Wednesday, March 15, 2017

Beware the Ides of March


Beware the Ides of March

“Et tu, Brute?”


        Today, the Ides of March, marks the anniversary of the assassination of Julius Caesar in 44 B.C. Caesar was famously assassinated at a meeting of the Roman Senate after having (almost certainly apocryphally) been warned to “Beware the Ides of March.” He was presented with a written warning of the conspiracy against him as he was walking to the Senate meeting, but seems to have never read the warning. Although stabbed twenty-three times by the various conspirators, only one wound was fatal.

            Caesar’s murder by members of the Senate (but not Cicero – the conspirators were unsure he had the stomach for such an act) was premised upon the notion that they were somehow preserving liberty for Rome; after the deed they paraded through the streets shouting “liberty.”  This against the fear that Caesar sought to be king, an especially galling notion in light of Rome having (at least as part of its foundation myth) having been ruled by kings and then thrown them off.  Still, at this stage Caesar had been appointed by the Senate Dictator for Life.  It seems this subset of the Senate sought to undo what the whole Senate had approved.

         “Liberty” was not to be had. Caesar’s death unleashed upon the tottering Roman Republic the Second Civil War of Caesar’s heir Octavian (later to be Caesar Augustus) and his compatriot Marc Antony (Lepidus, the third member of the Second Triumvirate, was a place holder) against the assassins and their various supporters. The night before the assignation a conscious decision had been made to not as well target Marc Antony.  In retrospect the assassins would regret that determination.

Assassins Brutus and Cassius (Gaius Cassius Longinus) would each commit suicide after losing a phase of the Battle of Philippi (notwithstanding the presentation in the HBO series “Rome,” they actually died on different days).  Cicero (who as noted above was not himself part of the conspiracy) would be executed as part of the proscriptions after the victory of the Second Triumvirate.

Still later Octavian and Antony would turn on one another, Antony’s forces being routed at Actium.  Octavian would go on to be the first Roman emperor, Caesar Augustus.

         But back to Caesar’s dying words. “Et tu Brute” is not recorded by any classical historian – it is a quote from Shakespeare. Plutarch, who was born exactly 100 years after the assassination, reports that Caesar said nothing after the attack began in earnest. Suetonius wrote that others reported his last words to be “καὶ σύ, τέκνον” (Greek still being the lingua franca of the Romans), transliterated as “Kai su, teknon” or “You also child,” addressed to Brutus (that is Marcus Junius Brutus the Younger, not to be confused with Decimus Junius Brutus, another party to the assignation). There were rumors, later reported by Plutarch (Suetonius is silent on the topic) that Caesar was in fact Brutus’ father – it was known that Brutus’ mother Servilia was Caesar’s mistress.  Still that would appear to be something of a stretch; Caesar was 16 at the time of Brutus' conception; Servilla was at that time 28. 
 
      For anyone watching the “Spartacus” series, while the sources do not exclude Caesar's participation in the war against Spartacus (i.e., the “Third Servile War”), they provide no details of that participation.  Ergo, the details of Caesar's actions as recounted are pure fiction.

Thursday, March 9, 2017

No Valid Claim Against Bank Where it Made Bank Secrecy Act Reports


No Valid Claim Against Bank Where it Made Bank Secrecy Act Reports

      In a decision rendered early last month by the Kentucky Court of Appeals, it rejected claims by bank customers that, when the bank made reports required by the Bank Secrecy Act relating to suspicious activities, the bank could be held liable to its customers. Rather, the court found that the bank enjoyed absolute immunity. Ventura v. Central Bank, No. 2015-CA-001407-MR, 2017 WL 461256 (Ky. App. Feb. 3, 2017).
      The Venturas own and operate Miguel’s Pizza and Rock Climbing Shop, a fixture of the rock climbing community in Kentucky's Red River Gorge. Central Bank, which handled the Ventura’s accounts, had made reports based upon the apparent manipulation of cash deposits. Special cash transaction reporting obligations arise when $10,000 or more is deposited. Additional rules under the Bank Secrecy Act require reporting if it appears that a bank customer is manipulating their deposits such as by making repeated deposits just below the $10,000 threshold. Eventually Central Bank would close the Ventura’s account. The Venturas were indicted on charges of violating the Bank Secrecy Act, but ultimately were acquitted by a jury. Thereafter, they filed this action against Central Bank, asserting a variety of claims based upon the reports that the bank had filed as required by the Bank Secrecy Act.
      The trial court, based upon the safe harbor preemption provided by the Bank Secrecy Act, dismissed the complaint, and this appeal followed. The Court of Appeals would likewise find that Central Bank employed absolute immunity from the claims being made. Specifically, the Bank Secrecy Act provides:
Any financial institution that makes a voluntary disclosure of any possible violation of law or regulation to a government agency or makes a disclosure pursuant to this subsection or any other authority, and any director, officer, employee, or agent of such institution who makes, or requires another to make any such disclosure, shall not be liable to any person under any law or regulation of the United States, any constitution, law or regulation of any State or political subdivision of any State, or under any contract or other legally enforceable agreement (including any arbitration agreement), for such disclosure or for any failure to provide notice of such disclosure to the person who is the subject of such disclosure or any other person identified in the disclosure.
Based thereon, there could be no claim against the bank.


 

Wednesday, March 8, 2017

Massachusetts Court Substantively Consolidates Corporation and Commonly Owned LLC


Massachusetts Court Substantively Consolidates Corporation and Commonly Owned LLC

      In a decision rendered last December, a Bankruptcy Court sitting in Massachusetts found, on the facts, that it could “substantively consolidate” the assets of the corporation, the debtor in bankruptcy, and a commonly owned LLC. In re Cameron Construction & Roofing Co., Inc. (Lassman v. Cameron Construction LLC), Case No. 14-13723-JNF, Adv. P. No. 15-1121, 2016 WL 7241337 (D. Mass. Dec. 14, 2016).
      Cameron Construction & Roofing Co. was, for all intents and purposes, in common ownership with Cameron Construction, LLC. When the corporation went into bankruptcy, the Trustee (Lassman) sought to bring into the bankruptcy Cameron Construction LLC and its assets.
      Cameron Construction LLC was the owner of the property out of which Cameron Construction & Roofing operated. Its articles of organization identified the purpose of the company as owning and managing real estate. It, however, went well beyond that, and had employees who were utilized in the corporation's construction and roofing activities. There was not, however, an employee leasing agreement with respect to those activities, and neither was there a signed lease for the use of the real property. Based on these and other activities indicating that the two ventures were not operated on arm’s-length terms, Lassman sought substantive consolidation.
      In response, it was argued that each company was duly organized, that the proper annual reports had been filed with the Massachusetts Secretary of State, and that each company filed its own income tax returns.
      The court would find that those distinctions were insufficient to preclude substantive consolidation. 2016 WL 7241337, *7. Specifically:
The Trustee demonstrated that there is a “substantial identity between the entities to be consolidated.” The common ownership and control of the Debtor and the Defendant by Cameron are admitted facts. The Debtor initially contributed $12,000 of capital for a 1% interest in the Defendant, whereas Cameron's contribution of $108,000 for a 99% interest in the Defendant was disproportionate. The capital structure was unfair to the Debtor, which should have been entitled to a greater percentage of ownership in the Defendant given its 10% capital contribution.
The Defendant did not engage in business in accordance with its business purpose as set forth in its Operating Agreement and Annual Report. It’s business went beyond the ownership, management and development of real estate. The Defendant’s seventeen employees worked exclusively for the Debtor in performing services in the Debtor’s business during 2011, 2012 and 2013. Thus, the work of the Defendant’s employees was outside the scope of the stated business purpose of the Defendant’s business as a real estate holding company. There was no formal sharing arrangement for the services provided by the Defendant’s employees to the Debtor.
The Debtor and the Defendant also did not have a written lease for the premises occupied by the Debtor. Funds were paid by the Debtor to the Defendant in denominated rent, but those amounts varied from year to year. The funds paid as “rent” were booked as payment of the work performed by the Defendant’s employees.
       While the court had been careful, earlier in the opinion, to distinguish substantive consolidation from piercing the veil, it also applied certain of the piercing factors as further evidence that substantive consolidation in this instance was appropriate.


 

Friday, March 3, 2017

Expulsion of Member for Being a Jerk Upheld; Effort to Re-characterize Relationship as a Partnership Rejected


Expulsion of Member for Being a Jerk Upheld;
Effort to Re-characterize Relationship as a Partnership Rejected

      In a decision rendered last year in Illinois, there was affirmed the trial court's determination that a member was expelled for cause. In addition, that same opinion affirmed a summary judgment to the effect that there existed no partnership amongst the members of an LLC. Herrick v. Jumpforward LLC, No. 1-15-3261, 2016 Il. App (1st) 153261-U (Aug. 29, 2016).
      Herrick, the plaintiff in this action, joined Jumpforward LLC (the “Company”) as a nonvoting member and at-will employee. The purpose of the Company was to develop a software application by which college coaches and athletes could better negotiate the recruitment process. The founders of the Company, one of whom had been Herrick's college roommate, were former college athletes familiar with the process. In the course of joining the venture, he represented that he had several years of experience in the utilization of several software packages that would be used in developing the web application for which the Company was organized. His initial 20% interest in the Company was structure as 1/3 vesting immediately, 1/3 vesting on the one year employment anniversary and the last 1/3 vesting on the second employment anniversary.
      The relationship was not successful. It ultimately came to pass that the representations as to experience with the various software packages were not true. In addition, Herrick did much of the work for the website using software packages that were not effective in achieving the stated aim.
      In addition to these technical failures to deliver, the plaintiff became  exceptionally difficult to work with in the Company, not responding to internal inquiries and as well refusing to respond to certain important outside customers.  He as well engaged in abusive communications to other employees, even after being admonished by more senior officers in the Company. Eventually, Herrick's employment with Jumpforward was terminated. Thereupon, the unvested portion of his interest in the Company was forfeited, and the balance, in accordance with the operating agreement, was redeemed. Herrick challenged both the validity of his termination and the redemption of his interest in the venture. Certain of his claims were dismissed on summary judgment, the balance were all resolved against him at trial. This appeal followed.
      The trial court, on summary judgment had dismissed Herrick's assertion that there existed a partnership between him and the defendants such that partnership duties should govern the propriety of the termination of their relationship. After reciting the components of a partnership, the court noted as well that, under controlling Illinois law “[a] complete, valid, written, contract merges and supersedes all prior and contemporaneous negotiations and agreements dealing with the same subject matter.” (Citation omitted). Applying this principle, the court found that the employment and operating agreements to which Herrick had entered both controlled the relationship and did not reflect the formation of a partnership. Rather, “[W]hen they memorialized the relationship in writing, they formed a limited liability company, and not a partnership.” 2016 Il. App. (1st) 153261-U,*9, ¶46.
      In addition, the court granted credence to the fact that the operating agreement cited that the parties thereto “disclaimed ‘any intent to form a partnership under the laws of any jurisdiction.’” Id., *10, ¶50.
      The Court of Appeals likewise upheld the trial court’s grant of summary judgment with respect to the plaintiff's claims for breach of fiduciary duty. Based upon various case authorities, but curiously without referencing the text of the Illinois LLC Act or any contrary language in the operating agreement, it found that there did not exist a fiduciary relationship between the plaintiff and either Jumpforward LLC or McCombs, the founder.
       The Court of Appeals also affirmed the determination that his termination had been for “cause.”

Wednesday, March 1, 2017

Suit Filed in Jefferson Circuit Court to Reverse Articles of Dissolution Filed Without Authority


Suit Filed in Jefferson Circuit Court to Reverse Articles of Dissolution Filed Without Authority

      A lawsuit filed last week in Jefferson Circuit Court highlights to the question of what happens when a business entity filing, in this case articles of dissolution, are filed without authority. Typically, getting that filing out of the public record is going to require a lawsuit.
      In Bollinger v. Bollinger, the complaint seeks a declaration of rights effectively revoking articles of dissolution filed with respect to Stoplight Liquor & Deli, LLC. This LLC was formed with three equal members, each of whom was named in the articles of organization. This particular LLC was member-managed, and therefore, under the LLC Act, any member could on the company’s behalf execute and deliver for filing with the Secretary of State articles of dissolution. See KRS § 14A.2-020(b)2; id. § 275.135(1). Under the LLC’s operating agreement, the default statutory rule with respect to voluntary dissolution was retained, namely that the company could be dissolved only with the approval of all of the members. However, notwithstanding that limitation, in May, 2015, one of the members, Jewell Bollinger, unilaterally executed and delivered for filing articles of dissolution. Those articles of dissolution were then filed by the Kentucky Secretary of State. The complaint seeks a declaration that those articles were filed without actual authority and directing the Secretary of State to remove them from the public record, in effect undoing the LLC’s dissolution. In a subsequent pleading, Jewell acknowledges that she did not have authority to file the articles of dissolution, in effect conceding the plaintiff's point. In effect, it appears this is a “friendly lawsuit” structured to yield the necessary ruling for presentation to the Secretary of State.
      But what about where there is not the possibility of friendly lawsuit? Assume the person who signed and delivered for filing the articles of dissolution would not cooperate. In that instance the LLC either by means of a direct lawsuit brought by a majority-in-interest of the members or, in the alternative, via a derivative action, would have to sue the person who executed and delivered the articles of dissolution, charging that person with having exceeded their authority and, likely, having breached the operating agreement. Before a decision can be made, even, assuming, that the LLC receives an order that the dissolution should be revoked, it will have incurred significant legal expenses. In the meantime, it may well have endured additional opportunity costs in the way of, for example, other companies refusing to do business with it because of its dissolved status. While damages may be owing to the company for violation of the warranty of authority (see Restatement (Third) of Agency § 8.10), determining with any degree of detail the damages will be difficult. Further, those damages would not include the LLC’s attorney fees and expenses.