Thursday, January 31, 2019

Is Qualification to Transact Business A Consent to General Jurisdiction? This Court Answered “No”


Is Qualification to Transact Business A Consent to General Jurisdiction? This Court Answered “No”

      As mentioned in a posting I made on January 18, there is an ongoing debate as to whether qualification to transact business in a foreign jurisdiction constitutes consent to general jurisdiction in that foreign state. In that posting, I discussed the recent decision rendered in American Dairy Queen Corporation v. W. B. Mason Co., 2018 WL 135699 (D. Minn. Jan. 8, 2019), wherein it was held that qualification constituted consent. HERE IS A LINK to that posting.
      Last week, a New York appellate court considered the same question and came to the opposite answer. That court, while recognizing that there is New York law to the effect that qualification is consent, recognized as well that law predates the decision of the US Supreme Court in Daimler AG v. Bauman, 571 U.S. 117 (2014). Looking at the question anew in light of the Supreme Court’'s guidance with respect to general jurisdiction, the court in Aybar v. Aybar, 2019 N.Y. Slip Op. 00412, 2019 WL 288307 (App. Div. 2nd Dept. Jan. 23, 2019) wrote:
We conclude that a corporate defendant's registration to do business in New York and designation of the Secretary of State to accept service of process in New York does not constitute consent by the corporation to submit to the general jurisdiction of New York for causes of action that are unrelated to the corporation’s affiliations with New York. 2019 WL 288307, * 8
      So there you have it. On essentially the exact same question, different courts are coming to diametrically opposed answers. At some juncture the US Supreme Court is going to need to step in and answer this question. At the same time, they are going to need to address statutes such as those of Pennsylvania which require a consent to jurisdiction in order to qualify.

Tuesday, January 29, 2019

Court Addresses Requirements for Showing a Commercially Reasonable Sale


Court Addresses Requirements for Showing a Commercially Reasonable Sale

      In a decision rendered last week, the federal district court denied summary judgment to a bank in connection with its claim that it had disposed of certain collateral, a houseboat, in a commercially reasonable manner. In doing so, the court identified certain requirements for a future similarly situated lender to satisfy the those requirements. Regions Bank v. Lenox, Civ. Act. No. 5:18-014-DCR, 2019 WL 320566 (E.D. Ky. Jan. 24, 2019).
      Regions Bank made a loan to Steven Lenox of $465,000 with which to buy a houseboat. Lenox defaulted on the loan, at which point the houseboat was repossessed. Later it sold at auction for $287,500. In a counterclaim that eventually became the only matter in dispute, Regions sought a deficiency judgment against Lenox in the amount of $140,682.32, that constituting the remaining balance on the loan, accrued but unpaid interest, late fees and repossession expenses.
      While Regions Bank sought summary judgment in opposition to the claim that the sale had not been commercially reasonable, the court found Regions had not made a sufficient demonstration to justify such a ruling. Rather:
Regions has failed to provide any specific information regarding reasonable commercial practices among dealers and houseboats, and whether it’s conduct conformed to those practices. It also has failed to provide any information regarding the reasonableness of its charges for storage, repossession, and an auction fee. …. and although the sale proceeds approach the low end of Marina Mile’s estimate, there is no evidence demonstrating how the estimate was calculated or whether it was reasonable.
Region’s motion for summary judgment will be denied because the Court cannot conclude that the sale of collateral conformed with reasonable commercial practices among houseboat dealers.
      The question will apparently now go to a jury to determine, as a matter of fact, whether the practices employed in selling the houseboat collateral were reasonable.

Monday, January 28, 2019

The Passing of Henry VIII


The Passing of Henry VIII


      Today is the anniversary of the death, in 1547, of King Henry VIII.  He was 56 years old and had reigned from the age of 18. By coincidence, today is as well the anniversary of the birthday of his father, King Henry VII.
 
      Although historians can and do dispute the issue, in many respects he was a lousy king.  On two occasions he sent England to war in France; in both instances the gains were minimal while the costs were huge.  He as well underwrote several campaigns, including those of Maxmillian, the Holy Roman Emperor, further depleting the quite healthy treasury left him by Henry VII (to suggest that Henry VII was in the later part of his reign, especially after the death of his wife, only miserly is to suggest to much frivolity).  Meanwhile, England’s greatest military victory during his reign, the Battle of Flodden Field, was won by Thomas Howard, then the Earl of Surrey, thereby earning him the return of Dukedom of Norfolk lost after his family fought for the wrong side (i.e., that of Richard III) at the Battle of Bosworth.  Henry VIII was not even in England when that victory was achieved.
 
      Henry fancied that at least northern Europe was a tri-part division of power between England, France and the Holy Roman Emperor.  While the Treaty of London, structured by Cardinal Wolsey, would reflect this division, the reflection was possible only because the Holy Roman Empire and France accommodated the fiction.  In fact  there were two great powers in Europe, France and the Holy Roman Empire, each tempered to a degree by the Papacy.  England, while economically important, was not a significant diplomatic power.
 
      Henry condemned Luther as a heretic in his Defense of the Seven Sacraments, earning him from the Papacy the title Defender of the Faith.  When, however, it became convenient to do so in order to achieve the desired annulment of his marriage to Catherine of Aragon, Henry separated the English Church from communion with Rome.  Unwilling to accept even silent dissent from his policies, he would procure the executions of numerous men of conscience including St. John Fisher and St. Thomas More.  Hungry for assets, in concert with Thomas Cromwell, he would destroy England’s monastic communities.
 
 
      While the now iconic portrait of Henry painted by Hans Holbein the Younger shows a man of dynamism and vigor (btw, what we have are copies; the original was lost when the Whitehall Palace burned), in many respects he was just not that great a king.

At the Risk of Repetition, Piercing the Veil is a Remedy


At the Risk of Repetition, Piercing the Veil is a Remedy

      Under Kentucky law, it applying the same rule that is applied largely throughout the country, piercing the veil is a remedy, and is not itself a cause of action. A recent decision from the US Court of Appeals for the Fourth Circuit applying Virginia law, held that to be the case. Bennett v. Garner, 2019 WL 209106 (4th Cir. Jan. 16, 2019).
      Bennett sued his former employer, Virtus Consulting, LLC, and its member, James Garner, in order to enforce a state law judgment. Most of the case would turn upon res judicata; in that context the timing and therefore the nature of a piercing claim were described. The court wrote:
With respect to Bennett’s alter-ego claim, we similarly conclude that the claim could not have been brought before the state court judgment was entered against Virtus. When an individual uses a corporate form to “disguise wrongs, obscure fraud, or concealed crime,” Virginia law permits a plaintiff to pierce the corporate veil and to impose liability directly on the individual as the “alter ego” of the corporation. However, before bringing an action to pierce the corporate veil, the plaintiff must “first obtain[] a judgment against the corporation.” (Slip op. at 11; citations omitted).
Thanks to Adam Back for the lead on this decision.

Friday, January 25, 2019

Dealing with Inconsistent Agreements


Dealing with Inconsistent Agreements

      In a recent decision from the Delaware Chancery Court, it was called upon to consider whether the words and the numerals describing what should be the same, were in fact inconsistent with one another. In this case, in several instances the agreement read “fifteen (30)”. The court needed to determine whether the written out “fifteen” or the numeric “30” would control. In this instance, the court determined that the written out term, rather than the numerals, would control Fetch Interactive Television, LLC v. Touchstream Technologies, Inc., No. 2017-0637-SG (Del. Ch. Jan. 2, 2019).
      While this dispute was not governed by the Uniform Commercial Code, the court’s decision was in part based upon Section 3-114 thereof, which provides “words prevail over numbers.” Finding that to be the rule under the UCC, the court carried this rule over to a more general contract analysis.
      This decision is discussed in Delaware Corporate & Commercial Litigation Blog in a January 21, 2019 posting Words Prevail Over Conflicting Numbers in Contract. HERE IS A LINK to that posting. It in turn links to commentary from Ken Adams, the author of A Manual of Style for Contract Drafting, where he cautions that this may not always be the best rule.

Friday, January 18, 2019

Is Qualification to Transact Business a Consent to General Jurisdiction?


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

Did the Sixth Circuit Misstep in a Diversity Analysis?


Did the Sixth Circuit Misstep in a Diversity Analysis?

      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

Elizabeth Regnum


Elizabeth Regnum

 

      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


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


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


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

Non-Equity Partner is Still a Partner For Purposes of Diversity Jurisdiction


Non-Equity Partner is Still a Partner For Purposes of Diversity Jurisdiction

      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 “partnerin 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.

      See also Rutledge, Unincorporated Business Organizations and Diversity Jurisdiction: Who Is a “Member”?, Business Law Today (February 12, 2019)., available at https://businesslawtoday.org/2019/02/unincorporated-business-organizations-diversity-jurisdiction-member/

Thursday, January 3, 2019

LLCs in the Law School Curriculum


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.