Friday, October 25, 2013

Court of Appeals New Opinion in Ziegler v. Knock is a Confused Mix of Partnership and LLC Law, Fiduciary and Contract Law

      In October, 2012,  the Court of Appeals issued its opinion in Ziegler v. Knock, affirming the trial court’s determination that there had been a breach of duty in accepting a secret commission but dismissing the action based upon a choice of venue provision in the subject agreements.  Ziegler v. Knock, No. 2008-CA-002160-MR, 2012 WL 5273999 (Ky. App. Oct. 26, 2012).  By its determination of improper venue the Court’s decision as to breach of fiduciary duty was rendered dicta.  That decision was reviewed here in Decision of Trial Court Reversed, Inter Alia, For Lack of Jurisdiction (posted Nov. 19, 2012).
      Presumably on a motion for reconsideration, the Court of Appeals issued a new decision in this case.  See Ziegler v Knock, No. 2008-CA-002160-MR (Jan. 18, 2013).  Like the prior holding it is designated “Not to be Published.”  On October 16, 2013, the Kentucky Supreme Court denied discretionary review.  The petition for discretionary review was restricted to the proper venue question.  That being the case I held off on a substantive review of the decision.  Ultimately it has serious issues.
      In this decision, on the basis that the question of venue had not been raised in a timely manner, the Court of Appeals determined that Ziegler had waived that defense.  Ergo, the Court of Appeal’s affirmance of the trial court’s ruling stands, and the matter would not be re-litigated in Ohio.
      Which brings us back to the primary point, namely Ziegler’s breach of duty.  The contract between Ziegler and Knock contained a warranty that Ziegler was not to receive a direct or indirect commission on the acquisition of the property to be acquired by TZG III, LLC, the acquisition vehicle formed by Zigler and Knock.  In fact, Ziegler received a $72,000 commission on the sale.
      While the ultimate determination that Ziegler’s conduct was improper is without question correct (at this point I’m not considering the effect of the release signed by Knock and Ziegler), the analysis applied by the Court of Appeals mixes concepts that are and should be distinct from one another.  Ergo, it might be a case of right answer, wrong reason.

      First is the issue of structure and the beneficiaries of fiduciary duties.  David and Richard Knock were the members of Knock Investments, LLC.  Ziegler Group, LLC appears to have been wholly-owned by Michael Ziegler.  Knock Investments, LLC and Ziegler Group, LLC in turn formed and were the members in TZG III, LLC; that LLC was the actual purchaser of the strip mall.  The agreement to form TZG III, LLC was labeled a “Membership Interest Purchase Agreement,” and it was in that document Ziegler represented he was not receiving a commission.
      One point of contention was whether the Knocks could individually be plaintiffs, or whether only Knock Investments, LLC had standing.  The Knocks were not individually parties to the Membership Interest Purchase Agreement.  Still the trial court allowed them to proceed individually, a decision not set aside by the Court of Appeals in either of its decisions.
      The problem with this conclusion is that it is manifestly erroneous.  The rights and claims of an LLC are not the property of its members.  See, e.g., KRS § 275.010(2) (LLC is a legal entity distinct from its member); id. § 275.250 (interest in an LLC is personal property); id. § 275.240(1) (property of LLC is that of the LLC and not of the members); Chou v. Chilton, Nos. 2009-CA-002198-MR, 2009-CA-002284-MR, 2012 WL 6526184 (Ky. App. Nov. 16, 2012) (individual member of LLC could not in his own name bring claim for breach of fiduciary duties owed to the LLC); R.C. Tway Co. v. High Tech Performance Trailers, LLC, 2013 WL 842577 (W.D. Ky. Mar. 6, 2013) (claim for misappropriation of company assets belongs to the LLC); Bobbitt v. Russellville Mobile Park, LLC, No. 2007-CA-00684-DG (Ky. App. Sept. 12, 2008, modified Oct. 17, 2008) (member of LLC, seeking to represent the LLC in court proceeding, engaged in unauthorized practice of law; member was not an attorney and the interests of the LLC were not those of the member). 

      Knock Investments, LLC, being a party to the Membership Interest Purchase Agreement, had standing to object to its breach.  The Knocks, not being parties to that agreement and absent other facts (e.g., intended third-party beneficiaries) not set forth in the opinion, had no standing.
      Turning to the substance of the dispute, Ziegler represented that he was not earning a commission on the sale of the property.  In fact he did receive a commission, and the court properly held him to account for his breach of that covenant.  The problem is in the muddled manner in which it did so.
      In explaining Ziegler’s liability for accepting the commission the Court wrote:
… because Knock Investments, LLC is a closely held entity owned by the Knocks individually, and because the Knocks were asserting claims of fraud and misrepresentation in their individual capacities rather than through the corporate entity, they had standing to assert their individual interests as members of the limited liability corporation. Ziegler and TZG have cited no statutory law or case law in support of their assertion that this conclusion was erroneous. The trial court's rulings are presumptively correct, and the burden rests with the appellants to demonstrate error. Boggs v. Burton, 547 S.W.2d 786 (Ky. App. 1977).

… The trial court determined that if Ziegler had not breached his fiduciary and contractual duty to forgo a commission, the purchase price of Park Plaza could have been lowered. In the alternative, the court determined that at the very least, the Knocks were entitled to a percentile share of the commission which they could have reinvested in the project or disposed of in some other manner. The basis of the court's conclusion on this issue is that as partners with mutual fiduciary duties, the Knocks and Ziegler were vested with the right to reap the benefits of their joint venture commensurate with their percentile ownership interest. Since Ziegler secretly received a 2% commission, the court concluded that equity demanded that the Knocks also benefit from that commission commensurate with their percentile ownership interest in the venture. The court awarded to the Knocks a 74% interest in the commission based on their 74% interest in the project. Since the relationship of partners imposes upon each the obligation of good faith and fairness with respect to partnership affairs, Betts v. Smither, 310 Ky. 402, 220 S.W.2d 989 (Ky. App. 1949), and since Ziegler unduly benefitted from his acceptance of a commission in violation of his fiduciary duty and the Membership Interest Purchase Agreement, we find no error in the court’s determination that the Knocks are entitled to a pro rata share of the commission.

      The Court, in these few sentences, mixed a significant number of concepts.
      First, even between those who stand in a fiduciary relationship with one another, is a breach of a contractual obligation a breach of fiduciary duty?  Assume that the receipt of a secret commission is a breach of fiduciary duty.  As was here the case that limitation was reduced to a contractual obligation.  There is then a breach of the obligation.  Does there now arise a decision for breach of fiduciary duty, breach of contract, or both?  The Court seemed to assume both, but it is not obvious that is correct.  Fiduciary duties are gap-fillers.  Conceptually, where the express contract addresses the point, there is no gap to be addressed by fiduciary obligation? 
      Second, what was the source of the alleged fiduciary duty?  The covenant was that Ziegler, and not Ziegler Group, LLC, was not receiving a commission.  Was Ziegler a member in a member-managed LLC or a manager of a manager-managed LLC?  The opinion does not say.  On the basis that the Ziegler Group, LLC was wholly-owned by Ziegler, is he being held responsible for discharge of the LLC’s fiduciary obligations?  The opinion does not say.   Did the operating agreement identify Ziegler as a fiduciary?  The opinion does not say.  Has USACafes been adopted as Kentucky law?  Essentially we are told that Ziegler violated a fiduciary duty without being provided any direction as to the source of that duty.
       Third, where was the breach of fiduciary duty?  Even assuming Ziegler was a fiduciary and that he accepted the commission, it does not necessarily follow that there was a breach.  What fiduciary duty was violated?  Subject to “First” above I have no doubt there was a breach, but the Court needs to tell us what it was and why.
       Fourth, if this is a case about a breach of fiduciary duties rather than contractual duties, why did the court use a contract measure of damages, namely putting the Knocks back in the same position they would have been but for the breach?

       Fifth, and going back to the point above on standing, whey is the recovery to the individual Knocks rather than either the TZG III, LLC or to Knock Investments, LLC?  Chou v. Chilton and the statutory law make clear that injury to the LLC, in this instance TZG III, LLC (if there had been no commission to Ziegler then TZG III, LLC’s purchase price for the subject property would have been lower), is to be addressed for the account and benefit of the LLC.
       Sixth, from where came this reference to “partners”?  Members in an LLC are members and they owe the duties and enjoy the benefits of members as defined by the LLC Act.  Partners in a partnership are partners and they owe the duties and enjoy the benefits of partners as defined in the law of partnerships.  Partnership law, by its express terms, does not apply among the members in an LLC.  See KRS § 362.1-202(2).  Yes, in LLCs there exists an obligation of good faith and fair dealing, but that is a principle of contract law that is confirmed by the LLC Act.  See KRS § 275.002(7).  And as good faith and fair dealing is a principle of contract law (and not the law of fiduciary duty), it cannot be the basis for the fiduciary duty Ziegler violated.

      It is clear that Ziegler’s conduct was improper, but this decision does little to illuminate why or to provide guidance for the analysis of future disputes.
      Which brings us back to the question of the effect of the mutual release, an issue to which the existence of the fiduciary duty is crucial.  Assuming a third-party independent relationship, a mutual release will be binding upon each party, and each party, in entering into such an agreement, is bound and required to look out for its own interest.  Where, in contrast, one bound by a fiduciary relationship seeks a release from the beneficiary of that relationship, the release is effective if and only if the fiduciary has made full and complete disclosure to that beneficiary.  See, e.g., Restatement of (Third) of Agency § 8.05.   Ziegler sought to avoid liability in this dispute by refereeing a mutual release that had been entered into.  Knock sought to avoid the application of that release on the basis that Ziegler was a fiduciary.  While the court may, ultimately, have been normatively correct in setting aside the release on the basis that Ziegler owed a fiduciary duty, its analysis was so muddled that little can be taken away from it.  For example, if Ziegler owed a fiduciary relationship, had that situation so broken down by the time that the mutual release was entered into that Knock had no right to expect Ziegler to be acting in a fiduciary, as contrasted with an arms-length independent, role?  Such determinations matter.  They were, however, ignored in this decision.


Sixth Circuit Court of Appeals Again Rejects Challenge to Contraceptive Mandate of the Affordable Care Act

Sixth Circuit Court of Appeals Again Rejects Challenge
to Contraceptive Mandate of the Affordable Care Act


      Yesterday, a unanimous panel of the Sixth Circuit Court of Appeals issued its decision in Eden Foods, Inc. v. Sebelius, No. 13-1677, 2013 WL 5745558 (6th Cir. Oct. 24, 2013), therein rejecting claims that the Contraceptive Mandate of the Affordable Care Act violates the religious rights of either the employer or of the shareholders of the corporate employer.  This decision follows upon the earlier holding of the Sixth Circuit in Autocam Corp. v. Sebelius, ___ F.3d ____, 2013 WL 5182544 (6th Cir. Sept. 17, 2013). 
     Michael Potter, identified as the Chairman, President and sole shareholder of Eden Foods, and Eden Foods itself sought exemption from the Contraceptive Mandate of the Affordable Care Act.  He and the corporation were denied a temporary injunction precluding enforcement of the obligations under the Mandate, and this appeal to the Sixth Circuit sought a reversal of that determination.  The Sixth Circuit held that order denying the issuance of a temporary injunction was correct.
      Rejecting the assertion that the obligation of compliance with the Mandate as imposed upon the corporation somehow imposes as well an obligation on Potter as the sole shareholder thereof, the Court wrote:
The Affordable Care Act’s contraceptive mandate imposes duties and potential penalties upon Eden Foods only, not upon Potter, despite his status as the sole shareholder of the corporation.  By incorporating his business, Potter voluntary forfeited his rights to bring individual actions for alleged corporate injuries in exchange for the liability and financial protections otherwise afforded him by utilization of the corporate form.  Adoption of Potter’s argument that he should not be liable individually for corporate debts and wrongs but still should be allowed to challenge, as an individual, duties and restrictions placed upon the corporation would undermine completely the principles upon which our nation’s corporate laws and structures are based.  Slip op. at 9
      With respect to a claim that the Mandate violates the Free Exercise rights of Eden Foods, a corporation, that may be addressed under the Religious Freedom Restoration Act, the Court noted that “[s]uch an assertion necessarily raises a threshold issue: ‘whether a for-profit secular corporation is able to engage in religious exercise under the Free Exercise Clause of the First Amendment and the RFRA,’” citing Conestoga Woods, 724 F.3d 377, 381 (3rd Cir. 2013).  Noting that Autocam had already held that a for-profit corporation “‘is not “person” capable of “religious exercise” as intended by RFRA,’” the Eden Foods court had no problem determining that the corporation of itself has no protected religious rights.

The Battle of Agincourt

Saint Crispin’s Day
Today is the anniversary of the Battle of Agincourt, taking place in 1415 between the forces of France and her various allies and the invading English forces under the command of King Henry V. Shakespeare, by having his character Henry V repeatedly referred to the day of the battle as St. Crispin’s Day, otherwise saved this obscure saint from being lost, save for experts in hagiography, to the mist of history.
The English forces, likely numbering in the range of 7,000, were compelled to do battle with a far superior French force likely numbering in excess of 20,000. All else being equal, the English force should have expected to be annihilated. As is typical in the case of significant historical events, however, all things were not equal. The terrain favored the English, requiring the French forces to attack uphill over a recently plowed field that, consequently to the recent rain, was more mud than dirt. The French knights and men at arms, slogging their way uphill, were a “target rich environment” for the rain of arrows let loose by the English longbows; assuming Henry’s forces numbered 7,000, likely 5,800 were longbowmen, each releasing four to six arrows a minute.
Another factor was the very size of the French force worked to its disadvantage in that those behind continued pressing forward, hoping for their moment of glory, even while those at the front were being slaughtered. It was not quite the situation suffered by the Romans at the hands of Hannibal at Cannae, but then likely it was not hugely better.
While comparative casualty figures are effectively impossible to ascertain, it is clear that the French were badly mauled with significantly more casualties than the English. Further, a significant number of French nobles fell in contrast to only two English nobles.
 For an excellent review of the battle, see Juliet Barker's Agincourt.
Today is also the anniversary of the storied “charge of the light brigade” in the Crimean War. That particular engagement was, for the English forces, significantly less successful.

Thursday, October 24, 2013

Coincidence is not Causation

Coincidence is not Causation

      A recent opinion by the Sixth Circuit Court of Appeals emphasizes the rule that mere coincidence is not equivalent to the showing of causation necessary for a suit to proceed.  Fish Farms Partnership v. Winston-Weaver Co., Inc., ___ Fed. Appx. ___, 2013 WL 4268103 (6th Cir. Aug. 16, 2013).
      Fish Farms Partnership operated a tomato farm in Tennessee.  After the 2008 growing season, they brought suit against Winston-Weaver and Crop Production Services alleging that defective fertilizer had harmed the crop.  Crop Production was dismissed on a not otherwise-described stipulation, and the trial court ultimately granted summary judgment to Winston-Weaver, concluding that Fish Farms had not produced admissible evidence supporting the assertion that Fish Farms “actually suffered the harm it alleged.”  While there was testimony that excess nitrogen from fertilizer is bad for tomato plants, Fish Farms had failed to demonstrate that its plants were themselves damaged by excess nitrogen.
     The brief opinion of the Sixth Circuit also cautions against hearsay evidence incorporated into expert witness testimony.

No Further Review of Gibson v. Ready Mix Concrete

No Further Review of Gibson v. Ready Mix Concrete

      On April 23, I reported on the decision of the Kentucky Court of Appeals rendered in Gibson v. Ready Mix Concrete, a case substantially about partnership by estoppel.  On October 16, 2013, the Kentucky Supreme Court denied discretionary review of this decision.

Federal Court Mis-steps in Assessing Citizenship of LLC with Business Trust as a Member

      I would encourage you to review Doug Batey’s review of WBCMT 2007-C33 N.Y. Living, LLC v. 1145 Clay Ave. Owner, LLC, No. 13 Civ. 2222(WHP), 2013 WL 4017712 (S.D.N.Y. July 30, 2013) and its assessment of the citizenship, for purposes of diversity, of an LLC having a business trust as its sole member.  Here is a LINK to that review.
As I commented on Doug’s blog, the Court mis-stepped and looked at only the trustee rather than the trust of which the trustee was the trustee, noting:
I'm in agreement with Doug on this one. If the trustee is acting as a principal then under the Navarro decision only the citizenship of the trustee matters. Where the action in is the name of the trust or when the action is brought by an unincorporated association of which a trust is a member then under the Carden decision the citizenship of all members, including all trust beneficiaries, matter. Here the LLC is the principal party to the action. The trust is a member through its trustee. Ergo the citizenship of every trust beneficiary should be attributed to the LLC.
The opportunity here missed (well, beyond that of the court ab initio applying the correct rule) is the court considering how one determines the diversity citizenship of a series entity. Is it based only upon the beneficiaries associated with the series or of all beneficiaries of the trust regardless of individual association?


Monday, October 14, 2013

Court of Appeals Upholds Security Interest Where Description of Property was Technically Inaccurate

Court of Appeals Upholds Security Interest Where
Description of Property was Technically Inaccurate

      In a decision rendered last Friday, the Kentucky Court of Appeals has upheld the security interest taken by a bank in personal property where the UCC-1 of record with the Kentucky Secretary of State accurately described the collateral, but where the incorrect serial number was listed.  Bishop v. Alliance Banking Co., No. 2012-CA-001605-MR (Ky. App. Oct. 11, 2013).  This opinion has been designated “To Be Published.”
      Timothy and Candace Elkins delivered a promissory note to Alliance Bank, which note was partially secured by a 1999 Case backhoe.  Alliance filed a UCC-1 with the Kentucky Secretary of State perfecting their security interest in that backhoe, describing it as a “1999 Case Backhoe 580L” and reciting a serial number of 1100249697.  Later that year Elkins defaulted on the note, whereupon the bank filed an action for breach and to obtain possession of the backhoe.  Elkins never defended the action, and a default judgment was entered in favor of the bank.  In addition to an award of damages and for attorney’s fees, the trial court determined that Alliance held a perfected security interest in the backhoe and granted it possession thereof.
      It turned out, however, that between entering into the note/collateral agreement with Alliance and Alliance bringing action for default, Elkins had sold the backhoe to Bishop.  Alliance, upon learning of this sale, moved to amend its complaint to add Bishop as a defendant.  Also, at the time of finding out about the sale of the collateral to Bishop, Alliance learned that Timothy Elkins’ representation of the serial number, which serial number was recited on the financing statement, was incorrect; rather, the correct serial number JJG0249697.  Bishop would argue that the incorrect serial number on the UCC-1 meant, inter alia, that he was not on notice of Alliance’s security interest and that he otherwise purchased the backhoe in good faith, for value and without knowledge of a prior claim thereon.  This position was rejected by the trial court, and that rejection was affirmed by the Court of Appeals.

      Notwithstanding the fact that the serial number listed on the UCC-1 of record with the Kentucky Secretary of State was incorrect, the two serial numbers overlapped by six digits.  Further, the financing statement did properly describe the equipment as a “1997 Case backhoe, 580L.” Applying the “inquiry test” of the UCC, and citing Nolin Prod. Credit Ass’n v. Canmer Deposit Bank, 726 S.W.2d 693, 697 (Ky. App. 1986):
[A] description of collateral is sufficient for either a security agreement or a financing statement if it puts subsequent creditors on notice that, aided by inquiry, they may reasonably identify the collateral involved.  (Slip op. at 5).
      Bishop also argued that he had contacted the Powell County Court and had been advised that there were no recorded liens against the Case backhoe.  The Court of Appeals ascribed no importance to this action, it being at the Kentucky Secretary of State that inquiry with respect to security interests is to be made. 
      Prospectively, in language quoted by the Court of Appeals, the trial court had indicated the protocol that should be implied in order avoid problems of this nature:

Bishop was under a duty to make an inquiry of the Secretary of State’s UCC records and if such inquiry was made [Bishop] would have found that [Alliance Bank] was claiming an interest in an 1999 Case backhoe 580L Serial # 1100249697.  [Bishop] would then have noticed the similarities between the serial numbers on [Alliance Bank’s] collateral and the one he was proposing to buy from [Elkins].  [Bishop] would have asked [Elkins] how many 1999 Case backhoe 580L[s] he owned and he would have called [Alliance Bank] and inquired as to whether [Alliance Bank] claimed any interest in the backhoe [Bishop] was about to purchase. (Slip op. at 2-3).
      Clearly a purchaser has due diligence obligations in order to ensure they are a purchaser in good faith without notice of prior claims.  Furthermore, it would well behoove lenders to insist upon verification of equipment serial numbers.

The Battle of Hastings

The Battle of Hastings
      Today marks the 947th anniversary of the Battle of Hastings.

      1066 has already been a tumultuous year in England. On January 5, Edward the Confessor died, leaving the English throne to Harold Gowinson. William of Normandy, also known as William the Bastard, claimed that he had been designated as Edward’s successor and that Harold had once promised him that he, Harold, disclaimed any claim on the throne, leaving it instead to William. In addition, Harold Hardrada asserted a claim to the English throne.

      Sometime in September, Harold Hardrada had landed his troops in the north of England. After fast marching his troops north, the invading army of Harold Gowinson met the army of Harold Hardrada at the Battle of Stamford Bridge (See my posting of September 25). The invading army was defeated. Learning of William’s invasion in the south, Harold had to turn his army around and fast march it south in order to respond to this new threat. That forced march was some 240 miles each way.

      The Battle of Hastings was largely a stalemate with the trend in favor of the English defenders when, perhaps apocryphally, Harold was struck in the eye with an arrow. Regardless, it is clear that Harold fell, that the battle went to William, and that by Christmas William was accepting the homage of various English nobles.

      The famous arrow in the eye may be a later invention. It is not mentioned in the earliest accounts of the battle. In addition, in medieval iconography, an arrow in the eye is the punishment afforded a perjurer. Having gone against his oath to leave the throne to William, some might have felt it poetic justice, even if not based in reality.

Tuesday, October 8, 2013

Court of Appeals Addresses Termination of Health Care Employment

Court of Appeals Addresses Termination of Health Care Employment

      In a recent decision, the Kentucky Court of Appeals considered a trial court’s grant of summary judgment against numerous claims for wrongful termination of employment in the healthcare setting.  Ultimately, the determination of the trial court was upheld in part and reversed and remanded in part.  Foster v. Jennie Stuart Medical Center, Inc., No. 2011-CA-001136-MR, No. 2011-CA-001137-MR (Sept. 20, 2013).  This opinion has been designated as “To Be Published.”
       Foster and Oliver were registered nurses at the Jennie Stuart Medical Center (JSMC).  Debbie Bower, Austin Moss and Terry Peeples, were individual officers of JSMC.  An anonymous e-mail was sent to the Kentucky Board of Nursing raising questions as to certain nursing practices at JSMC.  After that anonymous e-mail was forwarded on to JSMC, Bower and Moss undertook an investigation thereof.  Foster and Oliver alleged that “the investigation was not initiated to rectify the complaints listed in the e-mail but to find the sender or senders of the e-mail.”  Slip op. at 3.  Eventually, Foster and Oliver were terminated, it being explained that the termination “was in the best interest of [JSMC].”  Foster and Oliver then filed suit against JSMC, with the suits ultimately being consolidated.  Certain of the claims they each set forth were similar, while Oliver had two that were unique to her.  After suit was filed, and as such well after the actual terminations, it was disclosed that Foster had been the sender of the e-mail.
      Initially, Oliver brought a claim against JSMC and certain of its officers based upon KRS § 216B.165(3), it providing, inter alia, that a healthcare facility may not discipline or terminate an employee who makes a report raising questions as to the quality of care.  The trial court dismissed Oliver’s KRS § 216B.165(3) claim on the basis that she had not filed a report.  This determination was upheld by the Court of Appeals.  Distinguishing this statute from KRS § 61.102(2), the Kentucky Whistleblower Act, which extends its protections to those who assist an employee in making a report, the statute at question did not.  As the e-mail came from Foster and not Oliver, Oliver could not claim the benefit of the statute.
      Even as, however, the Court of Appeals upheld the dismissal of the statutory claim, it allowed a claim for common-law wrongful termination to proceed.  Essentially, while Oliver could not claim the benefit of KRS § 216B.165(3), if it could be shown that Oliver was terminated because it was thought she been the sender of the e-mail, such could support a claim for wrongful termination; “[I]f Oliver was discharged because it was believed she made the anonymous report, it would violate the stated public policy to ensure safe health-care facilities thereby meeting the elements of common-law wrongful termination.”  Slip op. at 9.

      Next, both Foster and Oliver brought claims against JSMC for its failure to comply with the termination of employment right of appeal as set forth in the company’s employee manual.  Upon their termination, Foster and Oliver were cut off from JSMC’s computer networks, including the on-line version of the employee manual.  They asserted several requests for that document were ignored.  Still, JSMC argued that as Foster and Oliver failed to appeal their termination within the ten days provided for in the manual, they waived their right to do so.  The Court of Appeals found that the trial court acted in error in dismissing these claims.  Rather, additional fact finding was necessary as to whether JSMC deprived Foster and Oliver of the opportunity to appeal their termination as provided for in the employee manual and whether or not JSMC had indeed failed to respond to the request for the terms of the manual.
      With respect to claims for defamation based on JSMC’s explanation that Foster and Oliver were terminated “in the best interest of the hospital,” the Court of Appeals upheld the trial court’s grant of summary judgment to JSMC.  As to the statement made and the plaintiffs’ argument that it indicated some professional, moral or legal failing as to “the standards required of registered nurses,” the Court of Appeals found rather:
The statement tells the listener nothing about [the plaintiff’s] professional abilities or the reason for the termination.  The statement is neutral at best, vague at worst.  Slip op. at 11.
      The trial court’s dismissal of all of the claims against the individual officers of JSMC was upheld except with respect to the failure to comply with the appeal rights set forth in the employee manual.  The Court of Appeals was not saying, however, that liability necessarily attached, but rather it noted it could not tell whether such a claim had even been made.

Agenda - 2013 LLC Institute (Oct 17-18)

LLCs, Partnerships and Unincorporated Entities Committee

2013 LLC Institute

October 17-18, 2013



Thursday, October 17, 2013



8:30 a.m.-10:00 a.m.    Partnership Creation – Avoiding Audit: Considering, Creating, and Caring for Family Limited Partnerships

Speaker:  Stephanie Loomis-Price, Winstead Attorneys, Houston, Texas

This session will provide practical tips with some discussion on recent developments in audits and case law related to creation and maintenance of family limited partnerships.  Topics addressed will include:

     Determining when it is not feasible to create a partnership

     Optimizing partnership defense to avoid IRS attacks

     Advising clients on proper entity operation


10:30 a.m. – 12:00 p.m.  Taxation of Transfers of LLC and Partnership Interests

Speakers:  Andy Immerman, Alston & Bird LLP (Atlanta, Georgia); Joseph Mandarino, Stanley, Esrey & Buckley (Atlanta, Georgia)

The speakers will review tax issues that arise when structuring sales and other dispositions of LLC interests. Recent law changes will be addressed, as well as traps for the unwary, planning alternatives and compliance matters.


12:15 p.m.-1:15 p.m. LUNCHEON 

Keynote Speaker:  Chief Justice Myron T. Steele, Delaware Supreme Court

Topic:  The Growing Importance of Alternative Entities as Compared to Corporate Structures


1:30 p.m.-3:30 p.m.     Effective Drafting of Capital Account Provisions

Speakers:  John Rooney, KPMG (Washington, D.C.); Sebastian Grasso, KPMG (Washington, D.C.)

Target Capital Accounts: Can You Hit the Mark?


Target capital account provisions have become the new standard for allocating income in partnership and LLC agreements, but no industry-standard language has emerged and drafting errors remain common.  This practice-oriented discussion will focus on the more common drafting errors and ways to avoid them.  The discussion will also highlight some of the more common difficulties with implementing target capital accounts.


3:30 p.m.-5:30 p.m.     LLC Interests and Securities Law

Speakers:  Jennifer Johnson, Lewis & Clark Law School (Portland, Oregon); Anita Krug, University of Washington School of Law (Seattle, Washington); Tanya Durkee Urbach, Lane Powell PC (Portland, Oregon)

This panel will discuss when LLC membership interests may be considered “securities” under federal and state securities laws. The panel will evaluate the securities law implications of the default provisions of various LLC statutes and provide drafting tips for attorneys who wish to avoid the securities designation. The panel will also explore the consequences for both attorneys and their clients when LLC interests are classified as securities.


6:30 p.m.-7:30 p.m.   Cocktail Hour – Cash Bar


7:30 p.m.-10:00 p.m. Lubaroff Award Dinner

                                    Elizabeth S. Miller, 2013 Award Recipient


Master of Ceremonies: Lauris G.L. Rall, SNR Denton LLP (New York, New York)



Friday, October 18, 2013


8:30 a.m.-10:00 a.m.     Recent Case Update         


Speakers:  Beth Miller, Baylor Law School (Waco, Texas); Lou Hering, Morris, Nichols, Arsht & Tunnell LLP (Wilmington, Delaware); Melissa Stubenberg, Richards, Layton & Finger (Wilmington, Delaware)


This panel will discuss recent LLC and partnership cases on various topics of significance, including cases dealing with fiduciary duties and veil piercing and cases illustrating pitfalls in drafting operating agreements.

10:30 a.m.-12:00 p.m.     Partnership and LLC Reorganizations


Speakers:  Bradley Borden, Brooklyn Law School (Brooklyn, New York); Steve Schneider, Goulston & Storrs (Washington, D.C.); Brian O’Connor, Venable LLP (Baltimore, Maryland)


How to structure and draft partnership and LLC mergers and divisions continues to perplex.  For example, how do you structure cash payments that are paid to some but no others?  How do you draft provisions to ensure that built-in gains are allocated to the right people and not accelerated in the transaction?  Finally, what do you do when a partner is relying on partnership debt to protect a “negative tax capital” account?  Each of the three experienced panelists brings many years of practical law firm, accounting firm, IRS, and teaching experience to bear in a panel designed to both educate and entertain.  


12:15 p.m.-1:15 p.m. LUNCHEON: Working Committee Meeting


     Report from S. Frost and A. Donn on status of NCCUSL Series drafting committee


   Discussion of Committee Business including 2014 LLC Institute and its relationship to ABA             Annual Meeting of Sections of Business Law, Tax and RPPT



1:30 p.m. – 3:00 p.m.      Rationalizing Entity Law:  Corporate Law and Alternative Entities


Speakers:  Joan Heminway, The University of Tennessee (Knoxville, Tennessee); Mark Loewenstein, University of Colorado School of Law (Boulder, Colorado)


Forms of business entity have proliferated in recent years.  The theoretical and policy underpinnings of the distinct statutory frameworks for business entities are not wholly transparent or consistent.  As a result, practitioners, academics, and others have sought (and continue to seek) to rationalize the various forms of entity.  This session seeks to identify salient differences in treatment as among the core forms of business entity by primary reference to limited liability company and corporate law and consider whether, as we pursue entity rationalization, these differences can be justified.  Where appropriate, reference will be made to limited partnership and limited liability partnership law in addition to limited liability company and corporate law.



3:30 p.m.– 5:00 p.m.    Key Issues for Creditors of Distressed Unincorporated Entities

Speakers:  Michelle Harner, University of Maryland Francis King Carey School of Law (Baltimore, Maryland); Peter Oh, University of Pittsburgh College of Law (Pittsburgh, Pennsylvania); Mark Collins, Richards, Layton & Finger (Wilmington, Delaware
Doing business by contract in an unincorporated entity form can create certainty for owners but it also can generate ambiguity and economic risk for parties doing business with the entity. This panel focuses on challenges to creditors of an LLC when the LLC attempts to shield its assets from creditor claims either through asset partitioning, securitization, or chapter 11 bankruptcy.  The panel will discuss the basic underpinnings of these alternatives and then examine defensive tactics that creditors can invoke to better protect their rights against the LLC and its members. These tactics include using contractual protections and existing legal doctrine such as equitable subordination, veil piercing, fraudulent conveyance, and charging orders.


5:00 p.m. – 5:15 p.m.   Closing Remarks and Adjourn


Monday, October 7, 2013

Even Delaware Courts Get Confused

Even Delaware Courts Get Confused

      A recent decision from the Delaware Court of Common Pleas demonstrates that even Delaware courts can get confused as to points of business law.  In this case, the Court seems to have entirely lost sight of the distinctions that exist between corporations and LLCs.  Avis Rent A Car System, LLC v. Holly, 2013 WL 5436759 (Del. Com. Pl. Sept. 27, 2013).
      Holly rented a car from Avis that she totaled.  At the time of the accident, Holly was acting as an employee of FranklyLegal, LLC.  When Avis sought to collect on the damages to the car, Holly filed a counter-claim against FranklyLegal asserting it was liable for any damages as they occurred while she acting within the scope of her employment.  In turn, FranklyLegal filed a motion to dismiss for lack of personal jurisdiction.
      Initially, there was some confusion over FranklyLegal’s organizational structure; at an oral argument it was stated that FranklyLegal is a series of Frankly Companies, LLC, all organized under Delaware law.  Essentially, FranklyLegal sought to argue that the Delaware Court had no jurisdiction over it in that the company had no connection with Delaware (its principal place of business being located in Philadelphia) beyond the fact that it is organized in that jurisdiction.  In contrast, Holly asserted that jurisdiction existed by the fact that FranklyLegal is organized in Delaware.
      It is here that the wheels start to fall off and the Court begins referring to FranklyLegal, an LLC, as having been “incorporated” in Delaware and as well referring to it as a “Delaware corporation.”  From there, the Court began looking to cases addressing jurisdiction over corporations.  Still, it ultimately applied the correct rule, namely that an entity created pursuant to laws of a particular state is subject to jurisdiction within that state, but again it did the analysis in the terms of “the corporation.”
      Not Delaware’s finest hour.

Wednesday, October 2, 2013

NC Decision on Direct versus Derivative Treatment of Claim that the Board Did Not Maximize Shareholder Value

      Mack Sperling at the North Carolina Business Litigation Report has reviewed a recent decision in which the shareholders sought to bring a claim that the board had not maximized shareholder value in a merger transaction.  The problem with that approach was that, as the Court found, that such a claim is derivative, and not direct, in nature.  Having not satisfied a requirement for bringing a derivative action, namely no demand upon the board, the suit was dismissed.

      Click here Don't Sue A North Carolina Board Of Directors Over A Merger Without Reading This Case to access his posting.