Tuesday, March 20, 2012

“Virtually Impossible” Not a Defense to Obligation to Prove Diversity

“Virtually Impossible” Not a Defense to Obligation to Prove Diversity
      In a recent decision the District Court for the Southern District of Illinois has held that there is not a “virtually impossible” exception to the obligation to prove the existence of complete diversity among the parties.  James v. Myers, 2012 WL 525583 (S.D. Ill. Feb. 16, 2012).
      Defendant Super Service, LLC, a Delaware LLC with a principal place of business in Michigan, removed the action to the federal court on the basis of diversity, alleging no more than that in its Notice of Removal.  In that the Notice of Removal “inadequately alleged Super Service LLC’s, [sic] citizenship,” the Court ordered additional briefing, which revealed that the LLC’s sole member is another LLC and its sole member is a limited partnership, Wayzata Opportunities Fund II, LP (“Wayzata”).  But here the trail came to an end; information as to the partners in Wayzata was not provided.  The Court wrote:
However, defendants argue, Wayzata is an “investment fund with tens of thousands of investors,” it is “virtually impossible” for it to allege the citizenship of its members.”  Thus, defendants argue this Court should “confer jurisdiction over this matter on the basis that Super Service, LLC, Super Service Holding, LLC and Wayzata Opportunities Fund [II], LP are not organized or principally located in the same state as the Plaintiff.  2012 WL 525583, *2.
Rejecting that invitation, the District Court observed:
[T]he Seventh Circuit has made abundantly clear that the Court must consider the citizenship of all the members of defendant Super Service, LLC, through the pertinent limited liability company, Super Service Holding, LLC, through all the layers of ownership of the pertinent limited partnership, Wayzata, until the Court reaches only individual human beings and corporations.  2012 WL 525583, *3.
Responding to the lament that it could not meet the burden imposed, the Court held:
…as defendants admit it is “virtually impossible” to allege the citizenship of Wayzata’s members, defendants have not met their burden of presenting competent proof, or a reasonable probability, that complete diversity exist among the parties.  Id.
      This holding pairs nicely with that of the 9th Circuit in Fadel Machinery Center, LLC v. Mid-Atlantic CNC, Inc., 2012 WL 8669 (9th Cir. Jan. 3, 2012), and its rejection of the suggestion that there is a de minimis exception to the requirement of complete diversity.

Monday, March 19, 2012

Conveyance of Assets to LLCs Challenged as Fraudulent Conveyances

Conveyance of Assets to LLCs Challenged as Fraudulent Conveyances
       An Oklahoma court has recently considered whether the capitalization of a pair of LLCs would be set aside as a fraudulent conveyance.  Scottsdale Ins. Co. v. Tolliver, 2012 WL 524414 (N.D. Okla. Feb. 16, 2012)
      Scottsdale had insured a house owned by Sandra and Michael Tolliver.  After that house was destroyed in a fire, Scottsdale sought to set aside the insurance contract on the basis that the Tollivers omitted material information on their application for insurance, namely the fact that at least three of their prior properties have likewise suffered fire losses.  As is noted in footnote 2 of the opinion, Michael Tolliver has otherwise been convicted of using fire or explosives to commit mail fraud and arson.
      Scottsdale prevailed at the initial trial seeking to set aside the insurance contract.  That decision was appealed, whereupon it was remanded for a new trial.  Again, Scottsdale prevailed.  Thereafter, Scottsdale requested attorney’s fees exceeding $163,000, and the magistrate judge awarded $140,000 to Scottsdale.  That judgment was appealed and in turn affirmed by the Tenth Circuit Court of Appeals.
       In a post-judgment collection proceeding, Scottsdale learned that, in March 2010, Michael and Sandra Tolliver had transferred assets into a pair of LLCs in which they were the two equal members.  These transfers took place subsequent to the entry of the $140,000 judgment against the Tollivers, and the LLCs admitted that the transfers were made to them after entry of the judgment for the attorney’s fees.  2012 WL 524414, *3.  Scottsdale, appreciating that the entry of a charging order against each Tolliver’s interest in the LLCs likely would not yield funds to satisfy the judgment, sought to set aside the transfers as having been themselves fraudulent.
       Applying the Oklahoma fraudulent transfer law, while implicitly accepting the determination that the conveyances were made “with actual intent to hinder, delay, or defraud any creditor of the debtor,” the Court found on the evidence presented there was no showing that the Tollivers, either at the time of the transfer or consequent thereto, were insolvent.  On that basis, the matter was remanded to the magistrate judge for a supplemental report as to the question of insolvency.

Thursday, March 15, 2012

Beware the Ides of March

Et tu, Brute?
     The above was not said by Julius Caesar.
     Today, the Ides of March, marks the anniversary of the assassination of Julius Caesar in 44 B.C.  Caesar was famously assassinated at a meeting of the Roman Senate after having (almost certainly apocryphally) been warned to “Beware the Ides of March.”  He was presented with a written warning of the conspiracy against him as he was taken to the Senate meeting, but seems to have never read the warning.  Although stabbed twenty-three times by the various conspirators, only one wound was fatal.
     Caesar’s death unleashed upon the tottering Roman Republic the Second Civil War of Caesar’s heir Octavian (later to be Caesar Augustus) and his compatriot Marc Antony (Lepidus, the third member of the Second Triumvirate, was a place holder) against the assassins and their various supporters. Assassins Brutus (Marcus Junius Brutus the Younger) and Cassius (Gaius Cassius Longinus) would each commit suicide after losing a phase of the Battle of Philippi, and Cicero (who was not himself part of the conspiracy) would be assassinated as part of the proscriptions after the victory of the Second Triumvirate.  Still later Octavian and Antony would turn on one another, Antony’s forces being routed at Actium.
But back to Caesar’s dying words.  “Et tu Brute” is not recorded by any classical historian – it is a quote from Shakespeare.  Plutarch, who was born exactly 100 years after the assassination, reports that Caesar said nothing after the attack began in earnest.  Suetonius wrote that others reported his last words to be “κα σύ, τέκνον” (Greek still being the lingua franca of the Romans), transliterated as “Kai su, teknon” or “You also child,” addressed to Brutus.  There were rumors, later reported by Plutarch (Suetonius is silent on the topic) that Caesar was in fact Brutus’ father – it was known that Brutus’ mother Servilia was Caesar’s mistress.

Wednesday, March 14, 2012

Automatic Stay Not Violated by Bank's Action Against Non-Debtor LLC

Banks Actions to Collect on LLC’s Debt Did Not
Violate Automatic Stay in Favor of LLC’s Members

      A decision of the Bankruptcy Court has (correctly) held that the lender to the LLC did not violate the automatic stays that arose when each member filed for bankruptcy protection, but its discussion of substantive LLC law was at best muddled.  In re Jorgensen, 2011 WL 6000871 (Bankr. D. Wyo. Nov. 30, 2011).
      Ted and Cynthia Jorgensen, debtors in bankruptcy, were the two members in Grand Interiors of Star Valley, LLC (“Grand Interiors”).  It does not appear that Grand Interiors was a debtor in bankruptcy.  Grand Interiors was indebted to the Bank of Jackson Hole (the “Bank”) under a secured promissory note.  After the Jorgensens filed for bankruptcy the Bank sent them notice of Grand Interior’s default under the note and thereafter served Ted Jorgensen, the LLC’s registered agent, with the summons and complaint in the Bank’s action against the LLC.  The Jorgensens asserted that these acts, as well as the Bank requesting to review and recover the collateral, violated the automatic stay in that the collateral was property of the bankruptcy estate.
      The assertion that the automatic stay was violated was easily dismissed, it being noted that the Bank received, as to the collateral, relief from the automatic stay.  While, it would seem, the story could have there ended, the Court continued with a stroll through the Wyoming LLC Act.  Unfortunately that stroll involved, it would seem, a few skips and jumps that are not detailed in the opinion.  Also, it would have been nice had the Court set out a rule (and here I assume this to be the correct rule) that advising the representatives of the LLC (it not being in bankruptcy) of action being taken against it is not a violation of the automatic stay even if that representative is themselves in bankruptcy.
      The Court began by reviewing the statute addressing the events that affect an LLC’s dissolution.  As this statute does not provide that the bankruptcy of either one or all members causes the LLC’s dissolution, why this is relevant to the discussion is not clear.  While the Wyoming LLC Act does provide that a member’s bankrtupcy does affect their dissociation from the LLC (Wyo. § 17-29-602(c)(vii)(A) (assuming the LLC is member-managed)), the Court never identified or applied this rule as the predicate of the discussion of the consequences of the LLC’s dissolution.
     Getting past that point, the Court recited the statutory language to the effect that an LLC continues to exist after its dissolution and the statutes governing notice to known and unknown creditors of the LLC and the order in which assets are to be distributed.
      There was no evidence that Grand Interiors wound up and distributed its assets in the manner required by the statues.  2012 WL 6000871, *5.  In an apparent typo, the Court wrote “The Bank, based on the Wyoming Statutes, cannot have received any distribution of assets from Grand Interiors, as assets must first be distributed to creditors, and only then to members.”  Id.  Working on the assumption the “The Bank” should read “The Debtors,” the following observations are helpful:
     In this case the Debtors gained possession of Grand Interiors’ assets, as they were the members, and should have been proceeding with the wind up of the dissolved LLC.  However, their possession of the assets does not equate to ownership.
     The dissolution of Grand Interiors triggered the winding up process.  The members of the dissolved LLC, Grand Interiors, did not automatically retain its assets as their own.  The Debtors’ holding and distribution of these assets is strictly controlled by the Wyoming Statutes.  Grand Interiors was required to “apply its assets to discharge its obligations to creditors.”
     How the Court thought “possession” of the LLC’s assets went to the members upon dissolution is unclear.  Still, its conclusion that the LLC’s assets were not part of the members’ respective bankruptcy estates is accurate:
     The court finds that the collateral that secured the promissory note signed by the members of Grand Interiors, as an LLC, in favor of the Bank, is not property of the estate.  Therefore, the Bank did not violate the automatic stay.

Tuesday, March 13, 2012

Charging Order does not Impact upon Management Rights

Entry of a Charging Order Does Not Divest a
Member of the Right to Participate in Management

A recent decision of the Nevada Supreme Court reiterated the rule that the entry of a charging order against an LLC member does not deprive the member of the right to participate in the LLC’s management.  Waddell v. H2O, Inc., 128 Nev. Adv. Op. No. 9 (Nev. March 1, 2012).
After a somewhat meandering review of LLCs generally and charging orders in particular, including the limited rights afforded a judgment-creditor holding a charging order, the court reversed the decision of the trial court to the effect that the charging order divested the judgment-debtor of the right to participate in the LLC’s management.
That was not, however, the end of the story.  Although the language of the subject operating agreement was not reviewed, apparently it provided a call right upon the entry of a charging order and dissociation upon the exercise of that call.
Irrespective of the discussion of charging orders, the Court made a noteworthy point as to participation in LLCs – “those who wish to enter into an LLC should be vastly familiar with [the LLC act] in order to properly protect their interests.”

Monday, March 12, 2012

No Pass Given on Demonstrating Diversity Exists

Complexity in Diversity Jurisdiction
       A recent decision from Maryland highlights certain of the complexities involved when seeking to invoke diversity jurisdiction.  Schaftel v. Highpointe Business Trust, 2012 WL 219511 (D. Md. Jan. 24, 2012).
      Highpointe Business Trust, organized in Maryland (“Highpointe”), was successful in rebutting the plaintiff’s assertion that the citizenship of its beneficial owners/shareholders was relevant for determining diversity.  Rather, the focus is upon the citizenship of the trustee and the court “need not consider the citizenship of the beneficiaries of the trust,” citing Navarro Sav. Assoc. v. Lee, 446 U.S. 458, 465 (1980).  Having won that battle, however, it proceeded to nearly lose the war.
      Highpointe’s trustee was HBT Beneficiary, LLC, a Delaware LLC with two members, each a limited partnership for which another limited partnership served as the general partner.  Highpointe did not, however, provide information as to the various limited partners, asserting it:
…lacks sufficient knowledge concerning the structure and residency of these investors and suggests that its “right to remove this action should not be frustrated by its lack of sufficient knowledge concerning parties who invested in an entity several layers removed from the operations and control over [Highpointe].  Such peripheral analysis would not afford [Highpointe] due process to protecting its right to removal.”
     The Court rejected this argument, noting both the settled law that the citizenship of all partners, general and limited, is assessed in determining citizenship, and that the “removing party bears the burden of establishing jurisdiction”:
By simply complaining that it is too cumbersome to parse its own structure, Highpointe does not meet its burden and the Court finds that Highpointe has not established that his action was properly removed.
     The Court afforded Highpointe the opportunity to amend its Notice of Removal to address the question of the citizenship of the ultimate constituents of its constituents.

Treatment of Contingency Cases in Law Firm Breakup

The Complexities of Breaking Up –
Treatment of Contingent Fee Cases in Law Firm Dissolutions
LaFond and Sweeney were the two members of a law firm LLC.  They agreed orally to split equally all fees earned but made no agreement as to how firm assets, including contingency fee cases, would be divided upon the firm’s dissolution.  Of course, that dissolution came to pass.  LaFond v. Sweeney, 2012 WL 503655, No. 10CA2005 (Colo. App. Div. VI (Feb. 16, 2012)).
After the dissolution of the LLC, LaFond continued to represent the plaintiff in a contingent fee case on which “considerable work” had been done prior to the LLC’s dissolution.  Cutting to the chase, the Court found that:
·                    Because the contingent fee case was brought into the law firm before the firm dissolved, and because LaFond continued to handle the case until it was resolved, the contingent fee allocated to him as a result of the settlement is the firm’s asset.  Therefore, Sweeney also has rights in the contingent fee.
·                    LaFond owed the dissolved law firm fiduciary duties, including the duty to divide the firm’s assets with Sweeney in accord with the oral fee-sharing arrangement in place when the firm dissolved.  This duty extends to the contingent fee.
Speaking to these points, the Court wrote:
An attorney who carries on the representation of a client on an existing case after a law firm dissolves does so on the firm’s behalf.  Under section 7-80-401(1)(a)(b), C.R.S. 2011, a member must
[a]ccount to the [LLC] and hold as trustee for it any property, profit or benefit derived by the member or manager in the conduct or winding up of the [LLC’s] business
[r]efrain from dealing with the [LLC] in the conduct or winding up of the [LLC] business as or on behalf of a party having an interest adverse to the [LLC].
Thus, any income received by a member from winding up unfinished business belongs to the dissolved firm, and any attempt by the member to convert such business solely to his or her own business violates the duty owed to the dissolved firm.
Ultimately, the Court determined that the attorney who, after the dissolution of the firm, completed the contingent fee case was entitled to no more compensation from the fee earned thereon than they would have received under the pre-dissolution of sharing ratio.
It bears noting that as Kentucky utilizes the same statutory formula for a member’s duty of loyalty to the LLC as is utilized in Colorado (see KRS § 275.170(2)), this analysis should be equally applicable in this Commonwealth.

Friday, March 9, 2012

More on Piercing the Veil – Not Appropriate on the Pleadings

More on Piercing the Veil – Not Appropriate on the Pleadings
Issued the same day as Inter-Tel Technologies, Inc., in Schultz v. General Electric Healthcare Financial Services Inc. the Supreme Court addressed additional procedural issues in piercing claims.  2012 WL 593203, 2010-SC-000183-DG (Ky. Feb. 23, 2012).
Thomas Schultz was the sole shareholder Intra-Med Services, Inc., a corporation that entered into a lease agreement for certain medical equipment from GE.  Intra-Med subsequently defaulted on that contract, and GE received a judgment on its complaint, exceeding $4.7 million.  GE was able to collect approximately $700,000 of that judgment.
While in the collection phase, GE learned of documents in another lawsuit demonstrating that Schultz used Intra-Med assets for his own purposes.  For example, he had purchased properties using Intra-Med assets but retained to himself all of the gains on the subsequent sale of that property.  At least one of these sales took place after the entry of the judgment in favor of GE.  GE intervened in that other lawsuit, filing a complaint seeking to pierce the veil of Intra-Med and hold Schultz personally liable on its debt to GE.  In response, Schultz filed an answer including twenty-two affirmative defenses.
            Initially, the Court here emphasized that piercing is an equitable, and not a legal doctrine.  Slip op. at 8, relying upon the ruling of the Kentucky Court of Appeals Daniels v. DCB, LLC, 300 S.W.3d 204, 213 (Ky. App. 2009).  It bears noting that a similar determination by the Kentucky Court of Appeals was recently rendered in Killian v. Tunacakes Properties, Inc., 2012 WL 162717 (Ky. App. Jan. 20, 2012).
Having confirmed that the perspective to be employed is one of equity, the Court turned its attention to whether, in the context of a motion for judgment on the pleadings, piercing can be appropriate.  Ultimately the Court determined that making such a decision on the pleadings would be inappropriate:
In light of [the Court’s] obligation to respect the legal fiction of corporate separateness, trial courts should be very reticent to pierce at this juncture of litigation [judgment on the pleadings].  And, though we do not completely foreclose such action, we simply cannot conceive of a scenario in which a trial court could appropriately pierce the corporate veil based solely on pleadings raising a multitude of equitable issues.  Slip op. at 11.
Ultimately, the trial court was directed to reconsider these issues in light of the Inter-Tel Technologies decision.

Kentucky Supreme Court Updates Piercing the Veil Analysis

Kentucky Supreme Court Updates Piercing the Veil Analysis
            In a tour de force opinion by Justice Abramson, the Kentucky Supreme Court has reviewed and updated the analysis to be applied in piercing cases.  Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 2012 WL 593194, 2009-SC-000819-DG (Ky. Feb. 23, 2012).
Integrated Telecom Services Corp. (“ITS”) was a subsidiary of Inter-Tel Technologies, Inc. (“Technologies”), it in turn being a subsidiary of Inter-Tel, Inc. (“Inter-Tel”).  ITS, prior to its acquisition by Technologies, entered into a lease with Linn Station Properties, LLC (“Landlord”).  That lease was not guaranteed by ITS’ owner, and the Landlord never requested, after ITS’ acquisition by Technologies, that Technologies guarantee the obligation.  ITS defaulted on the lease and abandoned the property.  In response to Landlord’s suit against ITS, Inter-Tel’s general counsel offered a default judgment, aware that ITS was judgment proof.  After entry of the default judgment, Landlord brought suit against Technologies and Inter-Tel, aiming to hold them liable on ITS’ obligation.
            It was ultimately determined that ITS, after its acquisition, “no longer possessed any financial independence.”  Slip op. at 6.  As evidence thereof, ITS did not have its own bank account, and any funds realized from the sale of equipment by ITS went into a lock box controlled by Inter-Tel.  All of the employees of ITS were in fact employees of Inter-Tel, paid by it from its headquarters in Arizona.  Vendors providing goods and services to ITS were paid by Inter-Tel, and all of ITS’ inventory was provided by another subsidiary of Inter-Tel, payment therefore being reflected by the means of intercompany transfers.  Inter-Tel paid ITS’ rent on the Linn Station property, and both Inter-Tel and Technologies were named insureds on the property insurance for the ITS facility on
Linn Station Road
.  Slip op. at 6.  In addition, all of ITS, Technologies and Inter-Tel in some or all years at issue had identical boards of directors and officer slates, although there was a failure to hold annual meetings.  The companies were treated interchangeably on various tax returns and financial statements.  Slip op. at 8-9.
            Relying in part upon Professor Stephen Presser’s treatise Piercing the Corporate Veil, the Supreme Court began its analysis by a general review of the development of piercing law nationwide, and from there focusing upon “Kentucky’s seminal and leading case on the subject,” namely White v. Winchester Land Development.  Slip op. at 10-13.  From there it reviewed in detail the White decision and its analytic antecedent, namely Professor Campbell’s article Limited Liability for Corporate Shareholders:  Myth or Matter – of Fact, 63 Ky. L.J. 23 (1975), both reciting the alternative (although acknowledged to be overlapping) theories of instrumentality, alter-ego and equity as alternative basis for piercing the veil.  However, where White focused upon a discreet list of five factors under the equity formula (Slip op. at 15-16), the Supreme Court has expanded that list to eleven, namely:
a) Does the parent own all or most of stock of the         subsidiary?

b)   Do the parent and subsidiary corporations have       common directors or officers?

c)   Does the parent corporation finance the subsidiary?

d)   Did the parent corporation subscribe to all of the capital      stock of the subsidiary or otherwise cause its        incorporation?

e)   Does the subsidiary have grossly inadequate capital?

f)    Does the parent pay the salaries and other expenses or        losses of the subsidiary?

g)   Does the subsidiary do no business except with the parent or does the subsidiary have no assets except           those conveyed to it by the parent?

h)   Is the subsidiary described by the parent (in papers or         statements) as a department or division of the parent or        is the business or financial responsibility of the    subsidiary referred to as the parent corporation's own?

i)    Does the parent use the property of the subsidiary as its       own?
j)    Do the directors or executives fail to act independently        in the interest of the subsidiary, and do they instead take orders from the parent, and act in the parent's       interest?
k)   Are the formal legal requirements of the subsidiary not         observed?,
the Court noting that “We believe that these are the most critical factors and that Kentucky courts should consider the aforementioned expanded list instead of focusing solely on the five factors identified more than thirty years ago in White.”  Slip op. at 19-20.

In further clarification of White, it was made express that while either “sanctioning fraud or promoting injustice” is a basis for satisfying, in part, the alter-ego test for piercing, it remains the rule that “the injustice must be something beyond the mere inability to collect a debt from the corporation.”  Slip op. at 21.  Still, proof or evidence of actual fraud is not required.  Id.
Applying these factors to the case at hand, the Court had no qualms about piercing both ITS and Technologies in order to hold Inter-Tel liable on the obligation at issue having stripped ITS of the opportunity to operate as a distinct legal organization holding assets with which to satisfy its obligations.  In this respect, the Inter-Tel decision parallels the holding of the U.S. District Court in the Hornblower decision, it piercing where the subsidiary was stripped of all income by the parent while being left with exposure to third parties under its contractual obligations.  Louisville/Jefferson County Metro Government v. Hornblower Marine Services – Kentucky, Inc., 2009 WL 3231293 (W.D. Ky. 2009) 
The Supreme Court disposed of argument by Technologies and Inter-Tel to the effect that they should not be bound by the default judgment entered against ITS on the basis they were not before the Court.  The Court dismissed this argument, finding that, as ITS would be pierced to hold Technologies and Inter-Tel liable on its debts and obligations, such would include liability on the default judgment.  Ergo, those subject to exposure on a piercing claim are not going to be afforded the opportunity to re-litigate the underlying liability.
One troubling aspect of this decision is that the Supreme Court noted (although it did not otherwise expand upon the holding by the trial court) that piercing was available on the basis that ITS was the instrumentality or alter-ego of its parents “operated by them to achieve tax benefits and avoid various liabilities.”  See, e.g., Slip op. at 3; id. at 9 (“[Members of company management] explained ITS was continued as a separate entity after its acquisition by Technologies so that Inter-Tel could gain a tax advantage by offsetting income from other subsidiaries against ITS’ net operating loss.”)  While manifestly dicta, these statements unfortunately perpetuate the views that the utilization of a distinct entity for the segregation of liabilities or for achieving desired consequences under the tax code is somehow suspect and justifies piercing.  Hopefully, the point is no more than the utilization of a subsidiary to generate tax advantages for the parent even as creditors go unpaid is inequitable but not of itself sufficient to justify piercing.
Another quibble with the decision is the suggestion that the Kentucky Business Corporation Act, KRS 271B.-220(2), gives “statutory recognition to the veil-piercing doctrine.”  Slip op. at 21.  It is this provision of the Kentucky Business Corporation Act that provides that the limited liability normally afforded a shareholder does not protect a shareholder from “personal [liability] by reason of his own acts or conduct.”  Simply put, this provision relates not to a piercing analysis, piercing being premised upon the misuse of the corporate form, but rather upon an agency analysis whereby one who acts on behalf of the business organization is not protected from personal liability for his own torts.  See also Thomas E. Rutledge, The 2010 Amendments to Kentucky’s Business Entity Laws, 38 N. Ky. L. Rev 383, 384-88 (2011).  Rather, at this time, piercing is and remains, in the context of a business corporation, purely an equitable doctrine arising under the common law.

Wednesday, March 7, 2012

Corporate Directors Cannot Vote by Proxy

Corporate Directors and Proxy Voting –
Don’t Go There

From time to time I review corporate articles/certificates of incorporation and bylaws, often in connection with either general legal compliance audits or the issuance of opinion letters. Something I always enjoy is a provision providing that directors may vote by proxy. The only problem with these provisions is that they are invalid; directors of a corporation, be it for profit or nonprofit, cannot vote by proxy.

In Kentucky we actually have a case reciting this rule. Haldeman v. Haldeman, 197 S.W. 376, 381 (Ky. 1917); “Neither can they [directors] vote by proxy.” This holding is entirely consistent with the commentary, both dated and current.

• WILLIAM W. COOK, COOK ON STOCK AND STOCKHOLDERS AND CORPORATION LAW (2d ed. 1889), § 592 at p. 659: “Directors, of course, cannot act or vote by proxy.” (citation omitted).

• II ARTHUR W. MACHEN, JR., A TREATISE ON THE MODERN LAW OF CORPORATIONS (Little, Brown & Co. 1908) § 1455: “Directors cannot vote by proxy.” (citations omitted). See also id. § 1458: “At a Directors’ meeting, votes by proxy cannot be received or counted, and the Directors have no power by resolution to alter this rule.” (citations omitted).

• 2 WILLIAM MEADE FLETCHER, FLETCHER’S CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 427: “The directors of a corporation generally can not vote at directors’ meeting by proxy, but must be personally present and act themselves . . . . Their personal judgment is necessary, and they can not delegate their duties or assign their powers.” (citations omitted).

• HOWARD H. SPELLMAN, A TREATISE ON THE PRINCIPLES OF LAW GOVERNING CORPORATE DIRECTORS (Prentice-Hall 1931) at 344: “It is the personal attention of the directors to the corporate affairs that underlies the purpose of the director’s meetings. It follows that a director may not deprive the stockholders of their right to his judgment by assigning his power to vote to another. Accordingly, it is unanimously held that directors must appear and vote in person and that they cannot give proxies to others, whether or not members of the board, to act in their place.”

• ABA CORPORATE DIRECTOR’S GUIDEBOOK at p. 18: “A director is expected to commit the required time to prepare for, attend regularly and participate (in person when feasible) in board and committee meetings. A director may not participate or vote by proxy; personal participation is required (which may take place by telephone or video when in-person participation is not possible.)”

• MOD. BUS. CORP. ACT § 8.20, comment.

► An exception to this general prohibition on director proxy voting is Louisiana, which permits it in particular corporations that so provide in the articles of incorporation. See LA. CODE 12 § 81(E).