Tuesday, September 12, 2017
Athenian Forces Defeat Invading Persians at Marathon
Today might be the anniversary of the great battle, fought in 490 at Marathon, at which the forces of Athens defeated the Persian invasion sent by Darius the Great. The exact date of the battle is subject to controversy, although there is something of an alternative consensus on the 21st.
At the time of the battle, the Persian Empire extended from the western boundaries of what is today India across the Middle East, Turkey and to Southwest Europe. Darius had decided that the land we refer to today as Greece, inhabited by a variety of city-states, would be next incorporated into his empire. An invasion fleet landed its troops some 26 miles northeast of Athens at the Bay of Marathon. Working with collaborators in Athens, it was thought that the army could be drawn away and destroyed even as the collaborators led an internal revolt, taking control of the city and making it available to Darius. It would not turn out that way.
At news of the landing, Athens sent word to Sparta seeking its assistance, the Spartan hoplite troops being the strongest force in the region. Famously, the Spartans were unwilling to send their forces in light of an upcoming religious festival. In consequence, Athens would stand alone. The Athenian army, well smaller than the Persian forces, camped facing their enemy for over a week. On the 8th day, seeing that the Persians were re-embarking some troops onto ships and fearing that they intended to launch a direct assault on Athens, the Greek forces attacked. Although outnumbered, by skillful flanking maneuvers the Greeks were able to envelop the Persian forces. While the historical records recite what must be grossly inflated figures, certainly the Persians lost in excess of 6,000 men while the Greeks lost fewer than 200.
Although not recounted in the contemporary historic record, a runner took off to announce the victory to Athens. Just over 26 miles later, he entered the city, announced “nickomen” (“victory”) and dropped dead from exhaustion. Meanwhile, the balance of the Persian army embarked on their ships and set out from the Bay of Marathon with the intent of directly attacking Athens. The Athenian army force-marched itself back to the city, manning its walls as the Persian fleet approached. The Persians decided that another attack was not in their best interest and they withdrew.
A decade later, the Persian forces under Xerces, son of Darius, would again invade Greece. They would ultimately fall victim to the Spartan and allied forces at Thermopylae, the Greek naval forces at Salamis and again the allied forces at Plataea.
Tuesday, August 29, 2017
The Latest Phishing Scam
The IRS is warning against a new phishing scam that tries to make you download an FBI questionnaire. But if you click the link, your computer will be infected with ransomware instead. The scam email uses the emblems of both the IRS and the Federal Bureau of Investigation.
Remember that the IRS does not use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds. THINK BEFORE YOU CLICK!
Remember that the IRS does not use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds. THINK BEFORE YOU CLICK!
The IRS stated: "Victims should not pay a ransom. Paying it further encourages the criminals, and frequently the scammers won’t provide the decryption key even after a ransom is paid. Victims should immediately report any ransomware attempt or attack to the FBI at the Internet Crime Complaint Center, www.IC3.gov. Forward any IRS-themed scams to email@example.com.
Monday, August 28, 2017
Nevada Supreme Court Addresses Limited Liability of LLC Members; They Really Have It
In a recent decision from the Nevada Supreme Court, it considered the argument that the two members of an LLC that operated a water park at which the plaintiff had been injured should, potentially, be liable to that plaintiff. Based upon the limited liability provision of the Nevada LLC Act, that assertion was rejected. Gardner v. Henderson Water Park, LLC, No. 71652, 2017 Nev. LEXIS 72, 2017 WL 3309660 (Nev. Aug. 3, 2017).
Henderson Water Park LLC operated the Cowabunga Bay Water Park in Nevada. Henderson Water Park was in turn owned by West Coast Water Parks, LLC and Double Ott Water Holdings, LLC (collectively the “member-LLCs”). After the plaintiff’s child was injured at the park, his parents brought suit against both Henderson Water Park and the member-LLCs, alleging negligence claims against the members “because of the Water Park’s inadequate staffing of lifeguards.” The member-LLCs moved for summary judgment on the basis that they were not proper parties to the action, which motion was granted. The Gardeners then brought this appeal. As characterized by the Supreme Court:
[T]he Gardeners argue that the District Court erred in concluding that [the Nevada LLC Act] shield[s] the member-LLCs from suit because the Gardeners seek to pursue a direct claim against the member-LLCs for the member-LLCs’ own tortious conduct in negligently operating the waterpark.
That assertion the Nevada Supreme Court would reject. The court began its analysis with:
Members of an LLC enjoy the benefit of limited liability, which refers to the fact that a member is not personally responsible for the LLC’s liabilities solely by virtue of being a member. See 1 Larry E. Ribstein & Robert R. Keatinge, Ribstein & Keatinge on Limited Liability Companies § 1.5 (2016).
The court went on to note that while a member is not protected from responsibility for their own negligence, the plaintiffs had failed to identify any duty owed to the plaintiffs by the members. “However, the Gardeners do not allege any conduct by the member-LLCs that is separate and apart from the challenged conduct of the Water Park – i.e., the Gardeners do not specify how any individual act or omission by the member-LLCs contributed to L.G.’s injuries.” In consequence:
[T]he Gardners impermissibly seek to hold the member-LLCs liable for the alleged negligence of the Water Park solely by virtue of the member-LLCs being managing members of the Water Park.
On that basis, the decision of the trial court granting summary judgment was affirmed.
Friday, August 25, 2017
Ohio Court of Appeals Applies Doctrine of Adverse Domination
In a recent decision from Ohio, the Court of Appeals reversed the grant of summary judgment made by the trial court in connection with claims that the directors of a failed corporation breached their fiduciary obligations. The trial court had dismissed those claims on the basis of Ohio’s four-year statute of limitations. It had not, however, consider whether the doctrine of adverse domination effected the tolling of that statue limitations. On that basis, reversal was granted, and the trial court was directed to consider whether adverse domination applies. Cohen v. Dulay, No. 28071, 2017-Ohio-6973, 2017 WL 3175781 (July 26, 2017).
Thursday, August 24, 2017
Ohio Court of Appeals Confirms No Aiding and Abetting Breach of Fiduciary Duty Claim
In a recent decision, the Ohio Court of Appeals affirmed the existing law that Ohio does not recognize a claim for aiding and abetting a breach of fiduciary duty. Cohen v. Dulay, No. 28071, 2017 WL 3175781, 2017-Ohio-6973 (July 26, 2017).
This lawsuit, brought by the receiver of a failed company, sought to bring a variety of breach of fiduciary duty and related claims against the corporation’s directors. Included therein were allegations that the directors aided and abetted other breaches of fiduciary duties. Considering the trial court’s dismissal of those claims on summary judgment, the Court of Appeals wrote:
Lastly, with respect to Cohen’s aiding, abetting, inducing or participating in breaches of fiduciary duties claim, we conclude that such a cause of action is not cognizable under Ohio law. See Sacksteder v. Senney, 2d Dist. Montgomery No. 24993, 2012–Ohio–4452, ¶ 73–76 (holding that Ohio courts have not recognized a cause of action for participation in a breach of fiduciary duty), citing DeVries Dairy, L.L.C. v. White Eagle Coop. Assn., Inc., 132 Ohio St.3d 516, 2012–Ohio–3828, ¶ 2 (holding that Ohio has never recognized a cause of action for tortious acts in concert under 4 Restatement (2d) of Torts, § 876 (1979)). Accordingly, we determine that the trial court did not err by dismissing Cohen’s claim for aiding, abetting, inducing or participating in breaches of fiduciary duties.
Direct Versus Derivative Distinction Applied in Single-Member LLC
In a recent decision from the North Carolina Business Court, the direct versus derivative distinction was applied to dismiss claims for breach of fiduciary duty brought by the LLC’s sole member. Timbercreek Land & Timber Co., LLC v. Robbins, 17 CVS 140, 2017 NCBC 64, 2017 WL 3214427 (Sup. Ct. N.C. July 28, 2017).
Hooper, who had no experience in the timber industry, thought it was a good investment opportunity. In turn, Robbins, who represented that he had extensive experience in the timber industry, needed financing. To that end, Hooper caused Timbercreek Land & Timber Co., LLC to be organized with Hooper as the sole member. It appointed Robbins as the LLCs manager, with authority to oversee all aspects of the LLC’s business operations. Ultimately, the trust placed in Robbins was unjustified. Rather, he engaged in a far-reaching program that included embezzlement, kickbacks, misappropriation of company assets, misappropriation of opportunities, etc. When suit was ultimately brought against him by both the Timbercreek LLC and Hooper individually, Robbins sought to dismiss all of the claims for breach of fiduciary duty, claiming he was not subject to any such duties.
With respect to the LLC’s claims, the court, applying a provision of the North Carolina LLC Act imposing fiduciary duties upon company officials who are not themselves managers (N.C. Gen. Stat. § 57D-3-21(b)), easily dismissed the allegations that Robbins was not subject to fiduciary obligations.
The claims for breach of fiduciary duty brought by Hooper himself were, in contrast, dismissed. Applying the direct versus derivative distinction, the court could not within the pleadings find any special duty owed by Robbins to Hooper; rather, Robbins’ obligations were owed to the LLC. This distinction was applied notwithstanding that the Timbercreek LLC was entirely owned by Hooper.
Tuesday, August 22, 2017
California Court of Appeal Recognizes Reverse Veil Piercing for LLCs (unfortunately, it does not do a good job in doing so)
California Court of Appeal Recognizes Reverse Veil Piercing for LLCs
(unfortunately, it does not do a good job in doing so)
In a decision rendered earlier this month, the California Court of Appeals recognized the possibility that a Delaware organized LLC, namely JPB Investments LLC (“JPBI”) is subject to reverse piercing. Curci Investments, LLC v. Baldwin, ___ Cal.Rptr.3d ___, 2017 WL 3431457 (Ca. App 4th Dist., August 8, 2017).
Curci held a judgment against Baldwin individually in the original amount of $7.2 million. Efforts to collect on that judgment were regularly stymied by Baldwin even as multimillion dollar transfers were made within Baldwin’s family amongst various trusts, partnerships and JPBI, that last company being the “management company” for Baldwin’s family assets. Charging orders entered against Baldwin’s interests in those various entities generated no return to Curci in that the entities thereafter terminated distributions notwithstanding a prior history of having made them. “Although Baldwin caused JPBI to distribute approximately $178 million to him and his wife, as members, between 2006 and 2012, not a single distribution has been made since the October 2012 entry of judgment on the Curci note.” 2017 WL 3431457, *2. In addition, loans in the original amount of $402.6 million made to various family partnerships were unilaterally extended by Baldwin, thereby delaying JPBI’s receipt of the principal and accrued interest. On these bases, the plaintiff sought to “reverse pierce” JPBI in order to directly access its assets and make them available to discharge the debt owed to Curci. The appellate court would agree that it is conceptually possible, writing:
For the reasons explained below, we agree with Curci and find remand appropriate to allow the court to make a factual determination of whether the facts in this case justify piercing JPBI’s veil. 2017 WL 3431457, *2.
After noting the effect of reverse veil piercing, namely that “reverse veil piercing seeks to satisfy the debts of an individual through the assets of an entity of which the individual is an insider.” (2017 WL 3431457, *3), the court turned its attention to whether there should be a particular test for reverse piercing or whether it should be the same test utilized in traditional piercing to hold the shareholders liable for a debt of the business organization. The court also considered another California decision, Postal Instant Press, Inc. v Kaswa Corp, 162 Cal.App.4th 1510, 77 Cal.Rptr.3d 96 (2008), in which it had been held that it was not possible to reverse pierce a corporation.
Finding that Postal Instant Press did not control in this case, the court first noted that here there is no risk to innocent owners in that Baldwin and his spouse, her assets being liable on the judgment pursuant to California community property law, were the only owners. Hence, there were no independent innocent owners whose interests could be infringed by reverse piercing. All of that is true, but the reasoning is somewhat questionable; the Postal Instant Press decision was not conditioned upon the existence of independent third parties whose interest would be impacted by reverse pierce. The Curci court also distinguished Postal Instant Press on the basis that it is “expressly limited to corporations,” and this is a case of trying to pierce an LLC. 2017 WL 3431457, *4. With due respect to the court, this reasoning is intrinsically flawed. Piercing is an equitable remedy available to courts to address situations in which individuals and business organizations are taking improper advantage of the rule of limited liability and the corresponding negative/affirmative asset partitioning function. Those concerns are consistent and equally applicable across all business organization forms that afford asset partitioning and limited liability, including corporations, LLCs, LLLPs and LLPs. Saying that a case precluding reverse veil piercing of a corporation may be distinguished on the basis that this dispute inolves an LLC is without merit. This distinction is especially weak when the court’s opinion had previously stated: “The question presented is whether reverse piercing of the corporate veil may be applied under the circumstances of this case,…” 2017 WL 3431457, *2.
In turn, the court did note an important distinction between a corporate shares and an interest in an LLC, namely the rights of a judgment creditor.
Where the debtor is a shareholder, the creditor may step straight into the shoes of the debtor. They may acquire the shares and, thereafter, “have whatever rights the shareholder had in the corporation,” including the right to dividends, to vote, and to sell the shares.
In contrast, if the debtor is a member of an LLC, the creditor may only obtain a charging order against the distributions made to the member. The debtor remains a member of the LLC with all the same rights to manage and control the LLC, including, in Baldwin’s case, the right to decide when distributions to members are made, if ever. 2017 WL 3431457, **4-5 (citations omitted).
Unfortunately, the court did not expand on how these distinctions, true as they are, favor reverse piercing of an LLC as to why even if not allowed in a corporation. Further, the court failed to address the relationship of the capacity to foreclose on the charging order, thereby taking title ownership to the underlying LLC interest, albeit as an assignee, would impact upon this comparison.
The court as well skirted the “exclusivity provision” of the charging order provision, noting that “Reverse veil piercing is a means of reaching the LLC’s assets, not the debtors’s transferable interest in the LLC.” 2017 WL 3431457, *5.
Ultimately, the court would conclude:
The case before us presents a situation where reverse veil piercing might well be appropriate. Curci has been attempting to collect on a judgment for nearly half a decade, frustrated by Baldwin’s nonresponsiveness and claimed lack of knowledge concerning his own personal assets and the web of business entities in which he has an interest. Although the formation of JPBI predates the underlying judgment, its purpose has always remained the same—to serve as a vehicle for holding and investing Baldwin’s money.
With Baldwin’s possession of near complete interest in JPBI, and his roles as CEO and managing member, Baldwin effectively has complete control over what JPBI does and does not do, including whether it makes any disbursements to its members (he & his wife). Since the time judgment was entered in Curci’s favor, Baldwin has used that power to extend the payback date on loans made to ultimately benefit his grandchildren (loans on which not a single cent has been repaid), and to cease making distributions to JPBI’s himself and his wife, despite having made $178 million in such distributions in the six years leading up to the judgment.
For all of these reasons, we conclude reverse veil piercing may be available in this case. However, we express no opinion as to whether JPBI’s veil should actually be pierced. Instead, we remand the matter for the trial court to engage in the required fact-driven analysis in the first instance. As with traditional veil piercing, there is no precise litmus test. Rather, the key is whether the ends of justice require disregarding the separate nature of JPBI under the circumstances. In making that determination, the trial court should, at minimum, evaluate the same factors as are employed in a traditional veil piercing case, as well as whether Curci has any plain, speedy, and adequate remedy at law. 2017 WL 3431457, **5-6, citations omitted.
So a California court, applying California law, may allow, on appropriate circumstances, the reverse piercing of an LLC. As that is well and good, but it should never have taken place. JPBI is a Delaware LLC, and the rule is that the law of the jurisdiction of organization applies to the piercing of an entity.