Enforceability of Non-Competition Limitations Against Shareholder Who Dissents From Merger

Enforceability of Non-Competition Limitations Against Shareholder Who Dissents From Merger

A recent decision from Colorado considered and rejected the enforceability of non-competition limitations entered into by an anesthesiologist shareholder who dissented when his practice merged into a larger practice. Crocker v. Greater Colorado Anesthesia, P.C., No. 17CA0099, 2018 COA 33 (Colo. App. March 8, 2018).

Peter Mahler in his blog New York Business Divorce, provides an excellent review of this decision. HERE IS A LINK to that discussion.

Partnerships, Disregarded Entities and Changing Horses Mid-Stream

Partnerships, Disregarded Entities and Changing Horses Mid-Stream

In a recent decision from the Tax Court, there was rejected an effort by a self-described partnership to have itself recharacterized as a disregarded entity, that recharacterization sought as a means of avoiding a liability for failure to file certain partnership returns on a timely basis. The Tax Court rejected this effort. See Argosy Technologies, LLC v. Commissioner, No. 29856-14 L, T.C. Memo 2018-35 (March 22, 2018).

When the IRS sought to impose certain ally penalties on Argosy Technologies, LLC for failure to timely file partnership returns (code § 6031), it was asserted that in fact the LLC was a disregarded entity not subject to the partnership return rules. The Tax Court, like the Appeals officer below, rejected that suggestion. In this case, the LLC had filed partnership tax returns and had made an election under code § 6231(a)(1)(e)(ii) to be covered under “TEFRA.” As such:

Since petitioner represented itself as a partnership on its tax returns, it may not argue that it is another entity and disclaim its validity.

The opinion recited that no evidence of an election pursuant to code section 761(f) existed.

 

[FYI - While, by definition, sole proprietorships may not have more than one owner, a married couple that file a joint return and jointly own and operate the business may elect to have that business treated as a sole proprietorship by making an election under section 761(f).]

More On Why LLCs Are Not Corporations

More On Why LLCs Are Not Corporations

      I have just finished reading Wang v. Xinyi Liu, No. 16-CV-12581, 2018 WL 132074 (D. Mass. March 13, 2018) and was preparing to do a report on this decision. However, right then I found out that Joshua Fershee at West Virginia, on the Business Law Prof Blog, had already reviewed the case. He has already said everything I would have said. HERE is a link to his discussion. Repeating his commentary:

Tuesday, March 20, 2018

At Least Mass. Court Knows LLCs Are Not Partnerships

By Joshua Fershee

 

 

My goodness. In a recent case, a Massachusetts court deals with issues related to Bling Entertainment, LLC, which is, as you would expect, a limited liability company.  It is NOT a partnership (as the court correctly notes), but ...

Yiming alleges Bling Defendants—as “managers, controlling members, and fellow members of Bling”—owed a duty of utmost good faith and loyalty to Yiming that they breached through their actions of fraud, self-dealing, embezzlement, and mismanagement. D. 16 ¶¶ 70-71. “It is well settled that partners owe each other a fiduciary duty of the utmost good faith and loyalty.” Karter v. Pleasant View Gardens, Inc., No. 16-11080-RWZ, 2017 U.S. Dist. LEXIS 50462, at *13 (D. Mass. Mar. 31, 2017) (quoting Meehan v. Shaughnessy, 404 Mass. 419, 433 (1989)). Bling is not a partnership, however, but is rather a limited liability corporation. D. 16 ¶ 10.

YIMING WANG, Plaintiff, v. XINYI LIU, YUANLONG HUANG, ZHAONAN WANG, BLING ENTERTAINMENT, LLC, SHENGXI TINA TIAN & MT LAW, LLC, Defendants., No. 16-CV-12581, 2018 WL 1320704, at *6 (D. Mass. Mar. 13, 2018).

Negative. Well, the first part is right.  Bling is an LLC, not a partnership. But it is not a corporation.  This is where some readers are probably thinking, "there he goes again being overly formalistic."  I am, of course, but here, it at least matters a little. Or could, and that's all that concerns me.  The court continued: 

Nevertheless, Yiming argues the same duty applies, which is correct if Bling were a closely held corporation. See, e.g., Demoulas v. Demoulas Super Mkts., 424 Mass. 501, 528-29 (1997) (explaining that in Massachusetts, close corporations shareholders owe one another the duty of utmost good faith and loyalty); Zimmerman v. Bogoff, 402 Mass. 650, 657 (1988). In Massachusetts, a closely held corporation is “typified by: (1) a small number of stockholders; (2) no ready market for corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.”Demoulas, 424 Mass. at 529 n.34 (quoting Donahue v. Rodd Electrotype Co. of New Eng., Inc., 367 Mass. 578, 586 (1975)).

Id. You know what an LLC doesn't have?  Stockholders.  Or corporate stock. Or any stock for the matter.  The court had more to say: 

In this context, the duty of “utmost good faith and loyalty” applies to majority and minority shareholders alike. See Zimmerman, 402 Mass. at 657-58. Although Yiming did not affirmatively plead that Bling is a close corporation, he did plead that this duty applied to Bling Defendants. D. 16 ¶ 70. Bling Defendants did not contest that they owed a fiduciary duty to Yiming. See D. 26 at 8-9. Accordingly, the Court declines to dismiss this claim.

Id. But we have never established that an LLC owes fiduciary duties to anyone.  In Massachusetts, fiduciary duties apply for LLCs as we expect in all states, and the ability to modify or abrogate those duties are, unlike Delaware, limited (and perhaps very limited).  Nonetheless, it would be worth exploring that and explain the source of the duty.  The court never explores whether such duties apply to LLCs, and apparently the plaintiffs never even asserted that was the case.  

A quick look at Massachusetts law suggests the outcome here would likely be the same for LLCs, but still, can we please establish that?  If an issue warrants two paragraphs about partnerships and closely held corporations, one can spend a little time on the entity actually involved in the case.  I really don't feel like that's too much to expect. And yet my blog history very much suggests otherwise.  More work to do.  

 

Except an LLC is Not a Corporation

Except an LLC is Not a Corporation

      All too often, we see court decisions that refer to an LLC as a “limited liability corporation” or otherwise referred to an LLC as being a corporation. In a recent decision from the Federal District Court for South Carolina, it was stated that:

GSH of Alabama, LLC (“GSH”) is an Alabama corporation that ….

GSH of Alabama, LLC v. South Star Financial, LLC, Case 2:17-cd-02689, 2018 WL 1335189 (D. S.C. March 15, 2018).

      Except it isn’t. Rather, an LLC is a limited liability company, and is in no manner a corporation.

Another Smack Down on How to Plead Diversity Jurisdiction

Another Smack Down on How to Plead Diversity Jurisdiction

      In a decision rendered last week in Texas, the court was quite explicit as to what is necessary to plead diversity jurisdiction. In this case, the plaintiff had entirely failed to satisfy those obligations. Tiro Solutions, L.L.C. v. Beacon Hill Staffing Group, L.L.C., Civ. Act. No. 3:17-CV-0934-L, 2018 WL 1368809 (N.D. Texas March 16, 2018).

      Tiro Solutions filed this action in federal court against Beacon Hill. As for itself, it disclosed that it is a Texas limited liability company with its principal place of business in Texas. As to the defendant Beacon Hill, it was asserted that it is an LLC organized under the laws of Massachusetts with its principal place of business in Boston, Massachusetts. The complaint was dismissed on the grounds of a lack of diversity on the following bases:

An LLC is a citizen of every state in which all of its members are citizens. According to the Complaint, Tiro is an LLC organized under the laws of the state of Texas, and its principal place of business is in Dallas, Texas. The Complaint, however, is silent regarding the citizenship of Tiro’s members. The Complaint also states that Beacon is an LLC organized under the laws of Massachusetts, and its principal place of business is in Boston, Massachusetts; however, once again, the Complaint is silent regarding the citizenship of Beacon’s members.

 This failure alone is fatal regarding diversity because the citizenship of each member of the LLC is omitted. The principal place of business is irrelevant insofar as determining the citizenship of an LLC. What must be set forth are the names of each member of the limited liability company and the citizenship of each member. The Complaint does not “affirmatively and distinctly” set forth this information regarding Tiro or Beacon.

 The court is, therefore, unable to ascertain whether complete diversity exists.

In light of the insufficient allegations made by Tiro with respect to the citizenships of the parties to this litigation, the court is unable to ascertain the citizenship of all parties. Therefore, Tiro has failed to carry its burden and set forth allegations that “distinctly and affirmatively” state the citizenship of each party to this action, and the court, therefore, is unable to ascertain whether complete diversity of citizenship exists between the parties. As Tiro failed to carry its burden and show that complete diversity exists between the parties, the court lacks subject matter jurisdiction over this action. Accordingly, the court will dismiss this action without prejudice.

2018 WL 1368809, *3 (citation omitted).

Pleading the Citizenship of an LLP

Pleading the Citizenship of an LLP

      In a recent decision from the Virgin Islands, the court considered and accepted the allegation of the citizenship of the limited liability partnership, it being the plaintiff in the action. In addition, the court set forth some useful guidance as to why, when an unincorporated association is the plaintiff in the action, it needs to bear the burden of reciting its citizenship.  Andreozzi Bluestein LLP v. Hamed, Civil Action No. 2817-0014, 2018 WL 1151117 (D. V.I. March 2, 2018).

      In its initial complaint, the plaintiff, a limited liability partnership, was not as expansive as to the basis of diversity jurisdiction as it could have been. In response, the plaintiff filed a motion to dismiss, asserting that the complaint “‘fails to allege the identity and citizenship of each [LLP] partner’ as required to properly plead Plaintiffs that’s citizenship.” The plaintiff then filed an amended complaint setting forth the names and citizenship of each of the partners. Thereby, by means of the amended complaint, the jurisdictional defect was cured.

      With respect to the obligation upon the plaintiff to, when asserting diversity jurisdiction, fully recite that of itself, it was observed:

The Court concludes that Plaintiff—as the proponent of diversity jurisdiction—is required to identify the individual members of the LLC (sic – partners in the partnership) and their respective citizenships to meet its burden of demonstrating diversity jurisdiction. See Lipitor Antitrust, 855 F.3d at 151 (noting that “an unincorporated association is in the best position to ascertain its own membership” and therefore should not be excused “of its obligation to plead the citizenship of each of its members”) (internal quotations omitted); see also Pike Co., 2013 WL 432928, at *1 (holding that a complaint failed to properly demonstrate the Plaintiff/LLP's citizenship for purposes of diversity jurisdiction where it failed to alleged the identities and citizenship of all of the Plaintiff's partners); MCF Ltd. Partners v. Seneca Specialty Ins. Co., 2012 WL 6681813, at *1 (M.D. Pa. Dec. 21, 2012) (same).

Interrelated Family of LLCs and Other Entities Pierced, Largely on the Basis of Co-Mingling of Assets

Interrelated Family of LLCs and Other Entities Pierced, Largely on
the Basis of Co-Mingling of Assets

      One of the classic justifications for piercing the veil of a corporation, LLC or other structure that otherwise affords asset partitioning is the co-mingling of the assets of the various business structures. Rather, each corporation, LLC or otherwise needs to receive its accounts receivable and pay its accounts payable. The balance may, in appropriate circumstances, the distributed as a distribution. In a recent case from Colorado, these rules are violated, and the assets of certain ventures were used to pay the debts of others. On the basis of this co-mingling, piercing was awarded so that assets, in this case a tax return payable to one subset of the companies could be applied to satisfy tax liabilities of other parts of the family. Cordes v. United States, 121A.F.T.R. 2^nd  2008-510, 2018 WL 496839 (D. Colo. Jan. 22, 2018).

      W.H.M. “Willy” Van Bakel, a citizen of the Netherlands, through a wide variety of LLCs and other structures organized in various states or in the Netherlands, operated a string of dairy farms around the United States. Numerous of these organizations fell behind on their responsibility to collect and remit employment taxes with respect to the employees. Separately, one of the LLCs, Orleton Farms, LLC had sold its property at a public auction. 10% of the sales price, $2,710,000, was paid to the IRS under section 1445(a). It would, ultimately, be determined and no tax was owed, so those funds were due to be refunded.

      Meanwhile, as the various LLCs experienced problems, judgments were issued against various of the companies and in some cases against Willy. In the course of a bankruptcy proceeding, it was learned that the refunded amount of it was that there was a plan to apply the refund amount to the withholding tax liability. That withholding tax liability did not arise, however, from the activities of Orleton Farms. Still, that tax return would be applied to address a liability incurred under the consolidated tax return of the various LLCs. When the government applied an offset against the tax return, the receiver for one of the companies within the group filed an action seeking a refund. The course of discovery, Marcus Carlin, a CPA who served as the controller for the group of companies, described them as being in “complete disarray,” that intra-company transfers were not recorded or were recorded improperly and that the assets of every entity were cross collateralized. Further, based upon his testimony, it was determined that:

By the middle of 2009 the entities were unable to pay their bills as they became due. Carlin testified that before bills would be paid, bookkeepers assigned to particular entities would make a list of those entities’ obligations. Carlin recalled that “a lot of times it happened that we would see what we would have with the milk checks coming in, what we had outgoing, and then kind of divvying it up from there.” Carlin said that funds to cover the bills might come from “whatever particular entity had a few extra pennies in its account.” Carlin testified that by 2009 Van Bakel was making the ultimate decisions about which bills would be paid and from which accounts.

      Based upon these facts, the LLCs were pierced, thereby denying the receiver’s claim for the funds collected by the IRS in its withholding from the tax return.

More on Non-Unanimous Approval of Operating Agreements

More on Non-Unanimous Approval of Operating Agreements

      Some states, including Kentucky and New York, is a default rule provides that an LLCs operating agreement may be amended by a simple majority of the members. This is in contrast to the rule in most states, which require, again as a default rule, and unanimous approval to amend an agreement. Last year, writing with Katharine Sagan, I published an article discussing an amendment by less than all of the members. Thomas E. Rutledge and Katharine M. Sagan, An Amendment Too Far?: Limits on the Ability of Less Than All Members to Amend the Operating Agreement, 16 Florida State University Business Review 1 (Spring 2017). HERE IS A LINK to that piece.

      In that article, one of the cases discussed was Schapiro, a decision from New York that has been reviewed by Peter Mahler in his blog New York Business Divorce. HERE IS A LINK to Peter’s review of the initial Schapiro decision.

      In a new posting, Peter reports on both the subsequent actions in the Schapiro case and other disputes that have arisen based upon the ability of less than all of the members to adopt an operating agreement. HERE IS A LINK to Peter’s review of those newer decisions.

Is There a “Deadlock” When the Equal Shareholders Disagree?

Is There a “Deadlock” When the Equal Shareholders Disagree?

      Under the Kentucky Business Corporation Act, dissolution of the corporation may be ordered when the directors are deadlocked as to the operation of the business and the shareholders are not able to break that deadlock. See KRS § 271B.14-300. New York has a similar, but not identical, statute. Peter Mahler, in his blog New York Business Divorce, reviews a recent decision Pokoik v. Norsel Realties, in which a New York court struggled to apply that statute. HERE IS A LINK to Peter Mahler’s review of that dispute.

      In a case out of Delaware, Feldman v. Yidl Trust, Ca. No. 2017-0253-ABG (Del. Ch, March 5, 2018), the court applied section 273 of the Delaware General Corporation Law which, as characterized by Frances Pileggi, allows for no-fault business divorce where the statutory criteria are met. In this instance, the only asset of the corporation was a vote, and the two shareholders were not able to get along and agree as to its use, as well as disputing the allocation of costs and expenses associated with ownership and maintenance of the boat. On that basis, dissolution was ordered. We can debate whether this case is simply proof of the adage that “a boat is a hole in the water into which you pour money.”

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. Marc Antony, to whom the plot had been divulged, tried to intercept Caesar, but he was himself interrupted.  Although stabbed twenty-three times by the various conspirators, only one wound was fatal. At the time of his death he was 56.

 

            Caesar’s murder by members of the Senate (some 60 senators were part of the plot, 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 (dictator perpetuo).  It seems this subset of the Senate sought to undo what the whole Senate had approved. 

 

 

            As set forth in Adrian Goldsworthy’s biography Caesar:

 

 

The conspirators spoke of liberty, and believed that this could only be restored by removing Caesar. Most, perhaps all, thought they were acting for the good of the entire Republic. With Caesar dead the normal institutions of the State ought to function properly again and Rome could be guided by the Senate and freely elected magistrates. To show that this was their sole aim they decided they would kill the dictator but no one else, including his fellow consul and close associate Antony. Brutus is said to have persuaded them to accept this, against the advice of some of the more pragmatic conspirators.

 

The “huddled masses” of Rome were less worried about Republican principles than they were with the loss of Caesar’s largess and the interruption of public work programs that provided desperately needed employment.

 

         “Liberty” was not to be had. Caesar’s death unleashed upon the tottering Roman Republic the Second Civil War of Caesar’s heir Octavian (18 years old at the time of Caesar’s death and 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 decision of the night before the assignation to not as well target Marc Antony, in retrospect, was no doubt regretted.

 

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. 

Enforcement of Foreign Charging Order Fails for Failure to Domesticate

Enforcement of Foreign Charging Order Fails for Failure to Domesticate

      An Alabama court entered a judgment in favor of Bentley for $1,350,000 against Byrd. When Bentley asked a Tennessee court to assist in collecting on this judgment by issuing a charging order against Byrd’s interest in Hisbach, LLC, a Tennessee LLC, things broke down. Estate of Mark Bentley v. Byrd, No. W2017-00446-COA-R3-CV, 2018 WL 930921 (Tenn. App. Feb. 15, 2018).

      Under Tennessee law, before the court would have jurisdiction, it needed to make service of the request for a charging order on Byrd, the judgment debtor. Tenn. Code Ann. § 26-6-105(c). Bisbach argued that “because Mr. Byrd had never been served with process, Mr. Bentley’s requested relief could not be granted.” 2018 WL 930921, *1. Still, the trial court issued the charging order, finding that Byrd was on notice, “both ‘actually and constructively’” as:

Plaintiff has made a good faith effort to serve actual notice upon Defendant at two separate residences in Alabama, a third residence in New Mexico listed for Defendant in a separate legal proceeding here in Madison County, and actual service upon Hisbach Partners. 

Legal counsel for Byrd participated in at least one telephone conference with the court.

      Under the Tennessee Uniform Enforcement of Foreign Judgments Act, the clerk of the court issues a summons to the judgment debtor and, if after being served, the judgment debtor makes no response, the judgment debtor may enforce the judgment. The Bentley court noted that:

As is clear, service on the judgment debtor plays a key role in the statutory requirements. The statute unequivocally provides that no execution whether enforcement action is allowed until thirty days after summons has been served on the judgment debtor. This requirement is important because it allows the judgment debtor to ‘appear and show why enforcement of the judgment should be stayed.’

2018 WL 930921, *4. The court also found that the participation by Byrd’s out-of-state counsel in one telephone conference with the court was not sufficient to waive lack of service.

      Ultimately, because Byrd was never served in Tennessee in connection with the effort to enforce the Alabama judgment, the charging order issued against him “was void.” Id. *5.

      This decision is rather troubling with respect to the ability to use a charging order to collect upon a judgment. Consider, for example, judgment entered by a court in Alabama with respect to a defendant resident in New York. That New York resident is a member in a Utah LLC. That New York resident, however, has absolutely no other connections to Utah. In fact, the investment in the Utah LLC was made by means of a wire transfer. In order to enforce the Alabama judgment against the New York resident with respect to his membership interest in the Utah LLC, (here assuming Utah law is the same as that of Tennessee discussed in the decision above), when application is made to the Utah court for a charging order, that Utah court must have personal jurisdiction over the New York resident. Absent a statute giving rise to special jurisdiction by reason of being a member of a Utah LLC (see, e.g. KRS § 275.335(6)), the Utah court will lack the capacity to enter the charging order.  In effect, by being a member in LLCs organized in states in which the member does not otherwise have contacts, it may be possible to avoid service and therefor the issuance of a charging order.

Wyoming Adopts Series LLC Legislation

Wyoming Adopts Series LLC Legislation

      The Wyoming legislature has approved H.B. 0126, it amending the Wyoming LLC Act by adding to it series provisions.

      The series provisions added to the Wyoming LLC Act are not (so it would appear) based upon the Uniform Protected Series Act. Rather, they appear, at least initially, to be based upon the series provisions of the Delaware LLC Act, with additions made thereto.

      The Act has an effective date of July 1, 2018.

Alabama Updates its Unincorporated Business Entity Laws

Alabama Updates its Unincorporated Business Entity Laws

      Alabama has adopted significant amendments to its General Partnership Law, its Limited Liability Company Act, its Limited Partnership Law and its law governing Unincorporated Nonprofit Associations.

      Signed by Alabama’s governor on February 22, 2018, the new laws are effective January 1, 2019.

      This new legislation is set forth in H.B. 72, and has been identified as Act 2018-125.

Piercing the Veil of the Single-Member LLC

Piercing the Veil of the Single-Member LLC

      On March 2018, Jay Atkinson, Elizabeth Fenton and Dan Kleinberger and I will be presenting an American Bar Association webinar on Piercing the Single-Member LLC. Applying the traditional law of piercing the corporate veil to LLCs is a complicated and at this time rather murky enterprise. The problems of applying piercing law to single-member LLCs are particularly difficult. In the course of this program, we hope to provide some useful guidance as to what is known and what remains to be resolved.

      HERE is a link to the registration for the program.

      For attorneys, 1.5 hours of CLE will be available.

Sixth Circuit Court of Appeals Holds that Termination of Transgender Employee Violates Title VII Prohibition against Discrimination on the Basis of Sex; Defense under the Religious Freedom Restoration Act Rejected

Sixth Circuit Court of Appeals Holds that Termination of Transgender Employee Violates Title VII Prohibition against Discrimination on the Basis of Sex; Defense under the Religious Freedom Restoration Act Rejected

       In a decision rendered yesterday, the Sixth Circuit Court of Appeals considered the case of an employee of a Michigan nursing home. When that employee, Stephens, who had previously presented as male, announced that she was going to begin transitioning to female, including by wearing female clothing, she was fired. After the Equal Employment Opportunity Commission (“EEOC”) became involved, a suit was brought, with the funeral home largely prevailing at the trial court level. On appeal, the Sixth Circuit Court of Appeals has ruled largely in favor of the employee. EEOC v. R. G. & G. R. Harris Funeral Homes, Inc., No. 16-2424 (6^th Cir. March 7, 2018).

Title VII

       Title VII prohibits employers from “discriminating against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin.” As had the trial court below, the Sixth Circuit found that the employee, Stephens, “was fired because of her failure to conform to sex stereotypes, in violation of Title VIII.” Here, because the employer viewed Stephens as being male, a status that could not be altered, even as Stephens sought to transition to a female persona, sex was clearly implicated, and the firing on that basis was improper.

      The funeral home defended on the basis of both the Religious Freedom Restoration Act and the “ministerial exemption.” Under the latter, courts are essentially prevented from scrutinizing the hiring, terms of employment and termination of persons who are ministers of religion. While the owner of the funeral home, Thomas Rost, alleged that it was operated as part of his ministry to those who are grieving, the court found that the company had in fact no overarching religious function and did not hold itself out as representing any particular religion. While it was at least implied that all of the employees were members of some Christian denomination, it was noted that, when performing services for persons of the Jewish faith, the employees would wear yarmulkes. In that the funeral home had “virtually no ‘religious characteristics’” (Slip op at 24), and Stephens was not a “ministerial employee in that “she was not an ‘ambassador of [any] faith.]’ and did not perform ‘important religious functions,’” (Slip op at 25), the ministerial exemption did not apply.

Religious Freedom Restoration Act

       In order to make a successful claim under the Religious Freedom Restoration Act, a defendant “must demonstrate that the government action at issue ‘would (1) substantially burden (2) a sincere (3) religious exercise.’” Slip op. at 28. Accepting that the operation of the funeral home was a religious exercise, the court stated that “the question then becomes whether the Funeral Home has identified any way in which continuing to employ Stephens would substantially burden Rost’s ability to serve mourners.” Slip op. at 29. These allegations were rejected. Claims that allowing Stephens to wear female clothing would be distracting to those at the funeral home were rejected as being based upon assumptions and “but more to the point, we hold as a matter of law that a religious claimant cannot rely on customers’ presumed biases to establish a substantial burden under RFRA.” Slip op. at 30. As for the existence of a substantial burden under RFRA, the court rejected the notion that such a burden arises simply by allowing Stephens to dress as she thinks appropriate” [W]e hold that, as a matter of law, tolerating Stephen’s understanding of her sex and gender identity is not tantamount to supporting it.” Therefore, it could not be alleged that Stephen’s continued employment would force Rost to violate his views as to sex being determined at birth and being immutable. Slip op. at 32.

      Continuing the analysis, the court noted that, under RFRA, government action may still be permissible, even if it substantially burdens the exercise of religion, if the required actions are the “least restrictive means of furthering a compelling government interest.” Slip op. at 35. Acknowledging that it did not need to do so, the Sixth Circuit considered the issue, and found that there exists a compelling interest in the elimination of workplace discrimination on the basis of sex such that in this instance, it was found that there exists a compelling interest in eliminating discrimination, and that affording a RFRA based exemption in this instance would “be allowing a particular person – Stephens - to suffer discrimination, and such an outcome is directly contrary to the EEOC’s compelling interest in combating discrimination in the workforce.” Slip op. at 37.

      In conclusion, the Sixth Circuit Court of Appeals wrote:

Discrimination against employees, either because of their failure to conform to sex stereotypes for their transgender and transitioning status, is illegal under Title VII. The unrefuted facts show that the Funeral Home fired Stephens because she refused to abide by her employer’s stereotypical conception of her sex, and therefore the EEOC is entitled to summary judgment as to its unlawful-termination claim. RFRA provides the Funeral Home with no relief because continuing to employ Stephens would not, as a matter of law, substantially burden Rost’s religious exercise, and even if it did, the EEOC has shown that enforcing Title VII here is the least restrictive means of furthering its compelling interest in combating and eradicating sex discrimination.

The 2017 Amendments to Kentucky’s Business Entity Statutes

      Previously, I posted a link to the prepublication draft of this article. The final version has now been released by the Louisville Law Review. Is available on both the SKO website and SSRN. HERE IS A LINK to the article as published.