat. § 78.138(3)) but there is no similar provision in the LLC Act. In this instance the operating agreement detailed what were the fiduciary duties in this LLC (formulae different than those in the LLC Act itself) but without referencing the BJR. So did it apply (as the defendants asserted) or not (as the plaintiff asserted)?  The answer to that question would in turn inform whether Silva had plead his various allegations with sufficient specificity to clear the bar of the motion to dismiss filed by the defendants. Cutting to the chase, Judge Gall wrote:

The court has reviewed the Operating Agreement.  While the court agrees with Silva that the Operating Agreement does not expressly set forth a business judgment rule or similar presumption, the court finds that by adopting fiduciary duties at Articles 6.1, 6.2, and 6.3, the members incorporated the business judgment rule to assess whether they breached those duties. Slip op. at 5.

In our article we argued that the BJR is a rule of corporate law that does not carry over to the highly contractual realm of LLCs; if you want that rule as part of your fiduciary provisions then write it into the operating agreement. However, we stipulated an exception to that “four corners” analysis when:

[I]f the agreement in question incorporates a corporate standard of care (either by reciting the corporate formulation in the document or by a statement to the effect that those in control of the unincorporated business are subject to the standards of a corporate director), and the state law applies the business judgment rule, it would be appropriate to apply the rule to the actions of those acting on behalf of the unincorporated association. While doing so involves an assumption that the drafter meant to incorporate the business judgment rule, it has a greater assumption to determine that the drafters sought to reject the standard of review applied to that standard of care.  Slip op. at 6, quoting 30 Del. J.  Corp. L at 384.

There then followed my favorite phrase from this decision, namely “Miller and Rutledge are right.” Slip op. at 6.  Judge Gall went on to observe:

It makes no sense to incorporate a duty of care without applying the business judgment rule to determine whether that duty has been breached - at least not without leading to an absurd result. With the fiduciary standard in one hand but without the business judgment rule in the other, the fact Finder is left to determine whether the complaint of transaction could have gone better period this is what the business judgment rule is meant to stop; otherwise, business will simply stop as disgruntled stockholders and members repeatedly asked the court to step in the place of business fiduciaries and second-guess decisions made by those who are better positioned to act on behalf of the company.

she then going on to quote Wynn Resorts, Ltd. V. Eighth Jud. Dist. In & for Cnty of Clark, 133 Nev. 369, 378, 399 P.3d 334, 344 (2017):

Accordingly, we reiterate that the business judgment rule goes beyond shielding directors from personal liability in decision-making. Rather, it also ensures that courts defer to the business judgment of corporate executives and prevents courts from substituting their own notions of what is or is not sound business judgment if the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.

Reiterating her conclusion as to the application of the BJR, Judge Gall wrote “Thus, the business judgment rule applies in assessing the sufficiency of Silva’s pleading breach of fiduciary duty claims.”  Slip op. at 8.

As to the substantive review of the claim for breach of the duty of care, the opinion (Slip op. at 10-11) provides:

Article 6.2 of the Operating Agreement sets forth a member’s duty of care as follows: 

In carrying out his duties and exercising his powers hereunder, each Member shall act in a manner he believes in good faith to be in the best interests of the Company and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. Subject to the preceding sentence, no Member shall be liable, responsible, or accountable in damages or otherwise to the Company or the other Members for any acts performed or omitted by him in good faith and within the scope of this Agreement.

Silva alleges that the Member Defendants breached their duty of care “both with respect to CPI and to Silva, by acting to improperly enrich themselves.” This allegation, however, invokes the duty of loyalty, not the duty of care [case citation omitted].

In Silva's opposition, he argues that his duty of care claims against the Member Defendants go beyond mere improper enrichment, to include: (1) ignoring distribution requirements to enrich themselves by diverting funds to other entities; (2) terminating Silva from his officer position and then terminating Silva’s membership interest and pocketing compensation tied to that interest; and (3) something about Freeman, although it is not incredibly clear whether that something has to do with hiring Freeman in the first instance or mow seeking to dismiss the derivative claims Plaintiff makes against her.  

Again, Sylva's allegations concerning the diversion of funds sound in breach of the duty of loyalty, not duty of care.  Also, it is entirely unclear to the court what duty of care allegations Silva makes about Freeman. Regardless, Silva is not alleging particularized facts to show that the Member Defendants’ decisions about Freeman - whatever they are may be - are grossly negligent or uninformed. Silva has also failed to allege particularized facts, or any facts, that show the Member Defendants terminated him from his office or position or terminated his membership interests on a uninformed or grossly negligent basis. [citation omitted] Instead, Silva merely alleges that the Member Defendants undertook actions inconsistent with the Operating Agreement. His claim is better suited as one for breach of the Operating Agreement. 

Thus, Silva's duty of care claim does not survive the motion to dismiss.

The opinion goes on to provide a useful review of the direct versus derivative distinction, the treatment of “good faith and fair dealing” as a contractual versus a fiduciary claim, and the categorization of certain claims as implicating either the duty of loyalty or the duty of care. 

The CTA’s Inactive Entity Exemption

I am happy to report that there has been released the Spring, 2025 issue of The Business Lawyer and with it the article co-authored by Bob Keatinge (of Ribstein and Keatinge on Limited Liability Companies fame) and me titled: The CTA’s “Inactive Entity” Exemption and Irrevocable Dissolution – “I’m Not Dead Yet.” 

This is a true “deep dive”; while in the statute this exemption is about 100 words, we used almost 20,000 words to in detail dissect and then apply the CTA’s “Inactive Entity” exemption - sometimes (as here) the situation is so muddled that a great many words are required to unravel the “Gordian Knot.” We as well considered and applied the various FAQs that in effect created an alternative mechanism for exclusion from reporting company status, a mechanism that may well be more important than the statutory/regulatory regime. 

We thought this exercise to be important in that unlike the CTA’s (then) 22 other exemptions, almost all reporting companies will someday want to exit the obligation to file CTA BOIRs via the “Inactive Company” exemption. While this analysis has as to domestic companies lost its application under the current interim final rule, the analysis is particularly pertinent to foreign companies aiming to end their obligation to file beneficial ownership information reports as they for all intents and purposes cannot satisfy the statutory/regulatory exemption. 

While neither bears any responsibility for the errors contained in this piece, the contributions of Diane Babal (ABA/BLS) and Christina M. Houston (DLA Piper) must be acknowledged; thank you each.

As always I am indebted to Bob Keatinge for the opportunity to work with him.

Here is a link to the article.

P.S. - we hope you will enjoy the “atypical” references distributed throughout the footnotes, they including the movies Unforgiven, Lord of the Rings, and Monty Python and the Holy Grail, Italo Calvino’s novella The Nonexistent Knight, Erasmus of Rotterdam’s Adages and Homer’s Odyssey.

Chalons

 The Battle of Chalons

      Today marks the anniversary of the Battle of Chalons in 451, between the Huns under the command of Attila versus the combined forces of the Roman Empire and the Visigothic Empire, it under the command of its King, Theodoric I.  The western forces were under the command of magister militum Flavius Aetius.  

      While Theodoric would himself fall in battle, the western forces were successful in defeating the Huns, forcing them to retreat from their efforts to expand their empire to include the former Roman province (portions of it had already withdrawn from it) of Gaul.

      The hero of the day was clearly Falvius Aetius.  He had been appointed magister militum (essentially “supreme commander” of all Roman military forces) by Valentinian III, a particularly weak (and in this era that is saying something) emperor.  While Boethius is oft identified as the last gasp of the Roman Empire’s (or at least its western components’) intellectual life, Flavius Aetius can equally be described as the last of the great western Roman generals. 

      Only three years after Chalons in September, 454, Aetius was assassinated by Valentinian.  Within the year, Valentinian would in turn be assassinated by friends of Aetius while Valentinian’s guard watched; the members of the guard had been followers of Aetius.

The Trial of Anne Boleyn

 The Trial of Anne Boleyn

      On this day in 1536, Anne Boleyn, as well as her brother George, was tried on allegations of adultery and incest.  The conclusion of the “trial” was a foregone conclusion.  On May 12, four of the men with whom Anne was accused of having engaged in adultery, Mark Smeaton, Henry Norris, William Brereton and Francis Weston, had already been convicted, and, so goes the adage, it does take two to tango. The Calais Swordsman may and likely was already on his way to London.

      Although some incomplete notes of the trial do survive, sadly no transcript is available; it would no doubt make interesting reading.  It is clear that both Anne and then George (George’s trial was separate and held after that of Anne) denied all charges against them.  Those denials (as well as the expected denials of the other men charged with having committed adultery with Anne) must be accepted at face value.  As has been demonstrated by several scholars, most conclusively Eric Ives, Anne and her various co-conspirators could not have been guilty of the charges made – even with the incomplete records available to us today, it can be demonstrated that in numerous instances Anne and a particular gentleman were charged with having committed adultery at a particular time and place when, in fact, either or both of them were at a different place or even two difference places.  The truth, however, was not the issue; the outcome of the trial was a foregone conclusion before it ever started. Henry was tired of Anne, and Cromwell had been charged to bring about her fall. End of story.

      On May 14, Cramner, Archbishop of Canterbury, had declared the marriage of Henry and Anne to have been invalid ab initio, possibly (the papers as to his determination have been lost) on the basis of her prior contract of marriage to Henry Percy the son of the then Fifth Earl of Northumberland (this Henry would be the Sixth Earl). An alternative basis was that Mary Boleyn, Anne's sister, had been Henry's mistress, and on that basis the marriage could have been invalid based upon consangruity. Regardless as to why, Anne would not die as the Queen of England, having never been validly married to Henry, and their daughter Elizabeth (the future Queen Elizabeth I) was rendered illegitimate.

      All of Mark Smeaton, Henry Norris, William Brereton and Francis Weston, along with George Boleyn, would be executed on May 17.  Anne’s death would not take place until May 19.

          The definitive biography of Anne Boleyn has been and remains that by Eric Ives.

Death of a Member and the Status of the Heir as an Assignee

In a recent (December, 2024) decision from Iowa court of appeals the court was called upon to assess the rights of a widow vis-a-vis her (now deceased) husband’s LLC.  Those familiar with LLC disputes will recognize the all too-common elements recited in the first paragraph of the decision, namely:

After forty-six years of marriage, Sharon Kellogg believed that the property owned by her late husband, Bruce Kellogg, was her property, “just like my property was his property." This included a membership interest Bruce owned in D & K Ranch, L.C., a limited liability company. The district court disagreed and dismissed Sharon's petition to vacate a deed conveying the company's only asset—a 100-acre farm—to one of its members after Bruce's death. The court ruled that because Sharon “was never a manager or a member and the land was sold for more than market value,’ she “has no legal right, or any legitimate grounds, to complain.”

The LLC in question was owned by the decedent Bruce (although the decision is less than express on the point it seems Bruce was a 25% member) as well several relatives and a friend; Larry Kellogg, Bruce’s brother was appointed the managing member.  It was provided that the LLC would dissolve upon the death of any of the members, and further it was agreed:

That in the event of the death of one of the parties, or the desire of one of the parties to sell his interest in the subject real estate, that the remaining parties be given the first opportunity to buy the fractional interest of the party who has died or has indicated the desire to sell, at the fractional appraised value, determined as of the date of death or the date the party has given written notice to the remaining parties of his desire to sell. The value shall be determined by either the value of the subject real estate set by the Chickasaw County Assessor or by independent appraisal. Said option shall be exercised within sixty (60) days of death or notice of intent by the party desiring to sell.

Larry, overseeing the LLC’s dissolution after Bruce’s death, offered Bruce’s estate $65,000 for his interest in the LLC, an offer Sharon refused.  Thereafter Larry procured a valuation of the LLC’s farm (not shared with Sharon) that set the value, depending upon the classification of certain portions thereof, at either $408,000 or $420,000.  The property was then sold by the LLC, represented by Larry, to Brian Kellogg, Larry’s son and another member of the LLC for $360,000; Larry sent Sharon a check for $86,465.26, that being one-fourth of the sale proceeds.  Sharon objected (we knew that was coming or this dispute would not have proceeded to a court decision) and returned the preferred check, to which Larry’s attorney responded:

Larry's attorney returned the check to Sharon through her counsel, writing “the actions of the manager, Larry Kellogg, were . . . approved by the surviving members of the Company,” although that was not required by the operating agreement. In closing, Larry's attorney stated: “I hope this brings closure to this private family matter. I know how difficult this must be for Sharon, but she was never a member of this Company and that is something each of the members agreed to.”

Sharon then brought suit against the LLC and the other members (Larry in the meantime having passed-away) seeking to set aside the conveyance of the farm and alleging Larry did not follow the terms of the operating agreement At trial, after the conclusion of Sharon’s evidence, the defendants argued:

that Sharon was neither a member of the company nor owed any fiduciary duty by Larry as its managing member. In response, Sharon argued that Larry owed a duty of loyalty to all the members, which did not end at Bruce's death but continued to her as “the holder of [Bruce's] interest until it is disposed of by either winding up or sale.” The defendants disagreed, urging that as a transferee of Bruce's membership interest, Sharon was not “entitled to vote or have any managerial interest or do anything as regards to the company. She only was entitled to [an] accounting and to the distribution of the proceeds upon winding up of the business . . . .”

And here things got a bit squirelly - 

The district court denied the motion for directed verdict, reasoning the question before it was not whether Sharon “had the right to vote” or whether “the other members could ratify a sale of the property without any input from her; it's whether [Larry's] choice to sell the asset at less than fair market value constitutes a fraudulent transfer or a breach of his fiduciary duty.” The court concluded,

I mean, basically, I don't think just because Bruce died that the remaining members can simply say, sorry, Sharon, you don't have an interest anymore; we're going to get rid of the assets and we're not going to give you any interest in it; we're going to sell them for far less than market value. I don't know if that's true or not. I'm waiting to hear your evidence that this was a sale at fair market value. And if that's true, then we don't have an issue.

But then after further trial proceedings and a “battle of the appraisers” as to the property’s value, the trial court determined Sharon:

had no right to see Greder's appraisal, no right to determine the market value of the real estate, and no right to object to or veto the sale to Brian for a price that every actual member of D & K Ranch agreed to. Sharon was only entitled to Bruce's one-fourth share of the sale proceeds that Larry attempted to give her.

On appeal, the court made numerous references to the Revised Uniform Limited Liability Company Act, which Iowa has adopted, as well as the comments thereon, and Professor Dore’s treatise on the LLC law of Iowa. With respect to Sharon’s assertion she is either a substitute member or is at least afforded the rights of a member in connection with the administration of the estate containing an interest in an LLC, the court found “For these reasons, we conclude that the district court did not err in failing to recognize Sharon's member status as Bruce's personal representative under section 489.504. She was instead a transferee (referred to as an ‘assignee’ under the operating agreement) with limited rights to information from the company.” Disposing of the assertion that she was the beneficiary of fiduciary duties owed in and among the participants in the LLC:

Because we agree with the district court that Sharon did not step into Bruce's shoes as a member of the company after his death, we reject her related claim that the court “erred in holding that Larry Kellogg did not breach his fiduciary duties” of loyalty and care under section 489.409(8)(a).  As Sharon recognizes, those duties are owed by a manager in a manager-managed company to the company and the other members. The statute does not extend those duties to transferees, and Sharon does not argue, or provide us with any authority, for such an extension. (citations omitted).

As to claims that the sale was a related party transaction that Larry did not have the authority to effect, the court reviewed the operating agreement’s definition of an “affiliate,” determined that the purchaser was not as to Larry an “affiliate,” and set aside that procedural attack on the transaction. As to the allegation the sale was at below fair market value, “We need not address this issue because, as explained above, we agree with the district court that Sharon, as a transferee, was not owed any of the fiduciary duties she cites on appeal.”  The plaintiff sought to appeal this decision to the Iowa Supreme Court, but that request was denied on the basis that it was filed out of time.

Last, a shout out to Professor Dore whose treatise on the Iowa LLC Act was cited by the Kellogg court.

Kellogg v. Kellogg, 2024 WL 5152373, 2024 Iowa App. LEXIS 886 (Iowa App. Dec. 18, 2024).

The Ky LLC Act and Foreclosure of a Charging Order

In Stich v. Mattingly, the court was called upon to determine whether a trial court’s foreclosure sale of the charged interests in a SMLLC was proper; specifically, was for foreclosure sale of the entire interest including the right to manage the LLC, or was it restricted to the distributional rights that were liened by the charging order prior to the foreclosure sale.  The court cited this treatise for the application and effect of a charging order prior to foreclosure:

The charging order itself only placed a lien on Stich's interest in Haunt Brothers up to the amount of the judgment. It did not operate as an actual assignment. While the charging order was in effect, Stich still had the right to participate in the company as a member subject only to the limitation that his distributions were to go to the receiver to satisfy Mattingly's judgment against him. Assuming distributions had been made sufficient to satisfy the judgment, the charging order would have been lifted giving Stich the right to receive the distributions going forward. Implications of foreclosure for the LLC, 1 Ribstein and Keatinge on Ltd. Liab. Cos. § 10:19. In this instance, Stich would have been freed of the effect of the charging order and distributions thereafter made with respect to his Haunt Brothers' interest would have been paid to him as a member in the normal course. Id. at § 10.17.

Turning to the effect of a foreclosure, Stich, the judgment debtor, argued that Mattingly could not by virtue of a foreclosure come into the management rights of the LLC, a proposition rejected by the Court of Appeals:

Stich asserts that the foreclosure order entered by the circuit court was in error   because it ordered his entire interest in Haunt Brother to be sold instead of limiting the foreclosable interest to the right to receive distributions up to the amount of the judgment. This interpretation ignores the fact that Mattingly already had a right to receive the distributions up to the amount of the judgment under the charging order pursuant to KRS 275.260(2). Adopting Stich's interpretation would render KRS 275.260(4) essentially meaningless and hollow, a result which we cannot countenance. Lewis v. Jackson Energy Co-op. Corp., 189 S.W.3d 87, 91 (Ky. 2005) (“Statutes should be construed in such a way that they do not become ineffectual or meaningless.”).

Having examined all sections of KRS 275.260 within the greater context of the Kentucky Limited Liability Company Act we are confident that "the limited liability company interest subject to the charging order" referred to in KRS 275.260(4) is the judgment debtor's entire transferable interest in the subject company. Thus, the circuit court did not err when it refused to limit the foreclosure to Stich's rights to distribution up to the amount of the judgment.

The error the court here made is that it assumed that the judgment-creditor would be the successful bidder that the foreclosure sale - in which instance it is in part true that the successful bid as to the foreclosed interest would not yield anything more to the judgment-creditor.  However, change the facts and assume that a third-party prevails - the amount paid at the foreclosure sale goes to the judgment-creditor and satisfies to the extent of those proceeds (and here assuming no third-party with superior claim thereon) the judgment.  

Curiously the court went on to properly state the effect of the foreclosure sale of a charge against all of the interests in a SMLLC, observing (and again citing this treatise):

The purchaser of the interest at the foreclosure sale would then receive "the rights of an assignee." Id. When the sole member of the limited liability company's interest is auctioned off via foreclosure, the sole member ceases to be a member. KRS 275.280(1)(c)3.; Implications of foreclosure for the LLC, 1 Ribstein and Keatinge on Ltd. Liab. Cos. § 10:19. This in turn would trigger dissolution pursuant to KRS 275.285(4).

Which explains away the court’s rational for treating the foreclosure sale as extending to the entire interest in the LLC rather than limiting it to the right to receive distributions - in fact even in that limited circumstance the judgment-creditor, now holding all of the economic interests in the LLC that is to dissolve, is able to access the proceeds of its assets (i.e., capital lock-in ceases) and can benefit therefrom, a position notably different that is that of the mere holder of a charging order.  I here must note that on this point the court made a common but significant error, namely assuming the purpose of the charging order is to protect the “pick-you-partner” principle of partnership law as carried forward into LLC law.  While this error is quite common it is still an error. The purpose of the charging order is to protect the asset partitioning effect of the LLC, and not pick your partner {member}; I reviewed this point in Thomas E. Rutledge, I May Be Lost But I’m Making Great Time: The Failure of Olmstead to Correctly Recognize the Sine Qua Non of the Charging Order, 13 J. Passthrough Entities 65 (Nov./Dec., 2010).

True, a third-party (even a lieutenant of the judgment-debtor) might prevail at the foreclosure sale, in which instance the judgment-creditor would not have the ability to unlock the value of the LLC’s assets, but presumably the order directing the sale could (and should) provide partitions against abusive sales, and if the judgment-creditor credit bids the full amount of the judgement, and a third-party bids more, all else being equal the judgment-creditor is made whole and cannot complain that she/he did not enjoy a windfall. 

Stich v. Mattingly, No. 2023-CA-0032-MR, 2024 WL 2788210, 2024 Ky. App. LEXIS 42        (Ky.App. May 31, 2024).