Oh What a Tangled Web We Weave When First We Practice To Deceive

Oh What a Tangled Web We Weave When First We Practice To Deceive

Franklin McRoberts, writing on Peter Mahler’s blog New York Business Divorce, has recently discussed a most interesting case of a man, now deceased, leading a double life. The title of the blog posting is How to Resolve Competing Estate Plans of an LLC Owner with a Double Life; HERE IS ALINK TO IT.

            Essentially, the decedent was originally a 50% member in an LLC. Over time he gifted certain interests in the LLC to his daughter; presumably she was admitted as a substitute member.  The operating agreement provided that upon his death the balance of his interests in the LLC would go to his daughter (a transfer upon death).  So far, so good.

            Not so fast.  After his death it came to be discovered that his will provided that his  remaining interests in the LLC would go not to his daughter, but rather to a life estate for his mistress with the remainder interest to his OTHER daughter by said mistress.  The dispute will turn on whether the operating agreement and its transfer on death provision to the first daughter or the subsequent will and the bequest to the second daughter will control. 

            If the second daughter prevails, I wonder what will be her treatment: member or assignee?

Even If That is the Law for Corporations (Which it is Not), That is not the Rule for LLCs

Even If That is the Law for Corporations (Which it is Not), That is not the Rule for LLCs

      A recent decision from the Ohio Court of Appeals may be cited for two important principles. First, even if the officers and directors of a corporation owe fiduciary duties to the corporation’s creditors, that rule does not apply in the case of LLCs and, second, in corporations, fiduciary duties are not owed to the creditors. Custom Associates, L. P. v. VSM Logistics, LLC, No. 2019-P-0104, 2020 Ohio 2994, 2020 WL 2521261 (Ohio Ct. App. 11^th Dist. May 18, 2020).

      VSM leased property from Custom Associates. When it fell behind on lease and utility payments, Custom Associates filed suit against VSM and then, in an amended complaint, added Maurice Vaughn and William Niegsch as defendants, asserting that they, the President/CEO and CFO of VSM, owed “a fiduciary duty to VSM and VSM’s creditors not to waste corporate assets which could otherwise be used to pay corporate debts.” They alleged as well that Vaughn and Niegsch violated this fiduciary duty “by transferring assets of VSM to other business entities and individuals who are not creditors of VSM … to the detriment of VSM, *** leaving VSM with insufficient funds to pay its creditors.” Vaughn and Niegsch filed a motion to dismiss on the basis that they were not parties to the lease contract with Custom Associates and that it lacked standing to assert a breach of fiduciary duty claim in that those duties do not run to creditors. The trial court dismissed of Vaughn and Niegsch from the suit. Conversely, VSM never answered, and a default judgment was entered against it. In this appeal, Custom Associates asserted that Vaughn and Niegsch should not have been dismissed (presumably, it was unable to collect its judgment against VSM).

     On appeal, the plaintiffs relied upon a series of decisions involving business corporations for the proposition that the officers and directors of an insolvent company owe a fiduciary duty to the creditors “not to waste corporate assets that could be used to pay those creditors.” It argued as well that those same principles should be applied in the context of LLCs. These arguments were rejected on a pair of bases.

     First, in reviewing the prior law on business corporations, it was held that it did not stand for a fiduciary duty owed to (and enforceable by) creditors of a corporation, even in insolvency.

      Second, in turning to the language of the LLC Act, it was held that the language employed creates duties to the LLC, but “does not codify a fiduciary duty of members or officers to creditors of the LLC.”

      On that basis, the order dismissing Vaughn and Niegsch pursuant to the motion to dismiss was affirmed.

Delaware Chancery Court Rejects Effort to Avoid Charging Order Based Upon Lease Covenants. But Should They Matter At All?

Delaware Chancery Court Rejects Effort to Avoid Charging Order Based Upon Lease Covenants. But Should They Matter At All?

      In a recent decision from the Delaware Chancery Court, there were considered and rejected defenses to the issuance of a charging order in favor of a judgment-creditor based upon certain lender covenants. Ultimately, they were found to not be violated. But the question still remains whether they need to be considered. GMF ELCM Fund L.P. v. ELCM HCRE GP, No. 2018-0840-SG, 2020 WL 2518000 (Del. Ch. May 18, 2020).

     Andrew White was the judgment-debtor in an amount exceeding $350,000. In the course of discovery, the plaintiffs identified two LLCs, EL FW Leasing LLC and EL FW Intermediary I LLC, both wholly-owned by White. In furtherance of collecting upon the judgment against White, a charging order was sought with respect to certain distributions made to White. White alleged that issuance of the charging order would cause the default of a Master Lease to which EL FW Intermediary I, LLC was a party, thereby jeopardizing the stream of payments against which the charging order was sought.  In response to that argument, the court ordered White to produce certain documents and allowed the parties to submit additional pleadings, all leading to this decision.

With respect to the argument that the charging order would constitute a prohibited lien, the Master Lease provided that the FW Intermediary LLC could not allow to be created a lien on the subject property. Holding that a charging order does not constitute a lien on the property of the LLC, that argument was rejected: “Because the charging order attaches to distributions from FW Intermediary to White, it is not a lien on ‘the Facilities and all rights related to the use and operation of the,’ Facilities or ‘rights to payment arising from the Facilities,’ which are rights that belong to FW Intermediary as the ‘Tenant.’ Therefore, a charging order on White’s interest in FW Intermediary would not constitute a prohibited lien under the Master Lease.” 

      Another event of default under the Master Lease was a change of control of the FW Intermediary LLC, being a “‘a transfer, assignment, or other event that results in [FW Intermediary] no longer being directly or indirectly controlled by Andrew White.’” In light of the fact that the Delaware LLC Act’s charging order provision expressly provides that a creditor holding a charging order shall not have the right to exercise legal or equitable remedies with respect to the LLC’s property, this argument was rejected: “In other words, the charging order would not affect White’s ability to control FW Intermediary, nor does it grant the plaintiffs any interest in FW Intermediary’s rights under the Master Lease. The charging order gives ‘only the right to receive any distribution’ that would otherwise go to White.”

      But should it matter what the contracts provided? The charging order exists to balance the asset partitioning function of a business entity against the rights of a judgment-creditor to collect on a judgment (sorry, the charging order is not part of the pick-your-partner analysis). Assume that “change in control” had been defined as including the entry of a charging order against White’s distributional interest in the LLC. We can even go so far as to assume that White might request that in order to, in effect, shield his distributional rights from the LLC from creditors and in so doing significantly increase the cost of collection.  The opportunities for abusive asset protection are all too obvious.

Florida Court Ruling Ordering Shareholder to Execute Loan Documents, Including Personal Guarantee, Set Aside

Florida Court Ruling Ordering Shareholder to Execute Loan Documents, Including Personal Guarantee, Set Aside

      In a decision rendered June 17, the District Court of Appeals in Florida set aside a trial court order that a 50% shareholder in a corporation execute, on the corporation’s behalf, certain loan documents, including a personal guarantee of the created indebtedness. Lugassy v. Lugassy, 2020 WL 3261409 (Fla. Dist. Ct. App. June 17, 2020).

      Shay and Yuval Lugassy were each 50% shareholders in Legaci, Inc. The two had had disagreements with respect to the corporation’s operations. In this particular instance, one of the brothers (neither is identified by name in the body of the opinion) had filed a complaint for the corporation’s dissolution on the basis of deadlock. That same brother wanted the corporation to undertake a loan. The other brother was opposed to the loan. The trial court had ordered the brother against the loan to sign the documents, one of which was a personal guarantee of the loan. It was that order that was appealed to this court. 

      Resoundingly, the order that the one brother execute the loan documents was reversed. Reciting language with respect to the nature of a contract being a voluntary undertaking, the court as well cited language as to the freedom to not enter into contracts. Further, the court found that the personal liability was not something that could be imposed as the circuit court ordering the documents to be executed and delivered did not have jurisdiction over the lender, so it would not be able to afford a remedy to the brother who resisted delivering the documents to begin with.

Ohio Decision Reminds Us of the Necessity of Careful Compliance with the Statute for Those Seeking to Become Members

Ohio Decision Reminds Us of the Necessity of Careful Compliance with the Statute for Those Seeking to Become Members

In a recent decision from Ohio, the court considered and rejected the argument that the plaintiff became a member in an existing LLC. In this instance, the statute required (and the operating agreement did not change the rule) that the admission of a new member be in a writing writing signed by all of the incumbent members and that detailed the members’ share of the LLC’s profit and losses they are to receive. Both were in this instance lacking. Boyles v. Kanz, 2020-Ohio-1222, 2020 WL 1526445 (Ohio Ct. App. Fifth Dist. March 23, 2020).

Kanz and Thompson owned and operated a limited liability company, Valley Masonry. It was alleged that they solicited the plaintiff, Boyles, to join that LLC. In furtherance thereof, they changed the name of the LLC from “Atlas TK Masonry, LLC” to “Atlas TKB Masonry, LLC.” When the relationship ultimately soured and Kanz and Thompson moved to squeeze Boyles out of the company, he alleged that in fact he was a one-third member therein. However, no new operating agreement had ever been signed reflecting Boyles as a member. Boyles alleged that are being forced out was a breach of fiduciary duties owed him by the other members. The trial court found that Boyles was never a one-third member in the LLC, leading to this appeal.

Applying the Ohio LLC Act and specifically section 1705.14 thereof, the court noted that the admission of a new member to an LLC requires the consent of all the members. It was noted as well that a “member” is defined in the Ohio LLC Act as “a person whose name appears on the records of the limited liability company as the owner of a membership interest in that company” and that “membership interest” is defined as “a member’s share of the profits and losses of the limited liability company and the right to receive distributions from that company. Ohio Code § 1705.01(G), (H).

Reviewing the voluminous records tendered, the trial court was unable to find, and the Court of Appeals was not going to reverse its determination as to those matters, either a written consent of Thompson and Kanz for the admission of Boyles as a member or any writing assigning to Boyles a membership interest detailing his allocation of company profits and losses.

Failing to carry his burden of proof that the statutory requirements for admission as a member were satisfied, Boyles’ complaint was dismissed.

No less so than in acquiring a membership interest from an already existing member, a person buying into an existing LLC needs to apply the rule of caveat emptor. This is not a transaction to be undertaken without legal counsel unless you are willing to entirely walk away from the anticipated investment. The first document that needs to be requested is a copy of the existing operating agreement. Money should not change hands until there is a written of admission agreement, either as a freestanding document or within the operating agreement, and amended operating agreement reflecting the new member’s admission as a member and their sharing ratios with respect to the various tax items and distributions, in the written consents of the other members at whatever threshold is defined by the statute or the operating agreement for admission. Failure to engage in these steps may result in a situation not unlike that of Boyles, believing you are a member when in fact you are not.

Returning to the Theme: The Personal Representative of a Deceased Member May Not Bring Action for Dissolution

Returning to the Theme: The Personal Representative of a Deceased Member
May Not Bring Action for Dissolution

In a recent decision by the Nebraska Supreme Court, it considered and rejected the suggestion that the personal representative of the estate of a deceased member could, with respect to the LLC, bring an action for, among other things, dissolution of the LLC. Benjamin v. Bierman, 305 Neb. 879, 943 N.W.2d 283 (2020). 

Mark Benjamin, deceased (“Mark”), was a 50% member in Sixth Street Rentals, L.L.C. (“Rentals”) with Douglas S. Bierman (“Doug”) and a 33.33% member in Sixth Street Development, L.L.C. (“Development”) along with Doug and Eugene J. Bierman (“Eugene”). Brenda, Mark’s widow and personal representative, brought suit against the LLCs and the other members for accountings, to dissolve both Rentals and Development, and damages. Negotiations as to the purchase of the estate’s interests in Rentals and Development proceeded through agreement on purchase price (determined by third-party appraisal), but then the buyers would not close. “The district court found that appellees breached the operating agreements of Rentals and Development, ordered an accounting for each, declined to dissolve either, and awarded Brenda damages of $22,200 with respect to Rentals and $473,233 with respect to Development.”

      In affirming the determination that Brenda, as Mark’s personal representative, lacked standing to bring an action for the dissolution of the LLCs, wrote:

Both Rentals and Development are limited liability corporations {sic – companies}, governed by the Nebraska Uniform Limited Liability Company Act. Under that act, a member is defined as “a person that has become a member of a limited liability company under section 21-130 and has not dissociated under section 21-145.” Neb. Rev. Stat. § 21-145 (Reissue 2012) provides that a person is “dissociated as a member from a limited liability company” upon the death of that person. Thus, upon Mark’s death, he was dissociated and was no longer a member per the definition of the term under the act.

Dissociated members' “right to participate as a member in the management and conduct of the company’s activities terminates,” and thereafter, a dissociated member has limited rights. In the instance presented here, the death of a member, “the deceased member’s personal representative or other legal representative may exercise the rights of a transferee provided in subsection (c) of section 21-141 and, for the purposes of settling the estate, the rights of a current member under section 21-139.” These rights are limited and primarily consist of the right to have access to records or other information concerning the company’s activities.

Brenda has alleged that dissolution is proper under § 21-147(a)(4)(B) and (a)(5)(B). Both of those subsections require an application to be made by a member, but Mark ceased to be a member upon his death. By virtue of this dissociation, Brenda is also not a member. As such, she cannot seek dissolution under the plain language of the act.

Nor are we persuaded by Brenda’s contention that article IX, section 2, of the operating agreement granted Mark the power to transfer governance power, along with his economic interest, in Rentals and Development. That section provides:

Any Member may transfer by gift or bequest all or any portion of his or her interest in the Company to a spouse or child of the transferring Member, or to a trust established for the benefit of such spouse or child, or to an existing Member of the Company upon written notice to the Company, of such gift or bequest.

We read the plain language of this section of the agreements as permitting the transfer of some or all of a member’s or dissociated member’s interest in a limited liability company by gift or bequest. Indeed, under Neb. Rev. Stat. §§ 21-140 and 21-141 (Reissue 2012) of the act, an interest in a limited liability company is personal property that is transferable. But any interest that is transferred is accompanied by limited rights, as discussed above. We do not read the language of the operating agreements as broadening the rights accompanying the interest to include governance power or, indeed, any other power beyond that permitted by the act.

We agree with appellees that Brenda lacks standing to seek dissolution, and therefore, we find no merit to her assignment of error on appeal.

      The court went on to affirm a determination that the defendants were liable for breach of contract, namely the failure to close on the repurchase, in accordance with the terms of the operating agreements, of Mark’s interests in Rentals and Development.

The Battle of Chalons

The Battle of Chalons

      Today marks the anniversary of the Battle of Chalons in 451, between the Huns under the command of Attila versus the combined forces of the Roman Empire and the Visigothic Empire, it under the command of its King, Theodoric I.  The western forces were under the command of magister militum Flavius Aetius. 

      While Theodoric would himself fall in battle, the western forces were successful in defeating the Huns, forcing them to retreat from their efforts to expand their empire to include the former Roman province (portions of it had already withdrawn from it) of Gaul.

      The hero of the day was clearly Falvius Aetius.  He had been appointed magister militum (essentially “supreme commander” of all Roman military forces) by Valentinian III, a particularly weak (and in this era that is saying something) emperor.  While Boethius is oft identified as the last gasp of the Roman Empire’s (or at least its western components’) intellectual life, Flavius Aetius can equally be described as the last of the great western Roman generals. 

      Only three years after Chalons in September, 454, Aetius was assassinated by Valentinian.  Within the year, Valentinian would in turn be assassinated by friends of Aetius while Valentinian’s guard watched; the members of the guard had been followers of Aetius.

Latest on Paycheck Protection Program (Except for the Stuff That Came Out While I Was Writing This Report)

Latest on Paycheck Protection Program (Except for the Stuff That Came Out

While I Was Writing This Report)

Earlier this week, as an SKO Insider, I published a review of the more recent developments in the Paycheck Protection Program.  Well, almost. Literally as I was finishing the piece the update loan forgiveness applications were released.  I’ll be reviewing them in a forthcoming piece.

In the meantime, HERE IS A LINK to that most recent review.

A Rose by Any Other Name: Using Tradename in Clean Air Act Citation Is Just as Good as Real Name of LLC

A Rose by Any Other Name: Using Tradename in Clean Air Act Citation
Is Just as Good as Real Name of LLC

      In a recent decision from Washington state, there was considered and rejected the suggestion that a citation for violation of the clean air act was deficient because it was issued in the LLC’s tradename, rather than its real name.  Annette Holding LLC d/b/a Super Duper Foods v. Northwest Clean Air Agency, 2020 WL 2731097 (Wash. Ct. App. May 26, 2020).

      In this case the notice of violation of the Clean Air Act was issued in the name of “Super Duper Foods”, that being the assumed name of “Annette Holding, LLC.” It was asserted that the citation was invalid for the use of the assumed, and not the real, name of the LLC. Rejecting that analysis, the court wrote: 

 In Washington State, a “person” may use an assumed name for a business. RCW 19.80.010. RCW 19.80.005(3) defines a “person” under RCW 19.80 to include a “limited liability company.” In Washington, a limited liability company, such as Annette Holding, must register its trade name and include the true name of the company as filed with the secretary of state before the “person ... carries on, conducts, or transacts business in this state under any trade name.” RCW 19.80.010. A trade name by definition is used by the entity “to identify the person’s business.” RCW 19.80.005.

     Nothing in the statutory language governing trade names suggests that the person registering the name is separate from its tradename. The Washington Supreme Court early proclaimed:

The general rule of law seems to be that a corporation may contract and do business in an assumed name, as well as can an individual, and be bound thereby in its corporate capacity.

Brotherhood State Bank of Spokane v. Chapman, 145 Wash. 214, 219, 259 P. 391 (1927).

     Foreign courts confirm that a person or entity is not separate from its trade name. A fictitious business name does not create a separate legal entity, rather the law deems the two identical. Pinkerton’s, Inc. v. Superior Court, 49 Cal. App. 4th 1342, 1348, 57 Cal. Rptr. 2d 356 (1996); Southern Insurance Company v. Consumer Insurance Agency, Inc., 442 F. Supp. 30, 31 (E.D. La. 1977); American Express Travel Related Services Company v. Beryle, 202 Ga. App. 358, 360, 414 S.E.2d 499 (1991); Wood v. Manufacturing Co v. Schultz, 613 F. Supp. 878, 884 n.7 (W.D. Ark. 1985); Krawfish Kitchen Restaurant, Inc. v. Ardoin, 396 So. 2d 990, 993 (La. Ct. App. 1981).

Repeat After Me: There Are No Monsters Under the Bed, and There Is No Such Thing as a Limited Liability “Corporation”

Repeat After Me:  There Are No Monsters Under the Bed, and There Is No Such Thing as a Limited Liability “Corporation”

It remains distressing how often courts, in writing decisions about “limited liability companies,” recite that the party is a “limited liability corporation.” Recently that term found its way into a decision of the Nebraska Supreme Court even as the same sentence referred to the “the Nebraska Uniform Limited Liability Company Act.” Benjamin v. Bierman, 305 Neb. 879, 885, 943 N.W.2d 283 (May 22, 2020).

But do not go thinking this was an aberrational error. Rather it happens all the time and across the country. A quick search on Google Scholar found ten decisions addressing “limited liability corporations” in just the last three weeks:

United States v. Tartaglione

Court of Appeals, 3rd Circuit, 2020 

Instead, as she asserts, those funds passed directly from the Clinic to third-party contractors for improvements to a building that Tartaglione owned through a limited liability corporation. But the District Court did not commit any error, much less plain error, in its forfeiture …

USCHOLD v. NSMG Shared Services, LLC

Dist. Court, ND California, 2020 

The Parties. Defendant NSMG is a limited liability corporation organized under Delaware law; the company maintains its principal place of business in Houston Texas.

Guevara v. Constar Financial Services, LLC

Dist. Court, MD Pennsylvania, 2020 

Plaintiff is a "natural person who was obligated to pay a debt to Hyundai Motor Finance" ("Hyundai"). Defendant is a limited liability corporation and a debt collector

In the Matter of the Marriage of  Miller v. Miller

Wash: Court of Appeals, 1st Div., 2020 

It also determined three of four businesses controlled by Zachary—a real estate limited liability corporation and two gyms—were community property, awarded them to him, and offset the award with a $38,000 payment to Madalyn …

City of Vista v.Telekom Transportation, LLC

Dist. Court, SD California, 2020 

CITY OF CITY OF VISTA, a California Municipality, Plaintiff, v. TELEKOM

TRANSPORTATION, LLC, a California Limited Liability Corporation

In re MDL 2700 Genentech Herceptin (Trastuzumab) Marketing and Sales Practice Litigation
Court of Appeals, 10th Circuit, 2020 

OF CENTRAL NEW YORK, PC, a New York Professional Corporation; VIRGINIA

CANCER INSTITUTE, a Virginia Commonwealth Professional Corporation; TENNESSEE

ONCOLOGY, PLLC, a Tennessee Professional Limited Liability Corporation

AM v. MME LLC

2020 NY Slip Op 31664 - NY: Supreme Court, 2020 

A conference is not required for the Court to issue the instant Decision and Order. Here, AP Marketing contends it is a foreign limited liability corporation subject to the service requirements of LLCL § 304. It further … 

Douglas Co. v. My Brittany’s LLC

2020 DNH 89 - Dist. Court, D. New Hampshire, 2020

My Brittany's is a limited liability corporation organized under the laws of Michigan,

with a principal place of business in Wixom, Michigan … [2] “DollsHobbiesNMore” is a “dba” ofSultana Enterprises, LLC, a Michigan limited liability corporation. Neither is a named defendant

Russell v. South Shore Indus. Ltd. 

2020 NY Slip Op 31600 - NY: Supreme Court, 2020

Defendant Wal-Mart Stores East, Inc. has not existed since 2011 and was converted to Wal-Mart Stores East, LLC, which is a foreign (Delaware) limited liability corporation with its principal place of business in Bentonville, Arkansas.

Ozone Int’l LLC v. Wheatsheaf Group US, INC.

Dist. Court, WD Washington, 2020 

(“WGUS”), a Delaware corporation with a principal place of business in Minnesota, and Wheatsheaf Group US Food Safety LLC d/b/a TriStrata (“TriStrata”), a Delaware limited liability corporation based in Washington. 

      Okay, maybe there are monsters under some beds; on that I cannot be sure.  But I am sure that there is no such thing as a “limited liability corporation,” and they should not be appearing in court decisions.  More so, I would not be surprised if the genesis of the error is in the pleadings filed by counsel who use the term.  

Always Check Provenance Before Taking an Assignment of LLC Interest

Always Check Provenance Before Taking an Assignment of LLC Interest

       Peter Mahler, in his blog New York Business Divorce, on March 2 posted an interesting article under the title Always Check Provenance Before Taking an Assignment of LLC Interest; HERE IS A LINK to that posting.

      Therein, he reviewed the decision rendered in Behrend v. New Windsor Group, LLC,180 A.D.3d 636, 118 N.Y.S.3d 709 (N.Y. App. Div. 2020).  Essentially, an assignee claimed that they owned a 50% interest in an LLC that owned a shopping center. It turned out, however, that the alleged assignor did not own a 50% membership interest, but rather held a contingent interest, the terms of which were never satisfied. As such, the purported assignor did not own the membership interest, and as such could not transfer it. 

      Peter’s advice, which I would second, is that anyone seeking to take an assignment of an LLC interest needs to adopt an attitude of “buyer beware” and undertake the often significant due diligence that is necessary to confirm they are buying what they really think they are buying.

The Mythology of Magna Carta

The Mythology of Magna Carta

      In 2015 there were held a series of events commemorating the 800th anniversary of the Magna Carta, the “Great Charter” imposed on “Bad” King John in 1215; that makes today the 805^th anniversary (yeah, that just does not sound as good) of its signing.  It’s a myth.

      June 15 is celebrated for the signing of Magna Carta by King John and his leading nobles, all at Runnymede.  From there the foundation of Magna Carta is espoused as a foundational document in the development of the rule of law.  The only problem is that the Magna Carta of June, 1215 was a dead letter.  John repudiated the charter, and that repudiation was affirmed by Pope Innocent III.

      John's after-the-fact rejection of Magna Carta precipitated the First Barons War, a contest in which a group of disaffected nobles actually aligned themselves with the King of France and which saw a French army, headed by the King’s son, have great success.  In fact the foreign army took Winchester, which had been England’s capital. Had history turned out only slightly differently, the Angevin house of England could have been replaced by the French royal house, thereby uniting England and France under a single crown.  That, of course, was the ultimate aim of the English in the Hundred Years War in the 14th and 15th centuries, but that is a different story.  Still, the First Barons War was a close call, and John could easily have lost.  King John would die in October, 1216, the Crown being inherited by his nine year old son Henry III.  As part of the effort to bring the First Barons War to a conclusion, William Marshal, the prototypical knight of the period and the Regent of Henry III, caused there to be issued a shorter version of Magna Carta. This effort was not entirely successful, but the shorter version was ultimately incorporated into the settlement the brought about the resolution of the First Barons War.

      Henry III would again issue Magna Carta during his reign as a trade-off for new taxes, and his son Edward I would as well issue Magna Carta in his own name.  Subsequent monarchs would do the same through the 14th century.

      That said, none of the issuances of Magna Carta, irrespective of a specific content, had the same theatrical flair as the June 15, 1215 signing at Runnymede.  For that reason, it remains the event to which everybody refers.

      But it did not bring Magna Carta into law. 

      In other anniversaries, today is without question the date of issuance, in 1520, of the bull Exsurge Domine by Pope Leo X.  Addressed to formerly obscure theology professor Martin Luther, it threatened excommunication if Luther did not recant certain heretical views. He did not do so, and the threatened excommunication was carried out in January 1520. 

Whereas the 1215 Magna Carta never had legal effect, Exsurge Domine did and does.

Boilerplate Matters: The Anti-Reliance Clause

Boilerplate Matters: The Anti-Reliance Clause

      All too often the “boilerplate” section of the contract is ignored. This lack of scrutiny is ill-advised as the language therein can have a material impact upon a decision, as exemplified in a recent ruling from Delaware.

     Mid-Cap Funding X Trust v. Graebel Companies, Inc., C.A. No. 2018-0312-MTZ (Del. Ch. April 30, 2020) involved the interpretation of a settlement agreement and the after-the-fact discovery by the plaintiffs that the defendant's representations made in the course of the settlement negotiations were incorrect. On that basis, the plaintiffs brought a complaint alleging fraudulent concealment, breach of the implied covenant of good faith and fair dealing, mistake and unjust enrichment. Those claims were rejected on a motion to dismiss because the Settlement Agreement contained both anti-reliance and integration clauses. As to the former, the Settlement Agreement stated that each party thereto do “is not entering into this Agreement in reliance upon any representations, promises or assurances other than those expressly set forth in this Agreement.” As for the integration (sometimes referred to as the merger) clause, the Agreement provided that it “supersedes any prior contracts, understandings, discussions, and agreements among the parties.” For that reason, the court dismissed the assertions, holding that any negotiations leading to the settlement agreement were “outside the four corners of the Settlement Agreements” and could not be considered.

Death is Fatal to Limited Partner’s Derivative Action

Death is Fatal to Limited Partner’s Derivative Action

            Barring the narrowest of exceptions, a derivative action may be brought only by a shareholder, a limited partner or a member.  A non-shareholder does not have the right to on behalf of a corporation bring a derivative action, a non-limited partner does not have the right to on behalf of a limited partnership bring a derivative action, and a non-member does not have the right to on behalf of an LLC bring a derivative action.  A recent decision from New York applied these rules in the context of a limited partnership to hold the estate of a limited partner may not continue to prosecute a derivative action filed before death.  Weinstein v. RAS Prop. Mgmt. LLC, 67 Misc. 3d 240, 119 N.Y.S.3d 49 (N.Y. Sup. Ct. 2020).

The introductory paragraph of the opinion gave away the punch line:

The critical issue is whether a personal representative of an estate has standing to maintain a derivative lawsuit on behalf of a New York limited partnership that was commenced when the decedent was alive and was a partner. Because the court holds that a personal representative cannot, the motion for substitution must be denied.

The limited partnership at issue, Ninety-Five Madison Company LP, owned a sixteen-story in Manhattan.  Lois Weinstein was a limited partner in the partnership.  She had filed a derivative action seeking judicial dissolution, the appointment of a receiver, and sale of the building. After her death the executors of her estate sought to be substituted in the derivative action so that they could continue to prosecute the derivative action.  Here they would run into the terms of the limited partnership agreement.

To wit, Section 8.2 of the Partnership Agreement provides that the death of a limited partner “shall not terminate or dissolve the Partnership,” and that upon the death of such partner:

the executor, administrator, guardian, committee, trustee or other legal representative or successor in interest of such Partner shall have the rights of such Partner subject to the provisions of this Agreement. Such successor in interest shall not become a Substitute Partner except upon compliance with the provisions of Sections 8.3 and 8.4 hereof.

67 Misc. 3rd at 242 (emphasis by the court). The court went on to explain the distinction as to the rule in corporations, in which the heir is a shareholder and having received the shares by operating of law and as such may prosecute a derivative action pending at the time of death. Here, where the executors are not limited partners in place of the decedent without a separate admission, and that had not taken place, they lacked standing to continue the derivative action.

Postscript:

         I’ve been reminded that Peter Mahler, in his blog New York Business Divorce, prepared a review of this decision.  HERE IS A LINK to that review.  Peter raised the issue of whether the suit was properly characterized as derivative or direct, but observing as well that likely it does not matter.

        I agree with Peter that it probably does not matter whether the suit was a direct or a derivative action. If it was a derivative action, the decedent’s estate is not a limited partner (or in the case of an LLC a member) with the status required in order to prosecute the derivative action.  alternatively, if it is a direct action for breach of/seeking recovery for breach of the agreement of Limited Partnership, the decedent’s estate runs headlong into the privity problem; you cannot sue for breach of an agreement to which you are not a party.  While some might assert that the estate of a decedent is an intended third-party beneficiary of the agreement of Limited Partnership who should be able to continue the action for breach/recovery, that characterization is belied by the limited partnership act (and almost every limited partnership agreement) when it is provided that the estate is not substituted as a limited partner, but rather is a mere assignee absent admission, and the rights of a mere assignee preclude participation in management of the venture.

       In a postscript to Peter’s posting, Stuart Pachman pointed out the Louisiana decision Schauf v Schauf in which the court allowed the estate of a deceased member to continue to prosecute an action for judicial dissolution. HERE IS MY REVIEW of that decision.  I continue to be of the view that the Schauf decision is at best an outlier that is substantively in conflict with the proper treatment of an estate as a mere assignee.

But Did They Really Withdraw?: Donnelly v. McNelis

But Did They Really Withdraw?:  Donnelly v. McNelis

In a recent decision from Maryland, the Court of Special Appeals reviewed the effect of an involuntary withdrawal from an LLC, holding that where the LLC did not exercise a call right to redeem the interests of the involuntarily withdrawn member that they were mere assignees with no voting or other rights to participate in the LLC’s management.  Which is all well and good.  It is not clear, however, that the members actually effected an involuntary withdrawal. Donnelly v. McNelis, No. 2347, Sept. Term, 2018, 2020 WL 1814777 (Md. Ct. Spec. App. Apr. 9, 2020).

Solomons II, LLC was owned by V. Charles Donnelly (“Donnelly”), and Deborah Steffen (“Steffen”), Christine McNelis (“McNelis”) and Catherine Erickson-File (“Erickson-File”).  The LLC’s “Amended Operating Agreement, which was drafted by Donnelly, listed the membership interests as follows: Donnelly (1%); Steffen (49%); McNelis and Erickson-File jointly (50%).”  Slip op at 2. Donnelly and Steffen formed on 50% faction in the LLC while McNelis and Erickson-File formed the other 50% block. Donnelly and Stefen purported to assign to Donnelly certain commercial pier rights related to the LLC’s property.  That property has been purchased pursuant to a note on which McNelis and Erickson-File were making payments even as Donnelly and Steffen had failed to do so – the opinion is silent as to member obligations to contribute to meet LLC obligations.  Donnelly and Stefen did not disclose to McNelis and Erickson-File that the assignment had been given or that it had been recorded.  Regardless, when the assignment of the pier rights was discovered, litigation ensued.  An aspect of that litigation was that Donnelly and Steffen filed a “Petition for Dissolution, Accounting, and Appointment of Receiver against Solomons II.” Slip op. at 5.  McNelis and Erickson-File brought a declaratory rights action seeking relief including a declaration that the assignment was invalid.  Further, “McNelis and Erickson-File additionally requested that the court declare that Donnelly and Steffen had involuntarily withdrawn from Solomons II and lost their voting rights.”  Slip op. at 6.  The trial court held that Donnelly and Stefen had involuntarily withdrawn from the LLC, but that they had not lost their voting rights therein.  Slip op. at 18. The determination that they had not lost their voting rights was reversed on appeal.

The decision of the Court of Special Appeals recites that:

Section 1 of the Operating Agreement defines “Involuntary Withdrawal” to include the occurrence of the filing of a petition seeking dissolution or seeking the appointment of a receiver.  Donnelly and Steffen filed for both, and therefore, had clearly involuntarily withdrawn from Solomons II.  Slip op. at 18.

***

The remaining question is the status of Donnelly and Steffen’s rights in Solomons II.  The Operating Agreement is silent regarding this issue, and therefore, we look to CA §§ 4A-606-606.1 for guidance on this issue.  Pursuant to CA § 4A-606, a person ceases to be a member of a limited liability company if removed as a member in accordance with the operating agreement, “[f]iles a petition or answer seeking for that person any reorganization, arrangement, composition, readjustment, liquidation, dissolution,” or “[s]eeks, consents to, or acquiesces in the appointment of a trustee for, receiver for, or liquidation of the member or of all or any substantial part of the person's properties.”  Donnelly and Steffen ceased to be members when they involuntarily withdrew from Solomons II. Slip op. at 19.

What is important about the first of these sentences is that it does not address whose dissolution, that of the LLC or that of the member.  The third sentence of the second paragraph does answer that question, restricting its application to dissolution “for that person.”   Except here the court said “if a member seeks the LLC’s dissolution, the member in so doing is treated as having moved for the member’s dissolution and in consequence ceases to be a member.

And that is inconsistent with any number of decisions on similar statutes. There have been a series of cases in which it was asserted that the action of seeking the LLC’s dissolution has the effect of depriving the moving member of the status to do so because that action effects the moving member’s dissociation.  A long series of decisions make it clear that this is an incorrect reading of the statute, its focus being upon the moving member and not the subject LLC. See, e.g., Darwin Limes, LLC v. Limes, No. WD-06-049, 2007-Ohio-2261, 2007 WL 1378357, * 5-6 (Ohio Ct. App. 6th Dist May 11, 2007) (applying an Ohio statute providing for withdrawal when a member “files a petition or answer in any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief proceeding under any law or rule that seeks for himself any of those types of relief” and finding withdrawal did not occur when an LLC member petitioned to dissolve the LLC); Sayers v. Artistic Kitchen Design, 633 S.E. 2d 619 (Ga. App. 2006); Nicolazzi v. Bone, ___ S.W.3d ___, 2019 WL 5700365, *4 (Mo. Ct. App. Eastern Dist. November 5, 2019) (holding that the provision addresses the member, and not the LLC, a determination that is consistent with the decisions of a number of other jurisdictions; “Our exhaustive multi-jurisdictional review demonstrates that courts interpreting statutes with nearly identical language have rejected the argument that a person’s membership automatically is relinquished when the individual member seeks reorganization or dissolution of the LLC rather than for itself.”); Oliver v. Johanson, 329 F.Supp.3d 684, 689-91 (W.D. Ark. 2018) (applying an Arkansas statute providing for withdrawal when a member “files a petition or answer seeking for the member any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation” and finding withdrawal did not occur when an LLC member petitioned to dissolve the LLC); Crumpton v. Vick’s Mobile Homes, LLC, 779 S.E.2d 136, 137-39 (Ga. Ct. App. 2015) (applying a Georgia statute providing for withdrawal when a person “files a petition or answer seeking for the member any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief” and finding withdrawal did not occur when an LLC member petitioned to dissolve the LLC or otherwise pursue equitable relief or an accounting); Crouse v. Mineo, 658 S.E.2d 33, 38-39 (N.C. Ct. App. 2008) (applying a North Carolina statute providing for withdrawal when a person “[f]il[es] a petition or answer seeking for him any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief” and finding withdrawal did not occur when an LLC member petitioned to dissolve the LLC.).

            It is not clear that either Donnelly or Steffen ever did anything that of itself constitutes an involuntary withdrawal from the LLC.

Paycheck Protection Program Lawsuits

Paycheck Protection Program Lawsuits

With my law partner Lea Goff, I have written a review of some of the lawsuits that have  been filed in connection with the paycheck protection Program.  I hope you find it of interest.

HERE IS A LINK to that article.

The Passing of Sophia of Hanover and the British Throne

The Passing of Sophia of Hanover and the British Throne

      Today is the anniversary of the death, in 1714, of Sophia of Hanover, sometimes referred to as Sophia of the Palatinate. Probably you have never heard of her. She is, however, the reason the current British royal family is what it is. 

      In the late 18th century, the succession to the British throne was in controversy. The direct lines were childless. The most adjacent lines were Catholic, and the political decision had been made that only a Protestant could sit on the throne. Under “An Act for the Further Limitation of the Crown and Better Securing the Rights and Liberties of the Subject ,” better known as the “Act of Settlement of 1701,”  the line of succession was placed upon a cadet line of descendents of James I, they being a Protestant. James I, the first Stuart on the British throne, was the son of Mary Queen of Scots, she being the daughter of Mary of Guise and James V of Scotland.  In turn, James V was the son of Scotland’s James IV and Margaret Tudor, she being the daughter of Henry VII (and the sister of Henry VIII).

         The Act of Settlement declared in part that: 

Therefore for a further Provision of the Succession of the Crown in the Protestant Line We Your Majesties most dutifull and Loyall Subjects the Lords Spirituall and Temporall and Commons in this present Parliament assembled do beseech Your Majesty that it may be enacted and declared and be it enacted and declared by the Kings most Excellent Majesty by and with the Advice and Consent of the Lords Spirituall and Temporall and Commons in this present Parliament assembled and by the Authority of the same That the most Excellent Princess Sophia Electress and Dutchess Dowager of Hannover Daughter of the most Excellent Princess Elizabeth late Queen of Bohemia Daughter of our late Sovereign Lord King James the First of happy Memory be and is hereby declared to be the next in Succession in the Protestant Line to the Imperiall Crown and Dignity of the forsaid Realms of England France and Ireland with the Dominions and Territories thereunto belonging after His Majesty and the Princess Anne of Denmark and in Default of Issue of the said Princess Anne and of His Majesty respectively.(12  and 13 Will 3 C. 2). 

      Sophia would die two months too soon to ever become the queen of England. Rather, the crown would be placed on the head of her son, George I, the first of the house of Hanover to sit on the English throne. It is from Sophia of Hanover that the current British royal claim succession to that throne.

The Raid on Lindisfarne and Bookends to the “Viking Invasions” of England

The Raid on Lindisfarne and Bookends to the “Viking Invasions” of England

From the mid-fifth century and for the two centuries that followed, the Anglo-Saxon “invasion” of England took place. The characterization as an “invasion” is rather questionable; typically “invaders” do not bring their families and children on the “invasion” with the intention of becoming permanent residents. Regardless, the “invasion” or the “migration” certainly took place, and the evidence thereof is retained in various place names throughout England. For example, Sussex was the land of the South Saxons just as Wessex was the land of the West Saxons. Over time, the culture of much of England became a melding of that of the original inhabitants, the Romans who occupied Britain for centuries and the Germanic roots of the Anglo-Saxons (and let’s not forget that as well the Jutes).

Today marks the anniversary of the Viking raid on the Abbey of Lindisfarne in 793 in Northumbria, signaling the beginning of the Scandinavian/Viking invasions (and ultimate domination) of England.  Lindisfarne was an important ecclesiastical site founded in the 630s.  While this was not the first time the “Vikings” had raided England, the destruction suffered by the Abbey is used as the beginning date of the Viking Age.  The Abbey would survive the raid, but by the time of the Dane Law was abandoned, the monks had moved to Durham.  The monastery was reestablished in 1093 and flourished until the Dissolution of the Monasteries under Henry VIII. Over the next hundred years after the Lindisfarne Raid England would be invaded, from various directions and at various points, from the territories we today refer to as Norway, Sweden and Denmark.

A word on “Vikings” is in order.  It is not a reference to a people.  The Vikings would originate from what are today Denmark, Norway and Sweden.  Like almost all people of the era, they were farmers, hunters and fishermen.  They lived under a variety of petty kings and lords tied together by any number of different allegiances even as they engaged in raiding and warring against one another.  From the late 8th Century, utilizing newly developed ship technology, these peoples began to raid outward.  Hence the raids upon England and later into Northern Europe.  The “Vikings” were the men (whether women participated as “shield maidens” remains in dispute) who went on the raids.  Hence, Viking is a job description.

Ultimately, most of England would come to be in various ways ruled by various Scandinavian kingdoms, culminating with Canute the Great (a/k/a Cnut, Knut) who would rule at an empire around the North Sea comprised of England, Denmark, Norway and portions of what is today Sweden. Again, the process that led to Canute’s kingship of England can be traced to that first Viking raid on Lindisfarne.

The second bookend happened this day in 1042 when Harthacnut, grandson of Canute the Great (a/k/a Cnut) and the King of England, died after a bout of drinking (there is an alternative theory that he was poisoned). With him ended the reign of the kings who are more closely associated with the Scandinavian kingdoms than the traditional Anglo-Saxon population. Harthacnut would be succeeded by Edward the Confessor, who while distantly related to Canute was clearly Anglo-Saxon.  Edward’s death in 1066 would lead to turmoil over the succession, leading ultimately to the victory of William the Bastard at the Battle of Hastings (whereupon he became William the Conqueror).

Hence, so it began, and so it ended, on June 8.

New Liberalized Rules for Paycheck Protection Plan Loans (Maybe)

New Liberalized Rules for Paycheck Protection Plan Loans (Maybe)

       Last Thursday evening the House on a bi-partisan basis approved changes to the Paycheck Protection Program.  Set forth in H.R. 7010,  the proposed changes will significantly liberalize certain aspects of PPP. There are five substantive points made in the legislation that will be of interest to borrowers.

First, under a Treasury regulation, in order for a PPP loan to be forgiven, 75% of the amount borrowed must be spent on payroll expenses with the balance spent on other permitted expenses.  Under the proposed changes that 75% threshold would be reduced to 60%. Section 3(b)(8).

Second, the “covered period” or the “alternative payroll covered period” during which the PPP funds must be deployed is eight (8) weeks.  Under the proposed changes that period would be increased to twenty-four (24) weeks. Section 3(b).

Third, to the extent a PPP loan is not forgiven, it will have a term of five (5) years rather than the two (2) years of the current law.  Section 2(b).  But see below as to effective date; this change does not apply to existing loans.

Fourth, the deferral of the obligation to pay principal and interest on a PPP loan will not begin until a determination on forgiveness has been made.  Section 3(c)

Fifth, two changes are made as to the reduction in forgiveness that are based upon the borrower’s reduction inn full time equivalent employees (“FTEE”).  While reducing to statute the regulatory relief already afforded when an employee rejects an offer to return from being furloughed or terminated, there is additional relief for companies that are unable to return to pre-pandemic employment levels consequent to compliance with certain “standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”  Section 3(b)(7).  This provision, if enacted into law, will provide relief to for example restaurants that may open but with fewer tables, requiring fewer wait staff and fewer employees in the kitchen to cook fewer meals.

The provisions of Section 3 are all retroactive to the adoption of the CARES Act, and as such apply to all existing loans. Section 3(d). The change in Section 2 extending the term of PPP loans that are not forgiven from 2 years to 5 years applies only to new loans, but lenders and borrowers may agree to modify existing loans to extend the maturity date to five years.  Section 2(b).

These are proposed changes to Paycheck Protection Program, and they are not law unless and until approved by the Senate and signed by the President. The fate in the Senate is at this point unknown.  While there are informed predictions that it will pass, there are no guarantees.  In addition, the House utilized proxy voting in approving this bill, and Senate Majority Leader McConnell has stated reservations as to the Constitutionality of bills so passed, and may be unwilling to bring them before the Senate.

As with all things PPP, if you do not like it, just wait a few minutes.