LLC as Necessary Party to Derivative Action; No Diversity Jurisdiction

LLC as Necessary Party to Derivative Action; No Diversity Jurisdiction

      A recent decision from New York considered the argument that an LLC, on which behalf the derivative action had been brought, had been fraudulently joined in order to defeat diversity jurisdiction.  The argument was rejected, and it was found that the LLC was a necessary party to the action. Rose v. Harem, No. 17-cv-6408 (MKB), 2018 WL 4344954 (E.D.N.Y. Sept. 11, 2018).

      Citing numerous cases, the decision begins with the punch line, namely:

In derivative actions commenced on behalf of an LLC, the LLC is not a nominal party but instead a necessary party under Rule 19 of the Federal Rules of Civil Procedure.

       The court continued its discussion by engaging in the fraudulent joinder analysis, finding that the LLC’s inclusion was not fraudulent.

      The case was remanded to state court.

More on VanWinkle

More on VanWinkle

Yesterday, in response to my review of the VanWinkle v. Walker decision, Professor Joshua Fershee of West Virginia law, on the Business Law Prof Blog, posted some additional thoughts. Essentially, in Should You Ever Pierce the LLC Veil to Let a Member Recover? Probably Not, he suggests that it is not appropriate to apply piercing analysis on an inter-se creditor dispute such as that at issue in the VanWinkle decision.  HERE IS A LINK to his posting.

The Passing of Phylis Skloot Bamberger

On Sunday last, our band suffered a loss as Phylis Skloot Bamberger, spouse of Michael Bamberger, passed away.  A graduate of Brooklyn College of the City University of New York, (B.A., 1960; magna cum laude and phi beta kappa) and New York Law School (LL.B., 1963), she spent more than two decades with the New York City Legal Aid Society before being appointed to the bench. According to the Oyez archive, when in private practice she argued three cases before the U.S. Supreme Court (Bell v. Wolfish (1978); Moody v. Daggett (1976); and United States v. Mara (1972)). She is reported to have argued some 200 cases to the Second Circuit Court of Appeals.

 

It should not be a surprise that lawyer who was the wife and partner for over half a century of our own Michael Bamberger (who may be better known to the rest of the world as a courageous constitutional scholar, but we know to be one of us) is no less of an accomplished polymath than he is.  Judge Bamberger spent her professional life thinking about, and contributing to the resolution of, the issues of criminal law and the indigent:

 

·         She spent more than two decades as an appellate defender with the New York City Legal Aid Society and in 1988 was appointed the New York State Supreme Court in the Bronx where she served for eighteen years.

·         She was a prolific author, whose publications include Specialized Courts: Not a Cure-all, 30 Fordham Urb. L.J. 1091 (2003), The Dangerous Expert Witness, 52 Brook. L. Rev. 855 (1986), Jury Voir Dire in Criminal Cases, 78-OCT N.Y. St. B.J. 24 Oct., 2006) and other articles as well as co-authorship of the frequently cited Practice Under the Federal Sentencing Guidelines.

·         She acted as chair a New York State Bar Committee charged to study civil representation of indigent prisoners that in 1974 issued a Draft Proposal for the Provision of Legal Services to Indigent Inmates in New York State Correctional Facilities.

·         She argued cases at the highest level.  Chief Judge Feinberg of the Second Circuit Court of Appeals at the Annual Judicial Conference Second Judicial Circuit of the United States 106 F.R.D. 103 (1984) noted that she “has probably argued more cases before the Circuit Court than any other member of the Bar,” and “She has argued an enormous number of appeals, more than 500, in numerous federal and state courts, including the Supreme Court of the United States. She participated in the preparation of at least 1,000 briefs, tried over 50 cases and has been involved in countless motions. Her professional affiliations, her articles, teaching positions and American Bar Association committee memberships would stretch across this room.”

·         For eighteen years she presided over a criminal trial court that may well have felt like its fictional counterpart in Bonfires of the Vanities, the Bronx Supreme Court. 

 

Her devotion to justice and compassion was demonstrated when, in 1990 “she wrote to the New York Times to criticize two articles describing a rape victim as ‘cut on her arms and hands but not seriously injured.’ Justice Bamberger wrote, “The suggestion that the rape itself is not a ‘serious injury’ is beyond comprehension. . . . The physical violence inherent in rape is generally no longer belittled, but the attitude that is expressed in your articles reflects an unfortunate view of community attitudes lurking below the surface.” See Lynn Hecht Schafran,  Maiming the Soul: Judges, Sentencing and the Myth of the Nonviolent Rapist, 20 Fordham Urb. L.J. 439 (1990). Like Michael, Judge Bamberger was both a multi-faceted legal intellect and a superb human being.  In times like these, we should pause to appreciate how fortunate we are to know them.

 

In his book Reckless Legislation - How Lawmakers Ignore the Constitution, Michael, in the acknowledgment, wrote:

 

Most of all, however, I have benefited greatly from the advice, criticism, and highly skilled editing of my wife, Phylis Skloot Bamberger, who also endured, without complaint, repeated vacations which I devoted in part to writing this book.

 

Kentucky Court of Appeals Reversed the Trial Court, Holds that Veil of LLC Should be Pierced

Kentucky Court of Appeals Reversed the Trial Court, Holds that Veil of LLC Should be Pierced

       In a recent decision, the Kentucky Court of Appeals held that a trial court had misapplied the law of piercing the veil and determined that, in fact, it should in this instance be pierced. Tavadia v. Mitchell, No. 2017-CA-001358-MR, 2018 WL 5091048 (Ky. App. Oct. 19, 2018). At this juncture it is not known whether Mitchell will be filing a petition for discretionary review with the Kentucky Secretary of State.

      Sheri Mitchell, in 2013, formed One Sustainable Method Recycling, LLC (“OSM”), a company that contracted with healthcare providers to recycle healthcare waste such as plastics and sharp metal objects. Mitchell was initially the 99% owner and the acting CEO, of OSM, with Ahmet Matha holding the other 1% total. Shortly after starting OSM, Mitchell approached Behram Tavadia about investing in the company. Within two months of OSM’s founding, Tavadia, acting through his company Tavadia Enterprises, Inc., loaned OSM $40,000 at a 6% interest rate. That loan was to be repaid $1,000 per month. In addition, Tavadia would be paid 5% of OSM’s yearly profits. Mitchell did not guarantee that loan. Not long thereafter, OSM received a $150,000 loan from the Louisville Metropolitan Business Development Corporation (“METCO”). Tavadia personally guaranteed that loan and pledged certain bonds as security thereon.

      Two years later, when no payments had been made to Tavadia under the original $40,000 loan, he agreed to delay repayment. Then, OSM and Tavadia entered into a second loan, in the amount of $250,000, refinancing as well the original $40,000 and another $12,000 loan Tavadia had made to the company in the fall of 2014. That second loan agreement provided that Tavadia would receive a 25% ownership interest in OSM (previously he only had a right to 5% of its annual profits). Again, Mitchell did not execute a personal guarantee on the loan from Tavadia. Mitchell explained that this 2015 loan was needed to purchase certain equipment that Mitchell represented was needed for the business.  No such equipment was ever purchased or even ordered.

      Thereafter, still in a cash flow crisis, OSM received a $20,000 loan from Fundworks, LLC. Without authority from Tavadia to do so, Mitchell signed Tavadia’s name on behalf of OSM and as well signed a personal guarantee in Tavadia’s name. That loan carried an interest rate of 15%.

      Not long thereafter, in October, 2015, OSM ceased operations. Its equipment was sold, and more than half of the sale proceeds were deposited in Mitchell’s personal bank account, the balance going to OSM’s account. Necessarily, OSM defaulted on the Fundworks’ loan, which Tavadia learned about for the first time when Fundworks contacted him demanding repayment. The loan from METCO also went into default, and it contacted Tavadia about selling or redeeming the bonds he had pledged as collateral.

      Tavadia filed suit against OSM and Mitchell asserting claims for breach of contract, fiduciary duty, of misappropriation and conversion of company assets, and failure to afford him access to company records. An amended complaint would add claims for fraud as well as for forgery.

       Mitchell never caused OSM to retain legal counsel, and she sought to represent it pro se. The court rejected that notion, and a default judgment was entered against OSM for $302,000. Thereafter, a bench trial was held as to whether or not Mitchell, individually, could be held personally liable on the judgment against OSM in favor of Tavadia. The trial court concluded that the elements of piercing, namely as set forth in Inter-Tel Technologies, Inc. v. Lynn Station Properties, LLC, 260 S.W.3d 152 (Ky. 2012) had not been met. HERE IS A LINK to my review of that decision. From the determination that the veil of OSM would not be pierced, and that Mitchell would not be held liable on the judgment, this appeal was taken.

      As there was a bench trial, the standard of review was that of “clearly erroneous.”

      Curiously, Mitchell did not file a brief with the Court of Appeals. In consequence, Tavadia had the opportunity to set the tone of the discussion.

       Beginning with the statement, made in reliance upon Pro Tanks Leasing v.  Midwest Propane and Refined Fuels, LLC, 988 F. Supp. 2d 772, 788 (W.D. Ky. 2013), that courts will assess “limited liability companies the same as corporations for purposes of liability analysis.”, the Court of Appeals assessed whether the Inter-Tel test was satisfied, namely were there both “domination of the [LLC] resulting in a loss of [LLC] separateness” and as well “circumstances under which continued recognition of the [LLC] would sanction fraud or promote injustice.” 2018 WL 5091048, *4.

      As to the first element:

While the trial court did, in fact, discuss several of the factors enunciated in Inter-Tel Technologies, Inc. in concluding that Tavadia failed to establish the first prong of domination of the [LLC] resulting in a loss of [LLC] separateness, we must agree with Tavadia that it ignored material facts and evidence in reaching its conclusion. Id. *5

       The Court of Appeals would determine that the permission granted to Mitchell to use OSM funds for living expenses had been abused, once she utilized them for “extravagant personal expenses,” notwithstanding that the total amount withdrawn was less than she would have received had she been drawing a salary. Continuing to the question of co-mingling funds with respect to the sale proceeds and a deposit of more than half in Mitchell’s bank account, “once Tavadia proved that Mitchell deposited OSM monies into her personal bank account, Mitchell was under an obligation to show that she spent those funds on business expenses.” She failed in that obligation. Still:

Concerning some of the other Inter-Tel Technologies, Inc. factors, the trial court found that OSM was grossly undercapitalized, although it noted that Tavadia was aware that it was a start-up company and could have protected himself by requiring Mitchell to execute a personal guarantee or post collateral. We cannot disagree. Nor can there be any dispute that OSM did not follow any corporate formalities, much less pay dividends. Finally, Mitchell and Tavadia both agreed that she was the only functioning member of OSM and had sole control over all day-to-day decisions. Id. *6.

      The court did not, however, provide any protocol by which these factors should be weighed against those where the Court of Appeals had found that Inter-Tel Technologies factors would support piercing.

      As to the second prong, that of “sanctioning fraud or promoting injustice,” the court wrote:

Contrary to the trial court’s conclusion, we believe that Mitchell was unjustly enriched from her use of OSM’s funds while it was insolvent and its creditors remained unpaid. Mitchell went so far as to forge Tavadia’s name on a loan application and personal guarantee to continue a source of funding. To continue to recognize OSM and permit Mitchell to avoid liability would essentially be condoning her personal use of OSM funds to the detriment of OSM and Tavadia, as an investor. Such a result would promote injustice and would excuse what we believe was morally culpable behavior on Mitchell’s part. Id.

      Also at issue was the determination by the trial court that Tavadia had not been injured with respect to the Fundworks loan in that he had paid nothing thereon and had defenses to liability. Tavadia prevailed in the argument that the trial court, having found fraud and forgery, should have considered nominal damages and then addressed Tavadia’s claim for both punitive damages and attorney's fees. “The trial court clearly erred in summarily dismissing these claims.”

 

Agency and Choice of Law

Agency and Choice of Law

      In a decision rendered in Delaware earlier this year, there was considered the question of which law would control whether the purported agent of an LLC had actual authority to bind the company. CompoSecure, L.L.C. v. Cardux, LLC f/k/a Affluent Card LLC, C.A. No. 12524-VCL (Del. Ch. Feb. 1, 2018 as corrected Feb. 12, 2018).

      In this dispute, Vice Chancellor Laster was, amongst many other issues, called upon to determine whether New Jersey or Delaware law would apply. At issue was whether a Marketing Agreement was validly entered into. That agreement provided that it would be governed by New Jersey law. However, that agreement had been entered into by a Delaware organized LLC. As such, the question was whether New Jersey or Delaware law would apply.

      Vice Chancellor Laster determined that Delaware law would control on the basis that the existence or not of actual authority to execute the agreement on behalf of the Delaware LLC was governed, pursuant to the internal affairs doctrine, by Delaware law.

Saint Crispin’s Day and the Battle of Agincourt

 

 

Saint Crispin’s Day and the Battle of Agincourt

 

 

 

 

       Today is the anniversary of the Battle of Agincourt, taking place in 1415 (603 years ago) between the forces of France and her various allies and the invading English forces under the command of King Henry V. Shakespeare, by having his character Henry V repeatedly refer to the day of the battle as St. Crispin’s Day, otherwise saved this obscure saint from being lost, save for experts in hagiography, to the mist of history.

 

            Agincourt was the third of a trio of famous battles in the course of the 100 Years War; the other two were Crecy (1346) and Poitiers (1356).  The English won all three of these battles.  In the end they lost the war.  If you should want a comprehensive review of the 100 Years War, the four volume treatment by Jonathan Sumption (The Hundred Years War I – Trial by Battle; The Hundred Years War II – Trial by Fire; The Hundred Years War III – Divided Houses; and The Hundred Years War IV – Cursed Kings) is authoritative.

 

      The English forces, likely numbering in the range of 7,000, were compelled to do battle with a numerically superior French force likely numbering in excess of 20,000. All else being equal, the English force should have expected to be annihilated. As is typical in the case of significant historical events, however, all things were not equal. The French and their allies were disorganized, and overall command of the battlefield was never achieved.  Rather, individual nobles led their own contingents forward in a disorganized and sometimes conflicting manner.  The terrain favored the English in several ways.  The French “artillery,” crossbowmen (largely Pisan mercenaries) were not effectively deployed, and they had the unenviable task of shooting uphill.  That same terrain required the French forces, both mounted and on foot, to attack uphill over a recently plowed field that, consequent to the recent rain, was more mud than dirt. The French knights and men at arms, slogging their way uphill, were a “target rich environment” for the rain of arrows let loose by the English longbows; assuming Henry’s forces numbered 7,000, likely 5,800 were longbowmen, each releasing four to six arrows a minute.

 

      Another factor was that the very size of the French force worked to its disadvantage in that those behind continued pressing forward, hoping for their moment of glory, even while those at the front were being slaughtered. It was not quite the situation suffered by the Romans at the hands of Hannibal at Cannae, but then likely it was not hugely better.

 

      While comparative casualty figures are effectively impossible to ascertain, it is clear that the French were badly mauled with significantly more casualties than the English. Further, a significant number of French nobles fell in contrast to only two English nobles. Also, a significant number of French knights who has been captured in anticipation of being ransomed were executed.  The validity of the execution order, given by Henry V, is to this day debated.

 

      For an excellent review of the battle, see Juliet Barker's Agincourt. It is also covered in volume four of Sumption’s treatise.

 

      As invented by Shakespeare in Henry V, Scene iii, the St. Crispin’s Day speech would immortalize Henry V:

 

WESTMORELAND. O that we now had here

 

But one ten thousand of those men in England

 

That do no work to-day!

 

KING. What’s he that wishes so?

 

My cousin, Westmoreland? No, my fair cousin;

 

If we are mark’d to die, we are enow

 

To do our country loss; and if to live,

 

The fewer men, the greater share of honour.

 

 

God’s will! I pray thee, wish not one man more.

 

By Jove, I am not covetous for gold,
 

Nor care I who doth feed upon my cost;

 

It yearns me not if men my garments wear;

 

Such outward things dwell not in my desires.
 

But if it be a sin to covet honour,
 

I am the most offending soul alive.
 

No, faith, my coz, wish not a man from England.
 

God’s peace! I would not lose so great an honour
 

As one man more methinks would share from me
 

For the best hope I have. O, do not wish one more!
 

Rather proclaim it, Westmoreland, through my host,
 

That he which hath no stomach to this fight,
 

Let him depart; his passport shall be made,
 

And crowns for convoy put into his purse;

 

We would not die in that man’s company

 

That fears his fellowship to die with us.

 

This day is call’d the feast of Crispian.

 

He that outlives this day, and comes safe home,

 

Will stand a tip-toe when this day is nam’d,
 

And rouse him at the name of Crispian.
 

He that shall live this day, and see old age,
 

Will yearly on the vigil feast his neighbours,
 

 

And say “To-morrow is Saint Crispian.”
 

Then will he strip his sleeve and show his scars,
 

And say “These wounds I had on Crispin's day.”
 

Old men forget; yet all shall be forgot,
 

But he’ll remember, with advantages,
 

 

What feats he did that day. Then shall our names,
 

Familiar in his mouth as household words-
 

Harry the King, Bedford and Exeter,
 

 

Warwick and Talbot, Salisbury and Gloucester-
 

Be in their flowing cups freshly rememb’red.
 

This story shall the good man teach his son;
 

 

And Crispin Crispian shall ne’er go by,
 

From this day to the ending of the world,
 

But we in it shall be remembered-
 

We few, we happy few, we band of brothers;
 

For he to-day that sheds his blood with me

 

Shall be my brother; be he ne’er so vile,

 

This day shall gentle his condition;
 

 

And gentlemen in England now-a-bed
 

Shall think themselves accurs’d they were not here,
 

And hold their manhoods cheap whiles any speaks
 

That fought with us upon Saint Crispin’s day.
 

 

      HERE IS A LINK to Kenneth Branagh’s masterful rendition.

 

            Not recited in the list of nobles who were part of the battle was Edward of Norwich, the Duke of York.  He was killed while defending the king.

 

      Today is also the anniversary of the storied “Charge of the Light Brigade” in the Crimean War (1854). That particular engagement was, for the English forces, significantly less successful.

Kentucky Supreme Court Rejects Arbitration as a Condition of Employment

Kentucky Supreme Court Rejects Arbitration as a Condition of Employment

      In a recent decision from the Kentucky Supreme Court, it has held that an employer may not condition employment upon the employee agreeing to arbitrate, rather than litigate, disputes arising out of or in connection with the employment relationship. Northern Kentucky Area Dev. District v. Snyder.

      Kentucky courts have a track record of opposition to arbitration agreements even as federal law, as embodied in the Federal Arbitration Act, has encouraged arbitration agreements. Only last year, the US Supreme Court struck down certain practices of Kentucky courts to undermine the enforcement of arbitration agreements. See Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421 (2017).

      HERE IS A LINK to a discussion of this most recent decision from the Kentucky Supreme Court. As noted therein, it is possible that this determination will be taken to the US Supreme Court.

More on Joint Employers

More on Joint Employers

      In several instances this blog has reviewed the question of whether a franchisor should, along with the franchisee, be treated as the employer. For example,  HERE IS A LINK to a recent decision related to McDonald’s.

      Recently the National Labor Relations Board has issued new guidance as to this question. HERE IS A LINK to a discussion of these developments.

VanWinkle v. Walker Not Appealed to Kentucky Supreme Court

VanWinkle v. Walker Not Appealed to Kentucky Supreme Court

      Previously, I reviewed the decision of the Kentucky Court of Appeals rendered in VanWinkle v. Walker, wherein the Court held that, consequent to the wording of the operating agreement, each of the members accepted personal responsibility for a portion of the LLC’s debts and obligations; HERE IS A LINK to that earlier posting.

      No application was filed for discretionary review with the Kentucky Supreme Court, and the ruling of the Court of Appeals is now final.

Kentucky's New Power of Attorney Law

Kentucky's New Power of Attorney Law

      In 2018, the Kentucky General Assembly updated Kentucky's laws governing powers of attorney. While powers of attorney created prior to the new law remain effective, their enforcement may be limited by the new Act. In consequence, the best approach is to review and update all existing powers of attorney.

      HERE IS A LINK to a discussion of that new law.

It's Just Not a Good Day for Carthage

It's Just Not a Good Day for Carthage

      Today is the anniversary of two significant events in the history of Carthage. Neither, at least from the perspective of Carthage, was positive.

      The first of these events was the battle of Zama, the climactic battle of the Second Punic War, and a crushing Roman victory. The battle of Zama took place in 202 BC.

      The Second Punic War had started off looking pretty good for Carthage. Hannibal Barca, beginning in what is now Spain (then Carthaginian territory) had now famously moved his army  and his elephants across the Alps, gaining allies as he moved into what is now Italy. There they had a number significant victories against the Roman forces, including the battle of Cannae, famous for its encirclement and complete destruction of the Roman legions. It was during this period that Cato the Elder famously ended every speech in the Senate, irrespective of the topic of what he was addressing, with “And Carthage must be destroyed.”

      Ultimately, the tables would turn, and Rome got the upper hand. That turn of fortune culminated at Zama, where having taken the battle back to Carthage, Hannibal’s forces were ultimately defeated. Under the terms imposed by Rome, Carthage, previously a significant naval power, was limited to ten ships, and forbidden to raise an army without the permission of the Roman Senate.

      The other significant event in the history of Carthage would not take place until 439 AD. The Vandals, under Gaiseric, had been pushed out of what had been their homeland in what we today consider Spain, transporting themselves to North Africa (they had started in the region we today call Poland). From there, they proceeded west. On this day, they captured and sacked Carthage. Ultimately, the Vandals would invade Italy proper, sacking the city of Rome in 455 AD.

     Again, it’s just not a good day in the history of Carthage.

The Battle of Dyrrhechium – Don’t I Know You From Somewhere?

The Battle of Dyrrhechium – Don’t I Know You From Somewhere?

      While the story of the Battle of Hastings (October 14) usually continues with a discussion of the Norman-French political and to a certain extent cultural conquest of England, it is interesting to consider the fate of certain of those who fought for the losing side of Harold. 

      The core of Harold’s army was a corps of household troops named the housecarls.  They fought with the Norwegian/Viking battle ax, sometimes with a shaft of four feet in length.  While it is true that in the Middle Ages it would not be surprising for a person to be born, live and die within a few miles of the same spot, all too often it is assumed that such limited travel was typical.  Likely it was not.

      After Hastings, some of Harold’s housecarls traveled to Byzantium and there joined the Byzantine Emperor’s Varangian Guard.  According to some sources, some of those housecarls, now as members of the Varangian Guard, fought at the Battle of Dyrrhachium on October 18, 1081, a battle which took place in modern day Albania.  Where they were opposing Norman invaders (the Normans had invaded and made a kingdom in Southern Italy and Sicily and were seeking to expand their reach).  According to those same sources, certain of the troops who had fought as mercenaries for William (now the Conqueror) in England in 1066 now faced off against the now Varangian  former housecarls of Harold. 

      Normans versus Saxons, this time in Albania.  Not everyone stayed close to home.

      BTW, the Normans won the battle.

      Today is as well the anniversary of one of the greatest sacrileges of all time, that being the ordering of the destruction in 1009 of the Church of the Holy Sepulchre in Jerusalem under the orders of Al-Hakim bi-Amr Allah. 

Recapping the 2018 LLC Institute

 

Recapping the 2018 LLC Institute

 

The 2018 LLC Institute (Day 1)

 

Notwithstanding the hurricane then working its way through the south-east, the first day of the 2018 LLC Institute convened on Thursday morning. While a great number of familiar faces were distributed throughout the room, it was great seeing so many new faces. Hopefully they found the the LLC Institute to be a great presentation and will be back with us in future years.

 

After introductory remarks from Chair Garth Jacobson, the morning began with the Case Law Review chaired by Professor Beth Miller, she joined by Sean Ducharme, Dan Sheridan and Kelley Bender. As always there were more cases reviewed in the materials than there was time to discuss. Regardless, the highlighting of particular factors from cases around the country brought everyone up to speed on how things can go wrong, even in the face of an operating agreement or statute that (on its face) enables the conduct in question. Furthering the discussion of Allison v. Erickson, Peter Mahler described a case in which the trial court seemed to have ignored distinctions between statutes and disapproved a squeeze out merger that was effected in accordance with the controlling statute.

 

Beth Miller, in response to a discussion of dissolution and cases reviewed by Kelley Bender, suggested that we at an upcoming institute do a program on dissolution. To quote Yul Brynner, “So let it be known, so let it be done.”

 

By the way, Peter Mahler’s blog, New York Business Divorce, should be on your reading list.

 

As you know, the October LLC & Partnership Reporter distributed last did not contain the case law review materials as they were still in the works so that they could be as up to date as possible. Be looking next week for a distribution of a substitute Reporter containing all of those materials.

 

The second morning panel, Tax & Choice of Entity, featured Bob Keatinge and Steve Schneider. Unless you have been living in a cave cut off from the news for the last year (in which instance I am most jealous), you know that the 2017 amendments to the federal tax code have significantly altered the choice of entity calculus, often making “back of the envelope” assessments questionable. The program began with a caveat - tax laws can and do change, and we can today only assess based upon what is the law today. No promises as to what could change tomorrow (or even later today).  From there the presentation addressed the application of section 199A. Steve suggested that companies and their owners consider reorganization only after the 2018 tax return is filed; only then will the application of the 2017 changes to a particular venture be clear. Also reviewed was the application of section 1202 to the choice of entity question, requiring a comparison of current returns versus an anticipated exit. The complexities of section 199A were then reviewed in detail.

 

At lunch we began with the presentation to Peter Hutcheon of the Committee’s Content Award that all else being equal would be named after Beth Miller. Highlighted were his long tenure as the Editor of what was then the PUBOGRAM, his work on legislative drafting committees in his home state of New Jersey and on the uniform acts with which we have been involved, his participation in Committee seminars as well as other ABA committees, and his Over 30 columns. Peter’s remarks focused on his foundation of the PUBOGRAM and the challenge in the early years to collecting materials (it is now much easier). Laura Holoubek wrote of Peter’s receipt of this recognition:

 

Peter -

 

Let me start by saying I can neither speak nor write like Peter.

 

Peter was one of the first people I met on the Committee after being introduced to the Committee by Tom Rutledge.

 

Beyond his incredible intellect, extensive reading, historical knowledge and ability to turn a phrase (in a way I often don’t understand), Peter is a genuine, kind, interested and engaging person. Not just a lawyer’s lawyer dedicated to service to his clients but a great person and friend.

 

As a new committee member I always looked forward to Peter’s thoughtfully edited Pubogram as a primer and reminder of all that I didn’t know and needed to learn. His final words in the Pubogram were my favorite. Even if I had to go look up some things. Or all the things.

 

Perhaps more importantly Peter and Barbara have become my good friends. He and Barbara have been so kind and inclusive since my first meeting.

 

We share a love of not just wine but horses and horse racing. Today they do a better job of keeping up with and watching current racing events than I do. It is always fun to receive their emails before or after a big race and know of their excitement and rooting interests.

 

As to contributing content to the committee and to the bar at large, I cannot imagine a more deserving recipient.

 

Congratulations Peter. Thank you for your kindness and friendship!

 

Laura Holoubek

 

 

The lunch continued with a keynote address from Dana Trier. After an introduction by Lou Conti, Dana provided his insights as to the tax changes made in 2017. Having participated in the crafting of those provisions, he explained the policy decisions and their place in the broader context of tax policy, the federal budget and the economy generally. He as well touched upon certain proposals, an example being section 1402 and classification for employment tax purposes, that were in the early draft but which ended up on the cutting room floor by the time of the final package. He joked about the anticipated section 162(j) regulations, questioning whether they will be 500 pages or only 450 pages. As for that final product, he did observe “It could have been much worse.”

 

Lunch was closed out with wishing Cristin Keane a most happy birthday.

 

The afternoon began with a program by Johnny Lyle and Cristin Keane on other tax law changes. Expanding on the discussion from the morning’s tax program, they reviewed in detail topics including opportunity zones and the now effective partnership audit rules.

 

The last program of the day was about beneficial ownership reporting. Garth Jacobson, chair of the program, was joined by Senator Whitehouse and a crack panel of participants in the ongoing debate as to whether and how beneficial ownership should be reported. After the Senator’s remarks there was a frank exchange of views as to whether beneficial ownership reporting will be effective. A recurring comment was to the effect the criminals are willing to violate the law (its in the job description), and they are going to file misleading beneficial ownership reports. From there we turned to comments from the other participants, Kevin Shepherd leading the way by explaining the alphabet soup (e.g., FATF) of this area. You just have to love the DNFBP; Designated Non-Financial Business and Professionals. FYI, attorneys are DNFBPs. In response to a question about the scope of the latest Geographic Targeting Order, which has not been published, and compliance therewith, it was explained that Treasury has reached out of everyone subject to it; if you were not contacted you need not comply with it. There was a debate, sometimes heated, regarded the viability of a variety of elements of beneficial ownership reporting.

 

The day ended with the Martin I. Lubaroff Dinner at which an entirely unworthy recipient of the Lubaroff Award was well roasted. Jim Wheaton with free time is a dangerous thing, but Beth Miller stole the show. The evening closed with a vigorous curling match (you needed to be there; too difficult to explain).

 

The 2018 LLC Institute (Day 2)

 

The second day of the 2018 LLC Institute began with the Delaware / Bankruptcy Case Law Review chaired by Lou Hering and including as well Tammy Mercer and Jim Wheaton. Jim’s presentation reviewed a variety of issues including what assets are in the estate and the current status of bankruptcy remote structures. Lou and Tammy reviewed cases on LPs and LLCs from the last year, explaining how they are clear and easily reconcilable (yeah, right). Actually they remarked on how different cases, sometimes even from the same judge, can and have come to different conclusions, typically based upon even slight changes in the language between the controlling agreements.

 

The second panel of the morning, chaired by Warren Kean and included Brock Czeschin and Professor Deborah Demott, was on derivative actions in LLCs. Having Professor DeMott present is an aspect of our efforts to bring in the leading academic authorities to share their insights. As well, hopefully, our questions will hopefully inform their work going forward. I would note as well the Professor Robert Thompson came to the Institute for this one program; we were glad to welcome him to our proceedings. Warren began the program by “I’m confused and I’m here to get less confused.” Professor DeMott began the presentation with a review of the history of derivative actions and how courts have oft found standing to bring a representational action absent a statute to that effect. Brock reviewed where is Delaware law as to what is a direct action, what is a derivative action, and what is a mixed case. Warren emphasized the contractual nature of LLCs and the need ab initio to review the operating agreement to assess what rights the members, individually and jointly, hold. Only then can there be an assessment of whether the claim may be direct even if absent the agreement it would be derivative.

 

We held a a general Committee meeting over the lunch break. It featured a presentation to Katie Koszyk. Katie is the ABA/BLS staff member who provides above and beyond support for all our activities, and she is integral to the event. As well, there was delegated to Scott Ludwig and me the authority to on behalf of the Committee give approval to the final Fundamental Principles on Beneficial Ownership Reporting and the related resolution being proposed to the House of Delegates.

 

The first session of the afternoon addressed legal ethics. AJ Singleton and Professor Nancy Moore presented 15 Topics Your Risk Management Partner Wishes You Would Remember. The presentation was focused upon the problems faced by transactional (rather than litigators) attorneys, including “who is the client,” a problem of particular concern during the pre-formation stage. Other topics included engagement letters and security in client communications. The application of Rule 4.2 in the days just before a deal closes vis-a-vis the emails where an attorney has included her or his clients in the cc: and the “reply to all” was reviewed.

 

The last panel was on Charging Orders. The program was chaired by Jay Adkisson, author of the Charging Order Practice Guide. Along with Lou Conti, Lisa Jacobs, John Williams and the undersigned, the oft confusing aspects of the remedy were reviewed.

 

Our annual Brigadoon now concluded, we dispersed to catch planes, trains and automobiles.

 

Epilogue

 

Planning for 2019 LLC Institute has already begun. Shortly there will be meetings to discuss the dates and location. That information will be distributed as soon as it is available. Again, if you have ideas for programs, please send them to Garth Jacobson or Christina Houston.

 

 

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