National Banks Are Not Required To Qualify To Transact Business In Kentucky

National Banks Are Not Required To Qualify To Transact Business In Kentucky

            Last Friday the Kentucky Court of Appeals, in an opinion “To Be Published,” held that a national bank is not required to have a certificate of authority in order to bring a lawsuit in Kentucky.  Williams v. Chase Bank N.A., No. 2010-CA-002034-MR, 2012 WL 1886502 (May 25, 2102).

            Chase sued Williams for defaulting, to the tune of in excess of $22 thousand dollars, on his Mastercard.  Williams defended, in part, by arguing that Chase was barred from bringing the action “because it had failed to obtain a certificate of authority from the Secretary of State as required by statute.”  Slip op. at 2.  The circuit court’s grant of summary judgment to Chase on that and other points was then reviewed by the Court of Appeals.

            The Court reviewed the then applicable KRS § 271B.15-020(1) (noting that it has now been replaced with the “substantially similar” KRS § 14A.9-020(1)), it providing:

A foreign corporation transacting business in this state without a certificate of authority shall not maintain a proceeding in any court in this state until it obtains a certificate of authority.

      The question was whether the requirement to have a certificate of authority is preempted by the federal National Bank Act, 12 U.S.C. § 1 et seq.  and particularly § 24 thereof.  Reviewing a Florida decision that in turn considered holdings from Massachusetts, Mississippi, Washington and New York, the Court of Appeals had no reservations with finding the Kentucky statute preempted by federal law.  On that basis the summary judgment as to that argument was upheld.

Delaware Court Awards Lost Future Earnings to LLC Investors Because of Promoter's Fraud and Breaches of Fiduciary Duty

Delaware Court Awards Lost Future Earnings to LLC Investors Because of Promoter's Fraud and Breaches of Fiduciary Duty

There's No Fiduciary Duty to Share and Share Alike for Shares of Stock

There's No Fiduciary Duty to Share and Share Alike for Shares of Stock

Kentucky Authorizes Series Statutory Trusts

Kentucky Authorizes Series Statutory Trusts

      As previously noted, Kentucky has become the first state to enact the Uniform Statutory Trust Act, it in turn enabling series statutory trusts.  This bill will become effective on July 12, 2012.  With this statute, Kentucky becomes the 5^th state (along with Delaware, Virginia, Wyoming and Connecticut; they may be organized as well in D.C.) to authorize a series trust.  At this juncture, Kentucky does not authorize either series LLCs or series limited partnerships.

      A series statutory trust has the capacity to partition its assets, liabilities and beneficial owners into one or more separate series, and with respect to each individual series, designate particular trustees responsible for its direction and management.  Assuming a variety of statutory requirements are satisfied, the liabilities of each individual series are enforceable only against the assets of or associated with that series, and each series will have the capacity to enter into contracts and to sue and to be sued in its own name.  By way of example, separate pieces of real property could be titled in the name of each individual series of a statutory trust, but there will only be one statutory trust in existence.  Note, however, that the series mechanism will not be a means of avoiding the Kentucky limited liability entity tax.  Rather, each series will, for purposes of that tax, be treated as a distinct entity.

      In order validly create a series, a variety of requirements must be satisfied; absent their satisfaction, the inter-series liability shield will not exist.  In summary, those requirements are:

·                     The certificate of trust as filed with the Kentucky Secretary of State must affirmatively state that the statutory trust may organize series;

·                     The governing instrument of the statutory trust must provide for the organization of series; and

·                     The records of the statutory trust must reflect the association of beneficial owners, trustees, assets and liabilities with each series.

      It is upon this last factor that most challenges to the inter-series liability shields will be based, and any series statutory trust should expect to expend significant resources in maintaining the necessary records.  Those of the believe that utilization of a series will be a cost saving vis-à-vis the organization of distinct, for example, single member LLC holding companies are likely due an unpleasant surprise.

      The series structure, outside of its traditional application in the organization of investment companies and in asset securitization, is relatively new.  To date, as noted above, series statutory trusts exist in only four other jurisdictions.  Delaware and D.C. have series limited partnerships, and all of Delaware, D.C., Illinois, Iowa, Kansas, Nevada, Oklahoma, Tennessee, Texas and Utah have series LLCs.

      Consequent to their relative novelty, there remain significant unresolved questions with respect to series.  As alluded to above, the degree of specificity that must be maintained in order to secure the inter-series liability shields has not been judicially determined.  Significant questions exist as well with respect to federal income tax classification (the IRS has proposed, but they are not yet final, regulations as to federal tax classification), state tax classification, nexus, whether an individual series can file for bankruptcy protection, the mechanism by which a security interest may be taken in the assets of an individual series and questions as to whether the inter-series liability shield will be respected in states that did not provide for the series in that particular form of organization.

      The fact that the Kentucky General Assembly has enabled the creation of series does not mean that the issues with respect to their utilization have been resolved.  Caution is highly warranted.

The Fall of Constantinople and the End of the “Middle Ages”

The Fall of Constantinople and the End of the “Middle Ages”

            On this day in 1453 the city of Constantinople, and with it the Byzantine Roman Empire, fell to the forces of the Ottoman Empire under Mehmed II.  Refounded as the Eastern capital of the Roman empire in the early years of the 4^th Century, it had previously fallen only once, that in 1204 to an army of Western Crusaders.  The strength of is walls, especially those on the land side, were legendary.  Since the fall of the Western Roman Empire in the 5^th Century, it was the Eastern “Byzantine” Empire that continued its traditions and namesake. 

Mehmed was able, however, to utilize the still relatively new cannon, but cast at sizes never before seen.  A combination of the battering of the city’s walls, siege and the deprivation of supplies, and a city without the necessary military forces to patrol and protect the walls set the stage for its downfall.  Ultimately the Ottoman forces were able to force entry through a gate left open in the walls through which a wounded Byzantine commander (he himself was from Genoa) had been evacuated.  The last of the Byzantine emperors, Constantine XI, died leading his troops in a final push against the enemy (or at least it is so assumed; the accounts records him leading the troops and his whereabouts are never again reported, his body was never recovered).

            Some scholars treat the Fall of Constantinople as the end of the Middle Ages.  An interesting notion, but since scholars can’t agree as to what are the characteristics of the Middle Ages, it is hard to say the age ended as of one point in time or another.  Maybe for that reason May 29, 1453 is as good a day as any.

The Battle of the Eclipse

The Battle of the Eclipse

      Today is the anniversary of an important event of which you likely have never heard and which is of itself of interest only to scholars, the Battle of the Eclipse.

      The battle itself took place in 585 BC in what is now Turkey between a force of Medes and a force of Lydians. Like I said, this is specialist stuff - the Medes and the Lydians have passed from history as distinct peoples. Today, if remembered at all, it is likely the Medes who were cannon fodder against the Spartans under Leonidas at the Battle of Thermopylae.

 

      The importance of the battle is that it was interrupted by an eclipse, and the time and date of that eclipse can be ascertained astronomically. As such it serves as a fixed point from which to measure dates. In an era in which dates were typically recorded in reference to rather transient events such as in the thirteenth year of the reign of King Whomever, a fixed point is very useful. If it is known that the Battle of the Eclipse took place in the fourth year of the reign of King X, and that his total reign was of 26 years, then we can know that he died some 22 years after 585 BC, and from there the reign of the successor to the throne can be measured. When that king, in his fifth year, signs a treaty with a neighbor, and it is the ninth year of that neighboring king's reign, it is now possible to start putting a series of events into chronological context.

Is the Statutory Fiduciary Duty of Corporate Directors Exclusive?

Is the Statutory Fiduciary Duty of Corporate Directors Exclusive?

      In preparation for an upcoming presentation at the KBA Annual Convention, I have prepared a short paper, Is the Statutory Fiduciary Duty of Corporate Directors Exclusive?  In it I review three recent decisions of the Kentucky Court of Appeals that have recently wrestled with the question of whether the statutory formula for a director’s fiduciary duties supplants any prior common law, both as to the nature of the fiduciary duties and to whom they are owed, or rather do those statutory formulae simply supplement the common law.  At least one of those cases, 1400 Willow, will be reviewed by the Kentucky Supreme Court.  This paper reviews as well my views as to the correct assessment of the matters in dispute.

       The paper is available on SSRN. Here is a Link to the paper.

Commercial Couriers in Place of Certified or Registered mail

Commercial Courier Services Equivalent to Registered/Certified Mail

      Under amendments made by the 2012 Kentucky General Assembly and effective July 12, statutory references to either “certified mail” or “registered mail” are defined as including certain commercial courier services. 2012 Ky. S.B. 160 (chapter 139), § 2, amending KRS § 446.010.

·         Under the revised statute, references to “certified mail” shall mean:

[A]ny method of governmental, commercial, or electronic delivery that allows a document or package to have proof of:

(a) Sending the package or document;

(b)  The date the document or package was delivered or delivery was attempted; and

(c)  The signature of the recipient of the document or package.

·         The new definition for “registered mail” provides that it means:

[A]ny governmental, commercial, or electronic method of delivery that allows a document or package to have:

(a)  Its chain of custody recorded in a register to enable its location to be tracked;

(b)  Insurance available to cover its loss; and

(c)  The signature of the recipient of the document or package available to the sender.

      Now I will not claim to have any knowledge of an electronic delivery system that meets these requirements, but clearly any number of commercial courier services such as FedEx and UPS will now be viable options for transmitting what previously required the trouble of a trek to the post office.  Further, completing delivery of notice likely will be easier; as a certified letter seldom conveys good news, few rush to retrieve, and many make efforts to avoid receiving, them. 

There is No Such Thing as a Limited Liability Corporation

Okay, Lets Go Over This Again – There is No Such Thing as a

Limited Liability Corporation

 

       It really cannot get much more clear than this – there is in no state a business organization identified as a “limited liability corporation.”  Every state has a statute providing for the “limited liability company” (“LLC”) and every state as well provides for the formation of a “limited liability partnership” (“LLP”).  “Corporation” and “Company” are not synonymous terms.

       In the just completed 2012 Kentucky General Assembly, H.B. 341 amended KRS § 11A.010(1) to correct a reference to the “limited liability corporation” to the correct “limited liability company.”  Having taken a step forward, however, that same General Assembly took two steps back.  S.B. 160 (2012 Ky Acts, ch. 139) created a new statute in chapter 281.  In not one but two places in that new statute it makes reference to the “limited liability corporation.” See S.B. 160, § 4.  Based upon discussions with the staff of the LRC, the Reviser of Statutes is not able to correct “corporation” to read “Company.”  A future General Assembly will need to amend the statutes.  In the meantime, the newly created statute sets forth no affirmative rules as to limited liability companies, and there are no “limited liability corporations” to take advantage of or to be subject to the new requirements.

The Death of Anne Boleyn

The Death of Anne Boleyn

       Today marks the anniversary, in 1536, of the execution of Anne Boleyn on spurious charges of adultery and therefore (by one argument) treason.  While she would be included in Foxe’s Book of Martyrs, a 16^th century effort at Protestant hagiography, all indications are that Anne died a Catholic; it is difficult to otherwise understand her request that the Eucharist be placed in her chambers at the Tower of London in the days before her execution.

      Famously, Anne was executed not with the traditional English ax, but rather by a French swordsman. I have never found a satisfactory explanation as to why the swordsman was requested over the axeman; Friedmann suggested, and Ives admits it as a possibility, that it was at Anne’s request, she desiring the French manner of execution in light of her having been raised in the French court.  His participation does lend an interesting element to the consideration of Anne’s trial.  Anne was consigned to the Tower on May 2, her alleged partners in adultery (other than her brother George) were tried on May 12 and she was tried on May 15.  The swordsman, normally resident in Calais, may have been ordered to come to England before her trial.  Even though her trial had not yet taken place, the manner of her dispatch may have already been selected.  Still she came out ahead (no pun intended); her sentence was commuted to beheading – the regular sentence for a woman convicted of treason was burning at the stake.

       Anne was buried in St. Peter ad Vincula, the church on the grounds of the Tower of London.

      Henry would marry Jane Seymour, his third wife, on May 30.

Business, not Family, Law Applies to Dispute over Corporate Management

Disputes as to Governance of Corporation Owned by Former Spouses

to be Resolved under Business and not Family Law

      The long-running battle between Alva and Patricia Sullivan has been ongoing for over 20 years.  Recently, the Court of Appeals rebuffed her effort to modify the terms of the divorce settlement as to the governance of Sullivan College Systems, Inc. (“SCS”), directing her to proceed, if at all, under business organization law.  Sullivan v. Sullivan, No. 2010-CA-001961-MR, 2012 WL 1447893 (Ky. App. Apr. 27, 2012) (Not to be Published).

      Under the divorce settlement as described by the Court of Appeals, 49.9% of the SCS stock was transferred to Mrs. Sullivan.  There was also an agreement that the corporation would pay an annual 10% dividend (the opinion of the Court of Appeals did not further describe against what this 10% would be measured).  She applied to the Family Court for a modification of the prior (and now decade old) decree, requesting for example, an increase in the dividend rate to 70%.  In support of this argument, she noted that Mr. Sullivan was drawing a substantial salary from the corporation (it is implied, but not expressed, in the opinion that she was not drawing a salary therefrom), that the corporation was accumulating significant earnings from which dividends could but were not being declared and which, consequent to SCS’s classification as an S-Corporation, were saddling her with tax liability on phantom income, and that she was not otherwise not enjoying the full benefits of ownership.  While again the opinion is somewhat ambiguous, it appears that each of Alva and Patricia received, in fiscal year 2009, a dividend of nearly $1 million.

      The Court of Appeals characterized the action as follows:

Patricia’s motion for modification of Decree is basically an action by a minority shareholder dissatisfied with the actions of the majority shareholder.  2012 WL 1447893, *3.

      With respect to Patricia’s objection that she had been denied access to corporate records, she was directed by the Court of Appeals to KRS § 271B.16-010 et seq., the statute permitting a shareholder to access certain information and as well providing a procedure for obtaining access to records when that access has been refused.  As to the balance of her objections with respect to the management of the corporation, the court directed her to those statutes governing the fiduciary obligations of a corporation’s director and officers, noting that:

This Court considers that the alleged intentional actions taken by a director or officer that causes Sullivan University to incur negative tax effects could be found by an appropriate court to be contrary to the best interest of Sullivan University.  Patricia should not ignore statutory remedies available to her.

Some Relief from the Rednour Decision

Supreme Court Grants Some Relief from Rednour Properties v. Spangler,

but not Nearly as Much as Might Have Been Hoped

            A trio of earlier postings reviewed the decision of the Court of Appeals rendered in Rednour Properties v. Spangler (November 7, 8 and 9, 2011).  Actually, suggesting that I simply “reviewed” the decision is an understatement; my intent was to explain the complete lack of analysis employed by the Court of Appeals and the entire departure from prior law.  In summary, the Court of Appeals upheld the piercing the veil of an LLC notwithstanding the absence of any showing of fraud or injustice and on the basis that (i) the LLC had a single member, (ii) the LLC was set up for tax purposes, (iii) the LLC was set up with the objective of gaining limited liability and (iv) the LLC’s registered agent was the sole member.  Of course, under Kentucky law, there must be a showing of fraud or injustice in order to justify piercing (see Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012)) and single member LLCs are expressly sanctioned under Kentucky law.

          On April 18, the Kentucky Supreme Court denied discretionary review of the Rednour decision, ordering as well that the ruling of the Court of Appeals not be published.

          While the order to not publish the Court of Appeals’ decision is helpful, and it may be argued strips the Rednour decision of any precedential value, in my view the Court can be justifiably criticized for not having remanded the matter to the trial court for reconsideration in light of Inter-Tel Technologies.  As matters stand, we are left simply with the argument (a good argument, but admittedly simply an argument) that the combination of the Supreme Court’s order that the Court of Appeals decision not be published, the legislative actions taken to in part overrule Rednour (see Single Shareholder Corps and Single Member LLCs are not for that Reason Subject to Piercing, April 12, 2012) and the published Inter-Tel Technologies decision render the Rednour opinion at most a historic (and embarrassing) footnote.

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 had already been convicted, and, so goes the adage, it does take two to tango.  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.

      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 to 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.

Simple Partnerships, TEFRA and the Tax Matters Partner

Simple Partnerships, TEFRA and the Tax Matters Partner

            While each partnership is obligated to file a return for each taxable year beginning in that in which it receives income or incurs expenditures allowable as deductions (Treas. Reg. § 1.6031-1(a)(1)), certain “small partnerships” are exempt from this requirement provided each partner reports his share partnership income and deductions. See also Rev. Proc. 84-35, 1984-1 C.B. 509 (exempting certain small partnerships from penalty imposed by Code Sec. 6698).  Admittedly saying small partnerships are “exempt” from the return filing obligation is beyond the express wording of the guidelines, but when you are exempt from a penalty for non-compliance, is compliance mandatory?

In addition, “small partnerships” are exempt from the partnership rules of The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and as well the requirement that the partnership maintain a “tax matters partner.”  In order to satisfy these requirements, the partnership, in addition to the requirement that at no point in the year may it have more than 10 partners, it may only have natural persons, estates or C corporations as partners, and each partner’s share of each partnership item must be the same as the share of every other item. Code § 6231(a)(1)(B). Where the partnership has a disregarded entity as a partner, it is no longer a “small partnership” and in consequence is subject to the rules of TEFRA and is outside the scope of Revenue Procedure 84-35. See Rev. Rul. 2004-88, 2004-2 C.B. 165; see also ECC 201219022 (May 11, 2012) (“The existence of a disregarded entity as a partner takes the partnership out of the small partnership exemption of TEFRA under Rev. Rul. 2004-88.”) 

In what would otherwise be a “small partnership,” the desire of a partner to hold their interest through an SMLLC significantly alters the partnerships operations.

The First Trial in the Fall of Anne Boleyn

The First Trial in the Fall of Anne Boleyn

      This last Saturday (May 12) marked the anniversary of the first trial in 1536 of, at least indirectly, Anne Boleyn on charges of adultery.  Anne, however, was not a participant in the trial.  Rather, at this trial each of Mark Smeaton, Henry Norris, William Brereton and Francis Weston were charged with multiple acts of adultery with the Queen.  Sadly, no transcript of the proceedings, if made (and that is doubtful), survives.  All were found guilty, thereby sealing Anne’s fate.  She did not attend the trial; rather, at that time she was confined in the Tower of London.  Her father, Thomas Boleyn, did sit on the jury – his vote in favor of conviction sealed the fate of his children.

      All four, along with George Boleyn, would be executed on May 17. 

Effective Date of Judicial Dissolution

Effective Date of Judicial Dissolution

The existing statutes governing judicial dissolution are confusing as to both the process and the effective date, and for that reason they have been amended by the 2012 General Assembly to provide clarity.

The formula typically employed permitted the court to enter the decree of dissolution, including specifying an effective date of dissolution, with a directive that the decree be then filed with the Secretary of State.  What then would be the effect of a decree of dissolution not filed with the Secretary of State – the statute was silent as to whether this step is a condition precedent to an effective dissolution.  Consider also the notion of an effective date of dissolution that pre-dates entry in the public record.  According to the Secretary of State’s website a particular LLC is in good standing even as, in a trial court’s docket, it has been dissolved.

To avoid these and similar problems, a variety of statutes have been revised to make clear that the filing with the Secretary of State is a necessary step in the judicial dissolution process and to provide specificity as to the effective date, namely the latter of the date of filing by the Secretary of State or the date in the decree of dissolution.

         See 2012 H.B. 341, amending KRS §§ 76, 103, 110 and 123.

The Sack of Rome

The Sack of Rome

      Today marks the anniversary of the Sack of Rome in 1527 by troops of Charles V, Holy Roman Emperor.

      Since the late 15^th Century Italy (or at least the region we today identify as Italy – the notion of the region as a nation was long in the future) had been repeatedly invaded by forces from Northern Europe, each seeking to claim dominion over one area or another.  Rival claimants to the crown of Naples caused as much trouble as did anything, but economic rivalry between for example Genoa and Venice did nothing to calm the waters.

      Charles’ forces were at this point battling the League of Cognac, it being comprised of France, Milan, Venice, Florence and the Papal States (keeping track of the various Leagues through the Italian Wars is a troubling task; the League of Cambrai was initially formed against Venice by the Papacy, France, Spain and the Holy Roman Empire.  Later the initial members would be allied against France with Venice as an ally.  Later Venice and France would be against the Papacy, Spain and the Holy Roman Empire).  After a significant victory over the French army the troops were restive in that they had not been paid – most were mercenary.  Pillaging Rome would be a way of paying the troops.  The city was not well defended, although its formidable walls did need to be and were breached.  Discipline immediately broke down among the troops and a sack of over three days began.

       The Pontifical Swiss Guard, created only in 1506 under Pope Julius II, rose to the occasion.  Of its then number of 189, 147 would fall defending Pope Clement VII, affording him time to take refuge in the Castel Sant’Angelo (Hadrian’s Mausoleum).  New members of the Pontifical Swiss Guard are sworn in on May 6.

      Of course this was not the only sack of Rome – it had fallen many times in its long history.  It fell to the Normans in 1084, in 546 by the Ostrogoths, in 455 by the Vandals, in 410 by the Visigoths and in 387 BC by the Gauls.

Resolution of Claims Against Dissolved Company

Martin v. Pack’s Inc. Overruled – Contracts may be Entered

Into on Behalf of a Dissolved Corporation or LLC

      The 2012 General Assembly, by means of H.B. 341, has legislatively overruled the holding of the Kentucky Court of Appeals in Martin v. Pack’s Inc., 358 S.W.2d 481, 2011 WL 3207947 (Ky. App. 2011).  The substance of this decision was previously reviewed on this blog on November 18, 2011.

       Martin v. Pack’s Inc. held, inter alia, that a corporate officer who, after the corporation’s administrative dissolution, entered into, on the corporation’s behalf, an agreement with a third party was personally liable on that obligation, treating, in effect, the corporation as an incapacitated principal.  The net effect of this holding is that one attempting to resolve outstanding claims against a dissolved corporation or LLC does so at their personal peril.

      To address these issues and to avoid future confusion, various of the statutes have been amended to provide that, in the course of dissolution, it is permissible to enter into contracts for the purpose of resolving the liabilities of the dissolving organization.  See 2012 H.B. 341, amending KRS §§ 271B.14-050, 272.325, 273.333 and 275.300.