Tuesday, September 12, 2017

Athenian Forces Defeat Invading Persians at Marathon


Athenian Forces Defeat Invading Persians at Marathon
 

      Today might be the anniversary of the great battle, fought in 490 at Marathon, at which the forces of Athens defeated the Persian invasion sent by Darius the Great. The exact date of the battle is subject to controversy, although there is something of an alternative consensus on the 21st.
 

      At the time of the battle, the Persian Empire extended from the western boundaries of what is today India across the Middle East, Turkey and to Southwest Europe.  Darius had decided that the land we refer to today as Greece, inhabited by a variety of city-states, would be next incorporated into his empire.  An invasion fleet landed its troops some 26 miles northeast of Athens at the Bay of Marathon.  Working with collaborators in Athens, it was thought that the army could be drawn away and destroyed even as the collaborators led an internal revolt, taking control of the city and making it available to Darius.  It would not turn out that way.


      At news of the landing, Athens sent word to Sparta seeking its assistance, the Spartan hoplite troops being the strongest force in the region.  Famously, the Spartans were unwilling to send their forces in light of an upcoming religious festival. In consequence, Athens would stand alone.  The Athenian army, well smaller than the Persian forces, camped facing their enemy for over a week.  On the 8th day, seeing that the Persians were re-embarking some troops onto ships and fearing that they intended to launch a direct assault on Athens, the Greek forces attacked.  Although outnumbered, by skillful flanking maneuvers the Greeks were able to envelop the Persian forces.  While the historical records recite what must be grossly inflated figures, certainly the Persians lost in excess of 6,000 men while the Greeks lost fewer than 200. 


Although not recounted in the contemporary historic record, a runner took off to announce the victory to Athens.  Just over 26 miles later, he entered the city, announced “nickomen” (“victory”) and dropped dead from exhaustion.  Meanwhile, the balance of the Persian army embarked on their ships and set out from the Bay of Marathon with the intent of directly attacking Athens.  The Athenian army force-marched itself back to the city, manning its walls as the Persian fleet approached.  The Persians decided that another attack was not in their best interest and they withdrew.


     A decade later, the Persian forces under Xerces, son of Darius, would again invade Greece.  They would ultimately fall victim to the Spartan and allied forces at Thermopylae, the Greek naval forces at Salamis and again the allied forces at Plataea.                             

Tuesday, August 29, 2017

The Latest Phishing Scam


The Latest Phishing Scam

 

      The IRS is warning against a new phishing scam that tries to make you download an FBI questionnaire. But if you click the link, your computer will be infected with ransomware instead. The scam email uses the emblems of both the IRS and the Federal Bureau of Investigation.

      Remember that the IRS does not use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds. THINK BEFORE YOU CLICK!


      The IRS stated: "Victims should not pay a ransom. Paying it further encourages the criminals, and frequently the scammers won’t provide the decryption key even after a ransom is paid. Victims should immediately report any ransomware attempt or attack to the FBI at the Internet Crime Complaint Center, www.IC3.gov. Forward any IRS-themed scams to phishing@irs.gov.

Monday, August 28, 2017

Nevada Supreme Court Addresses Limited Liability of LLC Members; They Really Have It


Nevada Supreme Court Addresses Limited Liability of LLC Members; They Really Have It

      In a recent decision from the Nevada Supreme Court, it considered the argument that the two members of an LLC that operated a water park at which the plaintiff had been injured should, potentially, be liable to that plaintiff. Based upon the limited liability provision of the Nevada LLC Act, that assertion was rejected. Gardner v. Henderson Water Park, LLC, No. 71652, 2017 Nev. LEXIS 72, 2017 WL 3309660 (Nev. Aug. 3, 2017).
      Henderson Water Park LLC operated the Cowabunga Bay Water Park in Nevada. Henderson Water Park was in turn owned by West Coast Water Parks, LLC and Double Ott Water Holdings, LLC (collectively the “member-LLCs”). After the plaintiff’s child was injured at the park, his parents brought suit against both Henderson Water Park and the member-LLCs, alleging negligence claims against the members “because of the Water Park’s inadequate staffing of lifeguards.” The member-LLCs moved for summary judgment on the basis that they were not proper parties to the action, which motion was granted. The Gardeners then brought this appeal. As characterized by the Supreme Court:
[T]he Gardeners argue that the District Court erred in concluding that [the Nevada LLC Act] shield[s] the member-LLCs from suit because the Gardeners seek to pursue a direct claim against the member-LLCs for the member-LLCs’ own tortious conduct in negligently operating the waterpark.
      That assertion the Nevada Supreme Court would reject. The court began its analysis with:
Members of an LLC enjoy the benefit of limited liability, which refers to the fact that a member is not personally responsible for the LLC’s liabilities solely by virtue of being a member. See 1 Larry E. Ribstein & Robert R. Keatinge, Ribstein & Keatinge on Limited Liability Companies § 1.5 (2016).
      The court went on to note that while a member is not protected from responsibility for their own negligence, the plaintiffs had failed to identify any duty owed to the plaintiffs by the members. “However, the Gardeners do not allege any conduct by the member-LLCs that is separate and apart from the challenged conduct of the Water Park – i.e., the Gardeners do not specify how any individual act or omission by the member-LLCs contributed to L.G.’s injuries.” In consequence:
[T]he Gardners impermissibly seek to hold the member-LLCs liable for the alleged negligence of the Water Park solely by virtue of the member-LLCs being managing members of the Water Park.
      On that basis, the decision of the trial court granting summary judgment was affirmed.


 

Friday, August 25, 2017

Ohio Court of Appeals Applies Doctrine of Adverse Domination


Ohio Court of Appeals Applies Doctrine of Adverse Domination

      In a recent decision from Ohio, the Court of Appeals reversed the grant of summary judgment made by the trial court in connection with claims that the directors of a failed corporation breached their fiduciary obligations. The trial court had dismissed those claims on the basis of Ohio’s four-year statute of limitations. It had not, however, consider whether the doctrine of adverse domination effected the tolling of that statue limitations. On that basis, reversal was granted, and the trial court was directed to consider whether adverse domination applies. Cohen v. Dulay, No. 28071, 2017-Ohio-6973, 2017 WL 3175781 (July 26, 2017).

Thursday, August 24, 2017

Ohio Court of Appeals Confirms No Aiding and Abetting Breach of Fiduciary Duty Claim


Ohio Court of Appeals Confirms No Aiding and Abetting Breach of Fiduciary Duty Claim

      In a recent decision, the Ohio Court of Appeals affirmed the existing law that Ohio does not recognize a claim for aiding and abetting a breach of fiduciary duty. Cohen v. Dulay, No. 28071, 2017 WL 3175781, 2017-Ohio-6973 (July 26, 2017).
      This lawsuit, brought by the receiver of a failed company, sought to bring a variety of breach of fiduciary duty and related claims against the corporation’s directors. Included therein were allegations that the directors aided and abetted other breaches of fiduciary duties. Considering the trial court’s dismissal of those claims on summary judgment, the Court of Appeals wrote:
Lastly, with respect to Cohen’s aiding, abetting, inducing or participating in breaches of fiduciary duties claim, we conclude that such a cause of action is not cognizable under Ohio law. See Sacksteder v. Senney, 2d Dist. Montgomery No. 24993, 2012–Ohio–4452, ¶ 73–76 (holding that Ohio courts have not recognized a cause of action for participation in a breach of fiduciary duty), citing DeVries Dairy, L.L.C. v. White Eagle Coop. Assn., Inc., 132 Ohio St.3d 516, 2012–Ohio–3828, ¶ 2 (holding that Ohio has never recognized a cause of action for tortious acts in concert under 4 Restatement (2d) of Torts, § 876 (1979)). Accordingly, we determine that the trial court did not err by dismissing Cohen’s claim for aiding, abetting, inducing or participating in breaches of fiduciary duties.

Direct Versus Derivative Distinction Applied in Single-Member LLC

Direct Versus Derivative Distinction Applied in Single-Member LLC

      In a recent decision from the North Carolina Business Court, the direct versus derivative distinction was applied to dismiss claims for breach of fiduciary duty brought by the LLC’s sole member. Timbercreek Land & Timber Co., LLC v. Robbins, 17 CVS 140, 2017 NCBC 64, 2017 WL 3214427 (Sup. Ct. N.C. July 28, 2017).
       Hooper, who had no experience in the timber industry, thought it was a good investment opportunity. In turn, Robbins, who represented that he had extensive experience in the timber industry, needed financing. To that end, Hooper caused Timbercreek Land & Timber Co., LLC to be organized with Hooper as the sole member. It appointed Robbins as the LLCs manager, with authority to oversee all aspects of the LLC’s business operations. Ultimately, the trust placed in Robbins was unjustified. Rather, he engaged in a far-reaching program that included embezzlement, kickbacks, misappropriation of company assets, misappropriation of opportunities, etc. When suit was ultimately brought against him by both the Timbercreek LLC and Hooper individually, Robbins sought to dismiss all of the claims for breach of fiduciary duty, claiming he was not subject to any such duties.
      With respect to the LLC’s claims, the court, applying a provision of the North Carolina LLC Act imposing fiduciary duties upon company officials who are not themselves managers (N.C. Gen. Stat. § 57D-3-21(b)), easily dismissed the allegations that Robbins was not subject to fiduciary obligations.
      The claims for breach of fiduciary duty brought by Hooper himself were, in contrast, dismissed. Applying the direct versus derivative distinction, the court could not within the pleadings find any special duty owed by Robbins to Hooper; rather, Robbins’ obligations were owed to the LLC. This distinction was applied notwithstanding that the Timbercreek LLC was entirely owned by Hooper.

Tuesday, August 22, 2017

California Court of Appeal Recognizes Reverse Veil Piercing for LLCs (unfortunately, it does not do a good job in doing so)

California Court of Appeal Recognizes Reverse Veil Piercing for LLCs
(unfortunately, it does not do a good job in doing so)

 

      In a decision rendered earlier this month, the California Court of Appeals recognized the possibility that a Delaware organized LLC, namely JPB Investments LLC (“JPBI”) is subject to reverse piercing. Curci Investments, LLC v. Baldwin, ___ Cal.Rptr.3d ___, 2017 WL 3431457 (Ca. App 4th Dist., August 8, 2017).
      Curci held a judgment against Baldwin individually in the original amount of $7.2 million. Efforts to collect on that judgment were regularly stymied by Baldwin even as multimillion dollar transfers were made within Baldwin’s family amongst various trusts, partnerships and JPBI, that last company being the “management company” for Baldwin’s family assets. Charging orders entered against Baldwin’s interests in those various entities generated no return to Curci in that the entities thereafter terminated distributions notwithstanding a prior history of having made them. “Although Baldwin caused JPBI to distribute approximately $178 million to him and his wife, as members, between 2006 and 2012, not a single distribution has been made since the October 2012 entry of judgment on the Curci note.” 2017 WL 3431457, *2. In addition, loans in the original amount of $402.6 million made to various family partnerships were unilaterally extended by Baldwin, thereby delaying JPBI’s receipt of the principal and accrued interest. On these bases, the plaintiff sought to “reverse pierce” JPBI in order to directly access its assets and make them available to discharge the debt owed to Curci. The appellate court would agree that it is conceptually possible, writing:

For the reasons explained below, we agree with Curci and find remand appropriate to allow the court to make a factual determination of whether the facts in this case justify piercing JPBI’s veil. 2017 WL 3431457, *2.

      After noting the effect of reverse veil piercing, namely that “reverse veil piercing seeks to satisfy the debts of an individual through the assets of an entity of which the individual is an insider.” (2017 WL 3431457, *3), the court turned its attention to whether there should be a particular test for reverse piercing or whether it should be the same test utilized in traditional piercing to hold the shareholders liable for a debt of the business organization. The court also considered another California decision, Postal Instant Press, Inc. v Kaswa Corp, 162 Cal.App.4th 1510, 77 Cal.Rptr.3d 96 (2008), in which it had been held that it was not possible to reverse pierce a corporation.
      Finding that Postal Instant Press did not control in this case, the court first noted that here there is no risk to innocent owners in that Baldwin and his spouse, her assets being liable on the judgment pursuant to California community property law, were the only owners. Hence, there were no independent innocent owners whose interests could be infringed by reverse piercing. All of that is true, but the reasoning is somewhat questionable; the Postal Instant Press decision was not conditioned upon the existence of independent third parties whose interest would be impacted by reverse pierce. The Curci court also distinguished Postal Instant Press on the basis that it is “expressly limited to corporations,” and this is a case of trying to pierce an LLC. 2017 WL 3431457, *4. With due respect to the court, this reasoning is intrinsically flawed. Piercing is an equitable remedy available to courts to address situations in which individuals and business organizations are taking improper advantage of the rule of limited liability and the corresponding negative/affirmative asset partitioning function. Those concerns are consistent and equally applicable across all business organization forms that afford asset partitioning and limited liability, including corporations, LLCs, LLLPs and LLPs. Saying that a case precluding reverse veil piercing of a corporation may be distinguished on the basis that this dispute inolves an LLC is without merit.  This distinction is especially weak when the court’s opinion had previously stated: “The question presented is whether reverse piercing of the corporate veil may be applied under the circumstances of this case,…” 2017 WL 3431457, *2.

      In turn, the court did note an important distinction between a corporate shares and an interest in an LLC, namely the rights of a judgment creditor.
Where the debtor is a shareholder, the creditor may step straight into the shoes of the debtor. They may acquire the shares and, thereafter, “have whatever rights the shareholder had in the corporation,” including the right to dividends, to vote, and to sell the shares.
In contrast, if the debtor is a member of an LLC, the creditor may only obtain a charging order against the distributions made to the member. The debtor remains a member of the LLC with all the same rights to manage and control the LLC, including, in Baldwin’s case, the right to decide when distributions to members are made, if ever. 2017 WL 3431457, **4-5 (citations omitted).

      Unfortunately, the court did not expand on how these distinctions, true as they are, favor reverse piercing of an LLC as to why even if not allowed in a corporation. Further, the court failed to address the relationship of the capacity to foreclose on the charging order, thereby taking title ownership to the underlying LLC interest, albeit as an assignee, would impact upon this comparison.
      The court as well skirted the “exclusivity provision” of the charging order provision, noting that “Reverse veil piercing is a means of reaching the LLC’s assets, not the debtors’s transferable interest in the LLC.” 2017 WL 3431457, *5.
      Ultimately, the court would conclude:
The case before us presents a situation where reverse veil piercing might well be appropriate. Curci has been attempting to collect on a judgment for nearly half a decade, frustrated by Baldwin’s nonresponsiveness and claimed lack of knowledge concerning his own personal assets and the web of business entities in which he has an interest. Although the formation of JPBI predates the underlying judgment, its purpose has always remained the same—to serve as a vehicle for holding and investing Baldwin’s money.
With Baldwin’s possession of near complete interest in JPBI, and his roles as CEO and managing member, Baldwin effectively has complete control over what JPBI does and does not do, including whether it makes any disbursements to its members (he & his wife). Since the time judgment was entered in Curci’s favor, Baldwin has used that power to extend the payback date on loans made to ultimately benefit his grandchildren (loans on which not a single cent has been repaid), and to cease making distributions to JPBI’s himself and his wife, despite having made $178 million in such distributions in the six years leading up to the judgment.
For all of these reasons, we conclude reverse veil piercing may be available in this case. However, we express no opinion as to whether JPBI’s veil should actually be pierced. Instead, we remand the matter for the trial court to engage in the required fact-driven analysis in the first instance. As with traditional veil piercing, there is no precise litmus test. Rather, the key is whether the ends of justice require disregarding the separate nature of JPBI under the circumstances. In making that determination, the trial court should, at minimum, evaluate the same factors as are employed in a traditional veil piercing case, as well as whether Curci has any plain, speedy, and adequate remedy at law.  2017 WL 3431457, **5-6, citations omitted.
      So a California court, applying California law, may allow, on appropriate circumstances, the reverse piercing of an LLC.  As that is well and good, but it should never have taken place.  JPBI is a Delaware LLC, and the rule is that the law of the jurisdiction of organization applies to the piercing of an entity.

A Horse, a Horse, my Kingdom for a Horse


A Horse, a Horse, my Kingdom for a Horse
 

      Today is the anniversary of the Battle of Bosworth, the final major battle of that English civil war titled The War of the Roses (this conflict was at the time sometimes referred to as the Cousin’s War).  It was at this battle that King Richard III, variously identified as the last King from the House of Plantagenet or the House of York, fell, he being the last English King to die in battle.  Henry Tudor, the victor, then became King Henry VII.
      Henry’s victory in battle was if anything surprising.  Richard’s forces outnumbered those of Henry.  Meanwhile, Lord Stanley (William Stanley) held back his own force; if combined with that of Henry, that of Richard would have been out-numbered.  Conversely, if Stanley joined with Richard, the weight of the forces arrayed against Henry would have been overwhelming.  Richard held Stanley’s son as a hostage.  As battle was about to commence, Richard sent word to Stanley that if Stanley did not join with him, he would execute Stanley’s son.  Stanley replied, “I have other sons.” 
       To provide but a taste as to why this conflict was referred to as the Cousins War, consider that William Stanley was the brother of Thomas Stanley, husband of Margaret Beaufort, she being the mother of Henry Tudor.  Ergo, Lord Stanley was the brother-in-law to Henry’s mother.  Thomas Stanley had previously been married to Eleanor Neville, sister to Warwick the Kingmaker and aunt to Richard III’s recently deceased wife. That wife was a daughter of Warwick.
      Richard’s attack upon Henry’s position nearly succeeded;  Henry’s standard-bearer William Brandon was killed at Henry’s side.  Polydore Virgil, a contemporary historian/chronicler, recorded that Richard fought well.  However, Richard’s fate was sealed when the Stanley family and its retainers, having until then not committed to either side, rode against Richard’s infantry as his cavalry was separately moving against Henry.
      William Brandon’s son Charles, ultimately Duke of Suffolk, would become the best friend of Henry VIII.
       In 2012, Richard’s remains were located in the course of excavations under a parking lot that now covers part of what was the Blackfriars (Dominican) Church in Leicester, England; early 2013 saw the announcement that testing had confirmed the remains were those of Richard.  In sad testimony to the modern age, litigation ensued as to whether Richard should be re-buried in Leicester Cathedral, apparently consistent with the terms of the agreement by which the archaeological work was performed and other British law, or in York where certain claimed descendants of Richard assert he would want to have been buried.  That question was resolved in favor of Leicester, and last year Richard III was laid to rest in Leicester Cathedral.
            Notwithstanding Polydore Virgil’s positive comments as to Richard III, in proof of the adage that the winners write the history, his reputation was besmirched by various Tudor affiliates such as St. Thomas More and William Shakespeare.   He is currently being reassessed by historians who are not so indebted to supporting the legitimacy of the House of Tudor.

Friday, August 18, 2017

Indiana Court Addresses, For Purposes of Diversely Jurisdiction, Classification of a Chinese Business Organization


Indiana Court Addresses, For Purposes of Diversely Jurisdiction, Classification of a Chinese Business Organization

 

      A lawsuit may be brought in or removed to federal court pursuant to “diversity” jurisdiction, which requires, inter alia, that none of the defendants have the same citizenship as do any of the plaintiffs.  In addition, diversity jurisdiction requires that the amount in dispute exceed $75,000.  The citizenship of a natural person is dependent upon their “domicile.” For business organizations, there are two tests that are applied. If the business organization is a corporation, it has the citizenship of its jurisdiction of organization and that in which it maintains its principal place of business. Alternatively, if the business organization is “unincorporated,” there is attributed to it the citizenship of each of its owners.  The application of this test becomes particularly difficult with respect to foreign business organizations as it is necessary to first determine whether they are equivalent to a corporation or, rather, are unincorporated.  Recently the Federal District Court for the Northern District of Indiana was presented with this challenge.  Nanshan America Advanced Aluminum Technologies, LLC v. Nemick, Case No. 4:13-CV-078 JD, 2017 WL3333963 (N.D. Ind. August 4, 2017).
      The substance of this dispute involves apparently blatant embezzlement by Nemick against his employer Nanshan.  The court, sua sponte, in ruling upon a motion for default judgment as to breach of fiduciary duty, considered first whether it had jurisdiction in the matter.
      The plaintiff, Nanshan, is an LLC and therefore has the citizenship of each of its members. The only member of Nanshan is a Shandong Nanshan Aluminum Co., Ltd., a Chinese entity.  So the question was, would Shandong be treated as a corporation or as an unincorporated association?  In determining that it is the former, the court wrote:

According to Nanshan’s supplemental filing, Shandong is organized as a “Gufen Youxian Gongsi,” which is also referred to as a “company limited by shares.” Such an entity provides limited liability for equity investors and also shares the features of personhood, including the right to contract and litigate in its own name. It also appears that the entity has a perpetual existence unless otherwise specified in its articles of association. Shares are also alienable, as such companies can be listed on a stock exchange, and Shandong is in fact listed on the Shanghai Stock Exchange. The entities are also governed by a board of directors, which employs a manager who is responsible for the company’s operations. Company Law of the People’s Republic of China, art. 108, 113. A Gufen Youxian Gongsi is also required to be treated as a corporation for U.S. tax purposes. 26 C.F.R. § 301.7701-2(b)(8)(i).

The Seventh Circuit has held that entities from other countries that share these characteristics qualify as corporations for the purposes of diversity jurisdiction. E.g., BouMatic, 759 F.3d at 791. It has also held that companies “limited by shares” under the laws of other countries are equivalent to corporations for these purposes. Superl Sequoia Ltd. v. Carlson Co., Inc., 615 F.3d 831, 832 (7th Cir. 2010) (holding that a “Hong Kong business organization ‘limited by shares’ “ is “equivalent to a corporation in the United States”); Lear Corp. v. Johnson Electric Holdings Ltd., 353 F.3d 580, 583 (7th Cir. 2003) (“[A] business organization ‘limited by shares’ under Bermuda law is equivalent in all legally material respects to a corporation under state law.”). Thus, the Court finds that Shandong is properly treated as a corporation for purposes of diversity jurisdiction. And because it is incorporated and has its principal place of business in China, Shandong (and thus Nanshan) is a citizen of China, meaning that complete diversity exists and the Court has subject matter jurisdiction under § 1332(a)(2).

As an aside, I believe this is the first opinion to, in the context of classifying a foreign entity as either incorporated or unincorporated, to have referenced the check-the-box classification regulations; I have previously argued that the courts should make that reference in these determinations.  See Rutledge, Recent Developments in Diversity Jurisdiction for LLCs and Other Unincorporated Forms, Journal of Passthrough Entities (Nov./Dec. 2015) , available at SSRN: HERE IS A LINK TO THAT ARTICLE
 

Battle of Thermophylae


Battle of Thermophylae

 
      Today, by one reckoning, is the anniversary of the commencement of the Battle of Thermopylae in 480 B.C.  The record is not clear – the battle may be dated to August 7-9, August 18-20 or September 8-10.
      Darius, King of the Persians, had invaded Greece in 490 B.C.  Meeting an almost exclusively Athenian force at Marathon, his army was decimated while the Athenian force suffered relatively few casualties.  A runner (so it is said) took off to announce the victory to the population of Athens.  Just over 26 miles later he entered the city, announced “Nikomen” (victory) and dropped dead from exhaustion.  Meanwhile, part of the Persian fleet had broken off to attack Athens.  The force at Marathon marched back to the city, manning its walls as the fleet approached.
      The Persian fleet and army withdrew from Greece.
      A decade later Xerces had succeeded Darius as the Persian King, and he resolved to subdue the Greeks.  Gathering a huge army (said to be over a million but likely not larger than 100,000), he invaded Greece.  A force led by 300 Spartan hoplites (heavy infantry) and several thousand others Greek troops, all under the command of King Leonidas, resolved to block the Persians at Thermopylae.
      For two days the Greek forces, taking advantage of the small front, it minimizing the advantage in numbers of the Persian forces, fought them to a standstill while suffering minimal casualties.  Those overwhelming numbers were, however, the basis of Dienekes’ boast, as reported by Herodotus, in response to the assertion that the Persian arrows will block out the sun, “Good, then we will fight in the shade.”  Ultimately, the Persians were shown how to outflank the Greek forces, but not before two of Xerces’ brother were killed.  Most of the Greek forces withdrew while the Spartan forces, along with certain others, stayed as a rear guard to hold off the Persians as long as possible.  In the last day of fighting the Spartans were annihilated; some of the other Greek troops surrendered.
      Notwithstanding the movie “The 300,” Leonidas did not fight in the final segment – he had already been killed.  That is not, however, the largest problem in the popular understanding of the Greco-Persian Wars.  The runner to Athens after the Battle of Marathon is not supported in the historic record, and is first recorded in the writings of the Roman Lucian.

Thursday, August 17, 2017

Shareholder Oppression on Steroids


Shareholder Oppression on Steroids


            Peter Mahler, in his blog New York Business Divorce, reports on a case from New York in which one branch of a family undertook clearly outrageous conduct in order to deprive the other branch of the family the benefits of co-ownership of a family company.

            HERE IS A LINK to his posting.

Charging Orders and Choice of Law


Charging Orders and Choice of Law

      In a recent decision from Maryland, the court held that it would apply Maryland law, to the issuance of a charging order against the judgment-debtor’s interest in a Georgia LLC. German American Capital Corp. v. Morehouse, Case No.: GJH-13-296, 2017 WL 3411941 (D. Md. Aug. 4, 2017).
      Morehouse owed German American Capital Corp. (“GACC”) in excess of $11 million on a judgment rendered in the District of Columbia.  Having domesticated the judgment in Maryland, GACC sought a charging order against Morehouse’s interest in Residences at Savannah Harbor, LLC (“Residences”), a Georgia LLC.  In a belated argument, Morehouse alleged that Georgia, and not Maryland, law should control.  The court found that the Maryland LLC Act’s charging order provision is broad enough to reach an interest in a foreign LLC, reasoning that:
In Maryland, a creditor of a debtor who “hold[s] an economic interest in a limited liability company” may request that a court “charge the economic interest of the debtor in the limited liability company for the unsatisfied amount of the debt.” Md. Code. Corps. & Ass’ns § 4A-607(b)(1). Because it was formed under the laws of Georgia. ECF No. 40-2. Savannah Harbor is a foreign limited liability company. See Md. Code. Corps. & Ass’ns § 4A-101(j) (defining “foreign limited liability” [sic – should read “foreign limited liability company”] as a company formed under the laws of a state other than Maryland.). Notably, the charging statute that GACC relies on does not reference foreign limited liability companies and the term, “limited liability company.” is defined as an unincorporated business “organized and existing under [the Mary land Limited Liability Company Act].” See id. § 4A-101(k). However, the charging statute also references a debtor’s “economic interest.” which is defined in the Act’s definitional section as the right of a “member.” of either a limited liability company or a foreign limited liability company, to receive distributions from a limited liability company, or a member’s share of the profits and losses of such a company. See id. §§ 4A-101(i), (m). Thus, reading the charging statue in conjunction with the definition section, and in the absence of any language specifically barring the entry of charging orders against foreign limited liability companies, the Court concludes that the charging statue does provide for the enforcement of a charging order against a foreign limited liability corporation [sic- should read “company”] like Savannah Harbor. Vision Mktg. Res., Inc. v. McMillin Grp., LLC. No. CIV.A. 10-2252-KHV, 2015 WL 4390071, at *6 (D. Kan. July 15, 2015) (reaching same conclusion after interpreting similar Kansas statute).

Wednesday, August 16, 2017

The Battle of the Eclipse


The Battle of the Eclipse

 
      Today is not the anniversary of the Battle of the Eclipse, which took place in 585 bc.  Rather, that anniversary is on May 28.  Still, with the upcoming eclipse on August 21, I thought a reprise of a prior posting on this important event is in order.  That said, the event itself is largely unknown and it of interest only to scholars.
      The battle itself took place in 585 BC in what is now north-east Turkey between a force of Medes (based in western Turkey) and a force of Lydians (eastern Turkey). Like I said, this is specialist stuff - the Medes and the Lydians have passed from history as distinct peoples. Today, if remembered at all, it is likely the Medes who were cannon fodder against the Spartans under Leonidas at the Battle of Thermopylae. Anyway, a war ostensibly predicated on the failure by the Lydians to turn over to the Medes a party of Scythians who has murdered a son of the Medes’ king, was being fought for control of that portion of the Anatolian peninsula.
      According to Herodotus, the eclipse had been predicted by Thales of Miletus, a mathematician/astronomer.
The importance of the battle is that it was interrupted by an eclipse, and the time and date of that eclipse can be ascertained astronomically. As such it serves as a fixed point from which to measure dates. In an era in which dates were typically recorded in reference to rather transient events such as in the thirteenth year of the reign of King Whomever, a fixed point is very useful. If it is known that the Battle of the Eclipse took place in the fourth year of the reign of King X, and that his total reign was of 26 years, then we can know that he died some 22 years after 585 BC, and from there the reign of the successor to the throne can be measured. When that king, in his fifth year, signs a treaty with a neighbor, that being the ninth year of that neighboring king’s reign, it is now possible to start putting a series of events into chronological context.
 
BTW, the Medes and the Lydians took the eclipse as a sign that they should drop their at that point six year war; a peace treaty followed.

Tuesday, August 15, 2017

Fun and Games and Diversity Jurisdictions; and Now the Rest of the Story


Fun and Games and Diversity Jurisdictions; and Now the Rest of the Story

      In a recent case out of Louisiana, the court considered the evidence necessary to demonstrate that a now former member had indeed been bought out of an LLC, with the effect that diversity jurisdiction would thereafter exist. An illuminating footnote discussed the back story of this transaction and how diversity jurisdiction had, from at least one perspective, been manufactured. HomeLife in the Gardens, LLC v. Landry, Civ. Act. No. 16-15549, 2017 WL 3189220 (E.D. La. July 27, 2017).
      Relying upon federal diversity jurisdiction i.e., that none of the defendants shared the same citizenship as any of the plaintiffs and the amount in controversy exceeded $75,000, HomeLife in the Gardens LLC brought this action in federal court against Landry. Landry's basis for seeking dismissal of the complaint was that diversity did not exist because one of the members of the plaintiff, Schmidt, was a citizen of Louisiana, as was she, thereby precluding diversity jurisdiction. Schmidt admitted that he had been a member of the LLC, but that his interest therein had been bought out. In support of this assertion, there were tendered to the court bank records documenting the transfer of funds pursuant to which the transaction took place, it happening on October 7, 2016. Schmidt as well file what was apparently an affidavit (“Schmidt declared under penalty of perjury”) explaining that he sold his interest in the company on October 7, 2016.  In that this complaint was filed after that October 7 date on which Schmidt ceased to be a member of the plaintiff, diversity jurisdiction was present.
      But then, the rest of the story. In a footnote, the court explained how this complaint followed on one voluntarily dismissed when the plaintiffs apparently recognized that diversity jurisdiction was lacking, leading to the Schmidt buyout so that the suit could be refiled. Specifically, at footnote 8, the court wrote:
The Court notes that the present case is not the first case to feature a dispute between these parties.  On September 27, 2016, these same plaintiffs filed suit against Landry in this Court asserting substantially the same claims as in the present case.  See Rankey et al. v. Landry, No. 16-14968, Dkt. 1 (E.D. La. 2016).  This first case was voluntarily dismissed by the plaintiffs on October 7, 2016-the same day that Schmidt sold his stake in HomeLife.  See id., Dkt. 11.  Schmidt represents to the Court that the dismissal of the first case was to permit “additional time” to “investigate the citizenship of the parties.” Case No. 16-15549, R. Doc. No. 43-1, ¶9.  Schmidt stretches the term “investigate” to its breaking point: Schmidt did not want time to “investigate the citizenship of the parties,” but rather wanted time to refile the case after changing HomeLife’s citizenship.  By first selling off his interest in HomeLife and then refiling the case, Schmidt created the complete diversity that – it is now obvious – was lacking in the first case.  While Schmidt and HomeLife should have been more forthright with the Court, current law permitted them to act as they did.  See Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 581 (2004).


 

Monday, August 14, 2017

Securitization Trust has Citizenship of the Trustee, and not the Certificate Holders, for Purposes of Diversity Jurisdiction


Securitization Trust has Citizenship of the Trustee, and not the Certificate Holders, for Purposes of Diversity Jurisdiction

      In a recent decision out of Texas, it was necessary that the court characterize a securitization trust as either a traditional trust or a business trust in order to determine whether diversity jurisdiction existed. In this instance, based upon the characteristics of this particular trust, it was found to be a traditional trust. On that basis, it was afforded the citizenship of only its trustee. DHI Holdings, LP v. Mortgageit, Inc., Civ. Act. No. H-17-0960, 2017 WL 3116152 (S.D. Texas July 21, 2017).
      The court characterized the question as follows:
The motion to remand presents a narrow issue.  One of the defendants in the case is US Bank, as trustee of the Terwin Mortgage Trust 2006-3 Asset-Backed Certificates, Series 2006-3 (referred to in the briefs, and this opinion, as the “2006-3 Trust” or the “Trust”). The issue is whether US Bank as trustee, or instead the 2006-3 Trust itself, is the real party in interest in the suit.  If US Bank is the real party in interest, the court looks only to US Bank’s Ohio citizenship, and there is complete diversity.  If it is not, the court must look to the citizenship of all of the Trust’s member certificate holders.  Because there is no record evidence of the certificate holders’ citizenship, the presumption against jurisdiction requires remand if the trust itself is the real party in interest.
      Assessing the terms of the trust, pursuant to which the trustee had legal title to the assets and managed same (sometimes through agents), as well as the provision that U.S. Bank could sue and be sued in its capacity as trustee, it was determined that it was the real party in interest under Navarro Savings Association v. Lee, 446 U.S. 458, 460-61 (1980). The court considered and rejected arguments to the contrary such as the ability of the certificate holders to compel certain actions, including the removal of the trustee, finding they were not sufficient to remove the trust from classification as a traditional trust in contrast to a business trust. Therefore, diversity jurisdiction existed.

Thursday, August 10, 2017

Federal District Court Addresses Aiding & Abetting a Breach of Fiduciary Duty


Federal District Court Addresses Aiding & Abetting a Breach of Fiduciary Duty

      In a recent decision, the Federal District Court for the Western District of Kentucky (Judge Simpson) addressed competing summary judgment motions, including an effort to dismiss a claim for aiding and abetting a breach of fiduciary duty.  In rejecting that effort, additional guidance as to what is or is not necessary to bring such an action was addressed.  Cadle v. Jefferson, Civ. Act. No. 3:07-CV-000070-CRS, 2017 WL 3013385 (W.D. Ky. July 14, 2017).

      William Jefferson, then a congressman, solicited for himself (through a company purportedly controlled by his spouse) both cash payment and stock from iGate, Inc., a company for which Vernon Jackson was the founder.  Those requests for cash and stock followed Jefferson’s introduction of iGate/Jackson to the US military as a potential customer for iGate technology.  Those case payments would come to $362,500.  Both Jackson and Jefferson were charged with bribery related offenses; Jackson plead guilty and Jefferson being tried and convicted by a jury.  This derivative action was then brought on iGate’s behalf.
      Cadle, on behalf of iGate, sought summary judgment with respect to a claim against Jefferson for aiding and abetting Jackson's breach of fiduciary duty to the company. In order to prevail on this claim, Cadle needed to show all of:
·                     That Jackson breached his fiduciary duty to iGate
·                     That Jefferson gave “substantial assistance or encouragement” to Jackson, and
·                     That Jefferson knew that Jackson's conduct breached a fiduciary duty.

      Turning first to the question of whether Jackson breached a fiduciary duty, the court, citing Steelvest, Inc. v Scansteel Serv. Ctr, Inc., 807 S.W. 2d 476, 483 (Ky. 1991), found that “An officer’s fiduciary duties include the duty not to act against the corporation’s interest. It was certainly against iGate’s interest when Jackson used iGate funds for an illegal purpose.” Later in the opinion, the court would observe as well that “Indeed, common sense and available case law indicates that a director or officer breaches his fiduciary duty when he pays bribes using corporate funds.” The first element of aiding and abetting was satisfied.
      In reliance upon Miles Farm Supplies, LLC v. Helena Chem Co., 595 F.3d 663, 666 (6th Cir. 2010), it was necessary for Cadle to show that Jefferson gave “substantial assistance or encouragement” to Jackson in connection with Jackson's breach of his fiduciary obligations to iGate. On this issue, Jefferson’s conviction for various bribery related offenses precluded him from arguing that he had not given substantial assistance or encouragement. Rather, under Count 16 of his indictment, for which he was convicted, it had been determined that he “demanded, sought and accepted things of value.” In effect, “Jefferson’s assistance in Jackson’s breach of fiduciary duty is apparent here because [Jefferson] not only sought but also accepted bribes from iGate.” The second element of aiding and abetting was thereby satisfied.
      Last, with respect to the requirement that Cadle show that Jefferson knew that Jackson was breaching his fiduciary duty in making the payments to Jefferson, the court, again in reliance upon Miles Farm Supply, stated that actual knowledge is necessary and that constructive knowledge is insufficient. Still, in reliance upon Aetna Cas. & Sur. Co. v. Leahey Constr. Co., 219 F.3d 519 (6th Cir. 2000), the court reiterated that actual knowledge may be demonstrated via circumstantial evidence and that “the exact level of knowledge necessary for liability remains flexible and must be decided on a case-by-case basis.”
      In this instance, Jefferson was a lawyer who graduated from Harvard Law school, it being asserted that “It is absurd to think any attorney would be unaware that soliciting and accepting bribes from Jackson would be a breach of Jackson’s fiduciary duty.” Ultimately, based in part upon Jefferson’s education as well as his efforts to interject his wife’s company between himself and the payments indicated that “Jefferson was attempting to hide the relationship between him and iGate, indicating his knowledge of the wrongfulness.” The third element of aiding and abetting was thereby satisfied.
      For these reasons, summary judgment was issued against Jefferson on the claim for aiding and abetting Jackson’s breach of fiduciary.

Wednesday, August 9, 2017

Is the Statute of Limitations for Breach of Fiduciary Duty Subject to Tolling?


 

Is the Statute of Limitations for Breach of Fiduciary Duty Subject to Tolling?

      In a decision rendered in June, the Kentucky Court of Appeals held that the statute of limitations for claims of breach of fiduciary duty (KRS § 413.120(6)) is not subject to tolling until discovery.  Middleton v. Sampey, No. 2015-CA-001029-MR, 2017 WL 2605224 (Ky. App. June 16, 2017).  All that is (or at least was) well and good, but now the Sixth Circuit Court of Appeals has decided that claims for breach of fiduciary duty are subject to a discovery rule if they arise in the context of familial fiduciary relationship.
      Osborn v. Griffin, ___ F.3d ___, 2017 WL 3205826 (6th Cir. July 28, 2017), is a multifaceted decision affirming a trial court’s determination that, inter alia, two brothers deprived their sisters of significant assets they should have received under their parent’s wills.  The actions of the brothers took place in the 1980s and 1990s – suit was not filed until 2011, and the brothers asserted that the sister’s claims were barred by the five year statute of limitations.
      In opposition, the plaintiff sisters argued that (a) the brothers, as executors under the parent’s wills, owed them fiduciary duties, (b) the brothers actively concealed their conduct, and (c) a fiduciaries’ concealment of the facts demonstrating the breach of duty justifies tolling the statute of limitation as provided for in KRS § 413.090(2) until such time as the beneficiaries actually learned of the breach.
      The plaintiffs’ argument prevailed.
      Under KRS § 413.190(2), a statute of limitations is tolled if and so long as the wrongdoer is “concealing himself or by any other indirect means abstracts the prosecution of the action.” The Osborn court, in reliance upon Munda v. Mayfair Diagnostic Lab., 831 S.W.2d 912, 915 (Ky. 1992), which noting that application of KRS § 413.190(2) ordinarily requires an affirmative act of concealment, “when the law imposes a duty of disclosure, the failure to disclose may constitute concealment.” Osborn, slip op. at 17.
      In reliance upon Security Trust Co. v. Wilson, 210 S.W.2d 336 (Ky. 1948) as well as Hernandez v. Daniel, 471 S.W.2d 25, 26 (Ky. 1971) (“When a confidential relationship exists between the parties, however, the statute [of limitations] does not begin to run until actual discovery of the fraud [or] mistake.”) and McMurray v. McMurray, 410 S.W.2d 139, 141-42 (Ky. 1966) (“The rationale of the actual notice requirement is that persons in a confidential relationship do not have the reason or occasion to check up on the other that would exist if they were dealing at arm’s length.”, the Osborn court held.
This case closely parallels Security Trust.  As a Security Trust, Plaintiffs and Defendants were in a close family relationship that would have made it difficult for Plaintiffs to question their brothers’ integrity or demand a detailed accounting of the brothers’ business activities.  The parties’ family dynamics were such that Plaintiffs trusted their brothers implicitly, and generally deferred to their business judgment.  Moreover, Defendants reacted aggressively and disparagingly whenever Plaintiffs tried to inquire into Defendants’ management of the family business and their parents’ assets.  Under these circumstances, Kentucky law excuses Plaintiffs’ failure to discover Defendants’ wrongful conduct.  Security Trust, 210 S.W.2d at 338 (“Where a confidential relationship exists between the parties, failure to discover the facts constituting fraud may be excused.” Osborn, Slip op. at 19-20 (citation omitted).
      Ultimately, the Middleton and Osborn decisions are not in conflict.  While the corporate directors in Middleton did owe fiduciary obligations, those obligations are owed to the corporation and not the individual shareholders.  Hence there was no concealment as there was no duty to disclose.  In Osborn, in contrast, the duty to disclose arose out of estate administration obligations of disclosure, obligations that were not satisfied.  Further, in Osborn there were additional overlaps of familial bonds and affirmative rejections of any obligation to response to inquiries.

Tuesday, August 8, 2017

Charging Order Receiver Could Not Exercise Control Over LLCs


Charging Order Receiver Could Not Exercise Control Over LLCs

      In a recent decision from Florida, the court held that a receiver appointed pursuant to the charging order statute could not exercise managerial control over the LLCs. McClendon v. Dakem & Associates, LLC, 42 Fla. L. Weekly D1189, 2017 WL 2298443 (Fla. 5th Dist. Ct. App. May 26, 2017).
      Dakem was successful in receiving charging orders against McClendon’s interest in numerous LLCs, those charging orders in furtherance of judgments in favor of Dakem. In four instances, with respect to LLCs controlled by McClendon, the receiver was charged to exercise managerial control over the companies. McClendon challenged the receiver’s exercise of those rights, asserting they were outside the scope of the statute. The Court agreed with that determination, writing:
[T]he charging order should only have divested [McClendon] of her economic opportunity to obtain profits and distributions from the LLC, charging only her membership interest, not her managerial rights. To the extent that the order appointing the receiver authorized the receiver to exercise managerial control over the LLCs, it exceeded the permissible scope and is reversed. In sum, the order granting the charging order and appointing a receiver is affirmed; however, the portions of the order permitting the receiver to be the financial officer of the LLC and exercise managerial control is reversed.

Monday, August 7, 2017

Courts Disagree as to the Standard for Issuing a Charging Order; Is the Judgment-Debtor a Member?


Courts Disagree as to the Standard for Issuing a Charging Order;
Is the Judgment-Debtor a Member?

      As a vehicle for collecting on a judgment, a charging order may be issued against a judgment-debtor’s interest in a partnership, limited partnership or LLC, functioning essentially as a garnishment of whatever distributions that company would otherwise make to the judgment-debtor. Pursuant to the charging order, those amounts are paid to the judgment-creditor. In a pair of recent decisions, courts disagreed as to what level of showing must be made that the judgment-debtor is indeed a member/partner in the LLC/partnership that would be subject to the charging order.
      In the first of these decisions, the court held, in effect, that there is a very low threshold for the issuance of a charging order.  Seufret v. Temple Management, LLC, 2017 WL 2622347 (Conn. Sup. Ct. May 25, 2017). In this instance, the judgment-creditor asserted that the judgment-debtor, Bergman, was a member in 660 Sherman, LLC, and that his interest therein should be subject to a charging order. An objection thereto was filed on the basis that the plaintiff had not made a showing that of the judgment-debtor held an interest therein. The court overruled that objection, writing:
If 660 Sherman, LLC is served with the charging order and owes no debt to the defendant, 660 Sherman, LLC is under no jeopardy. If a dispute arises about whether Bergman is owed a debt by 660 Sherman, LLC, that dispute can be presented to this court for resolution at a future date with notice to all relevant parties.
      In contrast, in a decision out of Missouri, the judgment-creditor seeking a charging order was held to a much higher standard. St. Louis Bank First v. Kohn, 517 S.W.3d 666 (Mo. Ct. App. 2017). Therein, the court of appeals reversed a lower decision granting charging orders with respect to the judgment-debtor’s alleged interest in certain partnerships and LLCs. On the basis that there had not been a sufficient showing that in fact the judgment-debtor was a member/partner in those ventures, the award of the charging orders was reversed.
      IMHO, the Seufret decision is the better of the two. Vis-a-vie the LLC, the charging order is a passive obligation to direct to the judgment-creditor what would otherwise be paid to the judgment-debtor. For that reason, little proof of the judgment-debtor’s interest in the LLC need be shown. Rather, even as the statute is silent as to the point, the judgment-creditor should be awarded a charging order on “information and belief” that the judgment-debtor is a member/assignee. If in fact the judgment-debtor is not in fact a member/assignee of the LLC, it is not obligated to do anything as there are no payments to divert to the judgment-creditor.

Friday, August 4, 2017

Diversity Jurisdiction and Donative Trusts; Look to the Citizenship of the Trustee


Diversity Jurisdiction and Donative Trusts; Look to the Citizenship of the Trustee

      In a relatively recent decision of the Second Circuit Court of Appeals, it considered and affirmed the traditional rule with respect to determining the citizenship, for purposes of diversity jurisdiction, of a traditional, donative (as contrasted with a business or statutory) trust. Raymond Loubier Irrevocable Trust v. Loubier, 858 F.3d 719 (2nd Cir. 2017).
      The federal statute governing diversity jurisdiction requires both that the amount in controversy exceeds $75,000 and, inter alia, that none of the defendants have the same citizenship as any of the plaintiffs. Rather involved and sometimes byzantine rules exist with respect to determining what is the citizenship of various organizations such as corporations and LLCs. Those rules can be particularly complicated in the context of a trust in that trust may be either donative or business; different rules may apply depending upon that characterization. In this instance, the question turned on the citizenship of a traditional donative trust. In that the trust did not have certain characteristics now seen in business trusts, such as the capacity to sue and be sued in its own name, it was a traditional donative type trust.
While the fiduciary relationship established by the plaintiff trusts allow vested beneficiaries to demand accountings from and even to sue the trustees, the trusts themselves are not entities that can be sued except through their trustees. 858 F.3d at 730.
      From there, applying Navarro Savings Association v. Lee, 446 U.S. 458 (1980), the citizenship of the trust parties to this litigation would be determined exclusively with respect to the citizenship of the trustees thereof.
       Ultimately, this case was remanded until such time as a clear determination as to the trustees’ citizenship could be made.

Thursday, August 3, 2017

Delaware Chancery Court Rejects Naked Assertion That Minority Member Owes Fiduciary Duties


Delaware Chancery Court Rejects Naked Assertion That Minority Member
 Owes Fiduciary Duties
      In a decision rendered last month by the Delaware Court of Chancery (Glasscock, V.C.), there was rejected the naked assertion that the minority member of the Delaware LLC is bound by fiduciary obligations. Re: Beach To Bay Real Estate Center LLC v. Beach To Bay Realtors Inc., Civ. Act. No. 10007-VCG, 2017 WL 2928033 (Del. Ch. July 10, 2017).
      The facts of this case are rather involved, if only because it involves a number of related companies with nearly indistinguishable names. Still, ultimately, this came down to a dispute with respect to the winding up and termination, with related settling of accounts, a failed real estate venture to which only one of the parties had made significant capital contributions beyond the original. Also complicating the case was the fact that there was no integrated written operating agreement, but rather a series of alleged oral agreements and one writing, it conflicting, in part with the alleged oral contract.
      In this decision, the court ruled on motions to dismiss that were filed in 2014. At that time, the parties requested that the court hold off on consideration as they were pursuing settlement discussions. Finally, in 2017, at the courts own motion, consideration was given to those arguments. Vice Chancellor Glasscock’s description of this case’s history is worth reading, namely:
In Yoknapatawpha County, Faulkner tells us, the “past is never dead. It’s not even past.” It must be so in Sussex, if this case is any indication. This matter involves a Sussex-centered real estate sales venture, ultimately unsuccessful and, according to the Plaintiffs, giving rise to a dog’s breakfast of claims and accountings, mostly concerning acts taking place during the time of the administration of the second President Bush. The Defendants moved to dismiss three of the counts. Three years ago. The matter was fully briefed in 2014, and oral argument had been schedule. I continued the argument, at the parties’ request, because they were “exploring” settlement. Outside the litigation, the world continued to turn. Births and deaths occurred, heartaches were endured, aspirations were pursed, wars were fought. Inside the litigation, in the micro-world of Beach to Bay v. Beach to Bay, time stood still. Apart from rousing themselves to answer, in desultory fashion, occasional proddings from this Court (themselves, I admit, less than energetic), the parties were content in a world slowed to the pace of matter chilled to near-absolute zero. Eventually, following a mandatory appearance of counsel at a call of the calendar, sufficient thaw set in to revive consideration of this partial motion to dismiss. The parties consented – that is, impliedly consented by failing to respond to a letter from the Court – to consideration of the briefs without amendment or update, and sans oral argument. Therefore, I have addressed the issues as fixed in the briefs from 2014 like flies in amber.
      But back to the merits. The plaintiff, in its complaint, alleged that the defendant owed a fiduciary duty to the plaintiff and failed to appropriately discharge that obligation by means of certain self-dealing transactions. The defendant sought dismissal of this claim on the basis that the plaintiff had not demonstrated that a fiduciary duty existed to begin with. The parties were in agreement that a manager/managing member of a Delaware LLC does owe fiduciary duties, but that did not extend to minority members. Rather, the Chancery Court found:
On the face of the Complaint, minority membership is the sole allegation that purports to create a fiduciary duty. That is insufficient as a matter of law. Thus, the pleading that [the minority member] owed fiduciary duties to [the majority member] falls short.

Wednesday, August 2, 2017

Courts Disagree as to the Standard for Issuing a Charging Order; Is the Judgment-Debtor a Member?


Courts Disagree as to the Standard for Issuing a Charging Order;
Is the Judgment-Debtor a Member?

      As a vehicle for collecting on a judgment, a charging order may be issued against a judgment-debtor’s interest in a partnership, limited partnership or LLC, functioning essentially as a garnishment of whatever distributions that company would otherwise make to the judgment-debtor. Pursuant to the charging order, those amounts are paid to the judgment-creditor. In a pair of recent decisions, courts disagreed as to what level of showing must be made that the judgment-debtor is indeed a member/partner in the LLC/partnership that would be subject to the charging order.
      In the first of these decisions, the court held, in effect, that there is a very low threshold for the issuance of a charging order.  Seufret v. Temple Management, LLC, 2017 WL 2622347 (Conn. Sup. Ct. May 25, 2017). In this instance, the judgment-creditor asserted that the judgment-debtor, Bergman, was a member in 660 Sherman, LLC, and that his interest therein should be subject to a charging order. An objection thereto was filed on the basis that the plaintiff had not made a showing that of the judgment-debtor held an interest therein. The court overruled that objection, writing:
If 660 Sherman, LLC is served with the charging order and owes no debt to the defendant, 660 Sherman, LLC is under no jeopardy. If a dispute arises about whether Bergman is owed a debt by 660 Sherman, LLC, that dispute can be presented to this court for resolution at a future date with notice to all relevant parties.
      In contrast, in a decision out of Missouri, the judgment-creditor seeking a charging order was held to a much higher standard. St. Louis Bank First v. Kohn, 517 S.W.3d 666 (Mo. Ct. App. 2017). Therein, the court of appeals reversed a lower decision granting charging orders with respect to the judgment-debtor’s alleged interest in certain partnerships and LLCs. On the basis that there had not been a sufficient showing that in fact the judgment-debtor was a member/partner in those ventures, the award of the charging orders was reversed.
      IMHO, the Seufret decision is the better of the two. Vis-a-vie the LLC, the charging order is a passive obligation to direct to the judgment-creditor what would otherwise be paid to the judgment-debtor. For that reason, little proof of the judgment-debtor’s interest in the LLC need be shown. Rather, even as the statute is silent as to the point, the judgment-creditor should be awarded a charging order on “information and belief” that the judgment-debtor is a member/assignee. If in fact the judgment-debtor is not in fact a member/assignee of the LLC, it is not obligated to do anything as there are no payments to divert to the judgment-creditor.