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.

Tuesday, August 1, 2017

Bamberger and SKO Have Merged


Bamberger and SKO Have Merged

 

      Effective today August 1, 2017, the merger of Bamberger, Foreman, Oswald and Kahn and Stoll Keenon Ogden is complete.  The Bamberger firm was one of the oldest and most respected firms in Evansville, Indiana and it has long maintained a successful, full service office in Indianapolis.  The attorneys resident in Evansville have already moved and are working from the SKO’s Evansville offices.

      As of today, Stoll Keenon Ogden serves its clients from full service offices in Lexington, Louisville, Frankfort, Pittsburgh, Evansville and Indianapolis.  

Agreement to Arbitrate Disputes Did Not Survive Contract Termination


Agreement to Arbitrate Disputes Did Not Survive Contract Termination

      In a recent decision by the Sixth Circuit Court of Appeals, it was held that an agreement to arbitrate disputes did not survive the termination of the agreement that contained that provision. On that basis, there being no agreement to arbitrate disputes, an arbitration decision was essentially vacated with, presumably, the parties now left to litigate their dispute in court. Gridsmart Technologies, Inc. v. Marlin Controls, Inc., Case No. 17-5121, 2017 WL 3084419 (6th Cir. July 20, 2017).
      Under the subject contract, Marlin Controls, Inc. had the exclusive right to distribute certain traffic-signal equipment manufactured by Gridsmart Technologies, Inc. On June 30, 2015, Gridsmart terminated that distribution agreement effective July 31, 2015. Thereafter, they attempted to reconcile how certain outstanding orders, delivered to Marlin on September 30, 2015, would be addressed. They were unable to come to agreement as to that point:
According to Marlin, it’s construction contracts did not pan out, so it sent the equipment for those projects back to Gridsmart. Gridsmart then demanded full payment for the returned equipment. Gridsmart argued that the returned equipment had been specifically made for Marlin and was obsolete by the time Marlin returned it.
      Ultimately, Gridsmart would file a claim with the American Arbitration Association. Marlin refused to participate in that arbitration. Ultimately, the arbitrator granted summary judgment to Gridsmart. Gridsmart then sought to enforce that arbitration judgment in court. After removing the case to federal court, Marlin moved that the district court vacate the arbitration award, which it ultimately did. Gridsmart then appealed to the Sixth Circuit Court of Appeals. It would determine that, under both the language of the agreement itself and the Tennessee Uniform Commercial Code, there was no agreement to arbitrate post-termination disputes.
     Section 6.2 of the subject Distribution Agreement provided (italics added by the court):
Effect of Termination on Unfulfilled Orders.  If at the time this Agreement is terminated for any reason by either Party, all orders for Products made by Distributor or the Company, that have not been fulfilled and/or shipped (whether partial or full) by the company to Distributor shall be fulfilled by mutual agreement between the Parties; provided, however, should Distributor terminate this Agreement for any reason within sixty (60) days of placing an order for Products, Distributor shall remain liable for payment of such order to the extent fulfilled by the Company unless the Company provides written notice that the order is deemed canceled.
      Applying this language, the court found:
Since the orders at issue were pending at the time the Distribution Agreement was terminated, those orders were subject to a different mutual agreement than the Distribution Agreement. Under the plain language of the contract, absent a second contract or new mutual agreement, the parties ceased to have any rights or obligations concerning the orders at issue.
      Also, applying the Tennessee UCC and specifically Tenn. Code Ann. § 47-2-106(3), which provides “all obligations which are still executory on both sides are discharged [upon termination of a contract] but any right based on prior breach or performance survives.”, the court held:
The Tennessee UCC instructs that once the Distribution Agreement was terminated, the parties’ rights and obligations, including the obligation to arbitrate disputes, as to those orders were also terminated.
      In response to suggestions that the agreement to arbitrate should survive termination, the court noted that in other instances particular provisions of the contract were identified as surviving termination. As the arbitration clause was not so identified as surviving termination, there was further support for the court’s to decision.
      The guidance of this case is rather clear. If there is an agreement to arbitrate disputes during the pendency of the contract, and it is desired that that right/obligation survive the contract termination, the agreement needs to so provide.