Friday, April 14, 2017

Deeds and the “Full Names” of the Grantor and Grantee

Deeds and the “Full Names” of the Grantor and Grantee


      In 2016, the Kentucky General Assembly passed amendments to the statute governing deeds, adding a requirement that deeds set forth the “full name” of the grantor and the grantee.  See KRS § 382.135. All that is well and good, but the statute did not define what is the “full name.”  By way of example, must the name of a natural person include any middle name, and must it be spelled out?  Is a “Jr.” a required element of a name?

      Amendments approved by the 2017 General Assembly address this question. 

      For natural persons, the “full name” will be determined under the same rules as are utilized under the UCC. See KRS § 355.9-503. Typically this will be the name as set forth on the person’s driver’s license. Otherwise it will be the first given name and surname.

      For business entities, the “full name” will be determined by applying the rules set forth in the assumed name statute.  See KRS § 365.015.  As such, for a domestic corporation, the “full name” will be the name set forth in the articles of incorporation.  With respect to a foreign LLC qualified to transact business under a fictitious name, the “full name” will be that fictitious name.

       This amendment is set forth in SB 235, legislation sponsored by Senator Morgan McGarvey. This amendment will be effective as of June 29, 2017.

      My thanks to my law partner, Tony Schnell, who first brought this problem to my attention.


Wednesday, April 12, 2017

The First Fall of Constantinople

The First Fall of Constantinople

      Today marks the anniversary of the fall, in 1204, of Constantinople, one of the only two times that its famed walls would ever be breached. 
      Constantinople, after having been re-founded by the Emperor Constantine, was protected, on at least the landside, by an initial wall.  The city subsequently expanded and it was in the early 5th century that the famous double Theodosian Wall was constructed.  Over the years, these walls would deflect attacks ranging from the army of Attila the Hun to several long-term sieges by various Muslim forces.  They would fall, ultimately, to a western Crusader army. 
      The Fourth Crusade intended, by means of an assault from the sea, to capture Egypt and thereby create a land base from which to again take possession of the Holy Lands and particularly Jerusalem; the few coastal cities remaining in the Crusader’s states were simply insufficient as a logistics base from which to act.  From the start essentially nothing went to plan.  Venice had been offered a significant contract to build and equip a fleet to move the Crusader army, its price calculated on a per capita basis.  Venice, a preeminent trading venture, essentially stopped all activities for two years in order to perform its part of the agreement.  When, however, time came for the Crusader army to depart, its numbers were significantly smaller than had been planned.  Those Crusaders who were present simply did not have the wherewithal to satisfy their end of the bargain.  After significant haggling, the reduced army departed, traveling first not to Egypt but rather to Zara, a city in the Adriatic that had earlier revolted again Venetian control.  Part of the army’s debt to the Venetians would be satisfied by bringing Zara to heal.  This action earned the Crusader army an excommunication issued by the Pope.
      Having now picked up a particularly weak claimant to the Byzantine throne, one who assured the Crusaders and the Venetians that he would be welcomed with open arms if returned to Constantinople, the fleet headed for Constantinople.  Needless to say, the Emperor was not pleased to find the fleet pulled up before the walls of his city, especially accompanied by a claimant to the throne.  Relations between the Byzantine authorities and the Crusaders/Venetians started off bad and essentially only got worse.  Ultimately, the fleet and the army would attack Constantinople and breach its walls, an event that for centuries forms a major iconographic event in Venice’s history. One means of entry were "flying bridges" mounted on the masts of the Venetian galleys - they sailed up next to the seaward walls and over-hanged the walls, then men at arms and knights climbed up the masts and walked over what must have been a precarious bridge. The city would fall and suffer a three day sack. The bronze horses that are featured on St. Marks Cathedral in Venice were part of the incalculable possessions stripped in the course of the sack. Ultimately one of the Crusader chiefs, Baldwin, would be placed upon the throne of Constantinople.
      The so-called “Latin Kingdom” in Constantinople would survive for only fifty-seven years when it would fall, the throne again taken by the Greeks.  However, the Latin Kingdom seriously weakened the Byzantine Empire, setting it up for its ultimate fall in 1453 to the Islamic Ottoman forces under Mehmet II.

Friday, March 31, 2017

Mistaken Identity of Capacity Does Not Eliminate Ability to Bind LLC

Mistaken Identity of Capacity Does Not Eliminate Ability to Bind LLC

      In a decision from California, the court consider whether the failure to correctly identify the role in which a person signed a document rendered the agreement unenforceable. In this instance, the court answered “no.” Western Surety Co. v. La. Cumbre Office Partners, LLC, 2017 Cal. App. LEXIS 77 (2017).
      In this instance, there was an LLC (“Manager LLC”) that itself was the manager of another LLC (“Managed LLC”). The Manager LLC was in turn managed by a natural person (“Person”). When, however, Person signed a document on behalf of the Managed LLC, he incorrectly identified himself as its managing member rather than the managing member of its manager. The question under consideration is whether Managed LLC on whose behalf the document had been executed was bound.
A      pplying language from California's prior LLC Act (although it is worth noting that the same language appears in the current Act), the court found that Managed LLC was properly bound notwithstanding the fact that Person had incorrectly indicated that he was the manager of the LLC.

Wednesday, March 29, 2017

Sixth Circuit Court of Appeals Applies Law Allowing Employee to Keep Handgun in Car on Company Property; Once Removed From the Car the Protection was Eliminated

Sixth Circuit Court of Appeals Applies Law Allowing Employee to Keep Handgun in Car on Company Property; Once Removed From the Car the Protection was Eliminated

      In a decision rendered earlier this month by the Sixth Circuit Court of Appeals, it applied the Kentucky statute providing that an employee is entitled to possess a handgun on company property so long as that gun is kept in the car. In this case, an employee removed the gun from the car, and thereby moving himself outside of the law’s protection.  Holly v. UPS Supply Chain Solutions,, Inc., No. 16-5337 (6th Cir March 2, 2017).
      Holly was an employee of UPS Supply Chain Solutions. One day, while driving to work, he experienced car troubles. His manager gave him permission to leave work and take the vehicle to a repair shop, sending along another member of management to drive Holly back to work.
       Holly’s car, however, contained a handgun in the center console. “Because Holly did not want to leave his handgun in the car while it was at the shop, he asked a subordinate employee, Kenneth Moore (who was working at the time, if he could store the gun in Moore's vehicle while it was being repaired. Moore agreed, and, in the UPS SCS parking lot, Holly removed the gun from his car and placed it in Moore's.” Slip op. at 2. Moore, however, became uncomfortable with the idea of having the gun in his car, and reported it to a supervisor. Later, UPS security became aware of the incident and ultimately terminated Holly's employment. One of the bases for that termination was his request that Moore do him a favor on company time, a rationale later expanded to include “that the reasons for Holly’s termination were: (1) misusing company time; (2) exhibiting poor decision-making skills; (3) putting a subordinate in an awkward and potentially risky position; and (4) general performance issues.” Holly then brought suit on the basis that his termination violated Kentucky's public policy as set forth in KRS §§ 527.020 and 237.106. The former statute provides in part:
No person, public or private, shall prohibit a person licensed to carry a concealed deadly weapon from possessing a firearm, ammunition, or both, or other deadly weapon in his or her vehicle in compliance with the provisions of KRS 237.110 and 237.115.
       In turn, KRS § 237.110 provides, in part, that a private employer “may not prohibit employees or other persons holding a concealed deadly weapons license from carrying concealed deadly weapons, or ammunition, or both in vehicles owned by the employee.” The majority of the Sixth Circuit panel (Judge Rogers would file a dissent) found the statute inapplicable in that the gun at issue was not in Holly's vehicle, but rather had been transferred to Moore's. Hence, in effect, rather than on having a handgun in his own vehicle at the employer's worksite, Holly had his own handgun in Moore's vehicle, and in that action the statute did not protect.

“Surface” Deed Found to Convey all Mineral Rights Except Specifically Excepted Coal

“Surface” Deed Found to Convey all Mineral Rights Except Specifically Excepted Coal

      In a decision earlier this month from the Kentucky Court of Appeals, notwithstanding that the subject deed referred to a conveyance of the “surface” of the property, based upon its particular wording, it was held that the “surface” deed conveyed all mineral rights except the expressly excepted coal rights. Potter v. Blue Flame Energy Corp., No. 2015-CA-000873-MR (Ky. App. March 3, 2017).
      At this stage of this long-running dispute, the question was whether all subsurface mineral rights had been conveyed by a prior deed or, in the alternative, had only the coal rights been conveyed, leaving to the holders of the surface rights title to the oil and gas under the subject property. The trial court, granting summary judgment, had held that only the surface rights had been conveyed, without any mineral rights. The Court of Appeals would reverse that determination.
      Focusing upon the language separately treating the rights to coal and affording as well the “usual mining rights… for removal of same,” it was held that the retained rights were only to the coal estate and nothing more. Ultimately, the subject deed severed the coal estate from the balance of the property, and had no impact upon the oil, gas and other mineral rights. On that basis the rights to the non-coal mineral rights went with the expressly addressed surface estate.

An LLC and its Members Are Legally Distinct

An LLC and its Members Are Legally Distinct

      In a recent ruling from a trial court in Massachusetts, it was reiterated that an LLC is legally distinct from its members. In this instance, an LLC agreed that it would not bring a legal action absent certain predicate acts. This provision was held not applicable when the LLC’s members brought a similar action. Meunier v. Market Strategies, Inc., 1684CV01546-BLS2, 1684CV03592-BLS2 (Mass. Suffolk Ct. Sup. Ct. Feb. 23, 2017).
      Market Strategies, Inc. (“MSI”) purchased Cogent Research Holdings. In connection therewith, there were certain deferred and Contingent Payments to be made. The owners of Cogent Research apparently organized a holding company as the vehicle to which those new payments would be made, and the purchase agreement so provided. A subordination agreement made the contingent payments subordinate to certain loan obligations to existing lenders to MSI. That subordination agreement went on to provide that HoldCo “shall not … take any Enforcement Action with respect to” those deferred payments absent the prior written consent of the lender’s administrative agent.
      Ultimately, the members of HoldCo would sue MSI in their individual capacities, asserting they were third-party beneficiaries of the agreement pursuant to which Cogent was sold by MSI and that there had been a breach in the making of the Contingent Payments. In response, MSI sued HoldCo for breaching the covenant not to sue. HoldCo was not, however, a party to the suit brought by its members and for that reason a motion to dismiss was granted.
      The court found that:
The plain language of the covenant not to sue bars HoldCo, not its individual members, from filing suit to compel MSI to make the Deferred and Contingent payments. MSI does not allege that HoldCo itself is a refileable lawsuit or taken any other enforcement action in violation of its covenant not to sue. Neither the subordination agreement nor the purchase agreement contain a covenant barring Meunier, White, and the irrevocable trust from bringing suit in an attempt to compel MSI to pay over the Deferred Payment and Contingent Payment amounts to HoldCo.  Presumably, it never occurred to MSI that it needed such a covenant, since the purchase agreement specifies that those payments are owed to HoldCo, and not to the individual owners and members of Holdco. Nevertheless, the only covenant not to sue binds HoldCo. and not Meunier, White or the trust.

Tuesday, March 28, 2017

Louisiana Court Holds That Assignee Member Is Not a Member With Respect to Assigned Interests

Louisiana Court Holds That Assignee Member Is Not a Member With Respect to
Assigned Interests


      Every LLC Act, as a default rule, requires some threshold of the members to approve the admission of an assignee as a member in the company. Often left unaddressed is whether an assignment among the members results in (a) the assignee being, with respect to the assigned interest, treated as a member or (b) treats the assignee, with respect to the assigned interest, as an assignee. In an article recently published in the Journal of Passthrough Entities, I reviewed two decisions, one from Delaware and one from North Carolina.  Rutledge, Interest Assignments Among Members, J. Passthrough Entities (March/April 2017) 53; HERE IS A LINK to that article. The Delaware decision, Achaian, Inc. v. Leemon Family LLC, is of little assistance in that it is the interpretation of what can be fairly characterized as curious language in the subject limited liability company agreement.  25 A.3d 800 (Del. Ch. 2001). This case is also reviewed in J. William Callison, Achaian and interest transfers among existing partners and members, Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations (Edward Elgar Publishing, 2015). In a similar vein, Ault v. Brady, 37 Fed. App, 222 (8th Cir. 2002), turned on the wording of the particular operating agreement at issue.   The second decision reviewed in that article is Blythe v. Bell, 2012 NCDC 60, 2012 WL 6163118 (N.C. Super. Dec. 10, 2012). The one advantage of the Blythe decision is that it interpreted essentially the default rules of the statute. In this decision, the North Carolina Business Court determined that upon an assignment of all of the interest from one incumbent member to another: (i) the management rights are fully conveyed to the assignee; (ii) the assignee may exercise the management rights related to the assigned interest.

      The recent decision from Louisiana, Bourbon Investments, LLC v. New Orleans Equity LLC,  207 So.3d 1088 (La. App. 4 Cir. 2016), came to the opposite conclusion as did the Blythe court. Curiously, the Blythe decision was not referenced by the Louisiana court.

This dispute arose out of a failed effort to acquire the famous Galatoire’s Restaurant (as well as a related restaurant in Baton Rouge). One of the issues in contention was whether the suit filed against the prior owners was legitimate turned on the question whether it had been validly approved. In support of the notion that there had not been valid approval of the lawsuit, the defendants pointed to certain interest transfers amongst the members of the plaintiff, claiming that required majority approval had not been received. In opposition, the plaintiffs “maintain[ed] that the general rule that requires unanimous consent for the transfer of full membership interest in an LLC does not apply where such transfer takes place between current member.” The LLC at issue not having a written operating agreement, the question turned on state law, the court observing that:

La. R.S. 12:1330 provides that a membership interest in a limited liability company is assignable, but such assignment entitles the assignee to only “receive such distribution or distributions, to share in such profits and losses, and to receive such allocation of income, gain, loss, deduction, credit, or similar item to which the assignor was entitled to the extent assigned.” La. R.S. 12:1332 provides that, except as otherwise provided in the articles of organization or in an operating agreement, “[a]n assignee of an interest in a limited liability company shall not become a member or participate in the management of the limited liability company unless the other members unanimously consent in writing.” The statute further states that an assignor continues to be a member unless and until the assignee becomes a member.

      Again, the plaintiff would argue “that the transfer restrictions set forth in La. R.S. 12:1332 apply only when the assignment is made to a third party who wishes to become a member of the LLC.” Rejecting this assertion, the court would find that:

The literal language of the statue does not support Plaintiffs’ interpretation of La. R.S. 12:1332.  The plain language of the statute requires unanimous written consent of all members for an assignee to become a member of or participate in the management of the LLC. The statute does not differentiate between a third party assignee and a current LLC member assignee.  The fact that the legislature did not draft a separate set of rules for membership transfers between current LLC members further supports the conclusion that the default transfer restrictions apply regardless of whether the assignee is a third party or a current member.

So there you have it. At least under the North Carolina LLC Act, an interest assignment among the members is not subject to the requirement of member approval to constitute the assignee as a member with respect to the assigned interest. In contrast, in Louisiana, the opposite is true, and the consent of the incumbent members is required to constitute a member with respect to an additional assigned interest.

      Several state statutes, with greater or lesser precision, address this point. Tennessee exempts the transfer of management rights among members from any requirement of consent from another member.  See Tenn. Code Ann. § 48-249-508(b)(1) (“A member may, without the consent of any other member, transfer governance rights to another member.”)  Utilizing a different statutory formula, the same result is dictated by the North Carolina LLC Act.

See NC LLC Act § 57D-5-04(b): [A] transferee of an ownership interest [(a term of art defined to mean all of the rights and obligations (economic, management, and others) of an interest owner in a LLC] or portion thereof who is or becomes a member has to the extent transferred to the transferee (i) the rights and powers and is subject to the restrictions and liabilities of a member under the operating agreement and this Chapter with respect to the transferred ownership interest….” (emphasis added).

The new Pennsylvania LLC Act, albeit in a rather cryptic formula, likewise exempts an assignment among members from any requirement of consent. See 15 Pa. C.S. § 8851(b) (“Only right that may be transferred. – A person may not transfer to a person not a member any rights in a limited liability company other than a transferable interest.”) See also Pa. Drafting Committee Comment:

This section is patterned after Uniform Limited Liability Company Act (2006) (Last Amended 2013) § 501.  Absent a contrary provision in the operating agreement or the consent of the members, a “transferable interest” is the only interest in a limited liability company that can be transferred to a non-member.  See 15 Pa.C.S. § 8852.  As to whether a member may transfer governance rights to a fellow member, the question is moot absent a provision in the operating agreement changing the default rule, see 5 Pa..S. § 8847(b)(2), allocating governance rights per capita. In the default mode, a member’s transfer of governance rights to another member: (i) does not increase the transferee’s governance rights; (ii) eliminates the transferor’s governance rights; and (iii) thereby changes the denominator but not the numerator in calculating governance rights.


Thanks to Bill Callison, Joan Heminway, Warren Kean and Lisa Jacobs for leads on various cases and the Louisiana decision