Wednesday, August 31, 2016

Lawyers of the Year


Lawyers of the Year

      While I have significant concerns as to the rating criteria as applied to myself, I do want to congratulate my law partners for recognition as being tops in their fields.  HERE IS A LINK to the announcement.
 

Wednesday, August 24, 2016

Make Sure Your Annual Report Has Been Filed with the Kentucky Secretary of State


Make Sure Your Annual Report Has Been Filed with the Kentucky Secretary of State

 

      Staying current on your annual reports to the Secretary of State is very inexpensive. Conversely, having to get a company reinstated is expensive. Your choice.

      HERE IS A LINK to some additional information.

Monday, August 22, 2016

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 (this conflict was at the time sometimes referred to as the Cousin’s War).  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 (William Stanley) held back his own force; if combined with that of Henry, that of Richard would have been out-numbered.  Conversely, if Stanley joined with Richard, the weight of the forces arrayed against Henry would have been overwhelming.  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.” 


To provide but a taste as to why this conflict was referred to as the Cousins War, consider that William Stanley was the brother of Thomas Stanley, husband of Margaret Beaufort and mother of Henry Tudor.  Ergo, Lord Stanley was the brother-in-law to Henry’s mother.  Thomas Stanley had previously been married to Eleanor Neville, sister to Warwick the Kingmaker and aunt to Richard III’s recently deceased wife. That wife was a daughter of Warwick.


      Richard’s attack upon Henry’s position nearly succeeded;  Henry’s standard-bearer William Brandon was killed at Henry’s side.  Polydore Virgil, a contemporary historian/chronicler, recorded that Richard fought well.  However, 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.


       In 2012, Richard’s remains were located in the course of excavations under a parking lot that now covers part of what was the Blackfriars (Dominican) Church in Leicester, England; early 2013 saw the announcement that testing had confirmed the remains were those of Richard.  In sad testimony to the modern age, litigation ensued 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.  That question was resolved in favor of Leicester, and earlier this year Richard III was laid to rest in Leicester Cathedral.


            Notwithstanding Polydore Virgil’s positive comments as to Richard III, in proof of the adage that the winners write the history, his reputation was besmirched by various Tudor affiliates such as St. Thomas More and William Shakespeare.   He is currently being reassessed by historians who are not so indebted to supporting the legitimacy of the House of Tudor.

Expelling LLC Members


Expelling LLC Members

 

      Peter Mahler, in his otherwise excellent blog New York Business Divorce, has this week posted an interview with me wherein we discussed member expulsion, reviewed the recent IE Test case and as well the string of decisions arising out of the All Saints University of Medicine, Aruba, LLC dispute.
 
      HERE IS A LINK to that interview.

Thursday, August 18, 2016

Necessity of Classification of Italian Srl For Purposes of Diversity Jurisdiction Avoided; Regardless of Whether Incorporated or Unincorporated, Diversity Existed


Necessity of Classification of Italian Srl For Purposes of Diversity Jurisdiction Avoided; Regardless of Whether Incorporated or Unincorporated, Diversity Existed

In order to access the federal courts on the basis of diversity jurisdiction, none of the plaintiffs may have the same citizenship as that of any of the defendants. A corporation is a citizen of its jurisdiction of organization and the jurisdiction in which it maintains its principal place of business. In turn, all other organizational forms including limited liability companies redeem citizens of each jurisdiction in which any of its members/owners are citizens. A persistent question is how to classify certain non-US business organizations is either being corporations or unincorporated. In a recent decision from Louisiana, a court analyzed and Italian Societ√† a Responsibilit√† Limitata (“Srl”) under both of analytic formats. Regardless of which was applied, diversity existed. PGS USA, LLC v, Popi Trading, Inc., Civ. Act. No: 16-6669, 2016 WL 4261726 (E.D. LA August 12, 2016).
In this breach of contract action, the defendant was a New York corporation with its principal place of business in New York. As such, Popi Trading, Inc. was a citizen of New York for purposes of diversity jurisdiction. It complained, however, that PGS USA LLC had failed in the complaint to fully detail its citizenship in a manner sufficient to confirm that diversity existed.
With respect to analysis of the Srl as a corporation, it was found to be organized in Italy, and likewise that its executive officers were in Italy. On that basis, be treated exclusively as a citizen of Italy.
Alternatively, when the Srl was treated as being unincorporated, analysis was undertaken of all of its members. One of those members was in turn another Srl, and its members needed to be investigated. Regardless, ultimately all were natural person citizens of Italy. And on that basis the Srl was treated as an Italian citizen.
Either way, diversity jurisdiction existed.
While this case is a useful reminder of the rules to be applied in assessing the citizenship of incorporated versus unincorporated entities, it unfortunately does not move forward the question of the analytic paradigm to be applied to non-US organized business organizations.
 
 

Wednesday, August 17, 2016

Significant Attorney’s Fees Awarded the Defendants In a Failed Derivative Action


Significant Attorney’s Fees Awarded the Defendants In a Failed Derivative Action

      Earlier this year, of the federal court for the Eastern District of Kentucky dismissed, on the grounds of a lack of standing, a derivative action purportedly brought on behalf of a Michigan nonprofit corporation. Pagtakhan-So v. Cueto, Civ. Act. No. 5:14-370-DCR, 2016 WL 617429 (E.D. Ky. February 16, 2016). That decision has now been appealed to the Sixth Circuit Court of Appeals. However, even while that appeal is pending, the trial court has ruled with respect to a motion for attorney’s fees filed by the defendants in that action, and a significant award of attorney’s fees has been made. Pagtakhan-So v. Cueto, Civ. Act. No. 5:14-370-DCR, 2016 WL 4094877 (E.D. Ky. August 1, 2016).

      In the initial decision, the derivative action that was filed on behalf of the nonprofit corporation had been brought by persons who were no longer directors of the corporation. No longer being directors, they lacked standing to bring a derivative action. In addition, it was found that they had failed to comply in any manner with Federal Rule of Civil Procedure 23.1, it governing derivative actions filed in federal court. On that basis, the claims were dismissed with prejudice.
      The second opinion involved the consideration of the defendant's motion for attorney’s fees. Under the Michigan Nonprofit Corporation Act, an award of attorney's fees to the defendants is permissible, the statue providing:
In an action brought in the right of a corporation by a record holder or beneficial owner of shares of the corporation or a member, the court having jurisdiction, upon final judgment and finding that the action was brought without reasonable cause, may require the plaintiff to pay to the parties named as defendants the reasonable expenses, including fees of attorneys, incurred by them in the defense of the action.
      Initially exhibiting what can only be described as chutzpah, the plaintiffs first asserted that this was not and was never intended to be a derivative action, a treatment that was evidenced by the failure to comply with Rule 23.1. This argument was rejected on the basis that the character of the action is derivative or direct is based upon the nature of the relief sought. Here, as the only alleged injury was to the corporation, the action must have been derivative on its behalf. Further, the court relied upon portions of the plaintiffs’ pleadings in which they, while not using the word “derivative,” indicated they were acting on the corporation’s behalf. In that the claims were derivative, the question was whether they were brought “without reasonable cause.” On bases including the complete failure to comply with the requirements of Rule 23.1, attorney’s fees were awarded. With respect to one defendant, those fees are in the amount of $40,805.84, and with respect to another individual defendant the attorney’s fees awarded are $50,623.00. As to the nonprofit corporation itself, it received attorney’s fees in $100,364.14. In total, the plaintiffs are responsible for attorney’s fees in the amount of $190,792.98.


 

Open and Obvious Doctrine No Bar To Suit


Open and Obvious Doctrine No Bar To Suit
      In a decision recently rendered by the Kentucky Court of Appeals, it was held that the Open and Obvious Doctrine is (i) a question of fact to be considered by the jury that (ii) goes to the allocation of responsibility for the injury. For that reason, a lawsuit against Kroger and Coca-Cola must be tried by a jury. Shirrell v. The Kroger Company, No. 2015-CA-000362-MR (Ky. App. Aug. 12, 2016).
      Shirell slipped and fell in a Kroger store on posters that had been laid on the ground by an employee of Western Kentucky Coca-Cola Bottling Company, presumably in preparation for erecting them as part of the display. After Shirell filed and brought this action, both Kroger and Coca-Cola filed for summary judgment on the basis that posters on the floor constituted an “open and obvious hazard.” The trial court granted summary judgment to each of those defendants. This appeal followed.
      On appeal, Shirell argued, inter alia, that the open and obvious doctrine does not go to ultimate liability, but rather is a factual question to be considered in allocation of fault. Specifically:
Shirell believes that the Circuit Court misinterpreted the law as to open and obvious hazards in relation to invitees. Even if the posters were an open and obvious hazard, Shirell maintains that the open and obvious nature of the posters merely constitutes an issue of fact for the jury to consider when allocating fault between him and appellees. Slip op. at 4.
       After summary judgment had been granted in this case, the Kentucky Supreme Court had issued an opinion in Carter v Bullit Host, LLC, 471 S.W.3d 288 (Ky. 2015), in which it clarified the law regarding open and obvious hazards vis-a-vie the premises liability claims of the invitees. Therein, the Kentucky Supreme Court held:
The open-and-obvious nature of a hazard is, under comparative fault, no more than a circumstance that the trier of fact can consider in assessing the fault of any party, plaintiff or defendant. Under the right circumstances, the plaintiffs (sic) conduct in the face of an open-and-obvious hazard may be so clearly the only fault of his injury that summary judgment could be warranted against him, for example when a situation cannot be corrected by any means or when it is beyond dispute that the landowner had done all that was reasonable.
      In that the open and obvious doctrine was not, on the facts available in considering the motion for summary judgment, a bar to the suit, the summary judgment was reversed, and the case remanded for reconsideration.

Tuesday, August 16, 2016

More Corporification - Incorporating Ambiguity Into the Operating Agreement


More Corporification - Incorporating Ambiguity Into the Operating Agreement

      In a recent case decided by the North Carolina Business Court, it was called upon to interpret an operating agreement which incorporated by reference the usual authority of the president of a North Carolina corporation. In the course of its opinion, the court explained that the authority of the president of a corporation is open to interpretation. Richardson v. Kellar, 2016 NCBC 60, 2016 WL 4165887 (Sup. Ct. N.C. Aug. 2, 2016).
      This case arose out of an application by Richardson for a preliminary injunction, which relief was ultimately granted. Richardson, through a wholly owned LLC, and Kellar, through another wholly owned LLC, where the two 50% members of a North Carolina LLC named TW Devices, LLC.  Richardson and Kellar were the two directors of TW Devices, LLC.  The organic documents of that company were quite specific in detailing the purpose of the company, namely the development of a variety of cardiovascular-related medical devices. Ultimately, TW Devices would become a shareholder in a subsequently organize corporation, Cleveland Heart, Inc. (“CHI”), which was also in part owned by the Cleveland Clinic Foundation.
      Kellar would ultimately seek to marginalize Richardson, unilaterally voting the interest of TW Devices, LLC in CHI, asserting that he could do so in his alleged capacity as CEO/President of TW Devices, LLC.
      At this juncture, the question would turn ultimately on whether TW Devices LLC was merely a holding company with respect to an interest in CHI, or rather had other business purposes. The court would hold ultimately that TW Devices, LLC was not a mere holding company. On that basis, the voting of that LLCs interest in CHI was an extraordinary matter which needed to be resolved by the LLC’s two member Board of Directors. On the basis that Kellar was in effect stripping Richardson of his right to participate in those decisions, the requested temporary injunction was granted.
      But back to corporification. Initially, Kellar argued that as TW Devices LLC should be viewed as a mere holding company, he, as the president/CEO thereof, would under the operating agreement have the capacity to vote the shares. In furtherance thereof, he pointed to section 4.12(a) of the TW Devices LLC Operating Agreement, which provides:

Any officer… shall have only such authority and perform such duties as the Board may, from time to time, expressly delegate to them…. unless the Board otherwise determines, if the title assigned to an officer of the Company is one commonly used for officers of the business corporation formed under the North Carolina Business Corporation Act, then the assignment of such title shall constitute the delegation to such officer of the authority and duties that are customarily associated with such office, including the authority and duties that a President may assigned to such other officers of the Company under the North Carolina Business Corporation Act. 2016 WL 4165887, *2.
      The only problem was that even as the operating agreement sought to incorporate the authority of an officer, including the president, those are actually open questions under North Carolina law. Rather:
North Carolina law does not provide definitive guidance regarding the “customary” authority possessed by corporate presidents. The Business Corporation Act does not define the duties or powers possessed by officers. North Carolina’s leading commentator on corporate law has noted that:
The allocation of authority and duties among corporate officers is usually outlined to some extent, either specifically or generally, by the corporate bylaws, and is then further defined in more detail by the directors and by the officers themselves. To the extent that these respective functions of corporate officers and agents are not thus defined by the corporation, they may be defined by the law and custom is developed by normal practices.
Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 16.01 (7th ed. 2015) (footnotes omitted).

      A pair of observations. First, this operating agreement failed in that it did not clearly delineate the scope of authority of the president and in so doing it failed to differentiate the authority of the president versus the authority of the Board of Directors. Second, it failed in that it was not amended at the time that TW Devices LLC became an owner of CHI as to whether the authority to vote the interest in CHI would be vested in the president as an ordinary transaction or in the Board of Directors as an extraordinary transaction. Had the operating agreement addressed those points, this lawsuit could have been avoided.

New York Court Holds that Assignee of Membership Interests Does Not Have Standing to Bring a Derivative Action


New York Court Holds that Assignee of Membership Interests
Does Not Have Standing to Bring a Derivative Action

      In a recent decision from New York, it was held that a transferee of a membership interest eho  was never admitted as a member did not have standing to bring a derivative action on the LLC’s behalf. MFB Realty LLC v. Eichner, 2016 NY Slip Op 31242(U) (Sup. Ct. New York County, June 24, 2016).
       The allegations in this purportedly derivative action are based upon assertions that certain members used one LLC in order to support another while at the same time depriving the first LLC of various opportunities. Ultimately, the substance of those allegations is irrelevant in that the suit was dismissed for lack of standing.
      Under the subject LLC’s operating agreement, a transfer of the economic rights of membership required the consent of 95% of the members (apparently this 95% threshold was applied on a disinterested basis). Separately, there was a requirement of 95% of the members (again, it appears that this was to be applied on a disinterested basis) in order to effect the admission of a transferee as a member. On the basis that MFB, the purported member bringing the derivative action, was a mere transferee, dismissal was sought.
      As an initial matter, the court reviewed the various allegations and determined them to be derivative (and not direct) in nature. In this case, while the first step, namely consent to the assignment of the economic rights, had been granted, there had been no satisfaction of the second step, namely written consent to the admission of the transferee as a member. With respect to the consent that was given:
Significantly, however, the consent letter is completely devoid of any express (or implied) reference to the transfer of a membership interest in T. Park, and nothing in that letter may be interpreted as a consent to the transfer of membership. From there, applying the rule that “only a member of an LLC at the time of the alleged wrong to the LLC has standing to bring a derivative claim on behalf of that company,”, citing Cordts-Auth. v. Crunk, LLC, 815 F. Supp. 2d 778, 786-787 (S.D. N.Y. 2011) (citing New York Law), affd 479 Fed. Appx. 375 (2d Cir. 2012), it was held that:
Because it has failed to show that 95% of the members of T. Park gave written consent to MFB becoming a substituted member of T. Park, MFB lacks standing to sue on T. Park’s behalf.

Good Faith Trumps Sole Discretion in LLC Agreement’s Repurchase Provision


Good Faith Trumps Sole Discretion in LLC Agreement’s Repurchase Provision

 

       Peter Mahler, in his blog New York Business Divorce, has reviewed a case involving an LLC buy-out provision that mixed the sole discretion and good faith standards,. The  short-term result was that summary judgment could not be granted the company on its argument that the plaintiff could not challenge the company’s valuation of the plaintiff’s interest therein.   Long-term it may mean that the valuation will not stand up, and the company may be subject to damages in excess of the value of the interest.

      HERE IS A LINK to Peter’s  review of Saleeby v Remco Maintenance, LLC, 2016 NY Slip Op 31447(U) [Sup Ct NY County July 25, 2016].

Thursday, August 4, 2016

New Jersey Supreme Court Analyzes Widely Used Provision for Judicial Expulsion of Member from LLC


New Jersey Supreme Court Analyzes Widely Used Provision for Judicial Expulsion of Member from LLC

 

Earlier this week, the New Jersey Supreme Court reversed both the trial court and the appellate decision division, finding, on the facts of this particular case, that the standard for judicial expulsion of a member from an LLC had not been satisfied. This decision has ramifications in all states that have adopted either the uniform limited liability company act or the revised uniform limited liability Company act, both containing these same standards for judicial expulsion.  IE Test, LLC v. Carroll, A-63 Sept. Term 2014, 2016 WL 4086260 (N.J. Aug. 2, 2016).

Before going any further, let me note that Kentucky does not have in its LLC act a provision for judicial exclusion of a member.  Likely one could be added in an operating agreement.

This case involves a three member LLC.  All three, two different degrees, had been involved in a predecessor organization in the same line of business;  they entity went into bankruptcy, causing one of the members, the defendant Carroll, to lose in excess of $2.5 million.  With respect to the new LLC, the three members did state their intention to enter into a full operating agreement for the LLC, IE Test, LLC, acknowledging in the meantime that “the Members of the Company and their LLC Percentage Interest have been and are: Kenneth Carroll (33%), Pat Cupo (34%) [and] Byron James (33%).”   It was with coming to agreement on that full operating agreement that the relationship between the members broke down.

Cooper and James were actively involved in the management of IE Test.  Carroll, in contrast, was not involved in day-to-day management had minimal involvement with the company beyond a single sales call.  Cooper and James drew “salary” and “benefits” from the LLC while Carroll was not similarly compensated. That said, Carroll was still feeling the sting from the $2.5 million loss he had suffered with respect to the predecessor entity. While there was agreement that IE Test LLC was not responsible on that loss, Carroll proposed an operating agreement pursuant to which he would receive certain payments intended to at least in part make him whole on the loss. Cooper and James, however, were unwilling to agree to those terms. Believing that the relationship with Carroll would be irrevocably broken consequent to their refusal to agree to those terms, they sought to judicially expel Carroll from the LLC.

Alleging all of breach of fiduciary duty of loyalty, breach of the fiduciary duty of care, breach of contract in breach of the implied covenant of good faith and fair dealing, the LLC filed an action against Carroll seeking his judicial expulsion.  To provision of the New Jersey Limited Liability Company Act at issue is N.J. Code § 42:2 B-24 (b)(3), which provides:

On application by the limited liability company or another member, the member’s expulsion by judicial determination because:

(a) the member engaged in wrongful conduct that adversely and materially affected  the limited liability company's business;

(b) the member willfully or persistently committed a material breach of the operating agreement; or

(c) the member engaged in conduct relating to the limited liability company business which makes it not reasonably practicable to carry on the business with the member as a member of the limited liability company.


On motions for summary judgment, the trial court rejected the effort to expel Carol based upon subsection (a) of the statute, finding that Carroll's insistent upon compensation did not constitute “willful misconduct” within the meaning of the statute.  Well those demands may have been unreasonable, they were not of themselves unlawful and they inflicted no harm on the LLC. Slip op. at 8.  The trial court did, however, find that Carroll could be expelled under subsection (c) on the basis that was no longer “reasonably practicable” for the three members to coexist in the LLC and that further controversy and litigation is likely to result. Slip op. at 9.  The determination would be affirmed by the Appellate Division. See 2014 WL 8132907.  This case, through the decision of the Appellate Division, has been reviewed by Peter Mahler in his blog New York Business Divorce in a posting titled Involuntary Member Dissociation Under RULLCA (September 28, 2015); HERE IS A LINK to that posting.

Looking first to the “not reasonably practicable” language of (c) in the statute quoted above, the Court began by noting that “not reasonably practicable” is not defined in the LLC Act.  Still, as the conduct at issue must be “relating to the limited liability company business,” the Court held that the “Legislature clearly did not intend that disagreements and disputes among LLC members that bear no nexus to the LLCs business will justify a member's expulsion under subsection 3(c).” Slip op. at 18.  Expanding on this theme, the Court wrote:

Significantly, the Legislature did not authorize a court to premise expulsion under subsection 3(c) on a finding that it would be more challenging or complicated for other members to run the business with the LLC member than without him. Nor does the statue permit the LLC members to expel a member to avoid sharing the LLC’s profits with that member. Instead, the Legislature prescribed a stringent standard for prospective harm: the LLC member’s conduct must be so disruptive that it is “not reasonably practicable” to continue the business unless the member is expelled.” Slip op. at 19.

In applying this test, “the court [is] to evaluate the LLC member’s conduct relating to the LLC, and assess whether the LLC can be managed notwithstanding that conduct, in accordance with the terms of an operating agreement or the default provisions of the statute.” Slip op. at 21. Detailing the factors to be considered in that analysis, the Court wrote:

In that inquiry, a trial court should consider the following factors, among others that may be relevant to a particular case: (1) the nature of the LLC member’s conduct relating to the LLC’s business; (2) whether, with the LLC member remaining a member, the entity may be managed so as to promote the purposes for which it was formed; (3) whether the dispute among the LLC members precludes them from working with one another to pursue the LLC’s goals; (4) whether there is a deadlock among the members; (5) whether, despite that deadlock, members can make decisions on the management of the company, pursuant to the operating agreement or in accordance with applicable statutory provisions; (6) whether, due to the LLC’s financial position, there is still a business to operate; and (7) whether continuing the LLC, with the LLC member remaining a member, is financially feasible. Id. (footnote omitted).

            In this instance, as the New Jersey LLC Act has a default rule of majority rule, and as the respective ownership percentages of the members had been determined, but for narrow actions that by default require the unanimous approval of the members, the Court found that IE Test, LLC could operate.  Carroll’s conduct did not affect the LLC vis-√†-vis third-parties, and it continued to financially flourish.    For those reasons, the trial court’s grant of summary judgment to IE Test LLC was reversed.

      Peter Mahler's review of this decision is available on his blog.  HERE IS A LINK to that posting.

Monday, August 1, 2016

Congrats to Professor Joan Heminway

      Congrats to Professor Joan Heminway
 
      My friend Joan Heminway has been appointed to the Rick Rose Distinguished Professorship at the University of Tennessee College of Law.  If you knew Joan you would know that this is a well deserved honor.  She is an outstanding scholar, an outstanding teacher and a great friend.
 
     HERE IS A LINK to the announcement.