Wednesday, January 25, 2012

Kentucky Court of Appeals Addresses Unjust Enrichment, Piercing the Veil

Kentucky Court of Appeals Addresses Unjust Enrichment, Piercing the Veil
            In a recent opinion, the Court of Appeals addressed two important issues, namely the availability of recovery under the theory of unjust enrichment in the context of a written agreement and piercing the veil.  Killian v. Tunacakes Properties, Inc., ___ S.W.3d ___, 2012 WL 162717 (Ky. App. Jan. 20, 2012).
            Dennis Browning and Michael Brown owned Tunacakes, a Kentucky corporation.  In 2003, they agreed to sell its assets to Killian, who subsequently assigned his acquisition rights to a single-member LLC, SK Development, LLC, and SKJ Properties, Inc., a corporation he owned jointly with his wife.  Tunacakes provided seller financing in the amount of $150,000 pursuant to which no payments would be made over the initial five years as required pursuant to the bank funding component of the transaction.  Over those five years, however, Tunacakes was to be paid a portion of the gross sales derived from the property, that payment being made pursuant to a Consulting Agreement.  Apparently no payments were made under the Consulting Agreement of 2004, resulting in the initial Complaint being filed in 2005.  Ultimately that Complaint was amended to note that no Consulting Agreement payments had been made through 2007 and that, by 2008, the buyers were in default under the $150,000 promissory note, an event of default that resulted in acceleration of the entire amount due.  After a jury trial, the LLC was held liable for breach of the Consulting Agreement in the amount of $42,391.67, and both the LLC and the corporation were found guilty on the seller financing promissory note in the amount $150,000.  The jury also found that the LLC, the corporation and Killian were unjustly enriched and were jointly and severally liable for the full amount of the judgment in favor of Tunacakes.
            The judgment based upon a theory of unjust enrichment was reversed for a pair of independent reasons.  Initially, recovery under unjust enrichment was rejected on the basis that it was determined by the jury where is should have been determined by the Court.
First, we note that any jury instruction on unjust enrichment is improper because unjust enrichment is an equitable doctrine, ... and the application of an equitable doctrine to the facts of the case is a question of law.  (citations omitted).
Second, the Court rejected the notion that there could be recovery under a theory of unjust enrichment in the face of an express contract. 
The doctrine of unjust enrichment “is applicable as a basis of restitution to prevent one person from keeping money or benefits belonging to another.”  However, when “an express contract is made defining the circumstances under which an obligation may arise with reference to a certain subject matter such contract excludes the possibility of an implied contract concerning the same matter.”  Therefore, any recovery must be under the terms of the express contract.  In this case, there was a written contract that set forth the obligations of SK Development and SKJ Properties to Tunacakes.  Thus, unjust enrichment was not an available remedy for Tunacakes as to SK Development and SKJ Properties. (citations omitted).
            Turning to the question of piercing, the Court of Appeals found that the already rejected claim for unjust enrichment had the effect of imposing on Killian personal liability for the debts and obligations of the LLC and the corporation, in effect piercing the veil.  Quoting Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 213 (Ky. App. 2009), the Court observed that:
[T]he decision as to whether to pierce the corporate veil is an equitable one to be decided by the trial court and not the jury.
In effect, just as the unjust enrichment claim was reversed for having been determined by the jury, so too was what was effectively a pierce by reason of an unjust enrichment verdict.  In that the trial court had not determined that piercing the corporate veil was appropriate, the de facto piercing against Killian was reversed with instructions that the trial court make a determination as to the appropriateness (or not) of a pierce.

Wednesday, January 18, 2012

9th Circuit Addresses Diversity Jurisdiction and LLCs

9th Circuit Addresses Diversity Jurisdiction and LLCs
            A recent decision of the 9th Circuit Court of Appeals addressed the requirements for diversity jurisdiction in a case involving an LLC and the necessity of tracing the ownership through the various owners.  In doing so, the Court rejected the notion that there is a de minimis exemption to the requirement of complete diversity.  Fadal Machining Centers, LLC v. Mid-Atlantic CNC, Inc., No. 10-56494, 2012 WL 8669 (Jan. 3, 2012) (Not For Publication).
            In the underlying action, the federal district court dismissed the claim on the basis that it was subject to arbitration.  It was that decision that was appealed to the Ninth Circuit.  It, in turn, determined that subject matter jurisdiction matter was lacking and, on that basis, both dismissed the appeal and vacated the district court’s judgment.
            As to the substance of the determination that diversity was lacking, a second appellant, MAG Industrial Automation Systems, LLC (“MAG”) was in turn owned in part (10%) by SP MAG Holdings, LLC (“SP MAG”).  SP MAG had members including a Delaware limited partnership, Silver Point Capital Fund, LP, and a Delaware LLC, SPCP Group III, LLC.  In turn, Robert O’Shea, a citizen of New Jersey, was a member of both SPCP Group III, LLC and Silver Point Capital Fund, LP.  Appellee Mid-Atlantic CNC, Inc. was a New Jersey corporation.  Applying the rule that MAG would, consequent to O’Shea’s membership in one of its members, be a citizen of New Jersey, diversity jurisdiction was lacking. 
            In response to a de minimis argument, namely that “‘SP MAG Holdings, LLC’s Membership Interest should be disregarded for purposes of determining citizenship,’ because the company holds ‘only a severely fractionalized interest with no control over the day-to-day operations’ of MAG,” and that interest being as well non-voting, the Court stated that “the character of [SP MAG Holdings’] membership interests is irrelevant to the determination of its citizenship.”, citing Carden v. Arkoma Assocs., 494 U.S. 185, 192 (1990).  “Scant though Mr. O’Shea’s interest in the Appellants, the rules governing subject matter of jurisdiction are ‘inflexible and without exception,’” again citing Carden.

Sunday, January 15, 2012

Elizabeth Regnum

Today marks the anniversary of the 1559 coronation of Elizabeth (now denominated 'I' of the 'First') as queen of England. Hence began the reign later called Gloriana. It was under Elizabeth that what we conceive of as modern England (contrasted with the minor power at the edge of Europe that it was at the onset of the Tudor Age) came into being.

The daughter of Henry VIII and Anne Boleyn, Elizabeth was declared a bastard upon her mother's trial (Cranmer having ruled the marriage to have never been legitimate) and threatened with death by her older half-sister, the Queen (Bloody) Mary.

Elizabeth would rule until 1603. She never married and the Tudor Age ended with her.

Friday, January 6, 2012

Resigning from a Kentucky LLC

Chapman v. Regional Radiology Assoc., PLLC
A Case Study in the Consequences of Resignation
         Chapman v. Regional Radiology Associates, PLLC, 2011 Ky. App. Unpub. LEXIS 251, considered the rights afforded a member of an LLC who had resigned.  Chapman, prior to his resignation, was a 40% member in the LLC.  For the year in which he resigned, Chapman asserted that he was entitled to 40% of the earnings accrued through the date of resignation.  The Court of Appeals (correctly) rejected that assertion.
          The Kentucky Law Journal Online has published my review of this decision, which article is available   HERE     
       Chapman filed a petition for discretionary review with the Kentucky Supreme Court; that petition was denied on December 15, 2011.

Marriage of Henry VIII to Anne of Cleves

Marriage of Henry VIII to Anne of Cleves
      Today marks the anniversary of the 1540 marriage of Henry VIII to Anne of Cleves.  In certain respects the marriage was a success - nobody died or was executed.
      Henry, having broken with Rome, was largely cut off from potential brides sourced from those parts of Europe that remained Catholic.  Cleves, just over the border into Germany from what is today Belgium, was partly Lutheran (Anne’s brother was Lutheran even as her mother was Catholic) and the marriage was hoped (by at least Thomas Cromwell) to bring military and economic support from the protestant portions of Europe.
       Henry and Anne never met before she travelled to England, marriage negotiations having been handled through ambassadors.  Hans Holbein, the famous painter, did a portrait upon which Henry relied in deciding the marriage should go forward.
       From the first meeting Henry was put-off by Anne, thinking her to be far less attractive than he had been led (more likely than he had self-deluded himself into thinking her to be) to believe her to be.  Still, the marriage took place.  It was, however, never consummated, and by July annulled.
         Anne received a significant pension and property including Hever Castle, former home of the Boleyns.  She and Henry eventually developed a friendly relationship, she being referred to as his “beloved sister.”  She was as well close to both Mary and Elizabeth.  
        Anne outlived Henry, dying of natural causes (possibly cancer) in 1557 during Mary’s reign.

Wednesday, January 4, 2012

Claim for Breach of Fiduciary Duty in Breach of Contract Action Rejected

Claim for Breach of Fiduciary Duty in Breach of Contract Action Rejected
         In a recent decision by Judge Coffman of the Western District, a claim for breach of fiduciary duty in the breach of an employment agreement was rejected on a motion to dismiss.  Gonzalez v. Imaging Advantage, LLC, 2011 WL 6092469 (W.D. Ky. Dec. 7, 2011).
         Alberto Gonzalez, a radiologist, entered into an agreement with Imagining Advantage pursuant to which he performed professional services reading radiology scans.  They had a falling out with respect to the amount of work directed to him and his consequent compensation, his hours and conditions of service.  While the Court allowed a straight breach of contract and intentional misrepresentation - fraud - negligent misrepresentation claims to proceed, on a motion to dismiss, the Court rejected claims for promissory estoppel, implied contract, quasi-contract and quantum meruit, wrongful termination, intentional infliction of emotional distress, defamation, interference with prospective contractual relationships and retaliation, and a wage claim under KRS 337.385.  As to the claim for breach of fiduciary duty, the Court wrote:
Gonzalez’s claim for breach of fiduciary duty fails outright.  Basic contractual relationships (such as the contract between Gonzalez and IA) do not give rise to fiduciary duties.
        The Court went on to analyze and reject Gonzalez’s assertion that there existed a joint venture between himself and Imaging Associates, finding that the profit sharing, as well as the exposure to losses, elements in the finding of a partnership were absent.

Tuesday, January 3, 2012

New York Court Sidesteps Question of Promoter Liability

New York Court Sidesteps Question of Promoter Liability
In a recent decision, the New York Court of Appeals sidestepped the question as to whether the promoters of an LLC, prior to its formation, undertake fiduciary obligations to the investors.  Roni LLC v. Rachel L. Arfa, et al., 2011 WL 6338906.
The promoters of the LLCs in question solicited investments, primarily from Israelis, for the purpose of acquiring residential buildings in the Bronx and Harlem districts of New York for the purpose of renovation and resale.  Those promoters did not disclose to the potential investors that they were paid commissions of up to 15% of the property purchase prices from the sellers and mortgage brokers, payments that had the effect of inflating the purchase prices.  The investors filed a complaint for a variety of causes including breach of fiduciary duty.  In turn, the promoters argued that the fiduciary duty claim should be dismissed “because no fiduciary relationship existed between the promoter defendants and the plaintiffs before the formation of the limited liability companies.”  Slip op. at 2-3.  The decision does not explain the mechanism by which the properties were acquired prior to the formation of the subject LLCs.
On the basis that, with respect to a motion to dismiss, the complaint is to be liberally construed and all allegations contained therein assumed to be true, the Court held that the complaint adequately pled a fiduciary relationship that could not yet be dismissed.
The question as to whether promoters have fiduciary obligation with respect to the investors prior to the LLC’s formation remains to be decided another day.