Tuesday, May 28, 2013
More on Hobby Lobby v. Sebelius
Last November, the District Court for the Western District of Oklahoma issued its decision in Hobby Lobby Stores v. Sebelius, 870 F. Supp.2d 1278 (W.D. Okla. Nov. 19, 2012), wherein it held that Hobby Lobby Stores, Inc. was not likely to prevail on the merits of its argument that aspects of the Patient Protection and Affordable Care Act requiring it to cover contraceptives in the health insurance plan provided its employees violated rights protected by the Free Exercise Clause of the Constitution.
The Tenth Circuit Court of Appeals, before a panel of eight as contrasted with the typical three judges, heard oral arguments on the appeal of this case on May 23, 2013.
Friday, May 17, 2013
Accord and Satisfaction Defense Rejected
In a January, 2013 decision, the Kentucky Court of Appeals rejected an accord and satisfaction defense to efforts to collect on an open account. Pop’s Classic Cars, LLC v. The Engine Warehouse Parts, Inc., No.2011-CA-001378-MR (Ky. App. Jan. 25, 2013).
Pop’s Classic Cars and (presumably – the opinion does not specify) its member, Dennis Sowder (collectively “Sowder”) signed a credit agreement with Engine Warehouse Parts (“Engine Warehouse”) pursuant to which Sowder agreed to pay the invoices and, if not, pay related attorney fees.
Sowder ran up a bill of $18,517.87. Engine Warehouse and Sowder entered into a payment plan to resolve the open account, but Sowder did not make the agreed payments. He did, however, tender a check in the amount of $236.16 containing an annotation that everyone agreed constituted an effort to claim “accord and satisfaction” of the entire debt.
When Engine Warehouse filed suit, Sowder filed an answer, but did not claim as an affirmative defense accord and satisfaction. He did, however, in response to Engine Warehouse’s motion for summary judgment, assert accord and satisfaction. In response, Engine Warehouse argued that (1) accord and satisfaction must be affirmatively pled in the answer, and in that Sowder failed to do so the defense was waived and (2) the amount in question was undisputed and liquated, for which accord and satisfaction is not available.
The Court of Appeals agreed with Engine Warehouse on both bases. As to the unavailability of accord and satisfaction as to liquidated amount, the Court wrote:
Sowder’s delivery of a $236.16 check to a lockbox as full payment for $18,517.87 owed to Engine Warehouse was not a good accord and satisfaction. Engine Warehouse submitted undisputed evidence that when Sowder tendered the check, the amount owed was liquidated and undisputed.
Procedurally, the accord and satisfaction defense satisfaction was waived because it was not presented in the answer or in an amended answer. “It is undisputed that Sowder did not plead accord and satisfaction in the answer to Engine Warehouse’s complaint and, therefore, the defense was waived.”
The Court also dismissed an argument that the credit agreement at issue was an unenforceable adhesion contract, and that Sowder was not bound by the terms on its reverse. As to the claim that it is an unenforceable adhesion contract, the court found rather that it reflected a “commercial transaction favorable to both parties.” As to the terms set forth on the reverse of the agreement, the Court found that the language on the face of the contract specifically referenced and incorporated that on the reverse, thereby making it part of the agreement entered into by Sowder.
Thursday, May 16, 2013
"There was never a better man in the office"
These are the words of Eustace Chapuys, Spanish Ambassador to the Court of Henry VIII, reporting on the resignation of Sir Thomas More from the office of Chancellor of England. Today is the anniversary of that resignation, it taking place this day in 1532.
More succeeded Thomas Cardinal Wolsey as Chancellor, Wolsey having fallen after the Trial at Blackfriars failed to yield a verdict from Cardinal Campaggio that Henry's marriage to Catherine of Aragon was invalid ab initio. More's time as Chancellor was far from smooth in that his opposition to the "Divorce" and Henry's increasing efforts to gain control over the English church pushed him away from Henry. Still, Henry recognized the genius of his Chancellor, and is know to have rejected earlier efforts by Thomas to resign.
In the spring of 1532 Parliament had accepted the Supplication of the Clergy and passed legislation against Church law including praemunire. Finally, on May 16, More presented the Great Seal to Henry, and it was accepted.
Wednesday, May 15, 2013
Wisconsin Court of Appeals Addresses (and Rejects) Claim for Breach of Obligation of Good Faith and Fair Dealing in Expulsion of Members and Redemption of Their Interests
Wisconsin Court of Appeals Addresses (and Rejects) Claim for Breach of Obligation of Good Faith and Fair Dealing in Expulsion of Members and Redemption of Their Interests
A recent decision of the Wisconsin Court of Appeals is focused primarily upon the assertion by certain expelled members of an LLC that their expulsion and the redemption of their interests violated the contractual obligation of good faith and fair dealing. Summary judgment was granted the defendants by the trial court and that summary judgment was affirmed by the Wisconsin Court of Appeals. Berndt and Gretzinger v. Berndt, Mattison and Hybrid Fitness, LLC, Appeal No. 2011AP2425 (March 21, 2013).
Hybrid Fitness, LLC organized in Wisconsin, had four members, namely Robin Berndt, Chris Gretzinger, Ryan Berndt (the opinion does not detail the relationship between Robin Berndt and Ryan Berndt), and Sarah Mattison. The LLC was owned 24% by Robin, 24% by Chris, 25% by Sarah, and 27% by Ryan. All were engaged in the operation of the fitness facility.
For reasons that are not detailed in the decision, there was a breakdown in the relationship between the four members. Ryan and Sarah, constituting 52% of the total ownership of the LLC, terminated Ryan and Chris as employees thereof and sent them notice of numerous breaches of the company’s operating agreement. That operating agreement provided that, upon a default thereof, the other members would have an option to acquire the defaulting member’s ownership interest for the “Determined Value.” Due to this being an early-stage business, the Determined Value at the time Robin and Chris were expelled from the LLC was zero. Robin and Chris brought an action challenging their termination and buy-out. With respect to their challenge to the summary judgment granted given as to the claimed breach of the obligation of good faith and fair dealing, the Court wrote:
On appeal, Robin and Chris argue that summary judgment was erroneously granted on the breach of good faith and fair dealing claim because genuine issues of fact exist as to the motivation for purchasing their shares. Robin and Chris concede the operating agreement “did indeed authorize Members to purchase the ownership units of other Members in the event of ‘any breach of the agreements or provisions contained in this Agreement.’” Nevertheless, they insist their breaches were wholly immaterial and resulting in no actual harm to Hybrid Fitness. Furthermore, they contend the manner in which Ryan and Sarah acted on their breaches “raise further suspicions about their true reasons for first terminating Robin and Chris and then re-purchasing their ownership shares.”
The court easily set this argument aside. While agreeing that every contract contains an obligation of good faith and fair dealing, it was undisputed that their removal as members was done in accordance with the operating agreement, as was the re-purchase of their shares. On that basis, the court found that there was no breach of the obligation of good faith and fair dealing. The court also distinguished a number of cases in which employees or commissioned independent contractors had been terminated with the expectation of depriving them of accrued, but as the time of termination unpaid, compensation. Under the law of Wisconsin, those payments would still due and owing. No such effort to deprive Robin and Chris of accrued benefits was here at issue. Rather:
The present case is not one of an agent suing a principal, or an employee suing an employer for terminating the relationship to avoid paying benefits or compensation previously earned. It is a case of co-owners of a business suing other co-owners for expelling them not of an accrued benefit, but of their ownership interest and potential future profits. When the terms of the operating agreement are complied with then sufficient grounds for termination of the ownership under the operating agreement existed, as in this case, the defendants’ motives in exercising their prerogatives under the agreement are not material.
Clearly this panel of the Wisconsin Court of Appeals was not going to allow the parties to an agreement to avoid its application. Also, this is useful guidance with respect to the obligation of good faith and fair dealing. As has been reviewed in innumerable decisions, the implied covenant informs the performance of contractually agreed-to terms, filling as necessary interstices therein. It will not, however, affect the addition of terms to the agreement or limit a party’s rights that are provided for therein.
Yet Again, an LLC Must be Represented by Counsel
In a recent decision, the U.S. District Court for the Southern District of South Dakota has directed an LLC to retain counsel on its behalf with the possible penalty of a default judgment if it fails to do so. Peterson v. RVS Line L.L.C., Civ. No. 12-4185-KES (D. S.D. Feb. 13, 2013).
In this case, the President of RVS Line, L.L.C. filed an answer on behalf of the L.L.C. in response to a negligence action brought by Peterson, The President of RVS Line, Solovyev was not himself an attorney. The Court, reviewing the long line of cases holding that a corporation may appear in court only through an attorney, applied those same principles to this limited liability company. As such, RVS Line was directed to hire counsel to file an answer on its behalf. Failure to do so, it was warned, could result in Solovyev’s answer being stricken and a default judgment being entered against the company.
Member Who “Resigns” in Breach of Operating Agreement is Still a Member for Purposes of Diversity Jurisdiction
Member Who “Resigns” in Breach of Operating Agreement is
Still a Member for Purposes of Diversity Jurisdiction
A recent decision from New York turned upon the question of whether a member who purported to resign in breach of the operating agreement of an LLC would continue to be treated as a member of the company for determining its citizenship for purposes of diversity jurisdiction. In this case, the resignation having been in breach of the operating agreement, that member’s citizenship is attributed to the LLC, resulting in a lack of diversity. Dumann Realty LLC v. Faust, No. 09-CIV-7651(JPO) (S.D. N.Y. Jan. 3, 2013).
Faust was a member of Dumann Realty, LLC. Dumann, along with other plaintiffs, brought suit against Faust asserting various claims including breach of the operating agreement and breach of the common law duty of good faith and fair dealing. Faust filed a series of counter-claims. The Court, raising sua sponte the question of diversity jurisdiction, considered whether Faust’s citizenship would be attributed to the LLC. Where that the case, diversity jurisdiction would be lacking.
In this case, pursuant to Dumann’s operating agreement, a member was empowered to withdraw from the company upon either of the consent of two-thirds of the other members or on at least six months’ prior written notice. No consent to the withdrawal was ever given, and Faust did not give six months’ notice of his withdrawal. In fact, this improper withdrawal was the basis of the claim for breach of the operating agreement filed by Dumann. In that Faust’s resignation was outside the terms of the operating agreement, it was deemed ineffective. In consequence, at the time the suit was brought, the LLC was attributed with Faust’s citizenship, and for that reason diversity jurisdiction was lacking. The suit was therefore dismissed.
Iowa Court of Appeals Addresses Authority to Bind LLC
A recent decision of the Iowa Court of Appeals considered the question as to whether the contract purportedly signed on behalf of the LLC thereby bound it, which question was raised in response to a suit asserting the LLC with breach of that same contract. In this case, the court found that the contract at issue had not been validly signed on behalf of the LLC, and therefore, it could not be liable for breach thereof. Three Minnows, LLC v. Cream, LLC, No. 3128/12-0591 (Iowa Ct. App. April 10, 2013).
Three Minnows, LLC filed suit against Cream, LLC for breach of a management contract. At trial, at the close of the plaintiff’s case-in-chief, Cream moved for and was awarded a directed verdict on the basis that the person who had purported to bind Cream on the subject agreement did not have authority to do so.
Three Minnows, a manager-managed LLC, was owned 99% by Dean Quirk, operated a bar named “Drink.” Cream was formed as a manager-managed LLC to purchase and operate an existing bar, “The Union Bar.” The managers of Cream were George Wittgaff III and Jeff Maynes; Martin Maynes, Jeff’s brother, was a 30% of Cream, but was not a manager thereof at the time at issue. Quirk, on behalf of Three Minnows, wanted to contract out the management of Drink. After a meeting that included Martin and Jeff Maynes, Martin Maynes exchanged a number of management agreements and similar contracts with Quirk, each signed by Martin in his capacity as a member of the LLC. In addition to the management agreements, there was a license agreement signed by George Wittgaff II, allowing the Three Minnows’ bar, formerly named Drink, to operate under the name The Union Bar. Cream only learned of the management agreements with respect to what had been “Drink” when it received a letter from Three Minnows’ attorneys claiming breach of the management agreement and substantial damages.
Three Minnows filed suit against Cream for breach of the management agreements. In response to Cream’s motion for a directed verdict, the Court found that it did not “believe that any reasonable juror – there are no inferences that could be drawn from the granting of that authority [for the licensing agreement] that would lead a reasonable person to believe that Martin Mayne was authorized to execute the subsequent [management] agreement.”
After discussing procedural matters such as the standard of review and the standard for granting a directed verdict, the Court turned itself to the question of agency. Under Iowa’s LLC Act, which is an adoption of the Revised Uniform Limited Liability Company Act, a member, as such, is not an agent of the limited liability company. Then drawing distinctions between actual and apparent agency authority, the Court turned to Cream’s articles of organization, which provide in part:
Unless authorized to do so by the operating agreement, or by a manager or managers of the Company, no member, agent or employee of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable pecuniarily for any purpose.
The Court noted that these articles of organization were of public record and that Dean Quirk was aware that he could access the articles to determine whether a member, as a member, had the authority to bind the LLC. He made no effort to do so, and that was held against him.
Not being a manager of the LLC, Martin did not have the express authority to sign contracts on its behalf or otherwise bind it to a third party. As such, he had no actual authority to act on the LLC’s behalf.
Turning to the question of apparent authority, the Court found it would be impossible to infer that Martin Maynes had authority to execute the management agreements on behalf of Cream. While he may have been granted the authority to sign the licensing agreement (the opinion is internally inconsistent as to who signed the licensing agreement, Wittgaff or Martin), that did not extend to other potential agreements between the companies. Ultimately:
Three Minnows failed to satisfy its burden of proving an agency relationship existed regarding the management agreements and therefore the grant of a directed verdict was proper.
Curiously, this opinion does not anywhere discuss a claim by Three Minnows against Martin Maynes for breach of warranty of authority. See Restatement (Third) of Agency § 6.10. That may be consequent to the fact that at one point he told Quirk that he did not have authority to bind the LLCs, and Quirk accepted the documents anyway, explaining he needed them merely to arrange financing. As such, he may have been estopped from making a claim based upon the warranty of authority.
The take-away from this decision and others of its nature is that LLCs have the capacity to determine, by private ordering, who will be the agents thereof. While a corporation has officers with the capacity to bind the company, and a partnership has partners, each of whom has capacity to bind the partnership, LLCs can be set up in myriad ways that, depending upon the state law, may define the agency authority on behalf of the venture and in so doing bind third parties. Ergo, whenever entering into a contract with an LLC, it is crucial to do an investigation of who has authority to bind that venture. Failure to do so may preclude enforcement of that agreement. While in most cases a claim against the purported agent for breach of their warranty of authority will be viable, seldom will the agent’s personal assets be sufficient to provide adequate remedy.
Friday, May 10, 2013
New York Court Addresses Relationship of Membership Interest Redemption,
Employment Agreement, Insolvency Defense
In a recent decision, a New York Federal District Court considered a pair of issues, namely (a) how an agreement for the redemption of a membership interest should be interpreted in relationship to an employment agreement between the redeemed member and the LLC and (b) the application of the insolvency defense to an otherwise agreed-upon redemption. In this instance, the Court found the termination of the employment agreement did not limit the redeemed member’s rights to the full agreed-upon redemption consideration and that the LLC had failed to put forth probative evidence of its solvency if required to perform. Dauphin v. Crownbrook ACC LLC, No. 12-CV-2100 (ARR) (SMG) (E.D.N.Y. April 10, 2013).
Dauphin had been a member of Crownbrook ACC LLC, as well as an employee thereof. He withdrew as a member from the LLC, taking a promissory note in the amount of $1.25 million. In addition, he entered into a new employment agreement with the LLC providing for annual compensation of $60,000. The LLC made the first few payments under the promissory note, but thereafter defaulted. After the default, Dauphin withdrew from the employment agreement, and he thereafter filed suit for damages flowing from the LLC’s breach of the promissory note. The LLC, in defense, raised a pair of arguments. First, it argued that under the terms of the employment agreement, Dauphin, in effect, waived his claims for further payments under the note. In addition, the LLC argued that payment on the note would render it insolvent and that it is precluded from paying on a redemption obligation when insolvent.
As for the argument that Dauphin’s termination of the employment agreement effected as well a termination of obligations under the note, the company relied on the following provision:
In the event that [Dauphin’s] employment is terminated … by [Dauphin] for any reason … prior to the Termination Date [i.e., the due date of the last payment under the promissory note], [Dauphin] shall only be entitled to receive the compensation payment [i.e., any compensation accrued but not yet paid under the employment agreement]. The compensation payment shall be paid to [Dauphin] in a single lump sum on the 30th day following such termination of [Dauphin’s] employment. [Dauphine] shall not be entitled to any other payments or benefits from the Company. After the termination of [Dauphin’s] employment under this Section 6.4, the obligations of the Company under this Agreement to make any further payments or provide any benefits herein to ]Dauphin] shall thereupon cease and terminate.
Following Dauphin’s termination of the employment agreement, the company argued that the sentence “[Dauphin] shall not be entitled to any other payments or benefits from the Company” effectively terminated its obligation to make further payments under the note. The Court, applying various principles of contract construction, found that the limitations of Section 6.4 of the employment agreement referred solely to payments due under the employment agreement and did not impact upon the company’s obligations to perform under the note. The Court noted as well that it is “inconceivable” that Dauphin would have made payments under the note contingent upon his continued employment by the LLC pursuant to an agreement terminable at will by either party. Further, the Court noted that the promissory note itself did not reference the employment agreement. With that in mind, the Court found that the note unambiguously created an obligation of the LLC not dependent on the terms of the employment agreement.
With respect to the insolvency defense, for reasons that are never made clear in the opinion, the defendant LLC cited the provision of the New York Business Corporation Law which provided that a corporation may not redeem its shares when it is either insolvent or when the redemption would render the corporation insolvent. See N.Y. Bus. Corp. L. § 513(a). The defendant properly pointed out that it is the New York LLC law, not the law governing business corporations that controls and that § 508 thereof imposing limitations upon distributions to a member; it does not, unlike the corporate law, specifically reference redemptions. In further support of its argument as to insolvency, the LLC issued very supplemental information, including an affidavit that the Court found could not have been based upon personal knowledge and which as well noted the inaccuracy of certain of the financial statements submitted therewith. Having raised the prospect of insolvency as an affirmative defense, the Court found that the LLC had “produced no affirmative evidence of insolvency in its opposition to plaintiff’s partial summary judgment motion,” and summary judgment was granted.
Thursday, May 9, 2013
Suit Dismissed Where Member Lacked Authority to Initiate Same
In a recent decision from the U.S. District Court for Nevada, suit purported to have been brought on behalf of an LLC was dismissed on the basis that the member initiating the action lacked authority to being either a direct action in the LLC’s name or a derivative action. Gashtili v. J.B. Carter Properties II, LLC, Case No. 2:12-CV-00815-MMD-PAL, consolidated with Case No. 2:12-CV-1156-MMD-PAL (D. Nev. April 23, 2013).
Carter, a member of J.B. Carter Properties II, LLC, initiated a suit in the LLC’s name against Nashrollah Gashtili and Integrated Dynamics Solutions, Inc. In response to a motion that all of the claims of Carter and the LLC should be dismissed for lack of capacity to bring same, the requested relief was granted.
The Court began by citing what it described as “Hornbook law” that an individual member of an LLC “has no interest in specific LLC property, and only has standing to bring a derivative action.” In this instance, the LLC, organized in Nevada, had no separate operating agreement, and as such was governed by the default rules of the Nevada LLC Act. Thereunder, management of an LLC is vested in the members in proportion to their capital contributions as adjusted from time to time. In order to bring suit on the LLC’s behalf against the defendant, Carter “had two options: (1) obtain approval for this lawsuit from [the] LLC’s members based on their proportional interest; or (2) bring a derivative lawsuit on behalf of the corporation (sic – LLC).” Holding only 44% of the interest in the LLC, and not having acquired the approval of any other members to bring the lawsuit, Carter did not have authority to so act. While the Nevada LLC Act provides for the bringing of derivative actions, there is a demand/utility requirement. The complaint did not indicate either the demand had been made or why a demand would be futile. As such:
Carter’s Complaint fails to plead facts sufficient to demonstrate that [the] LLC’s management brought this lawsuit on behalf of the corporation (sic – LLC) or that Carter satisfied the prerequisites for bringing this lawsuit as a derivative action. Accordingly, the Complaint must be dismissed.
Under the Kentucky LLC Act as adopted in 1994, KRS § 275.340 provided, inter alia, that a lawsuit could not be challenged on the basis that the party or parties initiating it lacked actual authority to do so. This provision, as is made by clear to the comments to section 1102 of the Prototype LLC Act, upon which KRS § 275.340 is referenced, was intended to apply exclusively to suits between an LLC and a third-party. The only time this provision was, however, applied by a Kentucky Court, it was used inter-se the LLC to avoid dismissal of the lawsuit brought by one member against another member when that suit was clearly barred by the controlling operating agreement. In consequence thereto, KRS § 275.340 was deleted. Still, while suit may be initiated by the LLC pursuant to KRS § 275.335, a third-party may question the authority of those bringing the suit, in which their capacity will be ascertained under general applicable rules. While Kentucky’s LLC Act is silent as to derivative actions, such necessarily exists under the rules of equity, equity being incorporated expressly into the LLC Act. See KRS § 275.003(1).
Tuesday, May 7, 2013
Indiana Court of Appeals Upholds Preliminary Injunction Against Former Employee
In a recent decision, the Indiana Court of Appeals upheld a preliminary injunction issued against a former employee who began competing with his employer prior to leaving its service and who thereafter continued to use its trade secrets. Snyder v. Classic Restaurant Services, LLC, No. 29A02-1207-CT-592 (Ind. App. April 3, 2013).
Synder was an employee of Classic Restaurant Services, LLC, it being in the restaurant HVAC, refrigeration and cooking equipment industry. Snyder was not subject to a non-compete agreement and was, it would appear, an at-will employee. His terms of employment allowed him to “moonlight” on residential jobs.
In July 2011, Synder convinced two of Classic’s customers, both Subway sandwich shops, to shift their work to him individually. That fall he proceeded with organizing a competing venture by purchasing and stocking a new van, obtaining business cards and insurance, and prepare marketing materials. In February 2012, he organized a new LLC under the name A Plus Air, LLC.
While still employed by Classic, Snyder solicited additional of Classic’s clients to shift their business to him. At the same time he failed to relay to Classic certain customer service complaints. When one Classic customer said they would shift their business to Snyder’s new company, he asked that they delay doing so until he had opportunity to use up his Classic paid vacation days.
Having completed his vacation, Snyder gave notice of his resignation, effective immediately. While he returned to Classic the company-provided van and service equipment, he kept a listing of all of Classic’s vendors and customers, that document having been marked “Confidential;” Snyder continued using that information in soliciting Classic’s customers.
Another Classic employee, Doris Warswick, the office manager, was aware that Snyder was planning to set up his own competing business and soliciting its customers. Immediately before Snyder submitted his resignation, Warswick e-mailed to him confidential documents from Ruby Tuesday’s, one of Classic’s largest customers. She then resigned from Classic.
Class brought suit against Snyder (this decision is silent as to any claims made against Warswick) seeking a temporary restraining order and a temporary injunction, both being based upon tortious interference with business relationships or misappropriation of trade secrets. After an evidentiary hearing a temporary injunction was entered, it precluding Snyder from having any business dealings with specific Classic customers; he could otherwise participate in his chosen industry. Snyder appealed.
Snyder’s first argument was that, consequent to his resignation, no further fiduciary obligations limited his conduct, and such, there was not a reasonable likelihood of success on the merits of a claim for tortious interference. Under Indiana law, tortious interference requires “some independent illegal action,” which may be a breach of the duty of loyalty. Under Indiana law, an employee owes a duty of loyalty to his or her employer. It upholding the temporary injunction, the Court of Appeals wrote:
On appeal, Snyder does not dispute that he actively violated his fiduciary duties to Classic during the last year of his employment. He argues only that this prior misconduct should not affect his ability to complete with Classic following the termination of his employment. In other words, Snyder claims essentially that once he resigned, he became free to enjoy the fruits of his breach of fiduciary duties. Snyder cites no relevant authority in support of this assertion.
In a related context, we have held that termination of a fiduciary relationship does not shield the fiduciary from its duties or obligations concerning “transactions that have their inception before the termination of the relationship.” Abdalla v. Qadorh-Zivan, 913 N.E.2d 280, 286 (Ind. Ct. App. 2009) (quoting Thompson v. Ctr. Ohio Cellular, Inc., 639 N.E.2d 642, 649 (Ohio Ct. App. 1994)), trans. denied. See also Sandage v. Planned Inv. Corp., 772 P.2d 1140, 1144 (Ariz. Ct. App. 1998) (“Where a transaction has its inception while the fiduciary relationship is in existence, an employee cannot by resigning and not disclosing all he knows about the negotiations, subsequently continue and consummate the transaction in a manner in violation of his fiduciary duties.”) (quoting Microbiological Research Corp. v. Muna, 625 P.2d 690, 695 (Utah 1981)); Duane Jones Co. v. Burke, 117 N.E.2d 245-46 (N.Y. 1954) (“[n]or is it a defense that the defendants-appellants did not avail themselves of the benefit of the customers … diverted from plaintiff until after the defendants [had left employment]”; the benefits realized by defendants’ new company were “merely the results of a predetermined course of action” and early breach of fiduciary duty. Although Snyder’s fiduciary relationship with Classic terminated when the fiduciary relationship ended, he may not capitalize on opportunities (i.e., customers) that he usurped or transactions that had their inception before the termination of the fiduciary relationship.
This decision, had the case arisen in Kentucky, should have been no different. Under Kentucky law, an employee, even one at will, owes a fiduciary duty of loyalty to his employer. See Stewart v. Kentucky Paving Co., Inc., 557 S.W.2d 438 (Ky. App. 1997). This is also the law under the new restatement of employment law that is currently in the works. See Restatement (Third) of Employment Law § 8.01(a) (tentative draft no.3 (April 8, 2010)). Kentucky applies the same law as does Indiana with respect to claims of tortious inference with contract.
Snyder continued his appeal on the basis that Classic was not likely to prevail on its claim of violation of trade secrets law. The court was able to set that concern aside on the basis that the grounds for the temporary injunction were in the alternative. Having upheld it on the basis of tortious interference, whether or not the additional grounds cited were valid was essentially a moot point.
Monday, May 6, 2013
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 15th 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). In recognition of this event, new members of the Pontifical Swiss Guard are sworn in on May 6.
There was earlier this year an event unique to the Guard, namely the recognition of a Pope’s retirement. Benedict XVI left the Vatican as Pope, flying to the Castle Gandolfo. The Swiss Guard accompanied him to the castle and there stood guard. When the moment his resignation became effective, and Benedict became not Pope but Pope Emeritus, the Guard left there station at the castle and returned to Rome. While the Vatican has its security forces, and they no doubt continued to provide protection for Benedict, the Swiss Guard serve the Pope.
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.
Sunday, May 5, 2013
A decision out of the U.S. District Court for the Western District of Michigan has held that a limited liability company must be represented by legal counsel, and may not be represented by a member thereof. Vandenburg & Sons Furniture, Inc. v. Katchen, Case No. 1:12-CV-1021 (W.D. Mich. Feb. 12, 2013).
Katchen, on behalf of Affordable Life Limited Liability Company, filed a motion to dismiss an action for lack of personal jurisdiction and improper service. Katchen, a member of the LLC, was not himself an attorney. Beginning with the rule that a corporation may be represented only by licensed counsel, the Court applied the same rule to an LLC:
In his motion to dismiss for lack of personal jurisdiction, Katchen also requests that the Court dismiss the Complaint against Affordable for lack of personal jurisdiction and improper service of process. However, corporations are required to be represented in court by licensed attorneys. Detroit Bar Ass’n v. Union Guardian Trust Co., 282 Mich. 707, 711, 281 N.W. 432, 433 (1938) (“While an individual may appear in proper person, a corporation, because of the very fact of its being a corporation, can appear only by attorney, regardless of whether it is interested in its own corporate capacity or in a fiduciary capacity.”); Peters Prod., Inc. v. Desnick Broad Co., 171 Mich. App. 283, 287, 429 N.W.2d 654, 655 (1988). Katchen does not purport to be an attorney licensed to practice before this Court. Therefore, even if Katchen is a former agent of Affordable, a limited liability company, he may not assert a motion to dismiss for lack of personal jurisdiction or improper service on behalf of Affordable. Thus, the Court will not consider Katchen’s arguments on behalf of Affordable.
Friday, May 3, 2013
Wisconsin Court of Appeals Addresses (and Rejects) Claim
for Breach of Obligation of Good Faith and Fair Dealing in Expulsion
of Members and Redemption of Their Interests
for Breach of Obligation of Good Faith and Fair Dealing in Expulsion
of Members and Redemption of Their Interests
A recent decision in the Wisconsin Court of Appeals focuses primarily upon the assertion by certain expelled members of an LLC that their expulsion and the redemption of their interests violated the contractual obligation of good faith and fair dealing. Summary judgment was granted the defendants by the trial court, and that summary judgment was affirmed by the Wisconsin Court of Appeals. Berndt and Gretzinger v. Berndt, Matttison and Hybrid Fitness, LLC, Appeal No. 2011 AP 2425 (March 21, 2013).
Hybrid Fitness, LLC, organized in Wisconsin, had four members, namely Robin Berndt, Chris Gretzinger, Ryan Berndt (the opinion does not detail the relationship between Robin Berndt and Ryan Berndt), and Sarah Mattison. The LLC was owned 24% by Robin, 24% by Chris, 25% by Sarah and 27% by Ryan. All were engaged in the operation of the fitness facility.
For reasons that are not detailed in the decision, there was a breakdown in the relationship between the four members. Ryan and Sarah, constituting 52% of the total ownership of the LLC, terminated Robin and Chris as employees thereof and sent them notice of numerous breaches of the company’s operating agreement. That operating agreement provided that, upon a default thereof, the other members would have an option to acquire the defaulting member’s ownership interests for the “Determined Value.” Due to this being an early-stage business, the Determined Value at the time Robin and Chris were expelled from the LLC was zero.
Robin and Chris brought an action challenging their termination and buy-out. With respect to their challenge to the summary judgment given as to the claimed breach of the obligation good faith and fair dealing, the Court wrote:
On appeal, Robin and Chris argue that summary judgment was erroneously granted on the breach of good faith and fair dealing claim because genuine issues of fact exist as to the motivation for purchasing their shares. Robin and Chris concede the operating agreement “did indeed authorize Members to purchase the ownership units of other Members in the event of ‘any breach of the agreements or provisions contained in this Agreement.’” Nevertheless, they insist their breaches were “wholly immaterial and resulted in no actual harm to Hybrid Fitness.” Furthermore, they contend the manner in which Ryan and Sarah acted on their breaches “raised further suspicions about their true reasons for first terminating Robin and Chris and then re-purchasing their ownership shares.”
The Court easily set this argument aside. While agreeing that every contract contains an obligation of good faith and fair dealing, it was undisputed that their removal as members was done in accordance with the operating agreement, as was the re-purchase of their interests. On that basis, the Court found that there was no breach of the obligation of good faith and fair dealing. The Court distinguished a number of cases in which employees or commission independent contractors had been terminated with the expectation of depriving them of accrued but as of the time of termination unpaid compensation. Under the law of Wisconsin, those payments were still due and owing. No such effort to deprive Robin and Chris of accrued benefits was here at issue. Rather:
The present case is not one of an agent suing a principal, or an employee suing an employer for terminating the relationship to avoid paying benefits or compensation previously earned. It is a case of co-owners of a business suing other co-owners for expelling them and depriving them not of an accrued benefit, but of their ownership interests and potential future profits. When the terms of the operating agreement are complied with and sufficient grounds for termination of the ownership under the operating agreement existed, as in this case, the defendants’ motives in exercising their prerogatives under the agreement are not material.
This panel of the Wisconsin Court of Appeals was not going to allow the parties to an agreement to avoid its application. Also, this is useful guidance with respect to the obligation of good faith and fair dealing. As has been reviewed in innumerable decisions, the implied covenant informs the performance of contractually agreed to terms, filling as necessary interstices therein. It will not, however, affect the addition of terms to the agreement or limited a party’s rights that are provided for therein.
Thursday, May 2, 2013
A recent case has considered the question of whether one should ascribe to an LLC the citizenship of a now-deceased member whose estate has brought suit against the LLC and the remaining member. In this instance, the court determined that the citizenship of the deceased member is not relevant for purposes of diversity jurisdiction. Tormey v. Mourning Dove, LLC, No. CIV-12-1328-D (W.D. Okla. April 9, 2013).
Tormey was a member of Bridgewater Office Park, LLC (“Bridgewater”) in which Mourning Dove, LLC (“Mourning Dove”) was the other member. Subsequent to Tormey’s death, his personal representative initiated suit against both Bridgewater and Mourning Dove alleging breach of the operating agreement as well as fiduciary duties existing thereunder. The basis for bringing the suit in federal court was diversity jurisdiction.
Seeking to have the suit dismissed, the defendants argued that diversity was lacking in that Bridgewater would have the citizenship of Tormey, and on that basis complete diversity would be lacking. In response, Tormey’s representative argued that diversity jurisdiction is determined as of the time the suit is filed. She, as his personal representative, would be attributed with his citizenship. Conversely, the operating agreement of Bridgewater provided that his status as a member terminated upon his death, whereupon he became a creditor of the LLC. No other member of the LLC having the same citizenship as Tormey/his personal representative, “because the lawsuit was not filed until after his death,” she argued “complete diversity of citizenship existed when the lawsuit was filed.”
The operating agreement described death as an “event of dissociation” triggering a series of call rights in the remaining members to acquire the membership interests of the deceased. The agreement provided also “[f]rom and after the Event of Dissociation, the Dissociated Member shall be considered a creditor of the Company . . . and all other statutory and contractual rights associated with the former Member’s interest shall cease.”
Confirming that complete diversity existed, the Court wrote:
Thus, under the clear terms of the operating agreement, Mr. Tormey was no longer a member of Bridgewater following his death, and his estate holds the status of a creditor of Bridgewater. The only remaining member of Bridgewater is Mourning Dove, and Mourning Dove is a citizen of Oklahoma for diversity purposes. As Mr. Tormey’s personal representative, Plaintiff is deemed to be a citizen of Utah. Because Mr. Tormey was no longer a member of Bridgewater at the time this lawsuit was filed, his Utah citizenship would not be attributed to Bridgewater, and diversity of citizenship existed when this lawsuit was filed on November 29, 2012.