Friday, June 29, 2018
The Charging Orders Practice Guide
We are happy to report that we are on the cusp of completing the Charging Orders Practice Guide. Largely written by Jay Adkisson, a nationally recognized expert on charging orders, with input from many members of our Committee, the manuscript has been edited and typeset by the Publications staff of the Section of Business Law. It awaits only one final check, and then it will go to press.
This book has been a great team effort, and many of you have devoted significant effort to it. In that regard, Jim Wheaton needs to be recognized for his contribution to the discussion of charging orders in bankruptcy. Special thanks go to Carter Bishop for allowing the book to include his tables comparing the various state acts and collecting, on a state by state basis, the cases discussing the law of charging orders. Still, it must be recognized that Jay has undertaken the laboring oar on this project; it would be easier to identify what he did not write than it would be to identify what he did write.
We are looking into making the book available at a reduced cost to those who attend the 2018 LLC Institute where (big surprise) there will be a program on charging orders that will be chaired by (another big surprise) Jay Adkisson.
Monday, June 18, 2018
Limited Liability Companies in Kentucky
When Limited Liability Companies in Kentucky was released in 2011, I was the author of five chapters on substantive LLC law. Since then I have prepared and published supplements to those various chapters. Beginning in 2014, the single largest of those chapters, Limited Liability Company Operations, was entirely amended and restated. Then, beginning in 2016, the remaining chapters were all entirely amended and restated. Also, I have added two new chapters, Developments in the Law of Kentucky LLCs and Charging Orders.
The 2018 edition of the updated chapters has now been released, and has been posted on SSRN, where it can be accessed for free. HERE IS A LINK to that supplement.
Friday, June 15, 2018
Today is Not the Anniversary of the Signing of Magna Carta
Some sources are reporting that today is the anniversary of the signing, in 1215, of Magna Carta by King John and his leading nobles, all at Runnymede. From there the foundation of Magna Carta is dated.
The only problem is that the Magna Carta of June, 1215 was a dead letter. John repudiated the charter, and that repudiation was affirmed by Pope Innocent III.
John's after-the-fact rejection of Magna Carta precipitated the First Barons War, a contest in which a group of disaffected nobles actually aligned themselves with the King of France. Had history turned out only slightly differently, the Angevin house of England could have been replaced by the French royal house, thereby uniting England and France under a single crown. That, of course, was the ultimate aim of the English in the Hundred Years War in the 14th and 15th centuries, but that is a different story. King John would die in October, 1216, the Crown being inherited by his nine year old son Henry III. As part of the effort to bring the First Barons War to a conclusion, William Marshal, the prototypical knight of the period and the Regent of Henry III, caused there to be issued a shorter version of Magna Carta. This effort was not entirely successful, but the shorter version was ultimately incorporated into the settlement the brought about the resolution of the First Barons War.
Henry III would again issue Magna Carta during his reign as a trade-off for new taxes, and his son Edward I would as well issue Magna Carta in his own name. Subsequent monarchs would do the same through the 14th century.
That said, none of the issuances of Magna Carta, irrespective of a specific content, had the same theatrical flair as the June 15, 1215 signing at Runnymede. For that reason, it remains the event to which everybody refers.
But it did not bring Magna Carta into law.
Today is without question the date of issuance, in 1520, of the bull Exsurge Domine by Pope Leo X. Addressed to formerly obscure theology professor Martin Luther, it threatened excommunication if Luther did not recant certain heretical views. He did not do so, and the threatened excommunication was carried out in January 1520. Whereas the 1215 Magna Carta never had legal effect, Exsurge Domine did and does.
The Importance of Updating Annual Reports
Under Kentucky law, corporations, LLCs and limited partnerships are required to file with the Kentucky Secretary of State an annual report. For a business corporation, the annual report will list the directors and executive officers. Foreign LLC, assuming it is manager-manage, each manager will be listed. For a limited partnership, each general partner must be identified. A recent case out of New York highlights the importance of keeping these public records current.
In that New York decision, Matter of Hu (Lowbet Realty Corp.), 2018 NY slip op. 03529 (First Dept. May 16, 2018), the court considered and rejected an effort to rescind a sale of corporate owned realty to a third party when the person who executed the transaction documents on the corporation’s behalf did not, in fact, have authority to do so. In part, the court did not grant the requested relief on the basis that the corporation’s public filings continue to list the individual as an officer of the corporation. On that basis, the court found that the third-party was able to rely upon the capacity to bind the corporation and transfer the real property.
This latest iteration of the Lowbet Realty Corp. saga is reviewed by Peter Mahler in his blog New York Business Divorce in a posting titled Bona Fide Purchaser Avoids Rescission of Minority Shareholder’s Unauthorized Sale of Corporation’s Realty (June 4, 2018). HERE IS A LINK to that posting.
Under Kentucky law, it is permissible to, over the course of the year, amend an annual report. Upon the departure of an officer, a manager or a general partner, prompt amendment of the annual reports corrects the public records and supports the position of the venture that there is no longer any apparent agency authority of that person to bind the venture.
Lemonade Stands and Fighting City Hall
According to a story circulated on various websites including the AP Wire, certain city health departments have both been shutting down and imposing fines on various lemonade stands organized by various kids. In response thereto, Country Time Lemonade has organized a “legal defense fund” that will pay the various fines that have been imposed. HERE IS A LINK to that story.
I'm not even going to start in on what a waste of civic resources it is for health departments, etc. to engage in these sorts of enforcement activities.
As of yet, I have not seen anything on whether the purveyors of cupcake and cookie mix are organizing a similar legal defense fund in connection with bake sales to support the lacrosse team.
Tuesday, June 12, 2018
Professor Elizabeth “Beth” S. Miller Appointed to the Baylor University College of Law Endowed Chair in Business and Transactional Law
Professor Elizabeth “Beth” S. Miller Appointed to the Baylor University College of Law Endowed Chair in Business and Transactional Law
Baylor College of Law has announced the creation of the M. Stephen and Alyce A. Beard Chair in Business and Transactional Law, and has as well announced that the position shall be held by Professor Elizabeth “Beth” S. Miller.
HERE IS A LINK to the announcement.
Wednesday, June 6, 2018
Court of Appeals Avoids the Question of Whether Kentucky Will Allow for the “Reverse Pierce” of an LLC
Court of Appeals Avoids the Question of Whether Kentucky Will Allow for the “Reverse Pierce” of an LLC
In a decision rendered last Friday, the Kentucky Court of Appeals determined, on the facts presented to the trial court, to affirm the granting of summary judgment to all the defendants on the question of whether the veil of an LLC could be pierced in order to hold it liable on a claim against the person who, at least at one time, had been the sole member. Unfortunately, the decision raised as many questions as it provided answers. Rector v. Calvert, Case No. 2013-CA-002057-MR, 2018 WL 2460361 (Ky. App. June 1, 2018.
Danny Calvert was the son of James Calvert. After the death of James, Rector, his Executor, brought claims against Danny for disposing of certain items of James’ property pursuant to a power of attorney. Over the course of this litigation, Danny would himself die, and Linda Calvert was appointed as his Executrix.
Some years prior to the time that Danny misused James’ power of attorney, Danny had organized an LLC under the name Lindan, LLC. Apparently at various undocumented times, Danny had conveyed to his wife, Linda and to their children interests in the LLC, perhaps all of the interests in the LLC. After James’ death, his estate brought an action against Danny Calvert and Lindan. The estate was awarded damages of $343,636.96. In seeking to collect, the Estate sought to reach Lindan’s assets by means of a “reverse pierce.” The trial court granted summary judgment to the defendants, and this appeal followed.
Ultimately, the Court of Appeals would avoid the entire question, writing:
Although Kentucky has not yet recognized a claim for reverse piercing, we agree with the trial court that James’ Estate failed to present sufficiently strong equities in support of such an extraordinary remedy.
In another place it wrote:
“We conclude that the current case is not the appropriate means of recognizing such a [reverse piercing] claim.”
Acknowledging that various courts either have or have not recognized outside reverse piercing, it was found that the plaintiff’s presentation to the trial court was not sufficient to support a pierce. Rather, while it was agreed that certain formalities had not been satisfied, including allowing Lindan to be administratively dissolved in 2008 (and only reinstated in 2015), there was a failure to bring forth evidence with respect to the other factors identified in Inter-Tel Technologies. Also, the court noted that reverse veil piercing cases must consider the impact thereof on the entity’s creditors and other innocent shareholders.
There are, however, a number of unanswered questions that still result from this opinion, namely:
(1) As is noted in the concurring opinion, it appears that the original judgment was against not only Danny individually but also Lindan LLC. If Lindan is a judgment-debtor to James’ Estate, why is piercing an issue at all?;
(2) As is mentioned in both the opinion and the concurring opinion, why was no charging order sought against Danny’s interest in Lindan?;
(3) While, in footnote 6, the California decision Postal Instant Press, Inc. v. Kaswa Corp. was a case cited for the proposition that reverse veil piercing is not permissible, the opinion failed to acknowledge that, in Curci Investments, LLC v. Baldwin, 2017 WL 3431457 (Ca. App. 4th Dist., Aug. 8, 2017), the possibility of reverse veil piercing was recognized;
(4) The repeated references to the “corporate veil” and the piercing of a “corporation” indicate a lack of attention to the appropriate nomenclature of an LLC. As Professor Jonathan Fershee of West Virginia Law oft points out, an LLC does not have a “corporate” veil; and
(5) As piercing is a remedy, rather than an independent cause of action, is the denial of that remedy necessarily subject to the same standard of review as is a grant of summary judgment with respect to a claim on the merits?
There is quite a bit happening with respect to the law of piercing the veil both in Kentucky and, across the country.
My thanks to Jay Adkisson for his email pointing out the Kaswa / Curci issue in this case.
Tuesday, June 5, 2018
Did Masterpiece Cakeshop Engage in Illegal Discrimination?
Apparently we will never know.
Yesterday, the United States Supreme Court handed down its decision in Masterpiece Cakeshop, Ltd. v. The Colorado Civil Rights Commission. In the case as presented to the Court, the question was whether Masterpiece Cakeshop and its owner, Jack Phillips, a self-professed devout Christian, engaged in illegal discrimination by refusing to create a wedding cake for Charlie Craig and Dave Mullins. Phillips argued that creating a cake is expressive conduct, and that he could not, consistent with his belief that marriage is between one man and one woman, create a cake that would message to third parties his approval of a same-sex marriage. In contrast, Craig and Mullins asserted that they had been discriminated on the basis of their sexual orientation in violation of Colorado law. It had been expected that there would be a close decision drawing the line between, on the one hand, Free Exercise of Religion and First Amendment rights of expression (e.g., does a wedding cake convey any message from the baker, or rather is it a message of the persons being married?) and state laws barring discrimination based upon sexual orientation. The decision of the Supreme Court was, rather than a bang, rather only a whimper. The Court avoided all of those questions, ruling only that an administrative ruling issued at the beginning of this case by the Colorado Civil Rights Commission was improper, thereby undercutting the entire case.
After Craig and Mullins were denied service at Masterpiece Cakeshop, they filed a claim for discrimination under the Colorado Anti-Discrimination Act. Thereafter the matter worked its way through the adjudicative process. In the course thereof, the Civil Rights Commission, through various of its commissioners, expressed a number of statements fairly interpreted as being anti-religious. Writing for the Court, Justice Kennedy found that these statements were derogatory of Phillips’ of religious beliefs. Ultimately, these statements violated the principle that the government must be absolutely neutral with respect to religious views. Justice Kennedy wrote:
The Free Exercise Clause bars even “subtle departures from neutrality” on matters of religion. Here, that means the Commission was obligated under the Free Exercise Clause to proceed in a manner neutral and tolerant of Phillips’ religious beliefs. The Constitution “commits government itself to religious tolerance, and even upon slight suspicion the proposals for state intervention stem from animosity to religion or distrust of its practices, all officials must pause to remember their own high duty to the Constitution and to the rights it secures.”
…. In view of these factors the record here demonstrates that the Commission’s consideration of Phillips’ case was neither tolerant nor respectful of Phillips’ religious beliefs. …. It hardly requires restating that government has no role in deciding or even suggesting that the religious ground for Phillips’ conscious-based objection is legitimate or illegitimate. Slip op at 17 (citations omitted).
On that basis, the determination by the Colorado Civil Rights Commission that formed the basis of the determination that Masterpiece Cakeshop had engaged in impermissible discrimination was set aside.
Still, there are aspects of the opinion, admittedly dicta (i.e. not part of the holding and not binding upon any other court) through which, at minimum, Justice Kennedy indicated that proprietors should be very careful before deciding to refuse service to those in a protected class. For example, it was stated that:
[W]hile those religious and philosophical objections are protected, it is a general rule that such objections do not allow business owners and other actors in the economy and in society to deny protected persons equal access to the goods and services under a neutral and generally applicable public accommodations law. Slip op. at 9.
As for the point that was initially to be the central question of Masterpiece Cakeshop, it will ultimately be resolved. Dozens of cases are working their way through the system as to whether bakers, florists, and other goods and service providers in the wedding industry must offer those goods and services freely irrespective of the sex of the intended spouses or, in the alternative, whether a particular purveyor’s religious views will protect them from discriminatory actions. Some of those cases will be up for consideration by the United States Supreme Court next year.
Tuesday, May 29, 2018
The Fall of Constantinople and the End of the “Middle Ages"
On this day in 1453 the city of Constantinople, and with it the Byzantine Roman Empire, fell to the forces of the Ottoman Empire under Mehmed II. Refounded as the Eastern capital of the Roman empire in the early years of the 4th Century, it had previously fallen only once, then in 1204 to an army of Western Crusaders. The strength of its walls, especially those on the land side, were legendary. The Hun army under Attila is reputed to have ridden up to the walls, taken a good look and ridden away, knowing they could not take the city. Since the fall of the Western Roman Empire in the 5th Century, it was the Eastern “Byzantine” Empire that continued the traditions and namesake of the “Roman Empire.”
Mehmed was able, however, to utilize the still relatively new cannon, but cast at sizes never before seen. A combination of the battering of the city’s walls, siege and the deprivation of supplies, and a city without the necessary military forces to patrol and protect the walls set the stage for its downfall. Only some 7,000 soldiers were availble in the city, many of them mercenaries from Italy. Those forces were stretched even more thinly after the Ottoman forces were able to bring ships into the "Golden Horn" which ran along a portion of the walls. Now the Ottomans did not sail their ships into the Horn - it was protected by a large chain that blocked the entrance, the chain being supported by barrel floats. Rather, the ships were beached and pulled up and over the surrounding hills, then relaunched in the Golden Horn.
Ultimately the Ottoman forces were able to force entry through a gate left open in the walls through which a wounded Byzantine commander (he himself was from Genoa) had been evacuated. The last of the Byzantine emperors, Constantine XI (who as well enjoyed the title as the Despot of Morea - very Tolkenish), died leading his troops in a final push against the enemy; or at least it is so assumed - the accounts record him leading the troops and his whereabouts are never again reported, his body was never recovered.
Some scholars treat the Fall of Constantinople as the end of the Middle Ages. An interesting notion, but since scholars can’t agree as to what are the characteristics of the Middle Ages, it is hard to say the age ended as of one point in time or another. Maybe for that reason May 29, 1453 is as good a day as any.
Thursday, May 24, 2018
An Oral Contract Is Not Worth The Paper It Is (Not) Written On
In a decision rendered in February of this year by a New York Court, there was again illuminated the rule that oral contracts are typically not worth the paper they are (not) written upon. In this instance, a shareholder asserted that a side oral agreement would permit him to significantly increase his holdings in the corporation. On the basis of the other agreements, they being written, precluded an oral contract, this assertion was rejected. Blobel v. Kopfli, 2018 NY Slip Op 30298(U), 2018 WL 984847 (N.Y. Sup. Feb. 20, 2018).
Dr. Günter Blobel, a recipient of the Nobel Prize in medicine, was the cofounder of Chromocell, a biotechnology company based substantially upon technology code invented by Dr. Blobel. The other founders of Chromocell were Dr. Shekdar, Dr. Blobel’s research assistant, and Christian Kopfli, an attorney. Once formed, Kopfli served as the CEO of Chromocell and Dr. Shekdar served as its chief science officer.
At the time of Chromocell’s formation, Dr. Blobel was employed by the Rockefeller University Laboratory of Cell Biology and as well held the position of Investigator at the Howard Hughes Medical Institute (HHMI). HHMI’s rules limited Dr. Blobel to owning “more than a 5% ownership interest in a company.” In light of this limitation, Dr. Blobel agreed to accept a 3.9% equity interest in Chromocell, with the balance being split equally between Dr. Shekdar and Kopfli. In connection with the organization of Chromocell, the parties, including Dr. Blobel, entered into a variety of agreements including a stock agreement and an independent contractor services agreement. Dr. Blobel would assert that there was a unwritten agreement that, to the extent that the rules of the HHMI would allow him to subsequently hold a greater ownership interest in the company, his allocation of shares would be adjusted accordingly
In 2012, HHMI revised its rules, allowing persons such as Dr. Blobel to own “less than a controlling interest” in a company. Upon this change in HHMI rules, Blobel believed that the alleged oral agreement should allow him to increase his share ownership to one-third of Chronocell, thereby rendering himself, Kopfli and Dr. Shekdar equal shareholders. After exchanging numerous emails on the point and as well a dinner, it was clear that neither Kopfli nor Dr. Shekdar would agree to increase Blobel’s ownership in the company; they even offered to buy out his interest in the company for $10,000,000. Refusing those offers, Blobel filed suit seeking, amongst other relief, specific performance on the alleged oral reallocation agreement.
Responding to the complaint, the defendants filed a motion to dismiss on the basis that there were no grounds for relief. In this decision, that motion for relief would be granted.
Each of the stock and the consulting agreements signed by Blobel, the former otherwise providing for his 3.9% ownership interest, were “fully integrated agreements.” Being fully integrated, the “merger clause thereof indicated that the agreement ‘establishes the parties’ intent to finalize all negotiated terms in the agreement.” With respect to the consulting agreement, it provided that “it constitutes the ‘entire understanding between the parties and supersedes, replaces and takes precedence over any prior or contemporaneous understanding or oral or written agreement.’” With respect to the stock agreement, it provided that “there have existed or exist no agreements or understandings, written or oral, between the company and [Dr. Blobel] or entered into by [Dr. Blobel] for the benefit of the company.” The court found that these agreements “constitute a concerted effort by the parties to finalize the terms of their agreement.”
Ultimately, the court would find:
Additionally, by executing the Agreement, Dr. Blobel sought to be bound by each Agreement’s merger clause, which expressly repudiated all prior agreements. Dr. Blobel’s argument requires the court to accept that, despite agreeing to reject all prior agreements on the issue, Dr. Blobel nevertheless believed the Allocation Agreement was exempt from those clauses’ controlling reach, even if it misrepresents the Agreements’ stated terms. This the court declines to do, particularly, when enforcing the Allocation Agreement would uproot each written Agreement’s merger clause and recital of Dr. Blow Blobel’s 3.9% equity ownership.
Additional arguments based upon, for example, unjust enrichment and equitable estoppel were rejected on the basis that they were inconsistent with the express written agreements.
Once again, the rule is clear; if you want your contract to be enforceable, it needs to be in writing.
Tuesday, May 15, 2018
The Trial of Anne Boleyn
On this day in 1536, Anne Boleyn, as well as her brother George, was tried on allegations of adultery and incest. The conclusion of the “trial” was a foregone conclusion. On May 12, four of the men with whom Anne was accused of having engaged in adultery, Mark Smeaton, Henry Norris, William Brereton and Francis Weston, had already been convicted, and, so goes the adage, it does take two to tango.
Although some incomplete notes of the trial do survive, sadly no transcript is available; it would no doubt make interesting reading. It is clear that both Anne and then George (George’s trial was separate and held after that of Anne) denied all charges against them. Those denials (as well as the expected denials of the other men charged with having committed adultery with Anne) must be accepted at face value. As has been demonstrated by several scholars, most conclusively Eric Ives, Anne and her various co-conspirators could not have been guilty of the charges made – even with the incomplete records available to us today, it can be demonstrated that in numerous instances Anne and a particular gentleman were charged with having committed adultery at a particular time and place when, in fact, either or both of them were at a different place or even two difference places. The truth, however, was not the issue; the outcome of the trial was a foregone conclusion before it ever started. Henry was tired of Anne, and Cromwell had been charged to bring about her fall. End of story.
On May 14, Cramner, Archbishop of Canterbury, had declared the marriage of Henry and Anne to have been invalid ab initio, possibly (the papers as to his determination have been lost) on the basis of her prior contract of marriage to Henry Percy the son of the then Fifth Earl of Northumberland (this Henry would be the Sixth Earl). An alternative basis was that Mary Boleyn, Anne's sister, had been Henry's mistress, and on that basis the marriage could have been invalid based upon consangruity. Regardless as to why, Anne would not die as the Queen of England, having never been validly married to Henry, and their daughter Elizabeth (the future Queen Elizabeth I) was rendered illegitimate.
All of Mark Smeaton, Henry Norris, William Brereton and Francis Weston, along with George Boleyn, would be executed on May 17. Anne’s death would not take place until May 19.
Friday, May 11, 2018
Waiving the Right to Bring a Derivative Action
In a pair of recent cases involving, respectively, Delaware and Nevada LLCs, the courts were called upon to determine whether each LLC’s operating agreement waived the ability of the minority members to bring a derivative action.
Both suits were decided in New York. In the case involving the Delaware LLC, Talking Capital LLC v. Omanoff, the court rejected the assertion that the structure of the operating agreement, which utilized a board with broad powers, was sufficient to eliminate the ability to bring a derivative action. It was noted as well that, were that argument accepted, it “would inherently immunize managing members who commit wrongdoing.” That decision as well noted that the provision of the Delaware LLC Act addressing derivative actions was not qualified by “unless otherwise provided in the operating agreement”, noting that this left open the question as to whether § 18-1001 of the Delaware LLC Act is mandatory or subject to modification by the members.
In the case involving the Nevada LLC, Human Nature Las Vegas Inc. v. Gildea, the New York Court was reviewing an operating agreement for a Nevada LLC. Under the Nevada LLC Act, the right to bring a derivative action is clearly subject to modification, the statute providing “unless otherwise prohibited by the… operating agreements.” In that instance, while the operating agreement required that at least a majority of the three members approve certain key decisions including whether to “commence or settle any litigation or arbitration or hire or terminate any counsel in connection with such litigation or arbitration,” that language was insufficient to eliminate the ability to bring a derivative action.
These two cases have been reviewed by Peter Mahler in his blog New York Business Divorce in an April 23, 2018 posting titled Can LLC Agreement Waive Right to Sue Derivatively? Not in these two cases; HERE IS A LINK to that posting.
While neither of these courts found it necessary to reach the ultimate question, namely can the right to bring a derivative action be waived, there is a Kentucky trial cout decision to that effect. In J & B Energy, Inc. v. Caldwell, the Kentucky Court of Appeals was focused upon whether or not one of the participants in a particular transaction was acting as the attorney for the other members. Unfortunately, not appealed in that case was a determination by the trial court that certain language in the operating agreement was sufficient to waive the right to bring a derivative action. I reviewed that issue in a blog posting on October 6, 2014 titled Waiver of the Right to Bring a Derivative Action? HERE IS A LINK to that discussion. I have otherwise taken the position that the capacity to bring a derivative action is not subject to modification in the operating agreement. For example, I blogged on that issue on May 19, 2015 in a posting On Further Reflection, “No”; HERE IS A LINK to that posting.
Thursday, May 10, 2018
Distinguishing a Written Operating Agreement from a Signed Operating Agreement
Under the Kentucky LLC Act, numerous of the default rules may be modified only if done in a written operating agreement. Put another way, while oral and course of conduct operating agreements are permitted under the LLC Act, those agreements are not effective to modify a default rule that the Act requires be modified only by means of a written instrument. There is not, however, a general requirement that a written operating agreement be signed by the members. While there are a few very narrow exceptions to the rule, such as with respect to the obligation to contribute additional capital to the company, a member is bound by the written operating agreement irrespective of whether they have ever signed it. Indeed, they may be bound by an agreement they have never seen.
These rules can become quite important when there is disagreement as to whether the terms of a written operating agreement have ever been approved.
These principles were recently applied in a decision in New York, a state whose LLC Act is in many respects similar to that of Kentucky. Therein, in 223 Sam, LLC v. 223 15th St., LLC, there existed a dispute as to whether a document that was exchanged by email constituted the final agreed upon operating agreement for the company. Peter Mahler, in his blog New York Business Divorce, has reviewed the 223 Sam, LLC decision; HERE IS A LINK to that posting.
Sunday, May 6, 2018
The Sack of Rome and the Papal Swiss Guard
Today marks the anniversary of the Sack of Rome in 1527 by troops of Charles V, Holy Roman Emperor.
Since the late 15th Century Italy (or at least the region we today identify as Italy – the notion of the region as a nation was long in the future) had been repeatedly invaded by forces from Northern Europe, each seeking to claim dominion over one area or another. Rival claimants to the crown of Naples caused as much trouble as did anything, but economic rivalry between for example Genoa and Venice did nothing to calm the waters. Pope Alexander VI gave command of the papal army to his son/nephew (which is a matter of dispute) Cesare in order to bring some order, and Pope Julius II would actually don armor and lead his army into battle, again in an effort to bring some stability to the situation. While Erasmus would condemn Julius for doing so, he did ignore the fact that the targeted cities surrendered to him.
But back to the Sack of Rome. Charles’ forces were at this point battling the League of Cognac, it being comprised of France, Milan, Venice, Florence and the Papal States . Keeping track of the various Leagues through the Italian Wars is a troubling task; the League of Cambrai was initially formed against Venice by the Papacy, France, Spain and the Holy Roman Empire. Later the initial members would be allied against France with Venice as an ally. Later Venice and France would be against the Papacy, Spain and the Holy Roman Empire. After a significant victory over the French army the troops were restive in that they had not been paid – most were mercenary. Pillaging Rome would be a way of paying the troops. The city was not well defended, although its formidable walls did need to be and were breached. Their commander having fallen in the course of the attack, discipline immediately broke down among the troops, and a sack of over three days began.
The Pontifical Swiss Guard, created only in 1506 under Pope Julius II, rose to the occasion. Of its then number of 189, 147 would fall defending Pope Clement VII, affording him time to take refuge in the Castel Sant’Angelo (Hadrian’s Mausoleum). In recognition of this event, new members of the Pontifical Swiss Guard are sworn in on May 6. Earlier today, in the continuation of that tradition, Pope Francis I officiated at the swearing in of a number of new Swiss Guards.
There was in 2013 an event unique to the Guard, namely the recognition of a Pope’s retirement. Benedict XVI left the Vatican as Pope, flying to the Castle Gandolfo. The Swiss Guard accompanied him to the castle and there stood guard. When the moment his resignation became effective, and Benedict became not Pope but Pope Emeritus, the Guards left their station at the castle and returned to Rome. While the Vatican has its security forces, and they no doubt continued to provide protection for Benedict, the Swiss Guard serve the Pope.
Of course this was not the only sack of Rome – it had fallen many times in its long history. It fell to the Normans in 1084, in 546 by the Ostrogoths, in 455 by the Vandals, in 410 by the Visigoths and in 387 BC by the Gauls.
Thursday, April 26, 2018
Delaware Chancery Court Addresses Obligation to Set Aside Reserves for Known Claims;“Undissolved” to LLCs so Creditor Claims May be Pursued
Delaware Chancery Court Addresses Obligation to Set Aside Reserves for Known Claims; “Undissolved” to LLCs so Creditor Claims May be Pursued
Yesterday, the Delaware Court of Chancery (Vice Chancellor Glasscock) issued an opinion addressing the obligation of an LLC to set aside reserves to satisfy likely claims. In this instance, the LLCs had dissolved and set aside nothing in the way of reserves to satisfy reasonably expected claims from some former members dissatisfied with the appraisal methodology utilized to determine their redemption price. Vice Chancellor Glasscock found that the zero reserve was inappropriate, and on that basis “undissolved” the LLCs. Capone v LDH Management Holdings, LLC, C.A. No. 11687-VCG (Del. Ch. April 25, 2018).
The plaintiffs in this action have been executive officers of defendant LDH. After termination of employment, LDH was entitled to redeem their interests in the company pursuant to a valuation performed as of the last day of the prior year. In this instance, however, LDH jumped the gun and performed the valuation before the end of the year. That valuation came it at essentially $1.4 billion. However, an essentially contemporaneous offer to sell part of the company received significantly higher valuations. The plaintiffs objected that those higher valuations, determined by what third parties would actually pay for the business, should have been taken into account in the valuation. Specifically, they asserted that the failure to consider those offers would violate the board’s obligation that they determine the value “in good faith” as specified in the operating agreement.
The Delaware LLC Act sets forth a detailed process for the dissolution of an LLC. One of those requirements, set forth at section 18-804(b)(3), requires that the LLC:
Make such provision as will be reasonably likely to be sufficient to provide compensation for claims that have not been made known to the limited liability company or that have not arisen but that, based on facts known to the limited liability company, are likely to arise or to become known to the limited liability company within 10 years after the date of dissolution.
Otherwise, the LLC Act requires as well that:
A limited liability company which has dissolved … shall pay or make reasonable provision to pay all claims and obligations, including all contention, conditional or un-matured contractual claims, known to the limited liability company.
Del. LLC Act § 18-804(b)(1).
The bulk of the opinion was then devoted to whether the complaints made by the plaintiffs over a series of emails and phone calls with respect to the valuation methodology employed by the company put it on notice of the claims. The court ultimately determined that the company had notice of the potential claims and had acted inappropriately in setting aside a zero reserve based thereon. The ultimate merits of that claim will be resolved in litigation already pending in New York.
What Vice Chancellor Glasscock did order was that the certificates of cancellation filed with respect to the subject LLCs be in effect withdrawn and the LLCs reinstated. This is necessary in that, under Delaware law, once a certificate of cancellation is filed, no suits can be brought by or against of the LLC. With those certificates of cancellation now no longer in effect, the LLCs continue in existence, and the New York lawsuit may proceed.
FYI, Kentucky does not have the concept of a certificate of cancellation, and a dissolved LLC may continue to sue or be sued after its dissolution.
Today Began the Renaissance (?)
By certain reckoning, today is the anniversary of an event in 1336 off from which is dated the Italian Renaissance. It was on that day that the poet Petrarch climbed to the top of Mount Ventoux in southern France. Petrarch was by no means the first person to have a climbed this “mountain” - it's only slightly over 6000 feet in height. Rather, his climb was considered noteworthy because he simply did it for the experience.
Whether this was, actually, the beginning of the Renaissance is open to significant debate. By then Petrarch had already completed a new epic poem in Latin titled Africa (it is about the second Punic war). Regardless, he would go on to be a prolific letter writer, corresponding with persons including Boccaccio, and would locate the writings of numerous classical writers, including Cicero.
All is not, however, good with Petrarch. He is credited with identifying the so-called “Dark Ages.” In fact, the purported “Dark Ages” never existed.
Tuesday, April 24, 2018
Beware Greeks Bearing Gifts
Today marks the anniversary of the traditional Fall of Troy in 1184 B.C., thereby bringing to its culmination the Trojan War.
The Fall of Troy is not recounted in Homer’s Iliad, the iconic epic, it rather covering only a period of ten days to two weeks within the supposed ten-year span of the war. The Fall of Troy through the subterfuge of the Trojan Horse is briefly mentioned in the Odyssey and is referenced in several other Greek sources. The story would not find, however, its full development until Virgil’s Aeneid.
Some modern historians have attempted to explain the story as an analogy, suggesting actually that an earthquake – Poseidon, whose portfolio included horses, was as well the god of earthquakes. I, for one, would rather retain the literal interpretation.
Regardless it is a great story, especially the fall of Achilles to Paris after the former killed Hector. Speaking of which, the movie Troy misstated the story, likely because they wanted to keep Brad Pitt on the screen. Achilles was killed before the fall of Troy; he never entered the city.
Some might consider the Trojan War to be ancient history. It’s all matter of perspective. At the time of the Fall of Troy the Egyptian civilization had been flourishing already for 2000 years.
Thursday, April 19, 2018
Evidentiary Hearing to Determine Whether There Was an Agreement to Arbitrate
Consequent to a recent decision, the defendant will be required to respond to certain discovery request so that there can be a substantive ruling as to whether the named plaintiff, on behalf of an as of yet uncertified class, is otherwise obligated to arbitrate the dispute. Tassy v. Lindsay Entertainment Enterprises, Inc., Civ. Act. No. 3:16-CV-00077-TDR, 2018 WL 1702335 (W.D. Ky. April 6, 2018).
At its core, this dispute involves whether or not there existed a valid agreement to arbitrate disputes. The question was whether the individual was properly classified as an independent contractor versus an employee. If classification should have been as an employee, there is a claim for failure to pay appropriate wages as mandated by federal law.
Tassy, an individual, on her behalf and on behalf of similarly situated persons, sought to bring a class action to resolve this dispute. In response, Lindsay Entertainment asserted that Tassy was bound by an agreement to arbitrate any disputes. Lindsay Entertainment could not, however, produce a copy of the allegedly signed agreement to arbitrate. In this dispute, the Sixth Circuit had directed that the District Court “‘summarily’ determine whether the parties had agreed to arbitrate.” Lindsay Entertainment wanted to rely upon testimony from Scott Lindsay, owner of Lindsay Entertainment, and another employee to that effect. Tassy, in part to collect testimonial evidence to the contrary, sought from Lindsay Entertainment a listing of all of the employees/independent contractors for a particular period, including their dates of service, last known address, last known phone number, etc. Lindsay Entertainment objected. That objection was overruled. To that end, the court wrote:
Allowing parties to conduct limited discovery prior to holding an evidentiary hearing, and for the purpose of determining the validity of arbitration agreements, is an accepted practice.
2018 WL 1702335,*4.
Still, Tassy was not granted free range but rather “discovery shall be limited to only the information necessary to prepare for the upcoming evidentiary hearing regarding whether there exists a valid agreement to arbitrate.”
Wednesday, April 18, 2018
Waiving the Few Rights of a Decedent’s Estate
Certain states, including New York, have a default statute that affords the estate of the deceased member certain rights (FYI, Kentucky does not). That said, a recent decision from New York applied an operating agreement that waived even those rights. Pappas v. 38-40 LLC, 2018 NY Slip op 30329(U) (Sup.Ct. NY County Feb. 22, 2018).
In this instance, Pappas had been a 25% member in an LLC controlled by Kirsch (70%). After Pappas passed away, his personal representative filed a direct and derivative complaint against Kirsch alleging that the company was being looted. Under the New York Limited Liability Act, specifically Section 608 thereof, “The member’s executor… may exercise all of the member’s rights for the purpose of settling his or her estate or administering his or her property, including any partner under the operating agreement of an assignee to become a member.” All else being equal, the question would be whether this provision affords the executor the ability to bring a derivative action on the LLC’s behalf. That, however, would not be the focus of this case as the operating agreement modified that rule. In this instance, a member’s death was defined as being a “Withdrawal Event” and went on to provide:
In the event of a Withdrawal Event with respect to any Member, any successor in interest to such Member (including without limitation any executor, administrator, heir, committee, guardian, or other representative or successor) shall not become entitled to any rights or interests of such Member in the Limited Liability Company other than the allocations and distributions to which such Member is entitled, unless such successor in interest is admitted as a Member in accordance with this Agreement.
In this instance, the executor was not admitted as a successor member in the LLC. Applying then the continuous ownership requirement for bringing a derivative action, the derivative claims were rejected. Further, on the basis that the alleged injuries were to the LLC and not uniquely to the decedent, the direct claims were rejected.
Peter Mahler, in his blog New York Business Divorce, provides a longer review of this decision, as well as a link to it. HERE IS A LINK to that review.
Tuesday, April 17, 2018
Volunteers at Church Operated Restaurant Were Not Employees
In a decision rendered yesterday by the Sixth Circuit Court of Appeals, it held that members of the church who volunteered to work at a for-profit restaurant operated by the church were not employees. Not being employees, there could not be a claim for violation of the Fair Labor Standards Act and its minimum compensation requirements. Acosta v. Cathedral Buffet, Inc., No. 17-3427 (6th Cir. April 16, 2018).
The Grace Cathedral Church operated a restaurant on its campus named Cathedral Buffet. The restaurant, a for-profit venture, is open to the public. It is staffed by a combination of paid employees and unpaid church members. After a Department of Labor inspection, that followed by a trial with the District Court, it was held that the use of the unpaid volunteers violated the Fair Labor Standards Act (“FLSA”) and its minimum wage requirements. The Sixth Circuit would reverse the decision of the District Court (and in so doing hold against the Department of Labor) based upon the definition of who is an employee. In this instance, the court focused upon the fact that the volunteers never intended or expected to be compensated for their services. “We agree that a volunteer’s expectation of compensation is a threshold inquiry that must be satisfied before we assess the economic realities of the working relationship.” Slip op. at 7.
There was as well an interesting discussion of coercion. Various members of the church were regularly solicited to volunteer at the restaurant, solicitations that came both from the pulpit and by direct phone calls from the restaurant manager and even the pastor. It was reported as well that the restaurant manager would tell potential volunteers that if they did not provide services the pastor would hear about it. On the basis that these coercions were spiritual, rather than economic, the court found that they should not be part of its secular analysis.
The Religion Clause Blog has as well a review this decision; HERE IS A LINK to that review.
It Was a Most Successful War
Today marks the anniversary of the 1986 treaty which drew to a close the (largely unknown) Three Hundred Thirty-Five Year’s War. “Fought” in only the loosest sense of the word, the war was between the Netherlands and the Isles of Scilly, they being at the south-west corner of England off of Cornwall. Over the Three Hundred Thirty-Five years of this conflict, it having commenced in the spring of 1651, there were no casualties. In fact, no hostile act was taken by one party against another during the course of the war. Needless to say, this was a significant cost savings versus the usual expense of munitions.
There exists something of a technical dispute as to whether there was actually a war in that the Isles are not themselves a nation-state. That should not, however, detract from the successful resolution of the dispute.
This treaty is, however, in no manner any sort of record. In 146 BC, at the conclusion of the Third Punic War, Rome destroyed Carthage. It was not until 1985, after passage of 2131 years, that a peace treaty between Carthage (now a suburb of Tunis), and Rome was signed.
The Passing of Lynn Stout
Yesterday Lynn Stout, a leading scholar in many aspects of the law of business organizations, passed away after a battle with cancer. Lynn was a cogent scholar arguing against shareholder primacy and the suggestion that corporate directors have a shareholder wealth maximization obligation.
Joan Heminway has posted on the Business Law Prof Blog some reflections on Lynn’s passing; HERE IS A LINK to Joan's thoughts.
Monday, April 16, 2018
Kentucky, and Not Federal, Court to Hear Dissenter Rights Action
A recent decision from the federal district court held that, on the basis of “Burford Abstention,” an action arising under the dissenter rights statute should be heard in state, not federal, court. Henley Mining, Inc. v. Parton, Civ. No. 6:17-CV-00092-GFVT, 2018 WL 1526081 (E. D. Ky March 28, 2018).
In connection with the merger of several companies in which he was a shareholder, David Parton exercised dissenter rights in accordance with the dissenter-rights provisions of the Kentucky Business Corporation Act. The successor corporation paid to Parton what it thought was the amount due; Parton disagreed with that amount. In response thereto, and again consistent with the Kentucky Business Corporation Act, the corporation filed a complaint with the court seeking a determination of the fair value of Parton’s interest. This suit was filed in federal court on the basis of diversity jurisdiction, Parton being a citizen of Virginia while Henley Mining, the successor corporation, was incorporated (and presumably has its principal place of business) in Kentucky.
Henley asked that the action be dismissed on the basis of Burford Abstention, essentially an argument that, notwithstanding the fact that the federal court has jurisdiction, it should decline to exercise it because the matter in controversy is particular to the competency of state courts.
Citing Caudill v. Eubanks Farms, Inc., 301 F.3d 658, 659 (6th Cir. 2002), it was observed that:
A corporation is “itself a creature of state law” and, specifically, “The Kentucky Legislature has enacted a comprehensive legislative scheme to govern businesses which elect to incorporate in the state.”
Finding that the question presented with respect to dissenter rights is “a difficult question of state law bearing on policy concerns,” the action was dismissed without prejudice so that it may be re-filed in state court.
Tuesday, April 10, 2018
Outsider Reverse Piercing of a Delaware LLC: The Fourth Circuit Court of Appeals Says It Can Happen
In a recent decision from the Fourth Circuit Court of Appeals, it applying Delaware law, it was held that, on the facts presented, a single-member Delaware LLC may be reverse pierced with the effect that the assets of the LLC may be applied to the sole member’s judgment-debt. In doing so the court also addressed an always vexing question, namely personal jurisdiction over the party being held liable on the debt. Sky Cable, LLC v. DIRECTV, Inc., __ F.3d __, 2018 WL 1514413 (4th Cir. March 28, 2018).
In 2013, Brandy Coley was found liable in the connection with a fraudulent scheme pursuant to which he provided content from DIRECTV to more than 2300 individual customers even while remitting payment for only 168 units. That judgment exceeded $2.3 million. Seeking to collect on that judgment, DIRECTV sought to pierce a trio of LLCs in which Coley was the sole member in order to “obtain access to the LLCs’ assets.” 2018 WL 1514413, *2. None of those LLCs had been party to the case against Coley and had not been served with process in connection therewith. The trial court, applying Delaware law found that an LLC could be reverse pierced and that:
(1) under Delaware law, the three LLCs were alter egos of Mr. Coley, and
(2) that Delaware would recognize reverse veil piercing under such circumstances.
Id. (footnote omitted).
In addition, it was held by the District Court that DirecTV’s failure to serve process on the LLCs did not prevent the court from exercising jurisdiction over them. Id. On appeal, each of these determinations would be affirmed.
Before continuing with the merits, there was as well a side discussion going on based upon an after-the-fact assertion by Coley’s spouse that she was a member in the LLCs. Reading between the lines, as she was not liable on the judgment in favor of First Bank, she wanted to assert an interest in the LLCs in order to defeat a reverse pierce on the basis that it would be detrimental to a person not liable on the judgment itself. However, earlier in the action, based on affidavits submitted to the effect she was not a member, she had been dismissed from the action. Applying principles of collateral estoppel, her efforts to reverse that position were rejected.
The challenges to the reverse pierce effected by the District Court were challenged on a pair of bases, namely that Delaware does not recognize reverse piercing and that the charging order provision of the Delaware LLC Act should set forth the exclusive remedy of a judgment creditor, thereby precluding a reverse pierce. Both of these arguments were rejected.
Reverse Piercing of a Delaware LLC
The Fourth Circuit began by reviewing on a number of veil piercing cases arising under Delaware law and discussing the nature of reverse piercing in both the insider and outsider realms, noting almost in passing that Delaware, being the jurisdiction of organization of the LLC, set the controlling law. From there reviewing a variety of Delaware cases as to the requirements for satisfying it’s alter ego test, it wrote:
Just as traditional veil piercing permits a court to hold a member liable for a company’s actions, reverse veil piercing permits a court to hold a company liable for the member’s actions if recognizing the corporate form would cause fraud or similar injustice.
Reverse veil piercing is particularly appropriate when an LLC has a single member, because the circumstances alleviate any concern regarding the effective veil piercing on other members who may have an interest in the assets of an LLC. Therefore, when an entity and its sole member are alter egos, the rationale supporting reverse veil piercing is especially strong.
The court noted as well that Delaware has an interest in precluding the use of the business entities it allows to come into existence to be used for improper purposes. Therefore, the Fourth Circuit held that reverse feel piercing of the single-member LLC organized in Delaware is permissible.
Charging Order Exclusivity
Turning to the question of the charging order, the court found that reverse piercing is not in the nature of a remedy that is intended to be excluded by the “exclusivity” provision of the LLC Act’s charging order provision.
Finding Cooley to be the Alter Ego of the LLCs
Which then brought the opinion to the question of whether the District Court had properly determined that the LLCs at issue were Coley’s alter egos and therefore subject to piercing.
First, the court considered what is Delaware’s law on piercing. While acknowledging that it is not formulaic, in reliance upon NetJets Aviation, Inc. v. LHC Commc’ns, LLC, 537 F.3d 168 (2d Cir. 2008), the Fourth Circuit wrote:
In Delaware, to prevail under an alter ego theory, a plaintiff is not required to show “actual fraud that must show a mingling of the operations of the entity and its owner plus an ‘overall element of injustice or unfairness.’”
In this instance, it had been and was again found that Coley operated all three of the companies and himself as a “single economic entity in which money flows freely between them at [Mr.] Coley’s whim.” Id at *8. For example, it found:
The evidence that Mr. Coley and his LLCs are alter egos is substantial. Mr. Coley clearly controls ITT and, on multiple occasions, testified pre-judgment that he is ITT’s sole member. Mrs. Coley separately testified that she had no ownership interest in any of Mr. Coley’s business entities and was not a member of ITT. Mr. Coley also produced an operating agreement during pre-judgment discovery listing himself as ITT’s only member, and testified that he is the only one who “get[s] a check” from his LLCs.
There is also abundant evidence in the record that Mr. Coley and his LLCs commingled their funds. Mr. Coley failed to keep complete records of how and why funds were deposited from one LLC’s account into another LLC’s account, or into his personal accounts. Checks made out to “East Coast Sales” were sometimes deposited into Mr. Coley’s personal account. However, Mr. Coley also received income directly from East Coast. Mr. Coley even reported East Coast’s profit and loss on his individual tax return. Yet, in his deposition testimony, Mr. Coley could not explain the amounts that he received from his LLCs as salary and other income. ….
Funds also were transferred freely among the LLCs. For example, South Raleigh and East Coast collected the rental revenue on properties owned by ITT, but South Raleigh and East Coast then transferred that revenue, less their expenses, to ITT as profit. Mr. Coley failed to explain why the revenue did not go directly to ITT, the owner of the properties. And when asked why certain transfers of funds also were made from ITT to one of the other LLCs, Mr. Coley had no explanation.
Mr. Coley also testified that payments for ITT’s “major expenses” frequently were transferred from another LLC to ITT. He stated that these expenses included “major thing[s] like taxes, insurance, taxes, we make sure it’s all paid out of [ITT].” Other expenses, however, were paid by another LLC, without passing through ITT. For example, Mr. Coley speculated that certain checks written from the South Raleigh account might have been used to pay “HOA fees” on the properties owned by ITT. Yet, he stated confusingly that those checks “are paid to South Raleigh Air. [But t]hey are [ITT’s] money.” Still other funds from Mr. Coley’s LLCs were used to pay loans on two vehicles for which Mr. Coley personally was the borrower.
Finally, the LLCs also made payments on mortgages for properties owned by ITT. Mr. Coley testified that on one such property, East Coast made payments on the mortgage loan, but that he and his wife were the borrowers. South Raleigh also made mortgage payments on a separate property owned by ITT, for which Mr. and Mrs. Coley were the borrowers. Moreover, even the mortgage on Mr. Coley’s personal residence was paid by one of his LLCs. Nevertheless, Mr. Coley took the mortgage interest deduction on such properties on his personal tax return. This cumulative evidence strongly indicates that Mr. Coley and his LLCs were in fact a single economic entity utterly dominated and controlled by Mr. Coley. We also conclude that an “overall element of injustice or unfairness” is present in this case, because DIRECTV has not received any payment on its judgment against Mr. Coley although the district court found Mr. Coley liable over four years ago. We therefore hold that the district court’s finding that ITT and Mr. Coley are alter egos was not clearly erroneous.
Id. at *8-9 (citations and footnote omitted)
Jurisdiction Over the Pierced LLCs
Coley asserted that as the LLCs who are subject to being pierced were not parties to the action, the judgment cannot be enforced against them. The court quickly dispatched this argument, holding, inter alia, that if there was jurisdiction over the judgment-debtor, with respect to each business organization who is the judgment-debtor’s alter ego, there exist jurisdiction over the alter ego. Therefore, while “service of process is a precondition to the court’s exercise of personal jurisdiction over a defendant.”, “When a court has engaged in traditional veil piercing, the court may exercise personal jurisdiction vicariously over an individual, if the court has jurisdiction over the individual’s alter ego company.” Id. at *9.
All in all a quite satisfying decision.