Agreement to Arbitrate Entered into Through Power of Attorney Held Enforceable

Agreement to Arbitrate Entered into Through Power of Attorney Held Enforceable

      There has been in Kentucky, over the last year, a significant string of cases in which reference of a matter to arbitration was avoided on the basis that the arbitration agreement was entered into by a purported agent who did not have the authority to bind the principal to arbitration.  See, e.g., Kindred Nursing Centers Limited Partnership v. Leffew, 2013 WL 1688361 (Ky. App. April 19, 2013), reviewed HERE on April 23, 2013; LP Pikeville, LLC, v. Pinson, 2013 WL 3335013 (Ky. App. June 28, 2013), reviewed HERE on July 11, 2013, and Kindred Hospitals L.P. v. Clark, No. 2011-CA-001663-MR (Ky. App. Feb. 15, 2013), reviewed HERE on March 11, 2013.  There are now decisions from both the Eastern and Western Districts of Kentucky in which the opposite result was achieved, namely arbitration was ordered.  The first of those decisions is Oldham v. Extendicare Homes, Inc., 2013 WL 1878937 (W.D. Ky. May 3, 2013), and the second GGNSC Vanceburg LLC v. Taublee, 2013 WL 4041174 (E. D. Ky. Aug. 7, 2013).

      In both of these decisions, the plaintiff sought to avoid arbitration by reference to the Kentucky Supreme Court’s decision in Ping v. Beverly Enterprises, Inc., 376 S.W.3d 581 (Ky. 2012), wherein the Court held that there was no agreement to arbitrate where the power of attorney did not enable the agent to enter into contracts on behalf of the principal, being restricted rather to financial and health-care decisions.  In these two cases, in contrast, the power of attorney at issue expressly allowed the agent to bind the principal to a contract.  In part, the power of attorney in the Oldham decision included the power to “make contracts” and “generally to do and perform for me and in my name all that I might do if present.”  From there, the Court was able to conclude that:

The arbitration agreement to participate in alternative dispute resolution for any tort, negligence, or gross negligence is undoubtedly a “contract” or “agreement” that [the agent] had authority “make and sign.”  2013 WL 1878937, *3.

      The GGNSC Vanceburg, LLC decision also included an extensive discussion of Colorado River abstention and the question whether the federal court should be involved in ordering arbitration in that was already pending a state court action, in this instance the federal court determining it could act.  The power of attorney at issue allowed the agent “make contracts,” “make and sign in my name any and all contracts or agreements,” “institute or defend suits concerning my property or rights” and “generally to do and perform for me and in my name all that I might do if present.”  In reliance upon this language, the court had no problem determining that the agent could property bind the principal to arbitration of an agreement.

      Clearly the language of the instrument designating the agent and the agent’s authority is crucial.

       Before closing, a small quibble must be raised with respect to the GGNSC Vanceburg, LLC decision.  It is stated therein that:

LLCs are required to file annual reports in order to comply with KRS 275.115, which in turn requires that LLCs maintain a registered office in Kentucky.

With due respect to Judge Forester, this statement, obviously dicta, is incorrect.  LLCs are required to file annual reports because every LLC is subject to the Kentucky Business Entity Filing Act, and subject to certain exceptions therein, every entity so subject is required to file an annual report with the Kentucky Secretary of State.  See KRS § 14A.6-010(1).  The requirement to name a registered agent is an independent duty; the LLC Act, at KRS § 275.115 requires each LLC to name a registered office and agent that comply with KRS § 14A.4-010.  Even without KRS § 275.115 the obligation to appoint a registered office and agent would exist by reason of KRS § 14A.4-010.  As such, the obligation to file an annual report and the obligation to designate a registered office and agent are independent of one another; there is nothing about the annual report requirement that requires an entity to designate a registered office/agent, or vice versa.

Kentucky Supreme Court Denies Review of Decision on Standing to Pursue Derivative Action

Kentucky Supreme Court Denies Review of Decision

on Standing to Pursue Derivative Action

      On July 11, 2012, I reported on the decision of the Kentucky Court of Appeals in Watkins v. Stockyards Bank Trust Co., 2012 WL 2470692 (Ky. App. June 29, 2012), an opinion designated as “To Be Published.”  Therein, the Court of Appeals determined that the beneficiary of a trust that was itself a shareholder of a corporation did not have standing to bring this particular derivative action.  Specifically, the Court determined that the plaintiff did not “fairly and adequately represent the interest” of the similarly situated shareholders for a variety of reasons including the universal opposition of the shareholders to the suit and the fact that the plaintiff had requested settlement of the claims in return for a payment to himself as contrasted with recovery by the corporation.  Here is a LINK to that review.

      By Order dated August 21, 2013, the Kentucky Supreme Court denied discretionary review.  Unfortunately, however, the Supreme Court, without other explanation, ordered that the decision of the Court of Appeals not be published.

Biting the Hand That Feeds You

Biting the Hand That Feeds You; New Jersey Court Rejects Effort by General Partners to Sue Limited Partners Who Brought a Derivative Action Against Those Same General Partners

      A recent New Jersey decision considered the curious facts of, in response to a suit brought by the limited partners against the general partners of a failed real estate venture, those general partners counter-suing the limited partners alleging breach of fiduciary duty, waste and violation of the covenant of good faith and fair dealing.  The court, on sound grounds, rejected the viability of that counterclaim.  Baratta v. Deerhaven, LLC, 2013 WL 3486743 (N.Y. Super. L. July 12, 2013). 

      After the failure of a real estate venture in which they had invested $1.9 million, the limited partners brought suit against the general partners asserting that they had usurped certain partnership opportunities.  In response, those general partners filed a counterclaim asserting that the limited partners’ suit constituted waste, breach of fiduciary duty and breach of the covenant of good faith and fair dealing.  Ultimately, that entire counterclaim was dismissed.

      On the motion to reconsider the dismissal of the counterclaim, the court noted that the defendant general partners had been unable to identify a single case in which an investor was successfully sued for filing  lawsuit to recover his or her investment.  As to the claim of breach of fiduciary duty, while noting that partners generally owe such duties to one another, such is imposed upon the majority/control partner.  In that the limited partners were not majority owners nor in any position of dominance, they were not bound by any fiduciary duty to not bring suit. 

       Because the counterclaim was so lacking in merit, the trial court's award of sanctions was affirmed.

The Nitty-Gritty of Partnership Dissolution

The Nitty-Gritty of Partnership Dissolution

        A recent decision from Connecticut highlights the nitty-gritty, as well as the problems that come about from imprecise agreements, of a partnership dissolution.  Estate of Richard L. Goldblatt v. Cuselias, 2013 WL 4056528 (Conn. Super. July 25, 2013). 

       This decision sets forth the resolution of accounts upon the dissolution of a partnership.  The partnership at issue extended over only two and one-half years, ending in December 2003.  The complaint was not filed until 2005,  and shortly thereafter the plaintiff attorney passed away; the suit was continued by his estate.  Trial did not take place until 2010.

      The primary value of this decision would appear to be its explanation of the laborious task that is involved in recreating accounting records after the fact and the application of an dissolution agreement that was less precise than it might have been, especially in that it did not require each of the partners to promptly remit funds and account for actions with respect to individual files.  Ultimately, the judgment against the defendant was relatively nominal; it is clear that a significant expense was incurred in order to recreate the accounting records.  A carefully written agreement might have avoided this and similar problems.  In addition, that agreement should be drafted by independent counsel – as goes the adage “The lawyer who represents himself has a fool for a client.”

Prior Liens Are Not a Defense to the Entry of a Charging Order

Prior Liens Are Not a Defense to the Entry of a Charging Order

      In a recent decision from Nevada, there was rejected the suggestion that charging orders should not be issued with respect to interest in a company on the basis that federal tax liens are already pending against those assets.  Renteria v. Canepa, No. 3:cv-00534-RCJ-CWH (D. Nev. June 19, 2013).

      In this case, Canepa executed a series of promissory notes to a trust of which, it would appear, Renteria was the trustee.  When those notes went into default, judgment was rendered against Canepa.  Seeking to collect on the judgment, Renteria sought charging orders against Canepa’s interest in two Nevada corporations, FQ Men’s Club, Inc. and Monkey Bars, Inc., as well as his interest in a Nevada LLC, Western Properties of Nevada.

      Initially, with respect to the charging orders sought against the corporations, Nevada has a unique statute that, with respect to certain closely-held corporations, imposes charging order protections.  As such, at least under Nevada law, a judgment-creditor cannot seize the stock of a Nevada corporation.

      Substantively, Canepa stated that federal tax liens were already recorded against him individually and against FQ Men’s Club, Inc., asserting, in the words of the Court, that in light of these superior tax liens “execution on the judgment [in favor of Renteria] against those assets would be inappropriate.”  The Court did not agree.  Rather, it found that:

It is only for this Court to determine whether the charging order requested is available under state law, which it is.  If the IRS or the entities to be charged wish to challenge Plaintiff’s subsequent attempts to enforce the charging orders under federal priority statutes, that is a separate matter.

       Another case involving the question of how a charging order would interface with federal tax liens was Cadle Company v. Ginsberg, 2002 WL 725500 (Conn. Supr. Mar. 28, 2002).  Therein, the Court first considered and rejected the notion that the LLC must be a party to the action in which a charging order is requested, determining that “An action seeking a charging order does not impact the rights or interests of a [LLC] to the degree necessary to require that it made a party in order for the action to proceed.”  Likewise, the Cadle Company Court dismissed the assertion that the IRS be made a party on the basis that it has or may claim a lien on the interest in the LLC, as “any charging order will be subject to any superior rights that the [IRS] may have in the defendant’s interest in the [LLC].”

       Still, the scope of the charging order entered in Renteria is open to questions (the text of the charging order is part of the Court’s decision).  Specifically, it precluded the LLC from making any loans to the defendants.  In addition, the charging order required the subject companies to supply the holder of the charging order with copies of the company’s operating agreement, federal and state tax returns and financial statements.  The Court’s authority to make these orders, especially with respect to the inspection of company books and records, is at best questionable.

Kentucky Supreme Court Will Not Be Reconsidering the Cinelli Rule

Kentucky Supreme Court Will Not Be Reconsidering the Cinelli Rule

       On October 23, 2012, I reviewed the decision of the Kentucky Court of Appeals in Spears v. Kentucky Insurance Agency, Inc., 2012 WL 4839015 (Ky. App. Oct. 12, 2012), wherein a highly fractured court (the three-judge panel issued three separate opinions) considered the application of Kentucky’s “all or nothing” rule as embodied in Cinelli v. Ward, 997 S.W.2d 474 (Ky. App. 1998).  Spears, who argued that a letter of intent was sufficient to create a binding contract, that position being rejected by the Court of Appeals, applied to the Kentucky Supreme Court for discretionary review.

        On August 21, the Kentucky Supreme Court denied discretionary review.  As such, the Cinelli Rule remains in place.

Challenges to Charging Order Rejected

Challenges to Charging Order Rejected

      In a recent decision from a Connecticut Court, numerous challenges to the entry of a charging order, including an assertion that the court did not have necessary jurisdiction over a foreign LLC, were rejected.  Rockstone Capital, LLC v. Marketing Horizons, Ltd., 2013 WL 4046597 (Conn. Supr. July 17, 2013).

      This action arose out of a post-judgment effort to collect upon a stipulated judgment.  Rockstone Capital sought charging orders against the interest that Ashton Edwards owned in two LLCs, Marketing Ventures Worldwide, LLC and Nonprofit Solutions, LLC.  With respect to the charging order sought against Nonprofit Solutions, Edwards asserted that the court could not enter the charging order on the basis it was a foreign, not a Connecticut, entity, and that the court lacked personal jurisdiction over it. 

      With respect to the first jurisdictional argument, the court (correctly) noted that it is not an issue of whether it has jurisdiction over the entity in which the interest is to be charged, but whether it has jurisdiction over the holder of that interest.  In this instance, and setting aside the question that Edwards could not, of himself, challenge jurisdiction over Nonprofit Solutions, LLC, such was simply not necessary:

Defendant Edwards offers no authority for his assertion that a court must have jurisdiction over a [LLC] in order to enforce a judgment against an individual who is a member of that entity.

      Secondly, the court determined that its ability to issue a charging order pursuant to the Connecticut LLC Act applied equally to an LLC organized under New York law. 

This Court finds no constraints in § 34-171 [the charging order provision of the Connecticut LLC Act] which limit application solely to domestic limited liability companies.

      This opinion is useful on both of these grounds, especially the latter.  With respect to those states that do not specify in their charging order statutes that the entity is not a necessary party to the proceeding, this decision answers the question of whether it need be.  A ruling to similar effect is Bank of America, N.A. v. Freed, 2012 WL 6725894 (Ill. App. I Dist., Dec. 28, 2012), which decision was reviewed here on January 4, 2013.  Kentucky is an exemption to this ambiguity – all of the Kentucky charging order provisions expressly provided that the entity is not a necessary party to the proceeding in which a charging order is sought.  See, e.g., KRS § 275.260(6).

      Of greater import is the court’s determination that it may issue a charging order, in accordance with domestic law, against an interest in a foreign entity.  Some have argued, typically without citation to any authority, that a charging order may only be issued in accordance with the laws of the jurisdiction of organization, and it is even suggested that only the courts of the jurisdiction of organization have the capacity to enter a charging order.  From there arises the claim that those states that have restricted the scope of their charging order laws  are effective as asset protection vehicles in other jurisdictions.  For example, the 2012 Ohio and 2013 Delaware amendments to those LLC acts aim to preclude equitable remedies for enforcement of the charging order lien.  Decisions such Rockstone Capital undercut that assertion.  Rather, if a judgment is issued in another jurisdiction, it may apply its charging order law even if that law would give the judgment-creditor more rights than would be afforded under the law of the LLC’s jurisdiction of organization.  As we have been reminded by my friend Jay Adkisson, “All remedies law is local,” and the charging order is a remedy.

A Horse, a Horse, My Kingdom for a Horse

A Horse, a Horse, My Kingdom for a Horse

      Today is the anniversary of the Battle of Bosworth, the final major battle of that English civil war titled The War of the Roses.  It was at this battle that King Richard III, variously identified as the last King from the House of Plantagenet or the House of York, fell, he being the last English King to die in battle.  Henry Tudor, the victor, then became King Henry VII.

      Henry’s victory in battle was if anything surprising.  Richard’s forces outnumbered those of Henry.  Meanwhile, Lord Stanley held his own force; if combined with that of Henry, that of Richard would have been out-numbered.  At the same time, Richard held Stanley’s son as a hostage.  As battle was about to commence, Richard sent word to Stanley that if Stanley did not join with him, he would execute Stanley’s son.  Stanley replied, “I have other sons.”  Richard’s attack upon Henry’s position nearly succeeded, Henry’s standard-bearer William Brandon being killed at Henry’s side.  Richard’s fate was sealed when the Stanley family and its retainers, having until then not committed to either side, rode against Richard’s infantry as his cavalry was separately moving against Henry.

      William Brandon’s son Charles, ultimately Duke of Suffolk, would become the best friend of Henry VIII.

      Earlier this year Richard’s remains were located in the course of excavations under a parking lot that now covers part of what was the Greyfriars (Franciscian) Church in Leicester, England.  In sad testimony to the modern age, litigation is now pending in England as to whether Richard should be re-buried in Leicester Cathedral, apparently consistent with the terms of the agreement by which the archaeological work was performed and other British law, or in York where certain claimed descendants of Richard assert he would want to have been buried.  A resolution of that dispute under the rules of trial by combat might well have merit.

No Arbitration of Claim for Judicial Dissolution

No Arbitration of Claim for Judicial Dissolution

      In a decision from the Superior Court of Pennsylvania, it has been held that notwithstanding a comprehensive (i.e., “all dispute”) agreement to arbitrate in an LLC’s operating agreement, a member’s action for judicial dissolution of the LLC on the basis that it is “not reasonably practicable to carry on the business of the LLC in conformity with the agreement” is not subject to arbitration.  In re:  L & S IBC, LLC, No. 639-WDA 12 (Supp. Ct. Pa. Jan. 23, 2013). 

      Stephen Kovac and Laura Ebbert were the two members of L & S, a Pennsylvania LLC.  Ebbert held a 51% in the LLC while Kovac held the balance of a 49%.  After a breakdown in their romantic relationship, Kovac filed suit for judicial dissolution of the LLC on the basis that it was no longer reasonably practicable to operate the company in accordance with its operating agreement, he alleging that she had barred him from the company facilities and refused his involvement in company decision making.  She moved to have the action for judicial dissolution set aside in favor of arbitration, that being provided for in the operating agreement with respect to “all disputes.”  The trial court denied arbitration, and she appealed.

      The Superior Court upheld the determination of the trial court.  Essentially, while the arbitration clause of the operating agreement would be upheld with respect to any disputes under the operating agreement, an action for judicial dissolution arises outside of its confines.  Rather, the mechanism for judicial dissolution under the statute provides “an independent mechanism for the judicial dissolution of a limited liability company.”

Alienage Jurisdiction and a Very Foreign Entity

Alienage Jurisdiction and a Very Foreign Entity

      A recent decision of a Wisconsin Federal District Court reviewed several issues with respect to alienage jurisdiction, including the troubling question of how to classify non-U.S. entities.  Principle Solutions LLC v. Feed.Ing BV, Case No. 13-C-223 (Ed. Wisc. June 25, 2013).

      On the basis of alienage jurisdiction (28 USC § 1332(a)(2)), Principle Solutions LLC brought suit against Feed.Ing BV.  Ultimately, Principle got nearly everything wrong in its allegation of jurisdiction.

      With respect to itself, Principle pled that it was organized and had its principal place of business in Wisconsin, and that all of its members are considered citizens of Wisconsin for purposes of assessing jurisdiction.  With respect to the assertion of the LLC's principal place of business, the court noted that issue is “irrelevant.”  Rather, Principle was directed to “allege each member of the [LLC] and its citizenship.”

      With respect to the defendants, Principle asserted in the complaint:

Defendant Feed is, upon information and belief, a limited liability company located in The Netherlands and organized in accordance with Dutch law.  Upon information and belief, no member of Feed is a resident of the State of Wisconsin.

      With respect to the assertions as to Feed, first, they were criticized for being based upon “information and belief,” the court writing that “It is well-settled that a plaintiff claiming diversity jurisdiction may not do so on the basis of information and belief, only personal knowledge is sufficient.”  Second, the court directed that an amended complaint be filed that as well provides factual information regarding the nature of a Dutch Besloten Vennootschap and whether it should, for purposes of jurisdictional analysis, be treated as a corporation or as an unincorporated entity, and from there set forth the necessary allegations as to citizenship.

Kentucky Has Some Strange Laws

Kentucky Has Some Strange Laws

      Notwithstanding that it is manifestly unconstitutional as a violation of the Establishment Clause, Kentucky has a statute, KRS § 158.170, which mandates that a portion of the Bible is to be read daily in every classroom in Kentucky’s public schools.  This statute has been unconstitutional since the 1963 decision of the United States Supreme Court in Abington School District v. Schempp, 374 U.S. 203, but it remains on the books.

Non-Party to Arbitration Agreement Able to Require Arbitration of Related Dispute

Non-Party to Arbitration Agreement Able to Require Arbitration of Related Dispute

        A recent decision of the Kentucky Court of Appeals held, inter alia, that a person, not a party to an agreement calling for arbitration of disputes, does have the right to compel arbitration.  In this instance, the individual controlled an unincorporated association that was alleged to be his alter-ego.  While he was ultimately held liable for the organization’s obligations, he did initially have the right to resist that determination on the basis of an arbitration clause.  Scott v. Louisville Bedding Co., ___ S.W.3d ___ , 2013 WL 3480312 (Ky. App. June 12, 2013). 

         Louisville Bedding entered into certain agreements with United Re Trusts and United Re AG dealing with certain aspects of the self-insured health insurance plan maintained by Louisville Bedding.  Scott, an individual, was the president of United Re AG; on its behalf he signed the relevant agreements.  There arose a dispute as to whether the United Re Trust or United Re AG committed to purchase or otherwise put in place reinsurance with respect to certain Louisville Bedding healthcare exposures.  Ultimately, Louisville Bedding brought suit naming both of the United Re companies and Scott as defendants; it was alleged that the United entities were themselves simply alter-egos of Scott.  While Scott did file an answer asserting that the dispute was subject to arbitration, neither of the United entities filed an answer, and default judgments were entered against them.  Scott moved to have the dispute referred to arbitration.  After some back and forth as to whether the Kentucky or the Federal Arbitration Act would control, it was ultimately held by the trial court that:

Because Scott signed the Agreement in his capacity as “President” of United Re AG, he was not a party to the Agreement; therefore, he could not enforce the arbitration provisions. 

Scott then appealed.

      For the Court of Appeals, the question came down simply to whether or not Scott was either a party to or beneficiary of the contract:

[W]e first address whether Scott was a party to the agreement or at least a beneficiary of its terms entitled to enforce the arbitration provisions.  Bedding admits that it entered into an agreement to arbitrate any claims it has against the United Re Entities; however, [Louisville Bedding] argues it did not enter into an agreement to arbitrate any claims it might have against Scott.  Scott argues that even though he was not a signatory to the Agreement, he is entitled to enforce it in his capacity as an employee of United Re AG.  2013 WL 3480312, *3. 

            The Court of Appeals would ultimately agree with Scott. 

First, in its complaint, Bedding alleges that Scott and United Re AG are one and the same.…  In short, Bedding treats Scott and the United Re Entities as if they are one and the same. Bedding cannot, on the one hand seek the benefit of the Agreement and, on the other hand, disavow the arbitration provisions that are part of the Agreement.

The Court of Appeals as well applied several federal decisions to the effect that an employee may enforce the arbitration agreement entered into between the employer and a third party.

      Ultimately, however, Scott did not prevail.  Under the Kentucky Arbitration Act, agreements to arbitrate with respect to insurance are not enforceable, and the Court found that the products sold by the United Re entities were in fact insurance.  Being unenforceable under the Kentucky Arbitration Act, the Court considered whether the agreement to enforce should alternatively be enforced under the Federal Arbitration Act.  There, engaging in an analysis of the McCarran-Ferguson Act, it was determined that there was no preemption.  Ultimately, Scott was afforded the right to enforce the terms of an arbitration provision that was otherwise unenforceable.

Filing Suit Against a Dissolved LLC

      Doug Batey has reviewed a recent Tennessee decision addressing the ability to sue a dissolved LLC. HERE IS THE LINK to that review.

What is the Consequence of Not Paying in the Agreed Capital Contribution

      Peter Mahler has reviewed a recent Delaware decision addressing the consequences of not making an agreed capital contribution as well as efforts by some of the members to open similar businesses without the participation of all the members of the first venture.

      His posting can be found HERE IS THE LINK

No Charging Order for Subsequently Acquired Interest

No Charging Order for Subsequently Acquired Interest

      In a recent decision from Michigan, the court denied an application for a charging order that would attached to interests in LLCs or limited partnerships subsequently acquired by the judgment-debtor.  Presidential Facility, LLC v. Debbas, Case No. 09-12346 (Ed. Mich. April 12, 2013).

      A judgment of $9.5 million was entered against the defendants, including Campbell.  The plaintiff then sought a charging order against Campbell, seeking to “encumber any interest in limited partnerships or limited liability companies in which Defendant Campbell has or may subsequently acquire.”  Reviewing the Indiana charging order statute as set forth in its LLC Act, the court, while certainly agreeing that a charging order could be placed against an interest currently held by a judgment-debtor, did not find that it provided for a similar order against a to-be-acquired interest.  Rather, the plaintiff was invited to apply for a charging order if and when Campbell acquires an interest in an LLC or LP that he did not hold at the time this order was requested.

Caesar, Vercingetorix and the Battle of Alesia

Caesar, Vercingetorix and the Battle of Alesia

      Its not often that these topics get a piece on NPR, so I thought a HERE IS THE LINK to the story might be appropriate.

      The story of the battle was well documented by Caesar in The Gallic Wars.   Caesar and the legions trapped the Gaul's army in Alesia.  In order to enforce the blockade they built a wall around nearly the entire town (some geography kept that walls from being complete).  Fearing the arrival of a relieving army, the Romans then built another wall around their siege lines (again nearly complete except where limited by geography).     Hence the Romans were intentionally in the space between the two walls.  A relieving army did arrive, and the Romans had to fight both the army on the outside of the fence as well as the forces in Alesia that were trying to break out.  The battles were bloody, and the outcome was a Roman victory.  Vercingetorix was brought back to Rome to be paraded at a Triumph held for Caesar.  He was then killed (likely strangled).