Friday, January 18, 2019
Is Qualification to Transact Business a Consent to General Jurisdiction?
There exists an ongoing debate as to whether qualification to transact business in a foreign jurisdiction constitutes consent to general jurisdiction in that foreign state. There are cases going both ways, although it must be noted that many of them are from Pennsylvania, which expressly provides in its qualification statute that qualification constitutes consent.
Most recently, in American Dairy Queen Corporation v. W.B. Mason Co., Inc., 2018 WL 135699 (D. Minn. Jan. 8, 2019), the court held that the defendant qualification to transact business in Minnesota was sufficient for it to be sued in Minnesota notwithstanding the lawsuit is over a product that the defendant never sold into that jurisdiction.
Wednesday, January 16, 2019
Recently, the Sixth Circuit Court of Appeals issued a decision in Kendle v. Whig Enterprises, LLC, 2019 WL 148420 (6th Cir. Jan. 9, 2019). In this case, the matter before the court was whether or not there existed diversity jurisdiction in a dispute involving an LLC.
Joshua Fershee, on the Business Law Prof Blog, has posted an analysis in which he indicates that the sixth circuit applied the wrong rules. That posting is titled Sixth Circuit, Why Can’t You Be More Like Your Sister, 11th Circuit?; HERE IS A HERE IS A LINKLINK to his posting.
Tuesday, January 15, 2019
Today marks the anniversary of the coronation, in 1559, of Queen Elizabeth I, she to be the last of the Tudor dynasty. It almost didn’t happen.
King Henry VII, the first of the Tudor monarchs, was, as described by the great Tudor historian G.R. Elton, a political solution to a dynastic problem; he was not clearly the closest claimant to the throne. He was, however, the successful leader at the Battle of Bosworth at which Richard III, who had seized the throne from the never-crowned Edward V (one of the two “Princes of the Tower”), was killed. Henry’s reign would be punctuated with several significant rebellions.
Upon the death of Henry VII, power did transfer easily to his son Henry VIII. That had not been, however, the plan. Henry had an older brother, Arthur, who was to inherit the throne; for that reason he had been engaged and ultimately married to Catherine of Aragon, daughter of Ferdinand and Isabella of Spain. After Arthur’s death, likely from tuberculosis, Catherine was engaged and then ultimately married to Henry, a situation that would set up the later dispute over the “Divorce.”
That marriage would ultimately sour on the fact that only one of the children of Henry and Catherine survived infancy, that being Mary. England was not, it was feared, ready to be ruled by a queen. The only example of it doing so, that being the reign of the Empress Matilda (daughter of King Henry I) was referred to as the “Anarchy.” Seeking to perpetuate the dynasty and avoid the possibility of civil war after his death, Henry pursued the Divorce (it was actually what we would refer to today as an annulment) so that he could marry Anne Boleyn.
The Divorce could not easily be had consequent to at least a pair of factors. Initially, on theological grounds, the basis for the Divorce was weak. Politically, Eleanor’s nephew, Charles V, was now King of both Spain, the Netherlands and as well Holy Roman Emperor. He was able, successfully, to delay any decision on the divorce, it depriving Henry of the one thing he did not have, namely time. Ultimately, Henry would schism the English church from Roman communion (an act which earned for Henry his very own bull of excommunication). The marriage to Catherine of Aragon then being annulled by Thomas Cramer, Archbishop of Canterbury, Henry proceeded to marry Anne Boleyn. She, already pregnant at the time of the marriage, would be the mother of Elizabeth. Elizabeth would be their only child. Henry was now in no better position than he was before; two potential female heirs to the throne did not address the perceived need for a male heir. Anne’s fortunes would ultimately be destroyed consequent to a series of events whose genesis is still greatly debated, but it is clear that the charges of adultery and incest for which she was convicted and executed were entirely fabricated.
After Anne, Henry quickly married Jane Seymour, and she shortly thereafter became pregnant, ultimately delivering a son who would survive infancy. That child was Edward VI. Jane would die of complications from childbirth.
While Henry would go on to marry three more times, namely to Anne of Cleves, Catherine Howard and Catherine Parr, none of them would have children by him.
Upon Henry’s death, the child Edward VI succeeded to the throne. Never, however, reaching his majority, the so-called reign of Edward VI is best understood as the reign of his counsel, dominated through much of his existence by his uncle Edward Seymour, he acting under the title of “Lord Protector.” It was during the reign of Edward that the English church moved from schism from the Catholic Church into the hallmarks of Protestant theology. With Edward’s death, likely from tuberculosis, approaching, members of the council feared that Mary, his oldest sister, would come to the throne and impose Catholicism instead of the recently adopted Protestant-influenced Anglicanism. These views led to an attempted revolt pursuant to which Lady Jane Grey was placed on the throne. Lady Jane Grey was a Tudor by means of descent from Margaret Tudor, sister of Henry VIII, and wife of Sir Charles Brandon, Duke of Suffolk. That revolt, spanning nine days, was ultimately unsuccessful, and Mary was able to take her place on the throne. Mary would die, however, without children.
Which brings us back to Elizabeth. As the second female child of Henry VIII, she was after Mary the heir apparent to the throne. She was, however, clearly Protestant, especially when contrasted with Mary’s strict Catholicism. Elizabeth had as well been involved (to what degree remains a matter in dispute) in a number of palace intrigues and revolts against Mary, actions which nearly led to her death. At the time of Mary’s passing from any number of causes (it is fairly clear she suffered from Type 2 diabetes), there had already been drafted the warrant of execution for Elizabeth. Her sister, Queen Mary, would, however, die without signing it, allowing Elizabeth to come to the throne.
So all Elizabeth needed to get to the throne was her grandfather’s victory at Bosworth, her uncle Arthur’s death, the divorce of Henry and Catherine so he could marry Anne Boleyn, the young death of her half-brother Edward, the rejection of Lady Jane Grey’s rebellion, the death without issue of her older half-sister Mary and surviving the threatened death sentence for her part in rebellion against Mary.
Elizabeth would never marry, and the Tudor dynasty would end with her death in 1603. It would be succeeded by the Stuarts, descendants of Henry VII through his daughter Mary who had married the King of Scotland.
Fixed-Price Buy-Sale Agreements: What Goes Around Comes Around
Just last week, at the Business Planning class at UK law, I had the students read the venerable Kentucky decision Krebs et al. v. McDonald’s, Ex’x, 266 S.W.2d 87 (Ky. 1953). Therein, the court enforced the provision of a buy-sale agreement requiring a deceased shareholder to be bought out of the corporation at a price that had been fixed many years previously; consequent to the passage of time that agreed price no longer reflected the intrinsic value of the shares. Ultimately, the agreement, having been entered into, would be enforced as written.
This week, in his blog New York Business Divorce, Peter Mahler reviewed a recent decision from New Jersey in which, all else being equal, the same rule was applied. In that blog post, Another Reason Not to Use Fixed-Price Buy-Sale Agreements (Jan. 14, 2019; HERE IS A LINK to that posting), Peter reviewed the decision rendered in Namerow v. PediatriCare Associates, LLC (Nov. 29, 2018). In this instance, the operating agreement contained an initial determination of firm value of $2.4 million. Even though the operating agreement invited the members to update the value from time to time, they never did so. It did contain a provision that if the price had not been adjusted for more than two years, the value would be adjusted “to reflect the increase or decrease in the net worth of the Company, including collectible accounts receivable, since the last agreed upon Value.” As Peter noted in his blog post, one of the deficiencies of this provision was a failure to address who would make the determination as to the adjustment in value.
An appraisal performed by the LLC yielded a value of $4.45 million, which would have netted Dr. Namerow in excess of $1.1 million. Keep that figure in mind. He rejected that offer.
At trial, applying the terms of the operating agreement, it was determined that the firm was worth slightly in excess of $3.2 million, yielding to Dr. Namerow $805,779, an amount significantly less than he had been offered two years previously. In making this determination, it wrote:
This Court is mindful that Plaintiff, as the first member of PediatriCare to retire, may feel as though his efforts as one of the founding members and an established physician for 38 years are being shortchanged, in this Court to some extent does not disagree. However, based on the language of the operating agreement and the lack of any updates to the Certificate of Agreed Value, the Court is left with little discretion but to apply the appropriate formula as agreed upon in 2001.
Monday, January 14, 2019
An LLC and its Sole Member are Legally Distinct
A recent decision from Washington state affirms and applies the rule that an LLC and even its sole member are legally distinct from one another. Williams v. PRK Funding Services, Inc., Case No. C18-48 RSM, 2019 WL 134704 (W.D. Wash. Jan. 8,, 2019).
Williams was the sole member of Williams Family Holdings LLC. The LLC borrowed in excess of $1.3 million to build a single-family residence on the real property contributed to the LLC by Williams. Ultimately, that loan went into foreclosure. On the eve of the foreclosure sale, Williams, individually (and not the LLC) filed for bankruptcy protection. Still, the sale of the property went forward. Ultimately the property was reconveyed.
Initially, Williams argued that the foreclosure sales violated the automatic stay that arose upon his bankruptcy filing. This assertion was rejected on the basis that Williams’ interest in the LLC is personal property, and he had no ownership interest in the LLC’s property citing In re Disciplinary Proceeding Against McGrath, 308 P.3d 615, 625 (Wash. 2013), the court wrote “under the Act, the Washington Supreme Court has expressly held that LLC members have no ownership in property owned by the LLC and that assets and property owned by the LLC are not part of a member’s bankruptcy estate.” 2019 WL 134704, *4. On that basis, Williams’ claims premised upon a violation of the automatic stay were set aside
Claims against the ultimate owners of the property were dismissed on the basis that Williams lacked standing. Rather, each of those claims was dependent upon a claim of ownership in the property, and the property had been held at the relevant times by the LLC, and not the plaintiff.
Friday, January 11, 2019
The Estate of an LLC’s Member is an Assignee
In a recent decision from Ohio, the court applied the LLC Act and the particular operating agreement, finding that the latter did not modify the former and that, in consequence, the estate of a member is an assignee. SDC University Circle Developer, L.L.C. v. Estate of Patrick Whitlow, M. D., No. 107085, 2019 WL 92791 (Ohio Ct. App. 8th Dist. Jan. 3, 2019). In this instance, Whitlow was a member in the SDC University Circle Developer, LLC. When he passed away, his estate asserted that, under the LLC’s operating agreement, the entirety of his interest, and not only the economic rights, would transfer to his estate. In contrast, the LLC asserted that the estate was not a member and that it was entitled only to an assignee’s right to receive distributions when and as made.
Under the operating agreement at issue, in order for an assignee of the Class B Membership Interest as held by Whitlow to become a member, it was required that there be the consent of the Managing Member. In this instance, no such consent had ever been granted. The court held:
Contrary to the estate’s assertion, the operating agreement is clear: as a general rule, a member cannot transfer his or her membership interest without consent of the managing member. Even where the managing member consents to a transfer, the transferee does not become a member unless the managing member further consents. Here, the estate is entitled to Whitlow’s interest, however, that interest devolved into economic rights only, as the managing member did not consent to estate membership. Id., *3, ¶ 13.
The court set aside consideration of a provision of the operating agreement addressing intra-family transfers, finding that the more specific provisions with respect to death would apply.
The opinion as well addressed the fact that Dr. Whitlow was bound by the operating agreement even though he had never signed it. Rather, he had signed a subscription agreement which cross-referenced the operating agreement.
Tuesday, January 8, 2019
In a recent decision, the court was called upon to assess whether or not a non-equity partner in a law firm would be treated as a “partner” in the firm when assessing its citizenship for purposes of diversity jurisdiction. EQT Production Co. v. Vorys, Sater, Seymour & Pase, LLP, 2018 WL 6790486 (E.D. Ky. Dec. 26, 2018).
In this case, there was no dispute that an LLP has the citizenship of each of its partners. The question turned upon whether a particular “non-equity partner”, he resident in Pennsylvania, would be attributed to the partnership. The court held that it would be.
It bears noting that there is not consistency across all of the courts with respect to this question. For example, in Morson v. Kreindler & Kreindler, LLP, 616 F.Supp.2d 171 (D. Mass. 2009), a “contract partner” who had no voting rights in the firm, was compensated on the basis of a Form W-2 and did not share in the profits and losses was a classified as a mere employee whose citizenship would not be attributed to the partnership. Likewise, in Passavant Memorial Area Hospital Ass’n v. Lancaster Pollard & Co., No. 11-CV-3116 (C.D. Ill. (Springfield Div.) April 2, 2012), the citizenship of certain “contract partners” who had no equity interest in the partnership, did not share in the firm’s profits and losses, who did not have voting rights in the partnership, and were paid fixed amount by contract, were not “partners” whose citizenship would be attributed to the partnership.
Thursday, January 3, 2019
LLCs in the Law School Curriculum
This Saturday I will be presenting at the AALS (American Association of Law Schools) annual conference on the place of LLCs in the business law curriculum. It is possible it is not as exciting as it sounds. Still, the traditional focus on the law of corporations, especially publically traded companys, needs to give way to the reality that most new businesses are LLCs, and it is in that space that today's law students will practice.