Friday, October 28, 2016

In Memory of Howard Lefkowitz

In Memory of Howard Lefkowitz
      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:
        Tom Rutledge:
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.
        Lou Hering:
And it better be good wine.    Howard had great taste in wines and always selected great ones for our meetings!
        Bob Keatinge:
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.
        Lou Hering:
He was that, but I think a single malt scotch would also fit the bill.
        Allan Donn:
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.”
        Lauris Rall:
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.
        Bill Callison:
Hear!  Hear!  One of my very favorites and deeply missed.  Thanks for the reason to think about him. 
        Jim Wheaton:
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 all.
        Peter Hutcheon:
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.
        George Coleman:
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 if  we 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.
        Gerald Niesar
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 called     Clos de Door.
Then we have developed an extremely dry red wine that is drawing great reviews and following:     PeeNo  Mo
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.
        Ann Conaway:
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 memories.
        Beth Miller:
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.


Tuesday, October 25, 2016

Saint Crispin’s Day

Saint Crispin’s Day
(601 Years Ago Today)

      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 better.
      While comparative casualty figures are effectively impossible to ascertain, it is clear that the French were badly mauled with significantly more casualties than the English. Further, a significant number of French nobles fell in contrast to only two English nobles.
      For an excellent review of the battle, see Juliet Barker's Agincourt.
      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 here
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 this fight,
Let him depart; his passport shall be made,
And crowns for convoy put into his purse;
We would not die in that man’s company
That fears his fellowship to die with us.
This day is call’d the feast of Crispian.
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 Crispian.
He that shall live this day, and see old age,
Will yearly on the vigil feast his neighbours,
And say “To-morrow is Saint Crispian.”
Then will he strip his sleeve and show his scars,
And say “These wounds I had on Crispin's day.”
Old men forget; yet all shall be forgot,
But he’ll remember, with advantages,
What feats he did that day. Then shall our names,
Familiar in his mouth as household words-
Harry the King, Bedford and Exeter,
Warwick and Talbot, Salisbury and Gloucester-
Be in their flowing cups freshly rememb’red.
This story shall the good man teach his son;
And Crispin Crispian shall ne’er go by,
From this day to the ending of the world,
But we in it shall be remembered-
We few, we happy few, we band of brothers;
For he to-day that sheds his blood with me
Shall be my brother; be he ne’er so vile,
This day shall gentle his condition;
And gentlemen in England now-a-bed
Shall think themselves accurs’d they were not here,
And hold their manhoods cheap whiles any speaks
That fought with us upon Saint Crispin’s day.
      HERE IS A LINK to Kenneth Branagh’s masterful rendition.

      Today is also the anniversary of the storied “Charge of the Light Brigade” in the Crimean War (1854). That particular engagement was, for the English forces, significantly less successful.

Saturday, October 22, 2016

“Let There Be Light,” On October 22, 4004 b.c.

Let There Be Light,” On October 22, 4004 b.c.

       The 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.

      By 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.

     Of 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 Time?

      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.

Tuesday, October 18, 2016

Disassociation of Member Pursuant to Operating Agreement Given Effect

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).

Monday, October 17, 2016

LLC Distributions and Self-Employment Tax

LLC Distributions and Self-Employment Tax

      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.
      HERE IS A LINK to that article.

Friday, October 14, 2016

The Battle of Hastings

The Battle of Hastings


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 reality.

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 England.

Thursday, October 13, 2016

The Beginning of the End For the Knights Templar

The Beginning of the End For the Knights Templar


      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 Templar.

      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 worthwhile.

        Philip IV's moniker is “the Fair”; who says history does not have a sense of irony?

Tuesday, October 11, 2016

The 2015 Amendments to the Kentucky Business Entity Statutes

The 2015 Amendments to the Kentucky Business Entity Statutes

The Northern Kentucky Law Review has released my article The 2015 Amendments to the Kentucky Business Entity Statutes.  This article reviews the various changes made by 2015 HB 440, they including:
  • the addition of a statutory derivative action to the LLC Act;
  • simplification of the statute governing the approval of a lawsuit brought on behalf of an LLC;
  • simplification of the filings made in connection with corporate and LLC mergers;
  • “forum selection” for internal disputes involving corporations;
  • clarification of the exclusivity rule of corporate dissenter rights; and
  • the adoption of the Unincorporated Nonprofit Association Act.
      HEREIS A LINK to the article.

The 2016-17 Limited Liability Company Handbook

The 2016-17 Limited Liability Company Handbook


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.

            HERE IS A LINK to further information on this book.

Monday, October 10, 2016

Petition of LLC to File for Bankruptcy Rejected: No Authority to File

Petition 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 30, 2016).

      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 later recited:
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.




Friday, October 7, 2016

Michigan Court Enforces Written Withdrawal From LLC

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, Clark:
[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 interest.
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 reasonable.
     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.

Thursday, October 6, 2016

Failure to Make Capital Contribution is Breach of Contract, Not a Breach of Fiduciary Duty

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 of $83,097.00.

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 Enterprise Member.

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 LLC.

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.

Wednesday, October 5, 2016

Notwithstanding Fiduciary Duties Amongst Members, Direct Suit Dismissed; Complaint Should Have Been Brought as a Derivative Action

Notwithstanding Fiduciary 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. 27, 2016).
      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.

Tuesday, October 4, 2016

Another LLC Case Dismissed For Failure to Name the Injured Parties to the Suit

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 court:
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 counts.
       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 persuasive.:
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 court found:
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.