The Charging Orders Practice Guide

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.

Supplement to Limited Liability Companies in Kentucky

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.

Today is Not the Anniversary of the Signing of Magna Carta

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

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

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.

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.

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. 4^th 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.

Did Masterpiece Cakeshop Engage in Illegal Discrimination?

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.