Monday, July 15, 2019

Void Transfer of Membership Interests


Void Transfer of Membership Interests

 

In a recnt decision of the Delaware Chancery Court, it was held that where a purported transfer of LLC interest was not made in compliance with the operating agreement, the court would enforce the agreement’s determination that the attempted transfer would be “null and void.” Absalom Absalom Trust v. Saint Gervais LLC, C.A. No. 2018-0452-TMR, 2019 WL 2655787 (Del. Ch. June 27, 2019).  

Anne Deane owned a 35.96% membership interest in Saint Gervais LLC. Anne was one of the children of Disque and Carol Deane, who had formed Saint Gervais “to pass on wealth to their children ... while maintaining control over that wealth.” Anne purported to transfer her interest to the Absalom Absalom Trust. The current dispute arose when Absalom sought to expect company books and records for a variety of reasons including a determination of the value of its interest, to determine the financial condition of Saint Gervais and investigate mismanagement and other improper conduct in connection with Saint Gervais’ management. In response, notwithstanding that certain documents had previously been provided, Saint Gervais defended on the basis that the trust was not a member of the LLC. Rather, its operating agreement, at section 5.2, provided that any disposition of an interest in the company required the prior unanimous written consent of the managers, and that failure to satisfy those requirements would render the transfer “null and void.” Specifically, it provided at section 5.2:

“[A] Member may dispose of such Member’s membership interest in the company in whole or in part only with the prior written consent of all of the Managers which consent may be given or withheld in their sole and absolute discretion. Any purported disposition of a membership interest in the company without the prior written consent of all the Managers shall be null and void.”

The agreement as well provided a comment at section 5.3:

“An assignee of a membership interest shall be admitted as a substitute Member … only with the prior written consent of all of the Managers, which consent may be given or withheld in their sole and absolute discretion. Any purported substation of a Member in the Company without such prior written consent shall be null and void.”

Holding that this case was quite similar to that recently resolved by the Delaware Supreme Court in CompoSecure, L.L.C. v. CardUX, LLC, 206 A3d 807 (Del. 2018), finding that:

The parties agree that Anne’s transfer of her membership to Absalom occurred without prior written consent. Thus, by the plain and unambiguous terms of the LLC Agreement, the transfer has no effect, meaning Absalom holds no interest in the Company. Slip op. at 9.

      From there the court rejected a number of arguments, all equitable in nature, to the effect that equitable principles cannot enforce an agreement that, by its terms, is “null and void” and therefore not subject to ex-post ratification.  In addition, the court rejected the trust’s argument that the provision with respect to limiting transfers was meant to preclude strangers from becoming members, “which is not a concern here because there is no real difference between Anne and Absalom.” Slip op. at 15. This position was rejected on the basis that, applying the words as set forth in the agreement, “whether or not an assignee is a stranger does not impact the intent as reflected in the four corners of the contract, and thus, it also does not impact Absalom’s lack of standing in this case.” Slip op. at 16.

 

Friday, July 12, 2019

An Interesting Case on Registered Agents


An Interesting Case on Registered Agents

 

It is entirely possible that the phrase “An Interesting Case On Registered Agents” is a phrase that has never been a uttered. In fact, issues dealing with registered agents and offices are typically mechanical. However, I recently stumbled upon a case that demonstrates the importance of precision with respect to identification of the registered agent. Pickens v. Aahmes Temple #132, LLC, 104 N.E. 3d 507 (Ill. App. Ct. (5th) May 18, 2018).
 

Pickens alleged that she suffered a slip and fall at a nightclub operated by Aahmes Temple #132, LLC. She filed suit, and was awarded a default judgment. After a significant passage of time, the LLC finally answered, seeking to have the default set aside on the basis that the complaint had never been delivered to its registered agent. Ultimately, that argument would be unavailable.

 
The LLC had identified as its registered agent “Jesse Gurley” and provided a residential address for him. It later came to pass that in fact there were three gentlemen at that address with the name Jesse Gurley they being, respectively, III, IV and V. “The defendant intended that it’s registered agent was to be Gurley IV, but the defendant’s designation of its registered agent did not include a suffix to distinguish which of the Jesse Gurleys located at its registered office was its registered agent.” It was ultimately determined that the complaint had been served upon Jesse III. The court recounted that:


According to Bouas [process server], the person who answered the door and identified himself as Jesse Gurley, accepted the service of the summons and complaint, and did not indicate he was the incorrect person or that he did not understand what was presented to him.


A number of other pleadings in the matter, including the application for a default judgment, were likewise served at the Gurley residence, apparently none of them being actually delivered to Gurley IV.


Responding to the effort to have the default judgment set aside, the court imposed upon the LLC the consequence of not clearly identifying the registered agent, writing:


In the present case, as noted above, the defendant’s articles of organization set forth “Jesse Gurley” as its registered agent and set forth Gurley III’s home address as its registered office. Although Gurley IV testified that the defendant intended to name him as its registered agent, not Gurley III, the defendant’s articles of organization failed to make such a distinction. The process server relied on the defendant’s representations to effect service of process on the company, and the process server complied with the defendant’s express representations with respect to both the exact name and location of its registered agent. Service on a person bearing the exact name as the company’s registered agent and located at the exact address of the company’s registered office is service that is calculated to give the defendant fair notice of the pending lawsuit. Based on the statutory scheme outlined above, we believe that the legislature intended for such service to be effective under section 1–50 of the Limited Liability Company Act.


Had the defendant identified its registered agent as Jesse Gurley IV or had the process server served Gurley III at a location other than the defendant’s registered office, our conclusion might be different. Here, however, the process server delivered the summons according to the defendant’s directions. If the defendant’s statutory obligation to establish its registered agent and registered office is to have any meaning, then service on a person having the exact name as the defendant’s registered agent and located at the exact address of the defendant’s registered office has to be effective service. The defendant had absolute control concerning the identification and location of its registered agent; it cannot now escape the consequences of the manner in which the summons was delivered when it was delivered in accordance with its own manifestations of agency.

The Birth of Julius Caesar


The Birth of Julius Caesar


On this day in 100 b.c., there was born in Rome Gaius Julius Caesar. Before his assassination in 44 b.c., famously on the “Ides of march,” he would serve multiple terms as a counsel of Rome and some five and a half years in the official office of Dictator.  The First Civil War, precipitated by the “Crossing of the Rubicon,” led to the initial failure of the Roman Republic, a failure that would find its completion is the Second Civil War precipitated by his assassination and the rise of the Roman Empire under its first emperor Caesar (Octavian) Augustus, Caesar’s post-death adopted son and heir.

Erasmus — Prince of the Humanist


Erasmus — Prince of the Humanist

     Today is the anniversary of the death in 1536 of Erasmus of Rotterdam, the Prince of the Humanist.  Erasmus devoted his career and his mastery of Latin and Greek to translating and commenting upon sacred texts including a new translation of the New Testament and non-sacred literature such as the writings of Seneca.  Along the way he wrote the Colloquies and the Adages, social commentary such as the Praise of Folly and on the need for internal reform of church practices including one of my favorites the Julius Exclusus.  He wrote a “paraphrase” of the New Testament (far longer in paraphrase than was the original text) that under Edward VI (in English translation) was required to be in every English church.  The future Queen Mary I (Mary Tudor) translated a portion of the Paraphrases into English.  The Paraphrases feature in the third of the Kingsbridge novels of Ken Follett, the Pillar of Fire.

     He and Sir Thomas More were the best of friends, and the Praise of Folly was written while he was staying with More.

     It’s not that I think a lot of Erasmus, it’s just that I have copies of his portrait hanging in both my house and my office.

      In at least the first episode of The Orville, behind the captain in his office are some bookshelves – one of the books is The Cloister and the Hearth.  This novel is an imagined account of the lives of Erasmus’ parents. Of more recent vintage, the book Fatal Discord recounts in parallel the lives of Erasmus and Luther and their conflict over the Reformation. 

 

Thursday, July 11, 2019

Pleading Diversity of Citizenship


Pleading Diversity of Citizenship

 

A recent decision from a Federal District Court in Indiana succinctly recited what is required in order to plead that there exists diversity of citizenship when one of the parties to the action is a limited liability company. Smith v. Dodson, Cause No.: 2:17-CV-372-TLS, 2019 WL 2526328 (N.D. Ind. June 19, 2019).


This action, originally filed in state court, was removed to federal court based upon the defendant’s assertion that there existed diversity of citizenship. Finding that the notice of removal was deficient with respect to the identification of the defendant LLCs’ citizenship, the court observed that “the name and citizenship of each member of a limited liability company must be identified to determine diversity jurisdiction.” After noting the rule that, where a member of an LLC is themselves an unincorporated association such as another LLC, the names and citizenship of those second (and higher) tier members must be identified, the court wrote:

 
Although the Notice of Removal alleges generally that the members of Defendant Swift Transportation Co. of Arizona, LLC and Defendant Swift Transportation Services, LLC are citizens of Arizona, the Defendants have not identified each member of the limited liability companies. Thus, the Defendants must identify the name and citizenship of each member of each limited liability company defendant as of September 21, 2017.

Tuesday, July 9, 2019

Another Sighting of the Elusive Limited Liability Corporation


Another Sighting of the Elusive Limited Liability Corporation

      In a recent decision from New York, there was addressed how a “limited liability corporation" would be assessed for purposes of federal diversity jurisdiction.  Harley v. Streamlicensing Networks LLC, 18-CV-9528 (CM), 2019 WL 2866563 (S.D. N.Y. July 3, 2019). Therein the court wrote:

But the citizenship of a limited liability corporation depends on the citizenship of its members, see Bayerische Landesbank v. Aladdin Capital Mgmt. LLC, 692 F.3d 42, 49 (2d Cir. 2012) (holding that a limited liability corporation “takes the citizenship of each of its members” for diversity purposes)

      Except of course there is no such thing as a” limited liability corporation”; there is of course a “limited liability company.”

Monday, July 8, 2019

Chief Justice Strine Tenders Resignation from the Delaware Supreme Court


Chief Justice Strine Tenders Resignation from the Delaware Supreme Court

 
      Effective sometime this fall, Chief Justice Leo Strine of the Delaware Supreme Court has tendered his resignation. HERE IS A LINK to a published report.