This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Howard Lefkowitz passed away
too soon; we lost him in 2007 – today would have been his 80th birthday.
Last year a number of us lucky
enough to know and work with Howard were remembering him.Here is (slightly edited) what we shared:
But for his untimely passing,
if my math is correct, today would have been the 79th birthday celebrated by
Howard Lefkowitz.He remains a treasured
friend to many of us. For those of you who never got to know him, you missed
out on a wonderful person.
I submit that a glass of wine
should today be raised in his memory.
And it better be good
wine.Howard had great taste in wines
and always selected great ones for our meetings!
D’accord.I guess that means that Bill, Allen, and I
can’t salute Howard at Shelby’s.Howard
was not only a wonderful person, but also a great partnership lawyer.
He was that, but I think a
single malt scotch would also fit the bill.
One of my wonderful memories of
Howard and Marty - after Susan and I had dinner in New York at which Marty and
Sandy had planned to join us but were unable to do so, I spoke with Marty about
the bill and he said, “Oh No, you didn’t let Howard select the wine.”
Well I just had a glass of
Malbec with a client and while not thinking of Howard specifically he has a
piece of my heart always.Although he
did not show affection easily in his last year he did things selflessly that
helped me and those acts will never be forgotten.I hope his spouse Midge is doing OK.
Looking forward to seeing you
all soon and raising a glass to Mr. Wheaton whom I just had a pint or two of
Pumpkin Ale in a Boston Pub.
Hear!Hear!One of my very favorites and deeply missed.Thanks for the reason to think about
My very first dinner with
Howard (Orlando ABA meeting in 1996) involved him choosing the wine.
No offense to anyone else on
the list, but his was my favorite Lubaroff dinner. Bittersweet given the
timing, but for what it meant to Howard and Midge, and Sandy, it topped them
As most of you know, I had the
great good fortune to become one of Howard’s friends - fairly often we would
have rather lengthy and complex discussions, as likely to have been about the
implications of tonal variance between “his” part of The Book and “mine”, as
the scope of legal review required to give an opinion about a Delaware LLC (ALL
of Del contract law and anything else affecting Del contracts, in addition to
the Del LLC law).And I can confirm -
having tasted some - that his wine cellar, esp. in the Berkshires, was
WELL-STOCKED with liquid assets.So it
is with humility, pride and an unending sense of loss that I can report that at
the ABA Meeting in Atlanta in ‘04 he allowed me to choose the wine.
Re Tom’s suggestion of a fine Cal cabernet, my
sense is that Howard was of an age and taste that particularly venerated French
wines, so let me suggest perhaps instead: a Cos, a Lynch-Bages, a Mouton; or a
Vosne-Romanee, a Beaune; or even L’Hermitage or some other great Rhone.To the extent one would follow the lead of
eminent Del counsel (not at all a “Red Herring”), may I commend Talisker to
your attention (it is in a way the “family booze”, coming from the headquarters
of the Clan Donald [Mac, not Trump] on Skye).
Midge -whom we see in NY, in the Berkshires
and at Silver Lake from time to time - is well.She is now on an outing to South Africa.I will pass along your very special observations and observances, which
she will cherish.Thank you all, and
esp. Tom, for remembering.
I would be remiss not add a few
recollections of Howard and Midge and some of the evenings that Jean and I
spent with them at various ABA BLS meetings.Howard and Midge along with Marty and Sandy rode subways together in NY,
dined together in SF, NY, Chicago and any number of other cities. The wine was
always important, so much so, when in some little spot in SF, the waiter, not
realizing that Howard was actually going to ready the WHOLE WINE LIST, just to
see ifwe could dine there, made a snide
comment to Howard about taking too long to make up his mind, whereupon we got
up and left. That was Howard at his best. He and I jogged together in NY, SF,
Chicago and in most other cities we met in.When he said after one jog that he didn’t know if he could keep jogging
at our meeting was when I knew he was really not well.
I counted Howard as a mentor
and companion along the way.
It is good to remember.
I have held back, as usual, to
avoid what might be considered ill-advised, improper, or downright obnoxious
comments.However, since we are
dwelling on Howard, and his wine fetish, I cannot any longer hold myself in
check.The only thing I can say in
self-defense is that Howard thought my revelations were so important that he
insisted on taking notes.
We were sitting next to each
other at a Combined Wine Tasting/Dinner event at Omi’s Farm several years
ago.Howard was waxing eloquent about
wines, his extensive experiences in connection therewith, and several other
things, which included, as I recall, or joint recollections of being members of
that rare breed of beings, former Naval Officers who had been billeted to DERs.(Don’t ask, it is too painful.)
I mentioned to Howard that
several colleagues of mine from Oakland, where the school board had recently
imposed a requirement that some of the courses be taught in Ebonics, had
decided It was time to have an Ebonics Winery.He naturally asked what (the hell) I was talking about.I explained that this was a Winery in West
Oakland that produced wines that had a fine bouquet, great nose and, at the
same time, a name that related to the local culture.Again I got that rather impertinent
question.So, I said:
Well our first vintage
definitely has a French character---it is calledClos de Door.
Then we have developed an
extremely dry red wine that is drawing great reviews and following:PeeNoMo
Finally, we are about to
release our first sparkling wine (a.k.a. Champagne)which we call:Sho Nuf du Pop.
I swear that in Howard’s
archives you will find the notes from this conversation.
I too have not said anything
but I’ve decided I will now reverse that. Several years ago I invited Howard to
be a speaker at one of my Delaware symposia. I was talking about RUPAs
articulation of the duty of care. My stand was that the RUPA duty of care was
not a fiduciary duty but rather a statement of degrees of accountability. As I
was leaving the podium Howard signaled to me. He whispered that he had enjoyed
my presentation but that I was completely wrong. That’s the way I’ve learned
with this group over many years. Thanks to all - past and present - for the
I have laughed out loud as I
have read some of these and have teared up as I have read others and have
savored remembering time spent with Howard and the rest of you. I treasure you
all as I treasured Howard.
Today is the anniversary of the
Battle of Agincourt, taking place in 1415 (601 years ago) 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 refer
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 numerically 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 French
and their allies were disorganized, and overall command of the battlefield was
never achieved.Rather, individual nobles
led their own contingents forward in a disorganized and sometimes conflicting
manner.The terrain favored the English
in several ways.The French “artillery,”
crossbowmen (largely Pisan mercenaries) were not effectively deployed, and they
had the unenviable task of shooting uphill.That same terrain required the French forces, both mounted and on foot,
to attack uphill over a recently plowed field that, consequent 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 that 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
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
Foran excellent review of the
battle, see Juliet Barker's Agincourt.
As invented by Shakespeare in Henry
V, Scene iii, the St. Crispin’s Day speech would immortalize Henry V:
WESTMORELAND. O that we now had
But one ten thousand of those men in England
That do no work to-day!
KING. What’s he that wishes so?
My cousin, Westmoreland? No, my fair cousin;
If we are mark’d to die, we are enow
To do our country loss; and if to live,
The fewer men, the greater share of honour.
God’s will! I pray thee, wish not one man more.
By Jove, I am not covetous for gold,
Nor care I who doth feed upon my cost;
It yearns me not if men my garments wear;
Such outward things dwell not in my desires.
But if it be a sin to covet honour,
I am the most offending soul alive.
No, faith, my coz, wish not a man from England.
God’s peace! I would not lose so
great an honour
As one man more methinks would
share from me
For the best hope I have. O, do
not wish one more!
Rather proclaim it, Westmoreland,
through my host,
That he which hath no stomach to
Let him depart; his passport shall
And crowns for convoy put into
We would not die in that man’s
That fears his fellowship to die
This day is call’d the feast of
He that outlives this day, and
comes safe home,
Will stand a tip-toe when this
day is nam’d,
And rouse him at the name of
He that shall live this day, and
see old age,
Will yearly on the vigil feast
And say “To-morrow is Saint
Then will he strip his sleeve
and show his scars,
And say “These wounds I had on
Old men forget; yet all shall be
But he’ll remember, with
What feats he did that day. Then
shall our names,
Familiar in his mouth as
Harry the King, Bedford and
Warwick and Talbot, Salisbury
Be in their flowing cups freshly
This story shall the good man
teach his son;
And Crispin Crispian shall ne’er
From this day to the ending of
But we in it shall be
We few, we happy few, we band of
For he to-day that sheds his
blood with me
Shall be my brother; be he ne’er
This day shall gentle his
And gentlemen in England now-a-bed
Shall thinkthemselves accurs’d they were not here,
Book of Genesis begins “In the beginning God created the heavens and the
earth.” At some time thereafter “Then God said, “’Let there be light;’ and
there was light.”According to
calculations made by James Ussher, Archbishop of Armagh, that first moment of
creation took place at the onset of evening (6 p.m.) proceeding October 23,
4004 b.c.These calculations were made
by working backwards from the birth of Jesus in 4 b.c. (Ussher accounted for
Dionysius’ error in calculating the year of Jesus’ birth) based upon the ages
of the Patriarchs and the Kings of Israel as set forth in the Old Testament.
Ussher’s calculations, October 23 would have been a Sunday, the first day of
the seven day week described in Genesis that would conclude on Saturday, the
Sabbath day of rest.
Ussher’s dating of the Exodus from Egypt to 1491 b.c. comports with the
modern scholarship of its dating (to the extent it took place as a historic
event) to a so called “early Exodus.”
Ussher’s chronology achieved its fame by being incorporated into
numerous Bibles, they sometimes listing its dates in marginal notes.Numerous similar chronologies, including one
by Isaac Newton and another by the Venerable Bede, failed to be so referenced
and faded into obscurity.
course it is all malarkey; the age of the Earth is measured in billions, not
thousands, of years.In addition, and
just to be snarky, if Creation took place at 6 p.m., was that Eastern Standard
October 22 is also the anniversary of the “Great Disappointment,” the
failure of the Second Coming predicted for 1844 by William Miller and certain
of his disciples based upon their interpretation of Biblical texts.When October 23, 1844 dawned the fallacy of
their prediction was laid bare.
Disassociation of Member
Pursuant to Operating Agreement Given Effect
A recent decision from
Connecticut held that the provision of an operating agreement providing that
upon certain defaults a member would be disassociated would be enforced. The
immediate effect of this ruling is that a suit against the disassociated member
for breach of fiduciary duty and conversion of company assets may proceed in
federal court pursuant to diversity jurisdiction Inteliclear, LLC v. Victor, Civil No. 3:16cv1403 (JBA), 2016 WL
5746349 (D. Conn. Oct. 3, 2016).
Inteliclear, LLC had four
members: Victor (30%), Powell (30%), Barretto (30%) and DeVito (10%). Victor
was the LLC’s “General Manager.” Prior to this suit they had been involved in
litigation as to the company. After the dismissal of that litigation (initiated
by Victor), the other members voted to remove Victor as the General Manager,
and this suit was filed against him.
The claims against Victor arose
out of his operation for the LLC other than in compliance with the operating
agreement. For example, while it provided that a check exceeding $5000 could be
issued only with the approval of a majority of the members, Victor was
apparently writing $5000 checks without that member consent. In addition, he
was using company funds to pay personal expenses. Consequent to that conduct,
the members other than Victor advised him that he was disassociated as provided
in the operating agreement.The
operating agreement of Inteliclear, LLC provided in part:
The default by any Member in the performance
of any Member’s covenants, obligations, responsibilities, duties or
undertakings set forth and provided for under the provisions of the Operating
Agreement, this Members Agreement, the Members Confidentiality and Non-Compete
Agreement or any amendment or successor thereto, in which event, in addition to
any remedy in law or at equity available to the non-defaulting Members, the
non-defaulting Members may elect to treat such default as a withdrawal of the
defaulting Member in connection with such Member’s desire to no longer provide
Member’s Services to the Company under paragraph 8.B of this Members Agreement
and may proceed with the elections provided non-withdrawing Members in
paragraphs 8.B(1) and (2) above in regard the defaulting ember’s [ (sic) ]
Interest.”Barretto, Powell and DeVito advised Victor that his violations of the
operating agreement would be treated as effecting Victor’s disassociation from
the LLC. Victor then moved the LLC’s funds to a new bank. He as well withdrew
$30,000 for himself. The suit sought a declaration that Victor, having been
disassociated from the LLC, could not act on its behalf. 2016 WL 5746349, n. 7.
The thrust of this decision was
whether the suit could be filed against Victor in federal court. An LLC is
treated, for purposes of diversity jurisdiction, as having the citizenship of
each of its members. If Victor was still a member of the LLC, there would be no
diversity and the suit would be dismissed. If, in the alternative, Victor was a
disassociated (i.e., a former member)
of the LLC, the suit could proceed.
The court would hold that
Victor was disassociated from the LLC (i.e.,
no longer a member) and in consequence his citizenship would not be attributed
to the LLC. In doing so it had to resolve the question of whether it was making
a determination on the merits, which it could not due absent a trial on the
merits, or rather resolving a jurisdictional question. In part on the basis that
there had been a hearing on the motion for a restraining order, that affording
Victor due process, the court said:
The Court is satisfied that the appropriate
way to proceed is to hear and decide the factual issues bearing on its subject
matter jurisdiction, recognizing that they also implicate elements of at least
one of the substantive claims as well as the basis for the injunctive relief
sought. 2016 WL 5746349, *5.
Reviewing Victor’s conduct, the
court found that injunctive relief keeping him from alleging he had control of
the LLC was warranted on the basis that he was no longer a member of the LLC.
Rather, he had been disassociated under the terms of the operating agreement
consequent to his own conduct.
The Court finds that Plaintiff has
demonstrated that Barretto, Powell and DeVito had legitimate justification for
believing that Defendant defaulted in the performance of his “covenants,
obligations, responsibilities and undertakings” under the Agreements.As early as the end of 2015, Barretto, Powell
and DeVito suspected Defendant was broadly misappropriating InteliClear funds
and hired Ram Associates, an accounting and financial consulting firm, to
investigate records that they became privy to as a result of the state court
action but had not been otherwise able to obtain from Defendant in the ordinary
course of business.
Most significantly, as Plaintiff claims,
Plaintiff’s American Express and bank records appear to show that Defendant
treated InteliClear’s accounts as his own personal piggy bank. The evidence
showed that Defendant used Plaintiff’s American Express card to purchase
personal items such as a guitar costing over $500 for himself; airline tickets
for his wife, daughter and even his daughter’s former boyfriend, totaling well
over $2,000; a gym membership costing over $1,000 for his wife and that he used
InteliClear funds to pay his personal credit card bill.The evidence showed these charges and
payments were not “reasonable and necessary business, educational and
profession expenses” permitted by Paragraph 4(1) of the Members Agreement, nor
reimbursable expenses under Paragraph 8.1 of the Operating Agreement.
Additionally, they were not authorized by the other Members. Plaintiff
characterizes Defendant’s actions as, in effect, stealing from Plaintiff,
demonstrating that he is a defaulting Member under Paragraph 12 of the Members
Agreement. 2016 WL 5746349, *5 (citations to record deleted).
Whether and when members of an
LLC are subject to self-employment tax with respect to distributions they
receive therefrom is a (at best) complicated question. A recent article posted
in Forbes sets forth a non-technical explanation of how the question arises,
even as it explains that there is no definitive answer.
Today marks the 950th 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 Godwinson
(King Harold II). Harold’s family, the Godwins, were the most powerful in
England. Harold was himself an earl, and as well the father-in-law to Edward
the Confessor, the latter having been married to Harold’s daughter Edith. 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 right to the throne, leaving it instead to William. In
addition, Harold Hardrada of Norway 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 army of
Harold Godwinson met the invading army of Harold Hardrada (supported by Tostig
Godwinson, Harold’s brother) at the Battle of Stamford Bridge (HERE IS A LINK
to a posting on those events). The invading army was defeated, and Hardrada was
killed. 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.
Those forced marches were some 240 miles each way.
For reasons that have baffled many later historians, Harold,
upon arriving in London, quickly turned his troops, already exhausted from the
march, toward Hastings. He did this notwithstanding that reinforcements were
due to arrive the following day. Still, Harold led his forces towards William’s
beachhead, leaving word for the reinforcements to actual up as soon as
possible. Those reinforcements included the archers.
The Battle of Hastings proper (there was an earlier
skirmish) probably began around 11 in the morning. Through most of the day the
forces of Harold prevailed – attacks on the shield wall were not effective, and
the Norman archers were not effective firing up-hill. Harold holding his own
against William would have been for Harold a win. As observed by Frank McLynn
in 1066-The Year of Three Battles:
[Harold] knew he had only to hold out until nightfall when
reinforcements were certain to arrive; he could play for a draw but William had
to have a win.
The Norman infantry having failed to break through, William
sent in his calvary. Attacking uphill, they did not have the force necessary to
break through. When William’s flank started to fail (the Breton forces) and
William was unhorsed and rumored to be dead. Harold’s forces began an advance
downhill, their shielded wall still intact and functionally invulnerable. But
then the advance lost its momentum, perhaps due to the death of its leader
Leofwine, Harold’s brother. William’s forces pushed back and in order Harold’s
forces reversed themselves back uphill. It was then a battle of attrition, and
the Norman invaders were lost at a lower rate than were Harold’s forces. A
combined archery and armored calvary assault finally broke the shielded wall,
and the battle dissolved into combat between small units ensued. Harold and the
remaining troops around him were attacked and Harold fell to multiple sword
blows and a lance through his chest.
Maybe an hour after Harold fell, reinforcements, including
additional housecarls, arrived.
The accepted, albeit almost certainly apocryphal, story is
that Harold fell after being struck in the eye with an arrow. The Bayeux
Tapestry may be interpreted as saying such. However, the “King Harold was
killed” heading is over two figures (neither wearing a crown), one with an
arrow in his eye and the other being struck down by a sword. If the former is
meant to be Harold, the famous arrow in the eye as depicted in the Bayeux
Tapestry 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
By Christmas William crowned King of England and was in
Westminster Abbey accepting pledges of fealty from England’s mobility. Still,
the next two decades of his reign would see numerous rebellions and challenges,
including one from his own son Robert.
As for the Bayeux Tapestry itself,
HERE IS A LINK is an animated (and translated) version.
The English like to claim that the
Norman Invasion was the last invasion of England. This is not true. For
example, during the Barons War, a French force invaded and had control of a
significant portion of southern England, and the Isle of Wight was invaded in
1545. But the Norman Conquest is the last successful invasion of
Today marks the anniversary of the widespread
arrest in 1307 throughout France of the members of the Order of Poor
Fellow-Soldiers of Christ and Temple of Solomon, better known as the Knights
Founded shortly after the First Crusade
as a monastic order, the mission of the Templars was to provide protection to
pilgrims coming to the Holy Land and otherwise protect the Latin Kingdom.Eventually, the Order developed a rather
sophisticated banking organization.For
example, one proposing to travel from England to the Holy Land could deposit
funds with the Templars in England, receiving in return what was essentially a
letter of credit against which the individual could make withdrawals as they
travelled through Europe and ultimately to the Holy Lands.The military component of the Order, although
not large in actual numbers (never more than 1,500 to 2,000 knights), was
considered highly effective – after the Battle of Hattin, Saladin ordered the
execution of all captured Templars.
With the eventual loss of the Holy Land
territories by the turn of the 14th century, the Templars were without a reason
for existence.At the same time, Philip
IV of France, anxious to address a depleted royal treasury by expropriating
Templar property and as well exterminate his substantial debts to the Order,
fabricated numerous salacious allegations against the Templars, leading to
their mass arrest on October 13, 1307.Ultimately Pope Clement V, then resident in Avignon and largely a pawn of
the French crown, issued a bull directing that Templars, wherever located,
should be arrested.The remnants of the
Order, other than those executed on spurious charges of heresy, were eventually
either pensioned or absorbed into other military orders such as the Knights
Hospitaller or the Teutonic Knights
A papal finding (a/k/a the Chinon
parchment) determined that the Templars were not guilty of the many charges
against them including idolatry and heresy.Their actual failing was having lost their mission while being at least
perceived as being wealthy while a king needed funds.Those assertions are in many instances
questionable – a detailed review of the inventories of the English properties
of the order demonstrated a far less than extravagant lifestyle. Although the
Templars would be found innocent of heresy, as a political concession the Order
was dissolved in 1312, its properties turned over to the Knights Hospitaller.
Notwithstanding the efforts of numerous
modern authors, the Templars did not possess the Holy Grail, irrespective of
whether that was a physical cup or, as suggested in one particularly fanciful
book, an oblique reference to Mary Magdalene and, ultimately, the line of
Merovingian kings. Ignore the movies as well – Guy de Lusignan was not, as “The
Kingdom of Heaven” would have you believe, a Templar. A well written
introduction to the history is The Templars by Piers Paul Read.The books by Malcolm Barber are as well
Philip IV's moniker is “the Fair”; who
says history does not have a sense of irony?
The 2016-17 issues of the Limited Liability Company
Handbook has been released. For a number of years I have contributed
Kentucky specific forms to this project. My thanks to editors Mark Sargent and
Walter Schwidetzky for their kind words in the Preface.
of LLC to File for Bankruptcy Rejected: No Authority to File
In the decision from earlier this year, a
bankruptcy court in Mississippi considered whether there was appropriate
authority to file a bankruptcy petition on behalf of an LLC.Holding ultimately that a vote of the members
was required to file for bankruptcy, in that there is been no member vote, the
petition was rejected. In re: Mid-South
Business Associates, LLC, ___ B.R. ___, 2016 WL 4717939 (N.D. Miss. March
At the relevant time, this LLC had four
members.Two of those members were
designated the “managers” of the LLC; those two members held well in excess of
a majority of the interests in the LLC.For reasons that are not detailed in this decision, the two managers
abandoned the LLC, and the two non-manager members stepped in to manage its
affairs. There was never, however, any vote of the members or any other
official action to endorse these changes.
Ultimately, the two non-manager members would
assert that the managers had, as members, abandoned their interests in the
LLC.Thereafter, they on the LLC's
behalf filed a petition for re-organization in bankruptcy. At that juncture,
the two majority members filed an objection to the bankruptcy petition, asserting
there was no authority to make that filing.
The bankruptcy court applied the
Mississippi Limited Liability Company Act and this LLC’s operating agreement
and determined that there was no authority to file the bankruptcy petition.
As to the alleged abandonment of the LLC
and the loss of member status, the court found there was no provision to that
effect in the LLC Act or the operating agreement.As such the manager/members remained members
in the LLC.
The court identified two
independent bases for finding that the bankruptcy petition was not authorized.
First, while the operating agreement vested authority over business operations
in the managers, it identified certain actions that could not be undertaken
without the approval of two-thirds of the members. While bankruptcy was not
listed therein, it was held that:
The Operating Agreement vested the Managers with the sole
right to manage the business operations of the Debtor as necessary in the
ordinary course of business, subject to any restrictions found in the Act. The
Operating Agreement lists certain situations which require a two-thirds
majority vote of the membership interests. Although filing a bankruptcy
petition is not an enumerated action explicitly requiring a two-thirds majority
vote, it is well-settled that “a decision to file for bankruptcy protection is
a decision outside the ordinary course of business, even for an entity in
dissolution.” In re Avalon Hotel
Partners, LLC, 302 B.R. 377, 379 (Bankr. D.Or.2003)(emphasis added).
Accordingly, even the Managers were not authorized to file for bankruptcy
protection without a membership vote, because doing so is not within the scope
of their authority as Managers under the terms of the Operating Agreement.2016 WL 4717939, *8.
On the same point, the decision
Furthermore, the filing of a bankruptcy petition on behalf
of an LLC is an extraordinary action that would have required a two-thirds vote
of the membership interests in the Debtor pursuant to the Operating Agreement. See In re Arkco Properties, Inc., 207
B.R. 624, 628 (Bankr. E.D. Ark. 1997)(collecting authority for the proposition
that “a bankruptcy filing is a specific act requiring specific
authorization.”). 2016 WL 4717939, *9.
In addition, the court observed that a
bankruptcy petition would transfer the LLC’s property to the bankruptcy estate.
As the operating agreement required the approval of two-thirds of the members
in order to transfer all of the LLC's property, and as there had been no vote
of the members, the petition was invalid. 2016 WL 4717939, *9.
Michigan Court Enforces
Written Withdrawal From LLC
A recent decision from Michigan
reviewed and in turn rejected the efforts by a former member of an LLC who,
after resigning therefrom, made claims including for reinstatement as a
member.The Michigan Court of Appeals
upheld the application of the written resignation documents.Clark
v. Butoku Karate School, LLC, Docket No. 326638, 2016 WL 4419321 (Mich. Ct.
App. Aug. 18, 2016).
Joby Clark and John Wasilina
were the two equal members of Butoku Karate School, LLC, a Michigan limited
liability company.The company was
formed in 2002 to operate a karate studio.In June, 2010 and thereafter, Wasilina learned of a rumor that Clark was
engaged in a sexual relationship with an underage student of the LLC.While Clark denied the rumors, he and Clark
did agree that “even if meritless, [the rumors] would likely destroy the school
because most of the students were children and parents were likely to withdraw
their children.” In light thereof, Wasilina
caused there to be drafted agreements providing, inter alia, that Clark was withdrawing from the LLC and had no
further claim on its assets. Those agreements were signed and delivered by
Clark. In connection therewith, Clark
and Wasilina withdrew nearly all of the company’s operating funds and evenly
split them. Ultimately Wasilina would be
twice charged with criminal conduct involving the underage student. Both trials ended in a mistrial. Clark thereafter entered a plea of no contest
to a lesser charge.
At some point thereafter, Clark
initiated this suit against the LLC and Wasilina, alleging all of fraud, a
failure to distribute and conversion of personal property. With respect to the allegation of fraud,
[A]lleged that defendants had
defrauded plaintiff because Wasilina had induced plaintiff to sign the
documents by misleading plaintiff into believing he would later be reinstated
in the company, and also by promising to pay plaintiff for his membership
The trial court granted summary
judgment to the defendants, and this appeal followed
With respect to the failure to
distribute, the Court of Appeals first considered whether the operating
agreement served to override the statutory default rule that would otherwise
provide for the distribution to withdrawn member of the fair value of their
membership interest. MCL § 450.4305. The court found that the written operating
agreement did address the question of rights to a distribution upon withdrawal,
and therefor controlled over the LLC Act. Further, the agreements signed by
Clark and Wasilina in connection with Clark’s withdrawal from the company
provided in part:
The Company accepts immediate
withdrawal and resignation of Member Joby Clark from any and all aspects [of]
the company … Joby Clark’s interest in the company is extinguished in its entirety without a substitute or financial
compensation. …. nor does the Company owe any monies, duties,
rights, responsibilities, privileges, accountings, or any other items or
tangible means of remuneration in any way to the resigning Member, Joby
Clark. (Bracketed language and italics added by the court).
With respect to the effect of
this release, the court found that it constituted an amendment to the operating
agreement. As such, Clark had no claim
against the LLC for a liquidating distribution.
With respect to the allegation
of fraud, and again reviewing the language of the release agreement indicating
that Clark had no further claim against the LLC, the court stated that “It is
difficult to imagine language more definite in ending a business relationship.”
Applying as well general contract rules
as to the effect of an agreement, the court observed:
Rather, plaintiff admits that he
understood the actions that the documents authorize, but chose to believe that
the opposite result would occur. If, as
plaintiff suggests, an oral statement was made contrary to the explicit
language of the documents that he signed, plaintiff’s reliance was not
With respect to the claim
of conversion, its dismissal was upheld on the grounds that the plaintiff had not
indicated what actions the defendants had taken to deprive the plaintiff of his
property. In addition, the consent to
withdraw provided that he had already removed all of his personal property from
the company’s location, and anything that was left behind was to become company
property. As the company now had a right to possession to the property left
behind, there could be no claim for conversion.
Failure to Make Capital Contribution is Breach of Contract, Not a
Breach of Fiduciary Duty
Earlier this summer, a court in North Carolina considered whether a
member's failure to make a capital contribution as called for by the operating
agreement constituted a breach of fiduciary duty.The court held that there was a breach of
contract, but not a breach of fiduciary duty.Brady v. Van Vlaanderens, 2016
NCBC 56, 2016 WL 4005858 (Sup. Ct. N. Ca. July 21, 2016).
Brady, the plaintiff in this action, was apparently involved in a wide
variety of business ventures with various of the individual defendants
involving a number of business organizations that likewise are defendants.After she was terminated from another
company, United Tool & Stamping Company of North Carolina, LLC, Brady
bought an apparently wide ranging action.This decision related exclusively to her claims with respect to
Enterprise Realty, an LLC in which she was a one third member.
When enterprise was losing money, in accordance with the operating
agreement, capital calls were made.Brady, however, default another obligation to satisfy those capital
calls on the basis that:
She has not been given access to adequate
documentation to determine the amount of the capital contribution, if any, that
she should be required to make to enterprise, and also that she should be
excused for making the capital contributions because of her exclusion from, and
the mismanagement of, Enterprise and the other company Defendants.
While Enterprise was a member-managed LLC, the members, in writing,
delegated to one of them, Townsend, authority to operate the company and the
authority determine “in his sole discretion” whether additional capital
contributions were necessary.Ultimately, Brady would fail to satisfy capital contribution obligations
With respect to Brady’s claim to inspect company records, in her
deposition, she acknowledged that she had been afforded either copies of or the
right to inspect all the documents she need it.On that basis, summary judgment was granted to the company.
With respect to a claim by Brady that Enterprise should be judicially
dissolved on the basis that her “reasonable expectations” with respect to the
company had been thwarted.Without
determining whether it would be appropriate to extend Meiselman v. Meiselman, 307 S. E.2d 551, 564-67 (N.C. 1983) to
LLCs, the court found that while she may have an expectation of employment with
one of the companies in the family, she had not shown any particular
expectation of employment with Enterprise, the company that had never had
employees.Further, with respect to
assertions that she had been frozen out of the management of Enterprise, there
was the fact that she had participated in the delegation of almost all
management authority to Townsend.Further, the court found that there had been informal discussions as to
management, and that Brady had also participated in the decision to sell the
company’s assets, the even at a loss, in order to cut off further exposure.
With respect to the capital contributions, Brady was found to have
breached the obligations undertaken in the operating agreement.:
The Operating Agreement requires that the
Members make capital contributions in proportion to their respective percentage
interests once the Members unanimously agreed to make additional capital
contributions to pay for Enterprise’s obligations, expenses, costs,
liabilities, or expenditures.Although
Brady has disputed whether the amount of the requested capital contributions is
proper, she has not disputed that she agreed to make the capital contributions
or that she agreed to the actions that led to Enterprise’s indebtedness.Further, Brady admits that, in June 2012, she
stop making capital contributions that were used to pay down Enterprise’s debt.
Brady argues, in part, that her failures
to make capital contributions should be excused because of the facts underlying
her claims against the other Defendants. As noted above, the Court concludes
that the actions underlying Brady’s claims against the other company
Defendants, and particularly the termination of her employment with United
Tool, do not translate to claims against Enterprise or defenses to Enterprise’s
claims and do not excuse Brady’s failure to make capital contributions as an
In turn, the court rejected the notion that the failure to satisfy the
capital contribution obligations constituted, by Brady, breach of fiduciary
duty.Starting with the rule that
members of an LLC do not owe fiduciary duties to one another, citing in support
thereof Kaplan v. O.K. Tech, LLC, 675
S.E.2d 133, 137 (N.C. App. 2009), it was observed as well that the managers of
an LLC owe fiduciary duties.Still,
Brady had undertaken the obligation to pay in additional capital in her
capacity as a member of the LLC, and not in her capacity as a manager of the
That is, the obligation, if any, to make
capital contributions arises as a result of a member’s status as a member, not
as a result of his or her status as a manager.
The Court concludes that Brady’s decision
to stop making capital contributions was made in her capacity as a member and
that Brady's failure to make such contributions is probably considered as a
breach of her contract as a member and not as a breach of the fiduciary duty
she owed as a manager.
Duties Amongst Members, Direct Suit Dismissed; Complaint Should Have Been Brought
as a Derivative Action
In a recent decision from
Connecticut, the court considered and applied the direct versus derivative
distinction in a dispute between two equal members of an LLC.Notwithstanding the fact that the two members
of the LLC stood in a fiduciary relationship with one another, the court found
that the plaintiff’s claims should have been brought as a derivative action on
behalf of the LLC.In that it had been
brought as a direct action, the suit was dismissed.Scarfo
v. Snow, No. AC37794, 2016 WL 5037389, ___A.3d ___ (Conn. Ct. App. Sept.
Scarfo and Snow formed Cider
Hill Associates, LLC as the vehicle through which to develop certain real
property into a subdivision. Snow
devoted his full-time efforts to the development while Scarfo was passive. Ultimately, the project was both over budget
and a loss, an outcome no doubt facilitated by the Great Recession. Ultimately, Scarfo sued Snow, alleging a
variety of claims including breach of fiduciary duty.
On appeal, the parties were
directed to submit supplemental briefings addressing “whether the plaintiff has
standing to maintain this suit in his individual capacity.” The court would find that, notwithstanding the
fiduciary duties that might exist amongst members in LLC, the claims were
derivative. Rather, notwithstanding the
fact that Snow pointed to specific provisions of the operating agreement that
he says were violated:
We conclude that the plaintiff did
not have standing in his individual capacity to maintain his various causes of
action and that the trial court should have dismissed his case.
In support of this
determination, the court relied upon the fact that an LLC is legally distinct
from its members and that, like a corporation, a derivative action is the
proper means for redressing injury to the entity.
In the present case, the plaintiff brought a direct action
against the only other member of Cider Hill, again Cider Hill itself, and
against other companies in which Snow had an interest. He alleges various causes of action flowing
from an alleged breach of fiduciary type duty and a breach of the amended
operating agreement, which was signed by the plaintiff and Snow.
The plaintiff contends that Snow essentially mismanaged the
Evergreen Project. Although the
plaintiff contends that he suffered direct injury by the alleged action or
inaction of Snow, any benefit he would have received from the Evergreen
Project, were it not for the alleged improprieties of Snow, would have flowed
to him only through Cider Hill, first benefiting Cider Hill. Accordingly, if there was an injury, that
injury was sustained by Cider Hill and then sustained by the plaintiff. Thus, the plaintiff’s injury is not direct,
and he has no standing to sue in his individual capacity.
The form of the judgment is
improper, the judgment is reversed, and the case is remanded with direction to
dismiss the case for lack of subject matter jurisdiction.
Another LLC Case Dismissed
For Failure to Name the Injured Parties to the Suit
In a recent decision from
Minnesota, an appeal was dismissed on the basis that the alleged injury was
suffered not by the LLC plaintiff, but rather by its individual members. Environmental Trust, LLC v. Hi-Tek Rubber,
Inc. No. A15-1942, 2016 WL 4421191 (Minn.
Ct. App. Aug. 22, 2016).
Gordon Cell, the majority owner
of Hi-Tek Rubber, Inc., had been pushing the company for a number of years to
develop various products. It was,
however, never successful. In 2007, it
was offered a $1 million line of credit by Guaranty Bank of Iowa provided the
line of credit was guaranteed. A number of Hi-Tek’s shareholders agreed to
guarantee that line of credit. Environmental Trust LLC was organized with those
guarantors as its members. Cell, while a “governor” of Environmental Trust, was
not a member thereof. As recited by the
According to its Member Control
Agreement (MCA), Environmental “was created as a financing tool for Hi-Tek.” The only members of Environmental were the
personal guarantors of the line of credit to fund Hi-Tek. Each guarantor guaranteed $55,000 as a “contribution.”
The MCA provided that the guarantors had no right against Environmental to
return any of the funds paid pursuant to the personal guarantees.
As you can anticipate, things
did not go well. Hi-Tek never developed a marketable product, and eventually it
suffered an uninsured fire that destroyed portions of its inventory and
equipment. Thereafter, theft and
vandalism caused further damage to its facility. Through all this time, Hi-Tek never executed
and delivered to Environmental an otherwise called for promissory note and
security agreement. As such, Environmental,
as to Hi-Tek, was an unsecured creditor. Then:
In 2011, Hi-Tek could not pay the
interest payments and announced he was going to default on the line of credit. To prevent default, the guarantors use their
personal funds to make interest payments on the loan and to pay off the line of
credit. The total amount of the loan
plus interest repaid by Environmental’s members was $675,730.39.In 2014, Environmental sued Cell for breach
of contract, unjust enrichment, breach of statutory and common-law fiduciary
duty, conversion, fraud, and intentional and negligent misrepresentation. A jury found in favor of Environmental on all
This appeal followed, with Cell
arguing that “Environmental lacked standing to sue him in his personal capacity
and because Environmental did not suffer an injury.” The court would find this reasoning
Environmental was never a party to
the loan agreement or personal guarantees and never experienced harm or injury
related to Cell’s failure to secure the line of credit. Environmental was not required to pay on the
line of credit, and there is no evidence in the record that Environmental
experience any negative consequences relating to high Hi-Tek’s ultimate failure
to repay the line of credit..... Because Environmental was not a party to the
relevant agreements, and because Environmental did not experience and
injury-in-fact, Environmental lacked standing to sue Cell.
In addition, the court
discussed Minnesota Statutes § 322B.88, which provides in part that a LLC’s
member “is not a proper party to a proceeding by or against [and LLC] except
when …. the proceeding involves a claim of personal liability or responsibility
of that member and that claim has some basis other than the member’s status as
a member.” Environmental argued this
statute should give it standing to pursue the claims on behalf of its
members.The argument was not
successful.Applying the statute, the
Here, Environmental’s members signed
personal guarantees relating to their Environmental membership, but not as
Environmental members. The claims
pursued by Environmental involve personal liabilities or responsibilities of
the guarantors, and were based on the executed personal guarantees, not on
their Environmental membership. Thus, in
Minn. Stat. § 322B.88 does not prevent Environmental’s members from suing, and
does not grant Environmental standing to sue on their behalf.