Friday, August 31, 2018
Today marks the anniversary of the passing, in 1422, of King Henry V of England. Things would go essentially downhill from there.
The victor of Agincourt would be succeeded by his 9 month old son, henceforth named Henry VI. His was not a pleasant succession. England fell into dissension with factionalism among various nobles as to who, during Henry VI’s minority, would rule the country. Meanwhile, from the heights of success in the Hundred Years War at Agincourt, leading to the marriage of Henry V to Catherine of Valois, daughter of Charles IV, King of France. Charles would also name Henry V as his heir. While Henry VI would be formally crowned King of France, in reality he was not. Rather, over his reign, and notwithstanding his marriage to Margaret of Anjou, an effort to further solidify the claim on the French throne, the French would push England out of the country save for the remaining toehold in Calais.
The weakness of Henry VI, combined with significant acrimony between the English nobility generally and Margaret of Anjou, would precipitate what is today referred to as the War of the Roses (at the time typically referred to as the “Cousins War”). Ultimately, Henry VI would be deposed by Edward IV assisted by Richard Neville, Earl of Warwick and a/k/a “the Kingmaker.”
California to Impose Gender Requirements
on Boards of Publicly Held Companies
on Boards of Publicly Held Companies
The California legislature has passed, and there has been sent to the governor for either approval or a veto, a new law governing gender composition of certain boards of directors. The new law (assuming it is enacted) is applicable to publicly traded securities that are either (a) incorporated or organized in California or (b) are a foreign entity with its principal place of business in California. For those companies, by not later than December 31, 2019, the company must have at minimum one female director. Then, for that same class of companies, not later than December 31, 2021, the company must have a number of female directors set by sliding scale: (i) if the company has four or fewer directors, one female director; (ii) if the company has five directors, it must have a minimum of two female directors; and, (iii) if the company has six or more directors, it must have a minimum of three female directors.
Companies are required to submit a report to the California Secretary of State with respect to their compliance with these new requirements. The law imposes significant penalties for any “failure to timely file board member information.” Those fines are $100,000 for the first violation and $300,000 for each subsequent violation.
The penalty provision here is somewhat curious. The fines are imposed for failure to file the report, rather than the failure to comply with the board composition requirements. As written, it would appear that a company could be out of compliance with the board composition requirements, file an accurate report indicating it is out of compliance, and not be subject to the fine. Put another way, it is not clear that the statute includes an enforcement mechanism as to the minimum female board member composition obligation. It is obvious what was intended, I'm just not sure that is what was written.
It bears noting that this obligation is applicable to publicly traded companies with her principal place of business in California. At least some of those companies are going to be organized outside of California, often in Delaware. California holds the view that it may impose substantive corporate law requirements on companies doing business in California irrespective of where organized. I would not be surprised if litigation ensues over California’s efforts to impose its substantive corporate law on companies organized in other jurisdictions.
HERE IS A LINK to the statute.
Thursday, August 30, 2018
Sixth Circuit Interprets Take Or Pay Contract
In the decision rendered earlier this month, the Sixth Circuit Court of Appeals was called upon to characterize a “take or pay” provision in a supply contract. In this instance, the court found that the agreement was to be characterized as one offering either performance or a liquidated damages provision. Hemlock Semiconductor Corp v. Kyocera Corp., No. 172276, 2018 WL 3949110 (6th Cir. August 16, 2018).
Kyocera entered into a contract with Hemlock pursuant to which Hemlock would sell to Kyocera polysilicon to be used in the construction of solar panels. The contract they entered into contained a so-called “take-or-pay” provision under which Kyocera was required to purchase a specified quantity of polysilicon each year or, in the alternative, pay full price for the product not taken. In effect, Kyocera was required to buy the fixed quantity irrespective of whether it needed the product. The contract as well contained an acceleration provision providing that, in the event of Kyocera’s default, it would be required to pay to Hemlock the total amount that would be paid over the contract’s remaining term.
The contract fell victim to macroeconomic developments.
Several years into Kyocera and Hemlock’ deal, the Chinese government disrupted the solar-panel market by subsidizing Chinese solar-panel companies. This intervention reduced the market price of polysilicon such that the price Kyocera agreed to pay Hemlock was far greater than the going rate.
Efforts to renegotiate the agreement were ultimately unavailing, and Hemlock filed suit seeking a declaratory judgment that Kyocera had repudiated the contracts by indicating it would no longer perform under the take or pay provision. Kyocera counterclaimed, arguing that the “pay” aspect of the take or pay provision is an unlawful penalty as is the acceleration provision. The trial court dismissed Kyocera’s claims, and this appeal followed. The Sixth Circuit characterized the question as follows:
[T]he key question is whether the take-or-pay provision offer Kyocera two viable performance options, on the one hand, or one performance option coupled with a liquidated damages provision, on the other. If the former, the take-or-pay provisions are enforceable as written. If the latter, the question becomes whether the “pay” option quantifies lawful liquidated damages or an unlawful penalty. If the payment obligation is a penalty, it is unenforceable - regardless of what the parties’ contract labels it. 2018 WL 3949110, *2 (citations omitted).
The court would find that contract should be characterized as one involving a performance option coupled with a liquidated damages provision. From there, it assessed the “pay” option under liquidated damage jurisprudence, assessing whether it truly is liquidated damages or the nature of a penalty. It would ultimately determine that the “pay” should be characterized as an impermissible contract penalty. That determination was based largely upon the economics of the transaction. For example, under the “pay” option, while Hemlock would receive 100% of the contract amount, it would never incur the costs of production.
Kyocera’s challenge to the acceleration clause, which had likewise been dismissed by the trial court, was dismissed as well by the Sixth Circuit, it finding a lack of ripeness.
Wednesday, August 29, 2018
LLC’s Members Waived Limited Liability,
Held Liable on LLC’s Debts and Obligations
Held Liable on LLC’s Debts and Obligations
In a decision rendered last Friday, the Kentucky Court of Appeals affirmed a determination that, consequent to the wording of a particular operating agreement, the members in the LLC assumed and are liable to satisfy the LLC’s debts and obligations. VanWinkle v. Walker, No. 2016-CA-000097-MR, 2018 WL 404-3388 (Ky. App. August 24, 2018).
VanWinkle, Walker and Crawford formed TLC Developers, LLC in 2004, executing an operating agreement in connection therewith. That operating agreement provided, in part:
The profits and liabilities of the Company shall be divided as follows: Carl David Crawford = thirty-three and one third (33 1/3%), Lyle A. Walker = thirty-three and one third (33 1/3%) percent and Troy Van Winkle [sic] thirty-three and one third (33 1/3%).
When the company fell upon hard times, Walker and Crawford contributed additional amounts in order that the company could meet its business expenses. As recited by the court, “in their view, in the event TLC did not have the cash on hand to pay the liabilities itself, the operating agreement mandated that the three members would pay the liabilities of TLC equally.” VanWinkle did not make those contributions, apparently of the belief that the operating agreement did not require him to do so. He did, however, on two occasions contribute one-third of the amount necessary to satisfy TLC’s property taxes.
Ultimately, Walker and Crawford filed a complaint seeking a declaration of rights with respect to the obligation to satisfy TLC’s liabilities and the interpretation of the operating agreement. After a bench trial, the circuit court held that “the operating agreement unambiguously stated that the three members agreed to split the liabilities of the company in thirds,” and ultimately ordered VanWinkle to pay $87,300 has his share of the company’s liabilities. This appeal followed.
VanWinkle had essentially two arguments. First, the operating agreement, and the LLC Act, protected him from liability for the LLC’s debts and obligations. Second, he would argue that personal liability for the LLC’s debts and obligations is antithetical to the very notion of an LLC and for that reason could not be enforced. Both arguments would fail.
While the operating agreement recited that the members enjoyed limited liability from the debts and obligations of the LLC, essentially repeating the language of KRS § 275.150(1), the court went on to note, however, that while not recited in the operating agreement, the LLC Act continues with KRS § 275.150(2), which provides:
Notwithstanding the provisions of subsection (1) of this section, under a written operating agreement or under another written agreement, a member or manager may agree to be obligated personally for any of the debts, obligations, and liabilities of the limited liability company.
Applying this language, the court found that “that is exactly what TLC’s members did when they agreed to split the liabilities of the company in the ‘Division of Profits and Liabilities' provision.” of the operating agreement.
As for the argument that imposition of liability for company obligations is antithetical to the very notion of an LLC, the court noted as well KRS § 275.003(1), it providing that it is the public policy to give maximum effective principle of freedom of contract and the enforcement of operating agreements. As to this point, the court wrote:
While holding the members personally liable for the TLC’s liabilities may seem contrary to the very point of establishing an LLC, it adheres to the intent of the General Assembly: namely, to allow business partners the freedom to contract and establish an LLC that fits the needs of the respective members. Here, following a meeting of the minds, TLC’s three members each decided to split the liabilities of the company in equal shares.
Tuesday, August 28, 2018
Manager’s Efforts To Graft Prior Notice Into Operating Agreement Rejected
In a recent decision from the Delaware Chancery Court, it rejected the assertion of a removed manager that it’s removal for cause was ineffective because it had not received notice that it was to be removed, an explanation as to why or the opportunity to respond to the allegations. Rather, the court applied the operating agreement as written; it contained none of those requirements. Re: A&J Capital, Inc. v. Law Office of Krug, C.A. No. 2018-0240-JRS, 2018 WL 3471562 (Del. Ch. July 18, 2018).
A & J Capital, Inc. (“A & J”) served as a manager of LA Metropolis Condo I, LLC (“LAMC”). Under the LAMC operating agreement, a majority of the members thereof could remove A & J for “gross negligence, intentional misconduct, fraud or deceit.” Those same members, after the removal of the manager, had the right to appoint a new interim manager. In this instance, after A & J was removed, the Law Office of Krug was appointed as that new interim manager.
After majority of the members of LAMC voted to remove A & J is the manager, they delivered to A & J notice of that action. A & J, objecting to its removal, asserted that in that the operating effectively required that he could be removed only for cause, he was entitled to pre-removal notice and an opportunity to challenge that assertion.
Cutting to the chase, after noting that an operating agreement typically will provide those procedural protections when desired, “in the absence of such provisions, the Court will not infer them or rewrite the contract to include them.” 2018 WL 3471562, *3.
A & J’s reliance upon corporate law requiring, where a director is to be removed for cause, that there be notice and opportunity to be heard, was rejected on the straight forward basis that LLCs are not corporations.
In that neither notice nor opportunity to object were written into this operating agreement, the court refused to write those provisions, for which there had never been negotiation, into the agreement.
Monday, August 27, 2018
Special Litigation Committee For New York LLC Rejected;
Standing In The Shadow of Obeid
Standing In The Shadow of Obeid
In the New York decision, it rejected the appointment of a Special Litigation Committee (“SLC”) made up of an outside attorney. The operating agreement vested managerial authority in a manager, and the controlling operating agreement did not provide for the appointment of outsiders to an SLC. LNYC Loft, LLC v. Hudson Opportunity Fund I, LLC, 154 A.D.3d 109, 57 N.Y.S.3d 479 (2017).
The underlying dispute involves the complicated facts giving rise to direct claims, which had already been litigated for some five years, and then newly added derivative claims. After the derivative claims were filed, the managing members of the LLC on whose behalf they were brought decided to appoint a Special Litigation Committee comprised of an independent attorney, Mark Zauderer. There is no suggestion that he was biased or unqualified or not independent. Rather, this dispute arose as to whether an outside party could be appointed as the SLC. It was held that Mr. Zauderer may not serve as the SLC because he is neither a member or a manager of these subject companies, and the related operating agreements did not authorize his appointment.
In substance, the operative operating agreements did not provide for the delegation of decision-making authority either to another member or to an outsider.
The agreements are explicit that while day-to-day management is vested in the manager, “major decisions” need the consent of the other members. We reject the argument that the appointment of the SLC (as opposed to the ultimate decision as to whether to proceed with the derivative litigation) was not a “Major Decision” within the meaning of the agreements. The SLC was specifically granted the authority to “determine the positions and actions that the Companies should take with respect to the claims, considering, among other things, whether the claims have merit, whether they are likely to prevail, and whether it is in the company’s best interests to pursue them.” 154 A.D.3d at 115, 57 N.Y.S.3d at 483.
The court went on to note that there is nothing inherently improper in appointing an SLC, and that an operating agreement could provide that an independent third-party would constitute that SLC. In this instance, however, the operating agreement did not so provide.
Friday, August 24, 2018
LLC Admits It Cannot Prove Its Own Citizenship
In a recent decision, an LLC had to admit that, consequent to the structure of its ownership, it could not demonstrate to the court its own citizenship. On that basis, because it could not be determined whether diversity jurisdiction existed, the case was remanded to state court. Calton v. JVM Sovereign Apartments, LLC, Case No. 17-2739-DDC-JPO, 2018 WL 3708167 (D. Kan. Aug. 3, 2018).
It is axiomatic that, for purposes of determining the citizenship of an LLC for purposes of federal diversity jurisdiction (28 U.S.C. § 1332), there will be attributed to the LLC the citizenship of each of its members. Where, in turn, a member is another unincorporated entity such as another LLC, the citizenship must be traced through to its ultimate owners. In this case, JVM Sovereign Apartments admitted that it could not attest to its citizenship. As for its structure:
JVM asserts it has two members. Those two members are LLC’s themselves. The members of the first LLC consist of 63 individual investors, 55 trusts, 25 individual retirement accounts (IRAs), and two more entities (which includes one LLC). The second member of JVM is an LLC comprised of 22 individual investors, 18 trusts, three IRAs, and seven additional entity (which includes three LLCs and two limited partnerships).
JVM, in a filing with the court, admitted it did not have information with respect to the beneficiaries of the sub-member trusts or the membership of the sub LLCs. The court wrote that “to its credit, JVM’s concedes, without this information, that it cannot determine the citizenship of its members. Thus, the court cannot determine if plaintiff and JVM are a completely diverse - as it must to exercise diversity jurisdiction over the action.”
Thursday, August 23, 2018
The Execution of William Wallace
Today marks the anniversary of the execution, in 1305, of William Wallace.
Most people in this age, to the extent they know anything about William Wallace, learned it from the movie in which Mel Gibson played that role. The movie is entirely correct that William Wallace lived and fought for an independent Scotland. The movie is correct in that the he was opposed by King Edward I, who was known by the nickname “long shanks” (he was quite tall for the age). It is true, as depicted in the movie, that William Wallace was executed by being drawn and quartered.
Almost everything else in the movie is incorrect. For example:
· Piers Galveston, the “friend” of Edward II, was never thrown from a window by Edward I. Rather, Galveston lived well into the reign of Edward II, although he was ultimately.
· In all likelihood, William Wallace and Robert the Bruce (the 7th) never met.
· Isabella of France did not marry Edward II until 1308, well after the death of William Wallace.
· Likewise, Isabella of France never negotiated with William Wallace for the treatment of York or anything else; she was born in 1295 and in consequence would have been less than 10 years old at the time of Wallace’s death.
· The moniker “Braveheart” was attributed not to Wallace, but rather to Robert the Bruce. In fact, after his death, his heart was cut out and carried in a chest by Scottish forces going into battle.
Wednesday, August 22, 2018
A Horse, a Horse, My Kingdom for a Horse
Today is the anniversary of the Battle of Bosworth, the final major battle of that English civil war titled The War of the Roses (this conflict was at the time sometimes referred to as the Cousin’s War). It was at this battle that King Richard III, variously identified as the last King from the House of Plantagenet or the House of York, fell, he being the last English King to die in battle. Henry Tudor, the victor, then became King Henry VII.
Henry’s victory in battle was if anything surprising. Richard’s forces outnumbered those of Henry. Meanwhile, Lord Stanley (William Stanley) held back his own force; if combined with that of Henry, that of Richard would have been out-numbered. Conversely, if Stanley joined with Richard, the weight of the forces arrayed against Henry would have been overwhelming. Richard held Stanley’s son as a hostage. As battle was about to commence, Richard sent word to Stanley that if Stanley did not join with him, he would execute Stanley’s son. Stanley replied, “I have other sons.”
To provide but a taste as to why this conflict was referred to as the Cousins War, consider that William Stanley was the brother of Thomas Stanley, husband of Margaret Beaufort, she being the mother of Henry Tudor. Ergo, Lord Stanley was the brother-in-law to Henry’s mother. Thomas Stanley had previously been married to Eleanor Neville, sister to Warwick the Kingmaker and aunt to Richard III’s recently deceased wife Anne Neville. That wife was a daughter of Warwick.
Richard’s attack upon Henry’s position nearly succeeded; Henry’s standard-bearer William Brandon was killed at Henry’s side. Polydore Virgil, a contemporary historian/chronicler, recorded that Richard fought well. However, Richard’s fate was sealed when the Stanley family and its retainers, having until then not committed to either side, rode against Richard’s infantry as his cavalry was separately moving against Henry.
William Brandon’s son Charles, ultimately Duke of Suffolk, would become the best friend of Henry VIII.
In 2012, Richard’s remains were located in the course of excavations under a parking lot that now covers part of what was the Blackfriars (Dominican) Church in Leicester, England; early 2013 saw the announcement that testing had confirmed the remains were those of Richard. In sad testimony to the modern age, litigation ensued as to whether Richard should be re-buried in Leicester Cathedral, apparently consistent with the terms of the agreement by which the archaeological work was performed and other British law, or in York where certain claimed descendants of Richard assert he would want to have been buried. That question was resolved in favor of Leicester, and in 2016 Richard III was laid to rest in Leicester Cathedral.
Notwithstanding Polydore Virgil’s positive comments as to Richard III, in proof of the adage that the winners write the history, his reputation was besmirched by various Tudor affiliates such as St. Thomas More and William Shakespeare. He is currently being reassessed by historians who are not so indebted to supporting the legitimacy of the House of Tudor.
A Limited Partnership Must Be Represented by an Attorney
Barring minor exceptions, an example being small claims court, neither a corporation nor an LLC may represent itself in court.
In a case from earlier this year out of New Jersey, it was confirmed that the same rule is applicable to a limited partnership. In this case, the general partner, who alleged that the claims of limited partnership were assigned to himself, was still found to be unable to represent the limited partnership. Rather, it needed to be represented by legal counsel. Goldstein v. Roxborough Real Estate, LLC, Civ. Act. No: 15-CV-3835 (PGS) (DEA), 2018 WL 504398 (D.N.J. Jan. 22, 2018).
Tuesday, August 21, 2018
Corporations and LLCs Must Be Represented by Legal Counsel
In a recent decision from New Jersey, the Court not less than three times repealed the rule that corporations and LLCs may appear in court only through an attorney. Parise v. Suarez, Civil Act. No. 17-6936 (JBS-JS), 2018 WL 3756427 (D. N.J. August 8, 2018).
Monday, August 20, 2018
Injunctive Relief Awarded to Compel Performance on a Requirements Contract
In a recent decision, injunctive relief was awarded to require a parts producer to continue to provide the parts to an upstream assembler. Hitachi Automotive Systems Americas, Inc. v. TI Automotive Ligonier Corp., Act. No. 5:18-CVS-438-JMH, 2018 WL 3615993 (E.D. Ky. July 27, 2018).
Hitachi Automotive Systems had entered into a requirements contract with, originally, Millennium Industries Corp. Millennium was in turn acquired by TI Automotive. Under that requirements agreement, Millennium was required to produce and supply to Hitachi all of Hitachi’s requirements for “damper cover assemblies.” Hitachi, in turn, incorporated the damper cover assemblies into “high pressure pumps” that in turn were sold to General Motors. The price of the damper cover assemblies was fixed by the contract, with the possibility of quarterly price adjustments based upon a Material Purchase Fluctuation Agreement. At no time over the period of the contract performance had the parties determined whether a surcharge should arise under that provision. Ultimately, however, when Hitachi issued purchase orders, TI did not ship the damper cover assemblies, stating that it was terminating the agreement and, in the meantime, the damper cover assemblies would be produced and sold only at an increased price. Absent those damper cover assemblies, Hitachi was not in a position to otherwise produce high pressure pumps, and there was the risk that the General Motors production line would shut down in consequence.
Hitachi moved for a preliminary injunction requiring TI to make and deliver the damper cover assemblies in accordance with the requirements agreement. TI’s objections thereto were for naught, and the injunction was entered. In doing so, the court found that (a) there existed an enforceable agreement between Hitachi and TI; (b) that it was TI, and not Hitachi, who first breached the agreement.
As to the propriety of issuing the injunction, it was found that Hitachi would suffer irreparable harm absent a compulsion upon TI to produce and deliver the damper cover assemblies. On the flipside, TI was not able to show that it would be substantially harmed consequent of the issuance of the injunction.
Friday, August 17, 2018
Train Wrecks and Appraisals
Peter Mahler, in his blog New York Business Divorce, has reviewed a decision in Nebraska that, at least for the plaintiff, is fairly characterized as a train wreck.
The dispute involved the valuation of a withdrawn partner’s interest from a law firm partnership. The law firm presented a single valuation expert, an individual with extensive experience in the valuation of law firms. This expert submitted a full valuation report.
The plaintiff, in contrast, sought to utilize not less than four “experts.” It should be noted, however, that one of those “experts” was the plaintiff himself, the withdrawn partner. another of those experts was a CPA with no certifications in appraisal who had valued a single law firm. The third expert had appraisal certifications, but had done only one law firm valuation. Across these “experts” there were employed a variety of valuation methodologies and inconsistent assumptions. Ultimately, the court gave credence to the firm’s single, accredited and experienced appraiser. The case is Frederick Pebbles & Morgan LLP v. Assane, 300 Neb. 670 (Neb. Aug. 3, 2018). Peter’s review of this decision appears in a blog posting titled Summer Shorts: Partnership Appraisal and Other Recent Decisions of Interest – A Train Wreck of a Valuation Case; HERE IS A LINK to that posting.
Thursday, August 16, 2018
Delaware Court Interprets “Including”
In a decision rendered last week by the Delaware Superior Court (the Superior Court is the court of general jurisdiction in Delaware) interpreted the phrase “including”. Triumph Arrow Structures-Tulsa, LLC v. Spirit Aero Systems, Inc., C.A. No. N17C-11-262 MMJ CCLD (Del. Sup. Ct. Aug. 8, 2018).
Triumph, pursuant to an asset purchase agreement (the “APA”) acquired from Sprint two wing supply programs for Gulfstream. Spirit, as the seller, retained responsibility for the Excluded Liabilities as defined under the APA. The dispute would term on what constitutes a Excluded Liability. Triumph, the purchaser argued that “any matter set forth in schedule 3.19(b) in the definition of Excluded Liabilities, enlarges, and does not limit, what falls within the definition. That schedule 3.19(b) in turn incorporated Attachment 3.19(b), it setting forth the warranty claims that are at the core of this dispute.
In response, Spirit argued that a separate provision of the agreement required that Triumph, as purchaser, assume all warranty liabilities, and that those claims listed on Schedule 3.19(b) should be treated as an exclusive list of those known claims for which it retained exposure.
The court would ultimately find that the subject provisions are clear and unambiguous, and that the “includes” should be treated as expanding, and not limiting, the items described on the schedule. Rather:
Triumph agreed to assume “all Warranty Liabilities.” That assumption explicitly excludes Known Claims. Spirit agreed to retain Excluded Liabilities. Excluded Liabilities include Liabilities arising from Known Claims. Excluded Liabilities include any matter set forth on Schedule 3.19(b), which is a Liability arising out of any lawsuit, proceeding, claim, arbitration, mediation, governmental inquiry, or investigation pending as of the closing.
* * *
Spirit is required to “pay, perform, discharge or otherwise satisfy” all Liabilities arising from Known Claims. Liabilities include matters set forth in schedule 3.19(b), which incorporates Attachment 3.19(b). The Court cannot determine at this juncture whether every single matter on Attachment 3.19(b) is a “Liability arising out of any lawsuit, proceeding, claim, arbitration, mediation, governmental inquiry, or investigation pending as of the closing …” Slip op at 8-9, footnotes omitted.
Wednesday, August 15, 2018
Sixth Circuit Court of Appeals, Applying Ohio Law, Finds No Contract and No Partnership
In a recent decision from the Sixth Circuit Court of Appeals, it applying Ohio law, it found that a letter of intent was so indefinite as to material terms that no enforceable contract arose. In addition, the Court found that an alleged partnership between the contract parties likewise did not exist. Capital Equity Group v. Ripken Sports Inc., No. 17-4006, 2018 WL 3620739 (6th Cir. July 30, 2018).
Capital Equity Group and Ripken Sports entered into a pair of letters of intent indicating that they “intend[ed] to work together to help develop a sports complex in Erie County, OH.” Although the LOI stated it shall be “treated as a binding contract,” it was also described as being “open-ended”. As noted by the Court, it did not specify how any profits would be distributed or how to measure any parties performance. After the involvement of Cedar Point Park in Erie County were accomplished, the defendant ceased communicating with Capital Equity. In turn, Capital Equity filed suit alleging various claim for damages. The defendants moved to dismiss on the basis that there was no enforceable contract. The trial court dismissed the complaint, and this appeal was taken to the Sixth Circuit.
Applying Ohio law to the effect that in order to be binding “a contract must be definite and certain,” and that they must agree as to the contract’s “essential terms,” the Sixth Circuit found that the LOI here at question was insufficient to create an enforceable agreement. Rather,
“nowhere within the agreement does it contemplate how any party would be compensated or how they would deal with a breach. Without any guidance on the parties’ understanding of the value of plaintiff’s services, this Court is wholly unable to craft a remedy for plaintiff’s breach of contract claim. Therefore, the district court correctly determined that the 2014 LOI did not constitute a valid contract under Ohio law.”
As to the assertion that, consequent to the letter of intent, the parties had entered into a partnership, the court found that numerous of the elements of a partnership were here missing. It further found that the use of the term “partnership” twice in the LOI did not give rise to a partnership.
There being no enforceable contract, the court as well set aside a claim for violation of the implied covenant of good faith and fair dealing.
New York Court Addresses to Whom Cooperative Board Owes its Fiduciary Duty
In a recent decision from the New York intermediate appellate Court, it was held that the directors of the board of a cooperative owe their fiduciary duties to the entity, and not to the individual shareholders. Further, the corporation does not itself owe a fiduciary duty to the members. Hersh v. One Fifth Avenue Apartment Corp., Index 157593/14, 2018 WL 3578714 (N.Y. App. Div. 1st Div. July 26, 2018).
When her apartment sustained extensive water damage consequent to a greenhouse located on an upper roof terrace, the plaintiff sued the owners of the greenhouse, the cooperative corporation itself and the individual board members. In this decision, only the claim for breach of fiduciary duty against the individual board members was at issue.
In rejecting this claim, the Court began by reciting the rule that there is no individual claim for breach of fiduciary duty against an individual board member absent individual wrongdoing:
It is well-settled that a breach of fiduciary duty claim does not lie against individual cooperative board members where there is no allegation of “individual wrongdoing by the members … separate and apart from their collective actions taken on behalf of the cooperative.” Here, the complaint does not allege that any of the individual board members committed an independent wrong that was distinct from the actions taken as a board collectively. Thus, the breach of fiduciary duty claim is not viable. Because the proposed amended complaint fails to cure this deficiency, plaintiff’s motion seeking to amend the plates was properly denied. 2018 WL 3578714, *1 (citations omitted).
The court went on to cite the rule that the corporation itself owes no fiduciary duty to its shareholders.
Tuesday, August 14, 2018
Answers That Are Simple, Obvious and Wrong – The Risk Inherent in a Common Business Structure
In many closely held business ventures, the real estate from which the business operates is held in a separate LLC owned by some or all of the owners of the operating company. The rationale for this structure is that the operating company will each year pay to the real estate company lease payments, generating for the operating company a tax deduction. In turn, the real estate company will have a deduction for any mortgage interest (if any) it pays and will in turn distribute net earnings exempt from Social Security and Medicare taxes. Mot oft recognized is that this structure exposes the real estate company to employee injury claims for which the operating company enjoys the benefit of worker’s compensation exclusivity.
This issue was identified in a recent decision from Maine, Clark v. Benton LLC, 2018 ME 99, __ A.3d __, 2018 WL 3432039 (Ma. July 17, 2018). Therein, the facilities from which a number of lumber company operations, Hammond Lumber Company, operated from realty owned by separate LLC's owned by one or more of the shareholders of Hammond Lumber. In February, 2015, Clark, a Hammond Lumber employee since 2009, visited the facility located in Fairfield, that property being owned by Benton LLC. Clark’s manager identified rooftops from which Clark was to remove the accumulated snow. In the course of doing so, he fell through a skylight, suffering significant injuries. In accordance with the worker’s compensation insurance policy maintained by Hammond Lumber, Clark’s claim for workers compensation was satisfied.
That was not, however, the end of the story, Clark then brought suit against Benton LLC on a variety of claims, specifically its:
Failure to (1) properly maintain the property; (2) provide premises reasonably safe for his work; and (3) warn him of dangerous conditions that Benton LLC, knew or should have known existed. 2018 WL 3432039, *2.
When Benton LLC moved for summary judgment on the ground that Clark had already been compensated in accordance with the worker’s compensation law and therefore Benton LLC was immune from suit, Clark objected, and Benton, LLC appealed.
The Maine Supreme Court, considered its prior law that, in certain instances, the worker’s compensation exclusivity could extend to a landlord closely affiliated with the employer. Focusing on the particular facts here presented, the Maine Supreme Court wrote “We know that a property-owning entity is not afforded immunity by the [Worker’s Compensation] Act by the simple facts that one of its officers is also an officer of the entity that employs the injured person, the employer has secured compensation according to the Act for the injured person, and the property-owning entity allows the employer to use its premises for its business purposes.” Id., *3.
From there, the Maine Supreme Court explored the “dual persona doctrine.” The court was clear that the effort by Benton LLC to utilize this doctrine was inapposite its intention, namely “as an exception to the employer immunity provisions of the workers’ compensation statutes.” Id., *4.
Distinguishing prior law, the Maine Supreme Court noted that:
“There is no employment relationship between Benton, LLC and Clark. Rather, Benton, LLC, is a legally separate entity from Hammond Lumber Company, with separate duties as a property owner.” Id.
Further, the Court indicated that this case may be more similar to that of Labelle v. Crepeau, 593 A.2d 653 (Me. 1991), wherein it was held that
“The land owner was not afforded immunity by the [Worker's Compensation] Act because he ‘was not sued in his capacity as an employee or corporate officer. Rather, he was sued individually as the owner of premises he leased to a separate corporate entity,’ and for his alleged breach of the duty to ensure that those premises were safe.” Id.
For that reason, the denial of summary judgment to Benton LLC was not improper, and Benton LLC is not immune from suit.
In a footnote, it was observed that “Benton, LLC, essentially argues that we should disregard its and Hammond Lumber’s separate corporate forms.” Id., n. 4. In rejecting those efforts, the court cited the Labelle decision for the principle that “[w]e do not ignore the corporate entity in order to allow a shareholder to avoid the burdens of incorporation.”
It should be recognized that this case is in no manner an outlier. Rather, there are a number of decisions from across the country that in effect call into question the operating company/realty company format. For example, in Howsden v. Roper’s Real Estate Company, 2011 WL 5105810 (Neb. Oct. 28, 2011), the real estate holding company affiliated with an operating company defended a claim brought by an employee who fell down a seldom-used elevator shaft. It was held that the suit against the realty company could proceed because it was not the plaintiff’s employer entitled to the exclusivity protections of the worker’s compensation statute. A similar decision from Kentucky, Jessie v. Dermitt, No. 2005-CA-0011961-MR (Ky. App. Dec 8, 2016), likewise held that the real estate holding company did not enjoy the exclusivity of the worker’s compensation coverage when an employee of the operating company fell through a hole cut in the floor as part of a remodeling effort and then covered with a tarp. Curiously, both the Nebraska Howsden and Kentucky Jessie decisions involve funeral homes.
Companies utilizing the dual operating company/realty company structure may be doing so for well reasoned, entirely legitimate reasons. The caution of these cases should be simply another component of that analysis, one that is recognized when insurance coverage is being sought.
Monday, August 13, 2018
Death, Dissolution and Dissociation: Louisiana Court Considers the Effect of Seriatim Deaths
In a recent decision from the Louisiana Court of Appeals considered the effect of the seriatim deaths of several members of an LLC and, ultimately, whether an action for judicial dissolution initiated by a member who subsequently passed away could continue. In this instance, the court found that the action for judicial dissolution of the LLC could continue. Schauf v Schauf, No. 51, 919-CA, __ So.3d __, 2018 WL 1937068 (La. App. 2 Cir. April 25, 2018).
Angela Schauf organized the Schauf Family LLC in 2001, keeping 50% of the ownership for herself and distributing to each of her four children a 12.5% interest. Those four children were Peter, Paul, Mary and Kathryn. Angela and all of the children executed an operating agreement; the LLC’s only asset was farmland that was leased out. Angela passed away, and her interest in the LLC was divided amongst the four children, resulting in each of them becoming a 25% member. Then, each of Peter and Kathryn passed away, leaving their interests in the LLC to their respective spouses, Jo Ann and Michael.
Thereafter, there arose disagreements with respect to the LLC and each of Jo Ann (assignee of Peter) and Michael (assignee of Kathryn) as well as Mary, an original member, sought to dissolve the LLC, sell its assets and distribute the proceeds. Paul objected to any dissolution, and as well rejected the proposal that he buy out the other members. Nonetheless, everyone except Paul did vote to dissolve the LLC and appoint Jo Ann as its liquidator.
Paul filed suit, asking for a ruling that the appointment of the liquidator and vote to dissolve the LLC was null and void. Then, Mary passed away, and a motion was filed to substitute Jo Ann, Mary’s executrix, in the lawsuit. In turn, the trial court granted Paul’s application for summary judgment, in which there was declared void the vote to liquidate and the appointment of Jo Ann as the LLC’s liquidator. Conversely, the defendant’s motion for summary judgment was denied on the basis that they had no authority to dissolve the LLC and liquidate its assets. The defendants filed this appeal.
The court’s opinion begins with a review of the status of the estate of a deceased member under the Louisiana LLC Act. Specifically, the estate does not become a member (absent a contrary provision in either the articles or operating agreement).
“Thus, an LLC’s articles of organization or a written operating agreement could, but have not in this case, provide that a person who inherits a decedent member’s interest in the LLC would become a member of the LLC or would have certain rights that are provided only to members.”
From there the court offered some observations as to the status of a decedent member’s estate vis-a-vie the LLC, namely:
The rule treating a decedent member’s legal representative as an assignee of the decedent’s interest may be problematic. As an assignee of the decedent member’s interest, the decedent’s legal representative is entitled only to receive distributions from the LLC as authorized by the LLC’s operating agreement or by the members, to share in the LLC’s profits and losses, and to receive allocations of the LLC’s items of income, gain, loss, deduction, and credit. A decedent member’s legal representative may not become a member of the LLC or exercise any of the rights or powers of a member unless the LLC’s articles of organization or a written operating agreement provides otherwise or the legal representative is admitted as a member of the LLC. Thus, the legal representative of a decedent member may not participate in the management of the LLC, vote on the LLC’s affairs, or inspect the LLC’s records unless the LLC’s articles of organization or an operating agreement specifically accords such management rights to the decedent’s legal representative or the legal representative is admitted as a member of the LLC. Without the right to vote or inspect records, a decedent member’s legal representative will have little ability to protect the interests of the decedent’s estate or heirs with respect to the decedent’s interest in the LLC. Id at *6-7.
Still, the court noted that an action for judicial dissolution may be brought by any member on the grounds that it “is not reasonably practicable to carry on the business of the LLC in conformity with its articles of organization and operating agreement.” La. R. S. 12:1335. The court went on to find that Mary had been a member of the LLC at the time the petition for judicial dissolution was filed, that “[h]er death did not terminate the dissolution process once it had been initiated.” and that JoAnn, as Mary’s executrix, could continue the dissolution action. Id., *8.
Almost in passing, the court rejected the suggestion that, consequent to the articles of organization providing that the LLC would dissolve after 25 years, it could not be dissolved prior to that time.
If this decision is restricted to its facts, namely an action for judicial dissolution, it is an entirely reasonable outcome. At the time the action for judicial dissolution was filed, three of the four persons having a derivative economic interest in the LLC’s assets no longer wish to be in business together. Likewise, one half of the members did not want to be in business with the other half. It would be dangerous, however, to extend this decision beyond the context of an action for judicial dissolution. If, in contrast, the suit were to have involved a derivative action or a request to inspect documents by a member who then passes away, different policy concerns, they being focused upon the LLC’s internal management, would arise.
Thursday, August 9, 2018
Delaware Court Reviews Fundamental Contract Law
In a trio of recent decisions, Delaware courts have reviewed some fundamental principles of contract law.
In Chyronhego Corp. v. Wight, C.A. No. 2017-0548-SG (Del. Ch. July 31, 2018), the court reviewed anti-reliance clauses, explaining what is necessary for one to be effective and applying the one at in the contract at issue. HEREIS A LINK to that decision.
Another decision, Flowshare, LLC v. Georesults Inc., C.A. N17C-07-227 EMD-CCLD (July 25, 2018), addresses whether an integration clause bars enforcement of promises made with respect to future performance and a fraudulent inducement claim. HERE IS A LINK to that decision.
Last, CSH Theaters L.L.C. v. Nederlander of San Francisco Associates, C.A. No. 9380-VCMR (Del. Ch. July 31, 2018), decided in the context of the question of whether alleged conversations were enough to create an enforceable contract, provides an exhaustive review of the Delaware law on what is required to create an enforceable agreement. HERE IS A LINK to that decision.