Friday, April 29, 2016

No Recovery to LLC Member Who Failed to Read Amended Documents


No Recovery to LLC Member Who Failed to Read Amended Documents

      In a recent decision from New York, a decision against a member of an LLC who signed, without reading it, an amended operating agreement that stripped him of control of the LLC was denied recovery on the grounds of either fraud or breach of fiduciary duty. Stortini v. Pollis, 2016 N.Y. Slip Op. 02984, 2016 WL 1576389 (N.Y. App. Div. 2 April 20, 2016).
      Stortini and Pollis were the equal members in a series of LLCs involved in real estate development. In connection with the refinancing of certain company properties, Stortini went to Pollis’ office to sign documents. Those documents included in operating agreement and the first amendment thereto. Stortini was told, by a Pollis employee, that the documents are “common, basic documents in order for the financing to proceed.” Upon learning that the documents he had signed had stripped him of a voice in company management, Stortini brought suit against Pollis alleging fraud, breach of fiduciary duty, and seeking an accounting. The trial court dismissed the complaint, and this appeal followed.
      Affirming the dismissal of the claim for fraud, the court recited the elements of that claim, including the requirement of “justifiable reliance upon the misrepresentation.” As a pleading failure, the plaintiff's allegations did “not contain any allegations setting forth any material misrepresentations the defendants made to the plaintiff.” Of greater importance, however, was the fact that:
The plaintiff’s averment that he did not read the documents before signing them prevents him from establishing justifiable reliance, an essential element of fraud.
       As to the allegation of breach of fiduciary duty, and accepting for purposes of this argument that fiduciary duties are owed amongst the members of an LLC, it was noted that there exists an obligation to plead breach of fiduciary duty with particularity. From there, this court was able to affirm the determination of the trial court that the complaint had failed to allege factual details and circumstances to support a breach of fiduciary duty. On that basis, it’s dismissal was affirmed.
      The dismissal of the count for an accounting of the LLC was affirmed on the basis of the absence of the demonstration of fiduciary duty.

Thursday, April 28, 2016

Alabama Court Enters Charging Order With Respect to Interest in Alabama LLCs, But Not With Respect to Foreign LLCs


Alabama Court Enters Charging Order With Respect to Interest in Alabama LLCs, But Not With Respect to Foreign LLCs
      In a decision rendered just this week by a United States District Court sitting in Alabama, it granted a motion to issue charging orders against the interest of a judgment-debtor in two Alabama LLCs. At the same time, the court would not, with respect to that same judgment-debtor's interest in LLCs organized in Wyoming and Nevada, issue a charging order. Arayos, LLC v. Ellis, Misc. Action 15-0027-WS-M, 2016 WL 1642676 (S.D. Ala. April 25, 2016).
      Arayos, LLC holds a multimillion dollar verdict against John Vellianitis. That judgment, originally issued in Maine, was domesticated in Alabama. In furtherance thereof, Arayos sought charging orders against Vellianitis's interest in two Alabama LLCs, an LLC formed in Wyoming and another formed in Nevada.  While it is not express in the decision, it appears that Vellianitis is domiciled in Alabama.
      Based in part on records from the Alabama Secretary of State indicating that Vellianitis was a member of each of the Alabama LLCs, in accordance with the charging order provision of the Alabama LLC Act (Ala. Code § 10 A-5-605), the requested charging orders were entered.
      With respect to the Nevada and Wyoming LLCs, the court was not so accommodating. Initially, the records presented indicated only that Vellianitis was the registered agent of each of those companies in Alabama. As such, the plaintiff had made no showing that Vellianitis is a member of those entities. {Whether that really should be an issue with respect to the issuance of a charging order is open to debate. If a charging order is entered with respect to a purported member's interest in an LLC when in fact they are not a member, the charging order will be a nullity as it will attach to nothing and impose no burdens upon the LLC.} Of greater import, however, was the court's question as to whether, pursuant to the Alabama LLC Act, it could enter a charging order with respect to an interest in either in Nevada or Wyoming LLC. While acknowledging in a footnote that the analysis might be different were it the court having rendered the judgment, rather than a court that was involved only for purposes of enforcing collection of the main judgment, the requested charging orders as to the foreign entities were denied on the basis that:
Plaintiff has presented no argument explaining why it contends a provision of the Alabama Business and Nonprofit Entities Code would empower this Court to issue a charging order as to a judgment-debtor’s membership interest in Wyoming and Nevada limited liability companies, as part and parcel of the judgment- creditor's efforts to enforce a judgment entered by a federal court in Maine.
      In effect, this court interpreted the reference to a “limited liability company” in the Alabama LLC Act’s charging order provision as relating exclusively to Alabama organized LLCs. This interpretation is consistent with the decision rendered in Fannie Mae v. Heather Apartments Limited Partnership, No. A13-0562, 2013 WL 622-3564 (Minn. Ct. App. December 2, 2013).  Whether that should be the focus, rather than upon jurisdiction over the judgment-debtor, is a question for another day.

Wednesday, April 27, 2016

Sixth Circuit Upholds Breach of Fiduciary Duty Claims and Multi-Million Dollar Judgment


Sixth Circuit Upholds Breach of Fiduciary Duty Claims and Multi-Million Dollar Judgment

 

      In the decision rendered last week by the Sixth Circuit Court of Appeals, it affirmed a decision against certain employees who set up a company that was competing with their employer. Nedschroef Detroit Corp. v. Bemas Enterprises LLC, Case No. 15-1728 (Sixth Cir. April 22, 2016).
      Marc Rigole and Bernard LePage were employees of Nedschroef Detroit Corporation.  In 2011, Rigole and LePage formed Bemas Enterprises LLC to provide replacement parts for fastening machines that were manufactured in Europe by a Nedschroef affiliate.  The catch was that their employer had exactly the same business purpose. Upon learning of the competing venture they had organized, Nedschroef terminated with Rigole and LePage and filed suit against them. Ultimately the district dourt granted summary judgment to Nedschroef on a variety of theories including breach of the duty of loyalty, breach of fiduciary duty and misappropriation of corporate opportunities, and awarded damages in the amount of $3,680,344.18. Further, LePage and Rigole were permanently enjoined from providing replacement parts or services for the Nedschroef fastener machines.
      On appeal, the Sixth Circuit handily rejected the defendant's suggestion that their LLC Bemas was not competing with Nedscrhroef because it was only providing services to those people whose quotes from Nedschroef had been rejected. As an aside, the irony seems to have been lost upon them in that both LePage and Rigole, in the course of their employment with each off, had authority to issue quotations to customers.
      The court also affirmed the finding that the defendants had misappropriated Nedschroef 's proprietary secrets, including by downloading from its proprietary and password-protected computer system various drawings of replacement parts.
       As another aside, it is curious that Rigole and LePage, while asserting that they had done nothing wrong, had set up Bemas Enterprises LLC's under the names of their respective wives.
      Ultimately, employees owe a fiduciary duty of loyalty to their employers. That duty precludes the employees, other than with respect to their agreed compensation, to benefit from the property and affairs of their employer. Clearly Rigole and LePage never learned of these limitations. Presumably a judgment in excess of $3.6 million and a permanent injunction will bring them up to speed.

Sunday, April 24, 2016

Beware Greeks Bearing Gifts


Beware Greeks Bearing Gifts
 

      Today marks the anniversary of the traditional Fall of Troy in 1184 B.C., thereby bringing to its culmination the Trojan War.


      The Fall of Troy is not recounted in Homer’s Iliad, the iconic epic, it rather covering only a period of ten days to two weeks within the supposed ten-year span of the war (the Iliad ends with Hector's death).  The Fall of Troy through the subterfuge of the Trojan Horse is briefly mentioned in the Odyssey and is referenced in several other Greek sources (there exists a long series of Greek stories regarding the Trojan War – Homer’s Iliad and Odyssey are only two examples).  The story would not find, however, its full development until Virgil’s Aeneid.


      Some modern historians have attempted to explain the story as an analogy, suggesting actually that it was an earthquake – Poseidon, whose portfolio included horses, was as well the god of earthquakes – that breached the walls.  I, for one, would rather retain the literal interpretation.


      Regardless, it is a great story, especially the fall of Achilles to Paris after the former killed Hector.  Speaking of which, the movie Troy misstated the story, likely because they wanted to keep Brad Pitt on the screen.  Achilles was killed before the fall of Troy; he did not participate in its sacking.  But then much of that movies departs from the legends.  For example, it has Patroclus sneaking off to battle wearing Achilles' armor.  In fact Achilles gave Patroclus his armor to wear in that engagement.  It did not end well for Patroclus.

Friday, April 22, 2016

Diversity Jurisdiction and Dissolved Entities


Diversity Jurisdiction and Dissolved Entities
      A recent decision from Maryland addresses how a dissolved corporation is assessed for purposes of diversity jurisdiction. On the facts here at issue, you do it the same way you would with a non-dissolved corporation. Stanback v. Levitas, Civ. Act. No. WMN-15-3064, 2016 WL 893245 (D. Md. March 9, 2016).
      Plaintiff Stanback brought suit against a variety of dependents including State Real Estate, Inc., a corporation whose charter had been forfeited some two years prior to the time the complaint was filed. Levitas had been a director of State Real Estate and became a trustee of its assets at the time the corporation’s charter was forfeited. Levitas sought to remove the action to federal court on the basis of diversity jurisdiction. Stanback would resist removal to federal court on the basis that, notwithstanding its dissolution, State Real Estate’s citizenship in Maryland would continue and would preclude diversity jurisdiction.
      Looking to Maryland law, notwithstanding a provision to the effect that corporate powers are rendered “inoperative, null, and void” as of the forfeiture of the charter, it is otherwise provided that “a corporation continues to exist, at least for some limited purposes beyond forfeiture or dissolution of its charter.” From there, citing a variety of authorities, the court was able to determine that a dissolved corporation that remains in the winding up phase is still “alive” for purposes of suing and being sued in order to satisfy its debts and liabilities. In that the court found that State Real Estate still had certain assets, namely an insurance policy, it was determined that it could be sued in its own name as a Maryland corporation. As such, the corporation was a party to the action and would continue to be deemed a citizen of its jurisdiction of organization and that in which it had its principal place of business. That being Maryland, diversity was absent and the case was remanded to state court.

Thursday, April 21, 2016

Sixth Circuit Court of Appeals, on Ohio's Behalf, Rejects Adverse Domination Tolling of Statute of Limitations


Sixth Circuit Court of Appeals, on Ohio's Behalf, Rejects Adverse Domination Tolling of Statute of Limitations

      In a recent decision from the Sixth Circuit Court of Appeals, applying Ohio law, it rejected a claim that adverse domination should effect the tolling of the statute of limitations of claims of breach of fiduciary duty against corporate directors/officers. This the Sixth Circuit did after the Ohio Supreme Court rejected a request to answer that certified question. Antioch Company Litigation Trust v. Morgan, No. 14-3790, 2016 WL 1161233 (6th Cir. March 24, 2016).
      This suit arose out all a leveraged ESOP transaction entered into in 2003. By 2007, the company was facing financial challenges. When efforts to market or recapitalize the company were unsuccessful, it was in March, 2008 placed in a Chapter 11 bankruptcy. This adversary action was filed in December, 2009 against Lee Morgan and Asha Morgan Moran, it charging them with breach of fiduciary duties owed to Antioch consequent to their positions as directors and officers of the corporation, they having in conflict of interest in approving the original ESOP transaction.
       Under Ohio law, there is a four-year statute of limitations for breach of fiduciary duty. The question is whether the statue limitations, which began to run as of the closing of the ESOP transaction on December 16, 2003, was tolled at any time before the suit was brought on December 23, 2009.
      Previously, the Sixth Circuit had asked the Ohio Supreme Court to answer a certified question as to adverse domination and the tolling of the statue limitations. The Ohio Supreme Court declined to answer the question, leaving the Sixth Circuit to assess, as best it could, what the Ohio Supreme Court would hold to be the law. Framing the question whether Ohio would “apply a discovery rule to the relevant claim for purposes of the statute of limitations,” and citing decisions including that of the Kentucky Supreme Court rendered it Wilson v. Paine, 288 S.W.3d 284, 287-88 (Ky. 2009), the Sixth Circuit assessed the wording of Ohio's statute of limitations and the related law as to the application of a discovery rule. Finding it informative that, apparently, Ohio courts will not apply a discovery rule were not provided for by statute, the Court of Appeals affirmed the trial court's determination that adverse domination would not toll the statute of limitations.
      There was a dissent written by Circuit Judge Moore focusing upon what a slender reed there is as to Ohio law on this point and suggesting that, on policy grounds, the Ohio Supreme Court would allow tolling on these and similar facts.

Wednesday, April 20, 2016

Loan Participation Bank Owed No Duties to the Borrower


Loan Participation Bank Owed No Duties to the Borrower

      A recent decision from Judge Hale of the Western District of Kentucky makes clear that a bank participating in a loan participation did not owe any duties to the borrower.  On that basis allegations of lender liability were dismissed.  Hurd Family Partnership, L.P. v. Farmers Bank, Civ. Act. No. 3:13-CV-485-DJH, 2016 WL 1030146 (W.D. Ky. March 10, 2016).
      The Hurd Family Partnership, L.P. was a minority shareholder in Freedom Holdings, Inc., which in turn owed Florida Gaming Corporation, it indirectly owning Jai-Alai gambling operations in Florida.  In order to close on options in Florida Gaming, Collett, the 84% owner of Freedom Holdings, sought to borrow $1.3 million from King Southern Bank.  While the opinion is not clear on this point, it implies that while Freedom was the maker on the note the funds were used to buy FGC stock in Collett’s name, i.e., corporate assets were used to fund a shareholder asset.
      Being concerned as to possible conflicts (Jim King, the owner of King Southern Bank, also owed the CPA firm that did work for Freedom), King solicited Farmers to participate in the loan.  Eventually Farmers would provide $650,000 while its affiliate Leitchfield Deposit Bank would provide the balance of $650,000.  Still, even as Farmers/Leitchfield provided all of the funding:
King Southern directly interacted with the Colletts and negotiated the terms of a loan.  In contrast, Farmers Bank “never negotiated this loan with [Collett] or Freedom Holding.  All negotiations were done with King Southern.”
Ultimately:
In other words, King Southern “dealt with the customer, closed the loan, and distributed the proceeds to the customer,” while Farmers funded the loan.
      The loan closed in 2008 with a maturity date of March, 2009, a date that King Southern would extend to March 2010.  At that time the loan was refinanced with Farmers as the lender; King Southern was out of the mix.  That loan was in turn refinanced in June 2012, Collett providing a guaranty. The loan ultimately went into default and the collateral was worthless.
     At that juncture the Hurd Partnership filed suit against Farmers “claiming that Farmers had a duty to determine that the loans were properly used for Freedom Holding’s corporate purposes.”  2016 WL 1030146, *2.  It was also alleged that Freedom’s board had not properly approved the loan and that it was ultra vires.
    The court would hold that these assertions, even if true, would not create a cause of action against Farmers as there was no duty to violate.  Rather, “it cannot be said that Farmers owed the Partnership any duty.” Id. at *3.
      Focusing on the nature of a participation agreement, it was observed that:
A participation agreement occurs when “two or more banks join a loan with each bank lending a portion of the amount to the borrower.”  Participation agreements assign “an interest in an intangible right,” constitute a “contract that prescribes duties of servicing the loan,” and can create agency relationships.  When the lending bank and participating banks sign a participation agreement, the lending bank often executes and delivers a simple document, called the “certificate of participation,” to the participating bank.  Importantly, a true participation agreement does not create a debtor-creditor relationship between the lending and participating banks; the lending bank does not promise to pay off a debt, it simply promises to remit the participating bank’s share of the borrower’s repayments.  Put another way, participation agreements are not themselves loans. They are contractual arrangements where a third party provides funds to a lender so the lender can execute a loan with a borrower. Id. (citations omitted).
      From there, it was determined that Farmers owed no fiduciary duty to either the Hurd Partnership or Freedom, and on the basis the case failed. 
Perhaps the Partnership has some legitimate complaint about how the Freedom Holding loan was handled.  But Farmers is not the proper target for the partnership’s ire.  There was no contractual relationship between the Partnership and Farmers, and so Farmers owed the Partnership no special duty.  Summary judgment is appropriate.  Id. at *5.

Tuesday, April 19, 2016

Court Finds There Not To Have Been A Debtor-Creditor Relationship, But Rather a Partnership


Court Finds There Not To Have Been A Debtor-Creditor Relationship,
But Rather a Partnership


      In a recent decision from the Bankruptcy Court for the Western District of Kentucky, it was held that claims of an alleged creditor arose not from a debtor-creditor relationship, but rather from a partnership between the alleged creditor and the debtor in bankruptcy. On that basis, the claims were rejected. In re: Mik, Case No. 15-31285(1)(13), 2016 WL 889631 (Bankr. W.D. Ky. March 8, 2016).
      Paul and Lee Ann Mik were debtors in bankruptcy under Chapter 13. They listed, as a creditor holding a nonpriority claim, an unspecified obligation to William Richards. Richards will ultimately file a claim for $127,125, identified those as “money loaned on various dates.” Mik would in turn object to that claim, asserting rather that Richard has from time to time purchase items from Mik and his auctioneer business and that the various amounts transferred from Richards to Mik were for items actually purchased.
      Rejecting the notion that these amounts represented a loan, and noting concerns that some of the documentation had been manipulated, the court observed that:
The state of the documentation between Mik and Creditor is disorganized and un-probative to say the least. If this had been a bona fide loan transaction for the sums claimed by the Creditor it was incumbent upon him to make sure the documents supporting his claim to repayment. They simply do not.
      From there the court analyzed the nature of the relationship between the parties and determined that it satisfied that of a partnership, the court referencing KRS § 362.150 and case law that arose thereunder. On that basis, all Richards’ claims against Mik were rejected.
      I do not have any criticism of the conclusion here reached, but I must question why the court cited KRS § 362.150. It is stated otherwise in the opinion that the auction business in which it was determined Richards and Mik were partners was organized in December, 2012. In consequence, this partnership was governed by the Kentucky Revised Uniform Partnership Act (2006). While the Uniform Partnership Act and the Revised Uniform Partnership Act (2006) will almost always come to the same conclusion as to whether a partnership existed, it would have been nice to cite the correct controlling statute.

Monday, April 18, 2016

Rule 11 Sanctions Imposed On Attorney Who Filed Diversity Suit That Was Not


Rule 11 Sanctions Imposed On Attorney Who Filed Diversity Suit That Was Not
      In a recent decision from a Federal District Court in New Jersey, where a plaintiff's attorney filed a lawsuit in federal court based on diversity jurisdiction where it was manifestly clear that diversity did not exist, Rule 11 sanctions were awarded. Singh v. Diesel Transportation, LLC, Civil Action No. 15-7930 (JLL), 2016 WL 901834 (D. N.J. March 8, 2016).
      This dispute arose out of a trucking accident that occurred in Nebraska. The plaintiff filed an action alleging claims in negligence and seeking to impose liability by means of respondeat superior. The complaint was filed on the basis of diversity jurisdiction, 28U.S.C. § 1332. However, that complaint alleged that the plaintiff was resident in New Jersey even as identified two defendants as likewise being resident in New Jersey. As such:
Plaintiff has alleged that he and two Defendants reside in New Jersey, thereby negating any grounds for diversity jurisdiction. 2016 WL 901834, *2.
On that basis the Defendant’s motion to dismiss for lack of subject matter jurisdiction was granted.
      From there, the court turned its attention to a motion for sanctions under Rule 11 against the attorney who filed the defective complaint. In determining that Rule 11 sanctions were appropriate, it observed:
The Court finds that Plaintiff’s counsel failed to make the appropriate inquiry into the law of diversity jurisdiction prior to filing the instant Complaint on Plaintiff’s behalf.
As discussed above, the jurisdictional defect here-namely, the lack of complete diversity-was apparent from a plain reading of the Complaint. The Court finds that the obviousness of this error of law, in conjunction with Plaintiff’s Council's failure to withdraw the Complaint even after being apprised of its deficiencies by Defense counsel, as well as Plaintiff’s counsel repeated failure to oppose the pending Motions, necessitates the “fashioning [of] sanction[s] adequate to deter undesirable future conduct.” 2016 WL 901834, *2 (citation omitted).
      On that basis, the defendant’s motion for sanctions against that attorney was granted.

Friday, April 15, 2016

More on Beads & Steeds; Denial of Leave to File Amended Complaint Asserting Substantive Consolidation Affirmed


More on Beads & Steeds; Denial of Leave to File Amended Complaint Asserting Substantive Consolidation Affirmed

     In the latest development in Beads & Steeds (Spradlin v. Beads & Steeds Inns, LLC (In re Howland), Case No. 12-51251, Adv. No. 14-5019 (Bankr. E.D. Ky.), Judge Karen Caldwell of the Eastern District affirmed the prior determination that the trustee would not be allowed to amend the complaint.
      Initially, at least as relevant to this discussion, the bankruptcy court had denied an effort by the bankruptcy trustee to utilize either or both of insider reverse piercing or outsider reverse piercing as a method to bring additional parties into the action. This dismissal was based upon the rule that piercing the veil is a remedy, not a substantive action, and a remedy could not be applied to create liability ab initio. That aspect of the case was read previously reviewed; HERE is a link to that discussion. Still, at the time it rejected the insider/outsider reverse pierce theories, the bankruptcy court afforded the trustee the opportunity to file an amended complaint based upon the theory of substantive consolidation. However, when ultimately tendered, the bankruptcy court rejected the amended complaint, finding it to be deficient in alleging facts that would justify substantive consolidation. HERE is a link to my review of this decision.
      In an opinion rendered March 31, the District Court affirmed the ruling of the bankruptcy court denying the motion to amend the complaint and as well affirmed the grant of judgment on the pleadings in favor of the debtors.

New Rules Under Bank Secrecy Act to Shortly Go Effective; I'm Sure The Timing Is Just A Coincidence


New Rules Under Bank Secrecy Act to Shortly Go Effective; I'm Sure The Timing Is Just A Coincidence

      On June 30, 2014, the Treasury released proposed regulations requiring the banks gather information as to who controls and owns business entity account holders. Previously I reviewed this proposal; HERE is a link to that discussion.
      Last Thursday (April 7, 2016) it was reported that the Treasury will shortly be issuing the final regulations. I'm sure this movement on a proposal that has been pending for nearly 2 years is entirely coincidental with respect to the release of the recent of “Panama Papers,” that being certain files from Mossack Fonseca describing various mechanisms used around the country (although largely not involving either US business organizations or US taxpayers) to evade taxes.

Wednesday, April 13, 2016

UK Law’s Professor Campbell Recognized


UK Law’s Professor Campbell Recognized

 

      A post by Professor Joan Heminway (U Tennessee) recognizes a paper presented by Professor Rutheford “Biff” Campbell last week in Miami Florida.

      HERE IS A LINK to that posting.
 

Tuesday, April 12, 2016

Pigs Get Fat and Hogs Get Slaughtered: Bankruptcy Remote Structure Declared Invalid For Elimination of Fiduciary Duties

Pigs Get Fat and Hogs Get Slaughtered:  Bankruptcy Remote Structure Declared
Invalid For Elimination of Fiduciary Duties

 

            In a recent decision from Illinois, a bankruptcy remote structure was declared void on the basis that the fiduciary duties of the person inserted by the creditor were eliminated.  In re: Lake Michigan Beach Pottawattamie Resort LLC, Case No. 15bk42427, 2016 WL 1359697 (N.D. Ill. April 5, 2016).

Lake Michigan Beach Pottawattamie Resort LLC (“LMBPR”) was a debtor to BCL-Bridge Funding, LLC (“BCL”).  In the course of entering into certain forbearance and related agreements, LMBPR amended its operating agreement to provide for a “Special Member” to be appointed by BCL.  The amended operating agreement would go on to provide that (i) the Special Member would owe no fiduciary duties to LMBPR or its constituents and (ii) the no bankruptcy or similar filing could take place without the consent of the Special Member.

LMBPR was unable to perform on its various financing commitments.  BCL filed a complaint against LMBPR, and published a notice of a  non-judicial foreclosure sale.  On the eve of that sale LMBPR filed a voluntary Chapter 11 bankruptcy, it having been approved by all members save and except the Special Member appointed by BCL.  BCL challenged the filing on the basis that (1) it was done for an improper purpose and (2) was in violation of the blocking rights of the Special Member.

The court assessed the purpose of the Chapter 11 petition under the test set forth in In re Tekena USA, LLC, 419 B.R. 341, 346 (Bankr. N.D. Ill. 2009) and determined that BCL had not met its burden of showing it to have been in bad faith.

As for the lack of authority to make the bankruptcy filing, LMBPR (here described as the “Debtor”) asserted:

The Debtor argues, in response, that the provision in the Third Amendment requiring BCL’s consent for the filing of a bankruptcy petition by the Debtor, is void as against public policy because it amounts to a prohibition of the Debtor’s right to exercise its right to bankruptcy relief and, alternatively, is not valid under Michigan law.  2016 WL 1359697, *7.

            The court then provided a review of the bankruptcy remote structure and the role of the independent director, noting that the format is permissible because the independent director has a fiduciary obligation to, on appropriate facts, vote in favor of the bankruptcy that would be against the interests of the creditor appointing that director.  Specifically:

Even though the blocking director structure described above impairs or in operation denies a bankruptcy right, it adheres to that wisdom. It has built into it a saving grace: the blocking director must always adhere to his or her general fiduciary duties to the debtor in fulfilling the role. That means that, at least theoretically, there will be situations where the blocking director will vote in favor of a bankruptcy filing, even if in so doing he or she acts contrary to purpose of the secured creditor for whom he or she serves. 2016 WL 1359697, *10.

In contrast, the court here focused upon the fact that the operating agreement amendment that added the Special Member as well eliminated any fiduciary obligations of that member. Specifically:

The Third Amendment limits BCL duties as the Special Member to those “rights and duties expressly set forth in this Agreement.” Third Amendment, Article 12.2(viii), p. 2. Those rights and duties are then limited by Article 12.4(iv):

Notwithstanding anything provided in the Agreement (or other provision of law or equity) to the contrary, in exercising its rights under this Section, the Special Member shall be entitled to consider only such interests and factors as it desires, including its own interests, and shall to the fullest extent permitted by applicable law, have no duty or obligation to give any consideration to any interests of or factors affecting the Company or the Members.

Id. at Article 12.4(iv), p. 2–3 (emphasis added). This language results in BCL as the Special Member having no duties to the Debtor, despite otherwise being a member of the Debtor.  2016 WL 1359697, *11 (footnote omitted).

            From there the court was able to determine that the provision requiring the consent of the Special member appointed by BCL before LMBPR may seek bankruptcy protection is unenforceable.  Hence the case may proceed.

Monday, April 11, 2016

As Amended From Time to Time


As Amended From Time to Time


As Amended From Time to Time is my most recent column from the Journal of Passthrough Entities.
 
       This article considers the impact of an amendment to an LLC Act when the operating agreement of a particular LLC does not address the issue. Essentially, does the LLC Act as it existed at the time the operating agreement was adopted continue to control, or in the alternative are the LLC and its members now bound by the LLC Act as amended?
 
      This is a complicated question of statutory interpretation that may be impacted by the wording of any particular operating agreement. For those reasons, I cannot give a definitive answer one way or the other. I submit, however, that the most important issue is to be aware of the question.
 
      HERE IS A LINK to the article.