Erroneous Declaration of Diversity Jurisdiction Could Cost the Plaintiff

Erroneous Declaration of Diversity Jurisdiction Could Cost the Plaintiff

 

In the decision from earlier this month, the United States District Court for the Southern District of New York opined with respect to a belated determination by the plaintiff that, in fact, diversity jurisdiction did not exist in a lawsuit that has been pending for 19 months. While the court dismissed the action without prejudice so that it could be re-filed in state court, it is considering sanctions against the plaintiff.  Errant Gene Therapeutics, LLC v. Sloan-Kettering Institute, 15-CV-2004, NYLJ 1202777366266 (S.D.N.Y. Jan 18, 2017).

Errant Gene Therapeutics, LLC (“Errant Gene”) brought suit, based upon the existence of diversity jurisdiction, against Sloan-Kettering. In connection therewith, Errant Gene made certain representations to the court as to the existence of diversity jurisdiction. On that basis, the suit proceeded for some 19 months. At the end of that period, Errant Gene advised the court that, in fact, diversity jurisdiction was lacking because one of the members of one of its member LLCs was in fact a New York resident. At the time of the prior representation of diversity jurisdiction, that person was inaccurately identified as being a resident of Delaware.

Sloan-Kettering resisted the effort to dismiss the case on the basis of the lack of diversity, but the court correctly determined that it must do so. “Under the circumstances, the Court has no choice but to GRANT Errant Gene’s motion. Accordingly, this action is DISMISSED WITHOUT prejudice to refile in state court.”

The court was not, however, done with this matter. Rather, noting that it has authority to amongst other things impose sanctions under FRCP Rule 11, it directed that:

Particularly in light of Errant Gene’s somewhat imprecise descriptions of both its original inquiry into its citizenship and its recent discovery of the lack of citizenship (not to mention it’s rather sluggish presentation of the pertinent facts to the Court, it is hereby ORDERED that Errant Gene and its counsel show cause, within 14 days, why Errant Gene and/or its counsel should not be sanctioned pursuant to Rule 11(c) for misrepresenting to the Court, in sum and substance, that Errant Gene was not a citizen of New York for purposes of diversity jurisdiction and allowing the litigation to proceed for months on the basis of that inaccurate statement.

What will happen in this particular case remains to be seen. Regardless, a court issuing a show cause order of this nature is a good reminder of the importance of a detailed assessment of the existence of diversity jurisdiction.

      My thanks to Peter Mahler for the lead on this case.

Kentucky Court of Appeals Addresses the Distinction between an Independent Contractor and an Employee

Kentucky Court of Appeals Addresses the Distinction between an Independent Contractor and an Employee

      In a December, 2016 decision, the Kentucky Court of Appeals again waded into the question of whether a particular person, based upon the manner in which they perform services, is properly characterized as an independent contractor or as an employee. On the facts here presented, the court found that an individual engaged in the delivery of newspapers was, as a matter of law, an independent contractor and not an employee. Armstrong v Martin Cadillac, Inc., No. 2015-CA-001892-MR (Ky. App. December 22, 2016).

      This dispute arose out of an automobile accident and related claims by the estate of Jonathan Elmore, one of the deceased in the accident, who was at the time of the accident was delivering the Daily News paper. One question was whether Elmore, delivering the papers, was an employee of the publisher, News Publishing, LLC, in which case liability under respondeat superior could attach, or rather was he an independent contractor?

      After reviewing the manner in which particular individuals are contracted with to deliver papers, including the fact that the carriers purchase the paper at a bulk rate and in effect resell to generate a profit, the court applied the 10 factor test set forth in the Restatement (Second) of Agency § 220. The Court of Appeals affirmed the lower court's determination that the relationship between News Publishing and Elmore was that of an independent contractor. On that basis, the newspaper publisher was not responsible for the consequences of the accident.

Delaware Supreme Court Emphasizes the Gap-Filling Role of the Implied Covenant of Good Faith and Fair Dealing

Delaware Supreme Court Emphasizes the Gap-Filling Role of the Implied Covenant of Good Faith and Fair Dealing

      In a decision rendered last week, the Delaware Supreme Court reviewed the gap-filling role of the implied covenant of good faith and fair dealing, emphasizing that it addresses lacuna between negotiated terms in order to give full effect to the agreement. In this instance, notwithstanding asserted compliance with the express terms of the agreement, the plaintiff's case could go forward because the defendant’s actions, even if the in strict compliance with the agreement’s express terms, did not satisfy the obligation of good faith and fair dealing.  Dieckman v. Regency GP LP, No. 208, 2016, 2017 WL 243361 (Del. Jan. 20, 2017.

      The underlying transaction involved a merger between two limited partnerships, both within the same family of a master limited partnership. In that transactions of this nature are anticipated, the partnership agreement contained a pair of mechanisms for addressing the conflict. First, the proposed transaction could be negotiated and approved by an independent committee. In the alternative, the transaction could proceed if it received the approval of a majority of the unaffiliated limited partners. In this instance, a belt and suspenders approach was (purportedly) employed. First, a two-person independent conflicts committee was charged to oversee the transaction. Thereafter, a comprehensive proxy statement (not required by the partnership agreement) was distributed to the limited partners soliciting their consent to the transaction based, in part, upon the independent review of the conflicts committee.

      When a limited partner challenged the transaction, it was defended on the basis that it had received the approval of both the independent conflicts committee and a majority of the unaffiliated limited partners, and on that basis the transaction was not subject to further scrutiny. While the Chancery Court accepted that argument, it was rejected by the Delaware Supreme Court. With respect to the independent conflicts committee, the Supreme Court found that it was not, at least for the standards employed in connection with a motion to dismiss, independent. Rather, of the two members, one of them had begun review of the transaction while still affiliated with the general partner. In fact, the persons comprising the committee had to effect certain resignations in order that they could become “independent”, and immediately after approving the transaction they were rehired to positions that would have created a conflict. Also, the standard for independence included that for members of an audit committee of a company listed on the New York Stock Exchange, but those standards were never satisfied.

As with the contract language regarding Unaffiliated Unit Holder Approval, this language is reasonably read by Unit Holders to imply a condition that a Committee has been established whose members genuinely qualified as unaffiliated with the General Partner and independent at all relevant times. Implicit in the express terms is that the Special Committee membership be genuinely comprised of qualified members and that deceptive conduct not be used to create the false appearance of an unaffiliated, independent Special Committee.

The plaintiff has agreed that the LP Agreement’s safe harbor provisions, if satisfied, would preclude judicial review of the transaction. But we find that the plaintiff has pled sufficient facts to support his claims that those safe harbors were unavailable to the General Partner. Instead of staffing the Conflicts Committee with independent members, the plaintiff alleges that the chair of the two-person Committee started reviewing the transaction while still a member of an Affiliate board. Just a few days before the General Partner created the Conflicts Committee, the same director resigned from the Affiliate board and became a member of the General Partner’s board, and then a Conflicts Committee member.

Further, after conducting the negotiations with ETE over the merger terms and recommending the merger transaction to the General Partner, the two members of the Conflicts Committee joined an Affiliate’s board the day the transaction closed. The plaintiff also alleges that the Conflicts Committee members failed to satisfy the audit committee independence rules of the New Your Stock Exchange, as required by the LP Agreement. In the proxy statement used to solicit Unaffiliated Unit Holder Approval of the merger transaction, the plaintiff alleges that the General Partner materially misled Unit Holders about the independence of the Conflicts Committee members. In deciding to approve the merger, reasonable unit holder would have assumed based on the disclosures that the transaction was negotiated and approved by a Conflicts Committee composed of persons who were not “affiliates” of the general partner and who had the independent status dictated by the LP Agreement. This assurance was one a reasonable investor may have considered a material fact weighing in favor of the transaction’s fairness.

 

Arbitration Returns to the US Supreme Court

Arbitration Returns to the US Supreme Court

      In 2011, a case styled at AT&T Mobility v. Concepcion, the US Supreme Court upheld the validity of agreements in a variety of contracts providing that disputes must be resolved through arbitration and that class arbitration is forbidden (i.e., each dispute must proceed on its own individual merits and not as part of a group). Earlier this month, the US Supreme Court agreed to hear three cases asking whether this rule applies equally to employment relationships.

      It is now common in employment relationships for the employer, often via an employee manual or similar document, to require that all of disputes as to the employment relationship be resolved by arbitration. It is also common for those same agreements to preclude class actions. The effect of such a provision is that, to the extent a number of employees allege injury, they must proceed on an individual, not a collective, basis. These rules have been challenged based upon a provision of the National Labor Relations Act that protects the right of workers to engage in “concerted activities.” Several lawsuits have been moving through the courts asserting that this protection of “concerted activities” serves to invalidate any waiver of the right to bring a class action over terms and conditions of employment.

     Two cases, decided by courts sitting in Chicago and San Francisco, have accepted the argument that the “concerted activities” protection precludes enforcement of a class action waiver. Conversely, a court sitting in New Orleans rejected that argument.

      The question will now go to the US Supreme Court. A ruling should come down of by the end of the Courts 2016-2017 session in June of this year.

Kentucky Court of Appeals Rejects Argument for Expansion of Economic Loss Rule

Kentucky Court of Appeals Rejects Argument for Expansion of Economic Loss Rule

      With respect to the sale of products, the Kentucky Supreme Court has endorsed the “economic loss rule,” a legal principle that “prevents the commercial purchaser of a product from suing in tort to recover for economic losses arising from the malfunction of the product itself, recognizing that such damages must be recovered, if at all, pursuant to contract law.” Giddings & Lewis, Inc. v. Industrial Risk Insurer, 348 S.W.3d 729, 733 (Ky. 2011). In a recent decision, the Kentucky Court of Appeals considered and rejected an effort to expand the application of the economic loss rule to a service contract. D.W. Wilburn, Inc. v. K. Norman Barry Associates, Architects, PLLC, No. 2015-CA-001254-MR (Ky. App. December 22, 2016).

      This dispute arose out of an effort to build a new high school in Oldham County. Consequent to various change orders, delays arose in the project. Eventually an electrical subcontractor would bring suit alleging various damages. One defense raised was the economic loss rule, a position that would be rejected by the Court of Appeals. After reviewing the history of the economic loss rule in Kentucky, and notwithstanding the citation to cases indicating that the economic loss rule has expanded beyond products liability into construction litigation (Cincinnati Ins. Cos. v. Staggs & Fisher Consulting Engineers, Inc., 2008-CA-002395-MR, 2013 WL 1003543 (Ky. App. 2013)), the Court cited other decisions predicting that Kentucky courts would not expand the economic loss rule to construction services contracts.

      This panel the Court of Appeals was comfortable concluding that the economic loss doctrine does not preclude a claim for negligent representation, finding that to the contrary holding would essentially “eviscerate” claims for negligent representation. Ergo “We conclude that the economic loss doctrine does not apply to a claim of negligent misrepresentation and the architect/contractor scenario.” Slip op. at 16.

Sixth Circuit Confirms that Piercing is a Remedy; In re Howland

Sixth Circuit Confirms that Piercing is a Remedy; In re Howland

      Last week the Sixth Circuit Court of Appeals issued its opinion in In re Howland, addressing whether a trustee could assert piercing the veil as a mechanism for merging the assets of an LLC into the bankruptcy estate of its members.  As did the Bankruptcy and the District Courts below, the Sixth Circuit rejected this effort. Phaedra Spradlin v. Beads and Steeds Inns, LLC (In re Howland), ___ Fed. App’x ___, No. 16-5499, 2017 WL 24750, 2017 U.S. App. LEXIS 222 (6th Cir. Jan. 3, 2017).  A review of the decision of the Bankruptcy Court is available AT THIS LINK.

      As a point of disclosure, Stoll Keenon Ogden and particularly Adam Back represented the defendants in this action.

      The facts underlying the dispute, as set forth by the Sixth Circuit, were as follows:

Matthew and Meagan Howland are the debtors in this personal bankruptcy case. In June 2007, they entered into a contract to buy a 133-acre farm in Lancaster, Kentucky, for $1.6 million. One month later, the Howlands assigned their interest in the purchase agreement to Meadow Lake Horse Park, a limited liability corporation they had recently formed under Kentucky law. They also personally guaranteed the loan Meadow Lake later obtained in order to purchase the farm.

For the next three years, the Howlands operated a horse farm and bed and breakfast on the property. In November 2010, the Howlands made a $760,000 payment on Meadow Lake's mortgage for no consideration. Then, a month later, Meadow Lake sold the property to Beads and Steeds Inns, LLC, a corporation formed by a third party for the sole purpose of purchasing the farm. The purchase price was $800,000, roughly half of what Meadow Lake paid just three years earlier. Along with the sale, the two parties entered into a $1,000-a-month lease agreement (about one-fourth the market rate), which allowed Meadow Lake and the Howlands to continue operating the horse farm and bed and breakfast.

Two years later, saddled with unmanageable debt, the Howlands filed for personal bankruptcy. The bankruptcy court appointed plaintiff, Phaedra Spradlin, as trustee of the debtors' estate. In her role as trustee, Spradlin filed this adversarial action against Beads and Steeds. Spradlin alleged that the December 2010 transfer from Meadow Lake to Beads and Steeds was fraudulent, done to evade the Howlands' creditors.

Beads and Steeds moved for judgment on the pleadings, observing that the trustee alleged that Meadow Lake—not the debtors, personally—engaged in the 2010 transfer. It argued that the trustee therefore failed to state a claim under the governing fraudulent transfer provisions, both of which required a “transfer of an interest of the debtor in property.” See 11 U.S.C. § 544(b)(1) (emphasis added); see also 11 U.S.C. § 548(a)(1)(B). The trustee responded that she could pierce the corporate veil in reverse and thereby treat Meadow Lake and the debtors as a single entity.

      The Sixth Circuit began by reviewing piercing law generally and noting that the states fall into one of two categories:

•     “identity,” in which piercing “expands the debtor’s estate to include the property of its alter ego” by “deeming a corporation and its alter ego to be a single entity.”;  or

•     “vicarious liability” which “shifts liability from the debtor to its alter ego.” 2017 WL 24750, *3 (citations omitted).

      Finding that Kentucky utilizes the “vicarious liability” theory (2017 WL 24750, *7), the effort to utilize piercing to enlarge the assets in the bankruptcy estate was doomed. 

The fact that Kentucky endorses the vicarious liability approach to veil piercing, as opposed to the identity approach, dooms the trustee’s fraudulent transfer claims against Beads and Steeds under a veil piercing theory. The Bankruptcy Code permits the trustee to avoid a transfer of property only if the debtor had an interest in the property. 11 U.S.C. §§ 544(b)(1), 548(a)(1)(B). Under the vicarious liability approach, however, veil piercing does not give the pierced entity (i.e., the debtor) an interest in its alter ego’s assets—it gives the pierced entity’s creditor (i.e., the trustee) an interest in the alter ego’s assets in order to satisfy its judgment against the pierced debtor. Compare Garvin, 74 P.2d at 992 (under vicarious liability approach, “[t]he doctrine of alter ego does not create assets for or in the corporation”), with In re Am. Int’l Refinery, 402 B.R. at 744–45 (stating that identity approach to veil piecing gives the debtor “an equitable interest in the assets of its alter ego”) (citation omitted). Under § 544 and § 548, that is not enough. Because Kentucky veil piercing does not transform the alter ego’s property into the property of the debtor, but rather simply allows a creditor to pursue the alter ego under a vicarious liability theory, the trustee has not stated a claim under § 544 and § 548, both of which require that the debtor have an interest in the transferred property. 2017 WL 24750, *5.

      The decisions below, even while they rejected the effort to enlarge the estate via piercing, had addressed at length the question of whether Kentucky would recognize either “insider-reverse” or “outsider-reverse” piercing. Initially determining that piercing was not here possible, it was able to avoid that issue, a point discussed in footnote 2 to the decision:

The parties spend a significant portion of their briefs jockeying over whether Kentucky would recognize “reverse” veil piercing. However, based on the foregoing, we need not address this issue because, regardless of the answer, Kentucky’s approach to traditional veil piercing makes clear it would not use reverse veil piercing to consolidate two entities. We therefore leave for another day the question whether the Kentucky Supreme Court would recognize reverse veil piercing.

      This decision is another square declaration that piercing the veil is a remedy and is not itself a cause of action, a point already made in numerous decisions cited by the Howland court. 2017 WL 24750, *4. 

      Still, I have two small quibbles with and a broader observation as to the decision.  First, it refers to Meadow Lake Horse Park as a “limited liability corporation,” (it is actually a limited liability company), and refers to Beads and Steeds Inns, LLC as a corporation (likewise, it is actually a limited liability company).  2017 WL 24750, *1.

      Of greater import, the Sixth Circuit presumed, without analysis, that the law of piercing that has developed in the context of the law of corporations is equally applicable with respect to LLCs.  On this point there is conflicting authority. In Turner v. Andrew, 413 S.W.3d 272, 277 (Ky. 2013), the Court wrote “The doctrine [of veil piercing] can also apply to limited liability companies.”  Turner was not, however, a piercing case, so this statement is dicta.  Conversely, in Pannell v. Shannon, 425 S.W.3d 58, 2014 WL 1101472, *7 (citations omitted), the Supreme Court observed:

In fact, “limited liability companies are creatures of statute,” controlled by Kentucky Revised Statutes (KRS) Chapter 275,” not primarily by the common law. To the extent that common law doctrines could arguably govern limited liability companies, the Kentucky Limited Liability Company Act “is in derogation of common law,” KRS 275.003(1), and the traditional rule of statutory construction that “require[s] strict construction of statutes which are in derogation of common law shall not apply to its provisions.” Id. Thus, to the extent the statutes conflict with common law, the common law is displaced.

This Court must therefore first look at the controlling statutory law. The obvious place to start, then, is the source of limited liability in the LLC context, KRS 275.150.

      Although this issue was raised in the lower court briefs, it was not briefed before the Sixth Circuit.  Both lower courts summarily found there to be no issue based on Tayloe, 2014 Ky. App. LEXIS 131, and Turner v. Andrew.  Whether and on what terms an LLC may be pierced remains a topic to be addressed by the Kentucky Supreme Court.  The fact that the Sixth Circuit did not undertake that analysis is worth noting only to make clear that In re Howland is not cited as authority that Kentucky LLCs are subject to the common law of piercing.

Sixth Circuit Denies Substantive Consolidation; In re Howland

Sixth Circuit Denies Substantive Consolidation; In re Howland

Last week the Sixth Circuit Court of Appeals issued its opinion in In re Howland, addressing whether a trustee could assert substantive consolidation as a mechanism for merging the assets of an LLC into the bankruptcy estate of its members.  As did the Bankruptcy and the District Courts below, the Sixth Circuit rejected this effort. Phaedra Spradlin v. Beads and Steeds Inns, LLC (In re Howland), ___ Fed. App’x ___, No. 16-5499, 2017 WL 24750, 2017 U.S. App. LEXIS 222 (6th Cir. Jan. 3, 2017).  A review of the decision of the Bankruptcy Court (Judge Schaff) is available AT THIS LINK.  A review of the decision of the District Court (Judge Caldwell) affirming the decision of the Bankruptcy Court is available AT THIS LINK.

As a point of disclosure, Stoll Keenon Ogden and particularly Adam Back represented the defendants in this action.

The facts underlying the dispute, as set forth by the Sixth Circuit, were as follows:

Matthew and Meagan Howland are the debtors in this personal bankruptcy case. In June 2007, they entered into a contract to buy a 133-acre farm in Lancaster, Kentucky, for $1.6 million. One month later, the Howlands assigned their interest in the purchase agreement to Meadow Lake Horse Park, a limited liability corporation they had recently formed under Kentucky law. They also personally guaranteed the loan Meadow Lake later obtained in order to purchase the farm.

For the next three years, the Howlands operated a horse farm and bed and breakfast on the property. In November 2010, the Howlands made a $760,000 payment on Meadow Lake's mortgage for no consideration. Then, a month later, Meadow Lake sold the property to Beads and Steeds Inns, LLC, a corporation formed by a third party for the sole purpose of purchasing the farm. The purchase price was $800,000, roughly half of what Meadow Lake paid just three years earlier. Along with the sale, the two parties entered into a $1,000-a-month lease agreement (about one-fourth the market rate), which allowed Meadow Lake and the Howlands to continue operating the horse farm and bed and breakfast.

Two years later, saddled with unmanageable debt, the Howlands filed for personal bankruptcy. The bankruptcy court appointed plaintiff, Phaedra Spradlin, as trustee of the debtors' estate. In her role as trustee, Spradlin filed this adversarial action against Beads and Steeds. Spradlin alleged that the December 2010 transfer from Meadow Lake to Beads and Steeds was fraudulent, done to evade the Howlands' creditors.

Beads and Steeds moved for judgment on the pleadings, observing that the trustee alleged that Meadow Lake—not the debtors, personally—engaged in the 2010 transfer. It argued that the trustee therefore failed to state a claim under the governing fraudulent transfer provisions, both of which required a “transfer of an interest of the debtor in property.” See 11 U.S.C. § 544(b)(1) (emphasis added); see also 11 U.S.C. § 548(a)(1)(B). The trustee responded that she could pierce the corporate veil in reverse and thereby treat Meadow Lake and the debtors as a single entity. 

      The trustee sought leave to file an amended complaint alleging substantive consolidation. That motion was denied by the trial court on the basis that the tendered complaint failed to adequately plead substantive consolidation. 2017 WL 24750, *2. The Sixth Circuit, in considering the matter, began by noting that “[a]lthough similar in some ways to veil piercing, substantive consolidation is a distinct concept unique to bankruptcy law.” 2017 WL 25750, *6. Whereas veil piercing is a mechanism for imposing vicarious liability, substantive consolidation “brings all assets of a group of entities into a single survivor. Indeed, it merges liabilities as well.” and in effect “treats separate legal entities as if they were merged into a single survivor.” Id.

      In reliance upon In re: Owens Corning, the Howland court wrote that:

To state a claim for substantive consolidation, the trustee must allege:

(i) prepetition [the entities sought to be consolidated] disregarded separateness so significantly their creditors relied on the breakdown of entity borders and treated them as one legal entity, or

(ii) post-petition their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors. Id.

      Looking to the proposed amended complaint, it was found that it fell “far short of demonstrating a significant disregard of corporate separateness such that the debtor’s and Meadow Lake’s creditors relied on the breakdown and treated them as one.” 2017 WL 24750, *6. Specifically:

Missing are any allegations that the debtors or Meadow Lake distributed misleading financial information to creditors, failed to accurately record their transactions with creditors, or otherwise misled creditors into believing they were dealing with them as one indistinguishable entity. Id.

      Having disposed of the first element of the Owens Corning test, it being focused upon pre-petition activities, the Sixth Circuit turned its attention to the question of post-petition scrambling of assets. In this instance, the trustee was hoist on the petard of the errors identified by the trustee. Specifically:

Moreover, the proposed complaint simply does not allege that the debtors’ and Meadow Lake’s assets are hopeless are “hopelessly scrambled.” Paragraph fifteen alleges that the debtors listed Meadow Lake’s debts as their own, the implication being that even the debtors could not distinguish between their assets and Meadow Lake's. However, the very fact that the trustee can make this allegation - i.e., highlight the debtors’ mistake of listing another entity’s debt as their own - demonstrates that she can, in fact, distinguish the debtors’ assets from Meadow Lake’s. 2017 WL 24750, *7.

      The court went on to note that substantive consolidation does not exist to address the alleged harm that creditors will be injured because of a reduction in the distributions to them.

      In footnote 3 to the decision, the court noted that the trustee argued for the application of the test for substantive consolidation set forth in In re: Owings Corning, and that the defendants responded thereto. On that basis, “Because the parties do not brief the issue, and because the trustee’s claim fails under the standard she proffers, it is unnecessary to decide whether the Owens Corning test sets forth the best articulation of the substantive consolidation elements.” 2017 WL 24750, footnote 3.

Limited Liability Goes Only So Far

Limited Liability Goes Only So Far

      A recent decision from New Jersey serves as a useful reminder that there are limits to the limited liability enjoyed by corporate officers. Specifically, an officer can be held personally liable for the consequences of their own torts. JT Queens Carwash, Inc. v JDW & Associates, Inc., 2016 N.Y. Slip OP 07295, 2016 WL 6605051 (App. Div. 2 Dept. Nov. 9, 2016).

      Frank Roman and JT Queens Carwash, Inc. sued JDW & Associates and Jay Weiss, its owner and president, asserting that while JDW and Weiss did procure certain insurance policies on behalf of the plaintiffs, they failed, as requested, to have the plaintiff’s landlord named as an additional insured. In addition, Weiss issued false certificates of insurance to that effect that the landlord was names as an additional insured.

      Reviewing a motion to dismiss the claims against Weiss individually, the court observed the general rule that corporate officers are not liable on contracts they enter into on behalf of the corporation, but noted as well that corporate officers “may be held personally liable for torts committed in the performance of the corporate duties.” (citations omitted.) In consequence thereof, it determined that the claim for negligent representation based upon that conduct should not have been dismissed. Rather, it found that the complaint and the evidence already submitted:

Alleged that Weiss personally signed a certificate of insurance falsely stating that the plaintiff’s landlord had been added as an additional insured on a certain commercial general liability insurance policy, and forwarded this certificate to the plaintiffs, knowing that it was required by the plaintiffs’ landlord. This is sufficient … to state a cause of action against Weiss, based on his personal participation in the commission of a tort. 2016 WL 6605051, *3 (citation omitted).

A Few Particular Points Out of an Otherwise Uninteresting Decision

A Few Particular Points Out of an Otherwise Uninteresting Decision

      A decision rendered last week by the Kentucky Court of Appeals, it reviewing an effort to in effect relitigate a matter that had already been determined by arbitration, is not particularly noteworthy. There are, however, few nuggets that are worth a bit of attention. Eitel v. Duncan Commercial Real Estate LLC, No. 2015-CA-000506-MR, 2017 WL 65607 (Ky. App. Jan. 6, 2017).

      This dispute arose out of a real property purchase by Robbins. Eitel asserted that she was entitled to a real estate commission on the sale. Duncan, whose involvement in the transaction is not detailed in the opinion, did receive a commission. Robbins, on whose behalf Eitel alleged she had been the realtor giving rise to her right to a commission, “at the closing,… executed an affidavit stating Eitel was not his broker for the transaction.” Still, Duncan was willing to pay to Eitel a referral fee of 25% of the commission he earned. Eitel refused that offer and initiated an arbitration proceeding before the Kentucky Association of Realtors. That arbitration panel awarded Eitel the amount of the previously offered referral fee. After a KAR procedural review of the award, it was affirmed, and Duncan paid over the amount of the referral fee. Eitel then attempted to move this dispute to the courts, an effort that was rejected.

      Initially, Eitel sought to bring the action on her own behalf and also on behalf of Eitel Real Estate Group, a Kentucky business corporation. On the basis that a corporation may be represented in court only by legal counsel, “Thus, insofar as Eitel personally undertook to represent the corporation, as a nonprofessional she was prohibited from doing so.” 2017 WL 65607, *3. Although not addressed the opinion, that Eitel Real Estate Group, Inc. was administratively dissolved in 2002 for failure to file its annual report with the Kentucky Secretary of State.

     One of the tort claims that Eitel sought to allege in court was that Duncan’s actions constituted tortious interference with a contract and business relationship between Eitel and Robbins. This claim failed on the basis that there was no contract at issue. Rather:

However, absolutely no reference appears in the record as to the existence of any brokerage contract between herself and Robbins - whether oral or written, and she even admitted to the arbitration panel no contract existed. There can absolutely be no interference with a contract that does not even exist. Id.

The court also affirmed an award of attorneys fee’s against Eitel, finding they were provided for in the agreement.

[S]he has clearly continued to contest the results of the arbitration as being incorrect. Duncan was therefore required to seek judicial confirmation of the award and, under the express language quoted above, is entitled to recover a fee for its retained counsel.  2017 WL 65607, *4.

 

 

 

Delaware Chancery Court Enforces Statute Precluding Fee-Shifting Clause In Bylaws

Delaware Chancery Court Enforces Statute Precluding Fee-Shifting Clause In Bylaws

      In 2014, in response to efforts to include “fee-shifting” provisions in our corporate charters and bylaws, the Delaware Legislature, except with respect to nonprofit corporations, invalidated such provisions. In effect, while some companies had sought to shift liability for defense costs and derivative and similar actions, they were forbidden to do so. In a recent decision, the Delaware Chancery Court applied those new statutes. Solak v. Sarowitz, C.A. No. 12299-CV, 2016 WL 7468070 (Del. Ch. Dec. 27, 2016).

       HERE IS A LINK to a discussion of this decision. 

Delaware Supreme Court Holds That Breach of Limited Partnership Agreement is a Derivative, and Not a Direct, Claim

Delaware Supreme Court Holds That Breach of Limited Partnership Agreement is a Derivative, and Not a Direct, Claim

      In a recent decision from the Delaware Supreme Court, it reversed a holding of the Chancery Court and found that claims by a limited partner challenging a drop-down transaction were derivative, and not direct. Consequent to that classification, a subsequent merger deprived the limited partners of continued standing to pursue a derivative action. El Paso Pipeline GP Company, LLC v Brinckerhoff, No. 103, 2016, 2016 WL 7380418 (Del. Dec. 20, 2016).

      El Paso Corporation (“El Paso”) was the sole member in El Paso Pipeline GP Company, LLC (“GP LLC”), which company in turn served as the sole general partner of El Paso Pipeline Partners, L.P. (the “LP”). El Paso sold certain assets to the LP in a master limited partnership drop-down transaction. Brinckerhoff, a limited partner in the LP filed a derivative action challenging that drop-down transaction. While that matter remained in dispute, El Paso was acquired and the LP was merged out of existence. Thereafter, the defendants moved to dismiss, arguing that Brinckerhoff's claims were exclusively derivative and that standing was lost consequent to the merger. The Chancery Court issued an opinion holding that GP LLC was liable for a breach of the partnership agreement on the basis there was not a reasonable belief that the drop-down transaction was in the best interest of the partnership; damages of $171 million were assessed. The Chancery Court rejected this claim that the injuries were derivative, finding that the limited partners were individually harmed.

      That classification was rejected by the Delaware Supreme Court, it finding that the injuries were suffered exclusively by the limited partnership and then only derivatively by the partners therein. No longer being partners in the LP, the former limited partners lacked standing to continue to pursue the derivative action.

      This is an important decision in that it adds to the line of authority standing for the proposition that the breach of the organizational documents of a limited partnership/LLC will typically be derivative, and not direct, in nature.

Top 10 New York Business Divorce Cases

Top 10 New York Business Divorce Cases

      Peter Mahler, in his excellent New York Business Divorce blog, has compiled a listing of the top 10 New York business divorce decisions from 2016. HERE IS A LINKto that posting.

Piercing is a Remedy, Not a Cause of Action

Piercing is a Remedy, Not a Cause of Action

 

            In a December 27, 2016 decision, Judge Schaaf made an interesting observation about piercing the veil.  In re Troy L. Vanwinkle, 2016 WL 7443168, (E.D. Bankr. Dec. 27, 2016).

            This decision was rendered in connection with a motion to dismiss an amended complaint, which motion was granted.  The debt at issue was damages for breach of contract, and the plaintiffs sought to avoid discharge of that obligation. In response to an argument that they would be seeking to pierce the veil (which argument was rejected), it was observed, in reliance upon Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 211 (Ky. App. 2009) that:

As such, veil-piercing is not seen as a separate cause of action, but a remedy and source of recovery on an underlying claim.