Thursday, February 21, 2019
First, Who Owes What Fiduciary Duties To Whom?
The recent decision from Texas highlights the importance of clarifying exactly who owes fiduciary duties to whom. If no duty is owed to the plaintiff, it follows there can be no breach of duty. Jang Won Cho v. Kum Sik Kim, No. 14-16-00962-CV, 2018 WL 6836199 (Tex. Ct. App. 14th Dist. Dec. 28, 2018).
This case arose out of a failed real estate venture organized through a limited partnership. The three persons involved, Lee, Cho and Kim, were all shareholders in a corporation that was in turn the general partner of the limited partnership. Cho was the sole director of that corporation. When the venture ultimately failed, Kim and Lee brought suit against Cho alleging breach of fiduciary duty and other claims. The court would dismiss the claims based upon the breach of fiduciary duty.
With respect to the assertion that Cho, as a corporate director, breached a fiduciary duty, the court found that Cho owed fiduciary duties to the corporation, but not to the individual shareholders. Further, Kim and Lee could not bring claims against Cho in his capacity as a shareholder because Texas law does not recognize fiduciary obligations amongst the shareholders of a closely held corporation.
With respect to the limited partnership, the court acknowledged that the corporate general partner would owe fiduciary duties to the individual limited partners, citing in support Crenshaw v. Swenson, 611 S.W.2d 886, 890 (Tex. Civ. App. - Austin 1980). From there, however, the court noted that the general partner was the corporation, not Cho as an individual. Thus, while the corporation may have owed fiduciary duties to Lee and Kim in their capacities as limited partners, Cho the individual did not.
Wednesday, February 20, 2019
The 2019 LLC Institute
SAVE THE DATE
The 2019 LLC Institute has been scheduled for
November 7-8, 2019
In Tampa, Florida
The Institute will be held at Stetson University College of Law
More details to follow, but for now please block out these dates
New York Court Applies the Near “Absolute Privilege” to Claims of Defamation in Litigation
In a posting drafted by Franklin C. McRoberts in Peter Mahler's blog New York Business Divorce, he reviews a recent New York decision that consider whether certain statements made in the course of family business litigation gave rise to claims of defamation and slander. Applying the “ancient law” of “absolute privilege” (as explained therein, absolute is a little overly broad), it was found that the statements made in this lawsuit were privileged. That posting is titled Sue for Dissolution - Get Sued For Defamation?; HERE IS A LINK to that posting.
Tuesday, February 19, 2019
Failure to Disclose Principal Exposes Shareholders to Personal Liability
It is practically axiomatic that the shareholders are not liable for the debts and obligations of the corporation. The “practically” is, however, crucial. The rule of limited liability as set forth in the various business corporation statutes is that, essentially, the shareholders are not liable for the debts and obligations of the corporation merely because they are shareholders. There are, however, a variety of other ways in which a shareholder may expose themselves to personal liability. In a recent case from Nebraska, the shareholders were held liable on what would have been a corporate debt because they never adequately disclosed that it was a corporation that was incurring the obligation. Thomas Grady Photography, Inc. v. Amazing Vapor, Ltd., 918 N.W.2d 853 (Neb. 2018).
Calderon and Anderson formed “Amazing Vapor, Ltd.” as a corporation in March, 2014. Thereafter, Anderson contacted Thomas Grady, a commercial photographer he had met several years previously, about photographing some of the electronic vapor products being sold by Amazing Vapor. The trial court accepted “that Anderson did not inform Grady of the corporate status of Amazing Vapor.” Ultimately, Grady would submit an invoice for $2,400.00, which went unsatisfied. After Grady declined a request to pay a reduced fee in consideration for future work, Grady brought suit against Calderon and Anderson as well as Amazing Vapor. While a default judgment was entered against the corporation and Calderon, Anderson represented himself, alleging that he was the minority owner of Amazing Vapor and that “Calderon closed the business, took the inventory and started his own business at an undisclosed location.”
The trial court imposed personal liability against Anderson on a variety of theories including piercing the veil and the fact that Anderson had taken distributions during the time when the company was indebted to Grady. Under Nebraska law, as is the law under most states, a distribution may not be made if the company is not able to pay its debts as they come due in the usual course of business. Neb. Rev. Stat. § 21-252(c)(1). In addition, there was evidence presented that Anderson had referred to Calderon as his “partner.”
The decision of the trial court was appealed to the District Court where it was affirmed, whereupon it was appealed again to the Nebraska Supreme Court.
The Nebraska Supreme Court, while setting aside the determination based on piercing principles, affirmed the liability of the basis of agency and the failure to identify the corporation as the party entering into the agreement. The Nebraska Supreme Court wrote:
The cases provide that it is the agent’s duty to disclose his or her capacity as an agent of a corporation if the agent is to escape personal liability for contracts made, and in the absence of such disclosure, the agent bears the burden of proof of showing that the contract was made while acting in a corporate, not individual, capacity. See, Purbaugh v. Jurgensmeier, 240 Neb. 679, 483 N.W.2d 757 (1992); 3 C.J.S. Agency § 565 (2013). The uncontradicted testimony at trial was that neither Calderon nor Anderson disclosed Amazing Vapor’s incorporated status during discussions leading up to the agreements. In text messages, Anderson referred to Calderon as his “partner.” At Anderson’s request, Grady sent the March 27, 2014, invoice to Anderson’s personal or attorney email, not an address associated with Amazing Vapor. The invoice reads, “Art Buyer: Tom Anderson & Manny Calderon Client: Amazing Vapor,” indicating that Grady believed the buyers were Calderon and Anderson for their client, Amazing Vapor. After the invoice remained unpaid after several attempts to collect on the contract, Grady texted Anderson: “You are also part owner. It’s time for you to pay and take it up with [Calderon] on your own.... [Y]ou are responsible for hiring me ... and therefore you are responsible just as much as [Calderon].” The series of communications between Grady and Anderson leading up to and following the photography services supports the county court’s finding of a breach of two oral agreements for which Anderson was liable, and we find no plain error with regard to the district court’s affirmance thereof.
Cases such as this pop up with far more familiarity than they should. The rule is simple; the agent has the responsibility to tell the person with whom the contract is being entered into who is the principal undertaking the obligation. Handing over a business card providing the full name of the business entity and the title of the agent may be all that is necessary in order to satisfy that obligation. Also, while not directly relevant to this case as the contracts were oral, agents should be sure that the signature blocks on documents clearly identify the party to the agreement as the business entity, and that the agent signature is in that capacity. For example, “Bob Smith, as president of ABC, Inc.” makes clear who is the principal and the capacity of the signatory.”
Monday, February 18, 2019
The Death of Michelangelo
Today marks the anniversary of the death in 1564 of Michelangelo Buonarroti.
Originally trained by means of an apprenticeship in sculpture, he had previously spent time as well living with the family of a stone mason. While living with the mason he was struck and his nose was broken; the consequences of the mishap can be seen thereafter in his portraits. Before reaching the age of thirty, Michelangelo created any number of significant works, including the Pieta, now in the Vatican, and his statue of David, which remains in Florence. He as well created the statue of Moses with Horns (the horns being based upon a translaion error in the Bible) that is a portion of the tomb of Pope Julius II; the final tomb was far smaller than intended.
He was a contemporary of Leonardo da Vinci, Raphael and Titian.
Although throughout his life he claimed he was a sculptor and not a painter, Michelangelo created innumerable paintings, most memorably the frescos on the ceiling of the Sistine Chapel and as well as the Last Judgment painted on the alter wall of the chapel. Famously, Michelangelo’s portrait appears in the latter, appearing on the flayed skin of St. Bartholomew. Today, the Cardinals of the Roman Catholic Church gather under those paintings when called upon to elect the next Bishop of Rome.
Michelangelo had also been commissioned (although the work was never put in place) to provide a new façade to a basilica in Florence and as well served as the architect for St. Peter’s Basilica in Rome. With respect that second project, much of the current shape of the basilica is his invention as is the design of the dome.
While he died in Rome, Michelangelo was buried in Florence. As recorded by Vasari:
They [those gathered for his funeral] did so eagerly that those who could approach near and get a shoulder under the bier could indeed count themselves fortunate, for they realized that in the future they would be able to boast of having carried the remains of the greatest man their arts had ever known.
February 18 is also the anniversary of the death in 1546 of Martin Luther. Following the admonition that if you don’t have anything nice to say about somebody you should say nothing , ....
Friday, February 15, 2019
Missouri Court Interprets Operating Agreement, But Sets Up a Foot Fault as to a Member’s Disassociation
Missouri Court Interprets Operating Agreement, But Sets Up a Foot Fault as to a Member’s Disassociation
In this recent decision from the Missouri Court of Appeals, it was called upon to apply an operating agreement and the LLC Act to a dysfunctional two-member company. Nicolazzi v. Bone, No. ED 106292, 2018 WL 6052144 (Mo. Ct. App. Div. 4 Nov. 20, 2018).
Nicolazzi and Boone were the members in Spirit Adult Day Care, LLC, it formed in 2005. The company had a written operating agreement, it providing that each member would contribute $50,000 to the LLC. The agreement did not, however, set a deadline for making those capital contributions. At trial, the LLC’s CPA testified that Bone contributed in excess of $50,000, while Nicolazzi contributed only $25,700. In 2011 Nicolazzi inquired of a competitor whether they would like to buy his interest in the LLC. It would appear those discussions went nowhere. Over 2011 the relationship between Nicolazzi and Bone “steadily deteriorated,” and Nicolazzi ultimately ceased to participate in the LLC’s activities. The opinion does not specify whether or not the operating agreement detailed the job responsibilities of the members and their commitment to provide services. On June 20 Bone filed articles of incorporation for a new corporation named “Young in Spirit Adult Day Care Center, Inc.,” and the next day advised Nicolazzi that she was dissolving the LLC. The operating agreement, addressing involuntary dissolution, provided “Either Member may initiate a dissolution of the LLC after 30-days’ written notice to the other Member in which case the affairs of the LLC shall be wound up as soon as is reasonably possible and all remaining assets divided as provided for by law.” Shortly after receiving notice of Bone’s plans, Nicolazzi filed suit, requesting:
· a determination as to whether Bone was a member of the LLC;
· whether Bone had misappropriated LLC assets or herself and the new corporation;
· for the recovery of distributions to Bone exceeding her 50% interest in the LLC;
· for an accounting; and
· for a constructive trust.
Bone counter-claimed, asking for a ruling that Nicolazzi was not a member of the LLC because he:
· failed to make the required $50,000 capital contribution;
· failed to participate in the LLC’s management;
· breached the operating agreement by soliciting the purchase of his interest without Bone’s consent; and
· fraudulently misrepresented the amount of his capital contribution.
A bench trial followed, ending on October 9, 2012. Judgment was entered on November 1, 2017. Ultimately, Bone prevailed, it being found that Nicolazzi had breached the LLC’s operating agreement both by failing to make the required capital contribution and soliciting the sale of his interest in the company without Bone’s consent. The trial court deemed those breaches as constituting “events of withdrawal” from the LLC to the effect that Nicolazzi he was no longer a member of the LLC. That left Bone as the sole member of the LLC. It was also found that all payments due to Nicolazzi that were due and owing had been satisfied. This appeal followed.
Nicolazzi was a Member in the LLC
Based upon the operating agreement’s recitation that Nicolazzi (as well as Bone) were the members of the LLC, and that the operating agreement did not set any additional prerequisites or conditions to being a member, Nicolazzi was a member: “As [Nicolazzi] is named as a member of the LLC in the operating agreement and sign the operating agreement when the LLC was formed, he was a member of the LLC from that point onward.”
Nicolazzi Breached the Capital Contribution Obligation
While, at trial, Nicolazzi and his expert had testified that he had contributed in excess of $50,000 to the venture, the LLC’s CPA testified that he had not done so. The trial court accepted the testimony of the LLC’s CPA. Addressing that determination, the appellate court wrote that “We defer to the trial court’s findings of fact in a court-tried case.” On that basis, it was determined that Nicolazzi had failed to satisfy his obligation to contribute $50,000 to the LLC. With respect to the absence, in the operating agreement, of a deadline for making the contribution, it was written:
and even though there was no deadline in the operating agreement or Appendix A for when the parties were required to make the initial capital contributions, we need not analyze the meaning of the word “initial” as used in the operating agreement here. At trial, it was established that both parties intended and understood that “initial,” as used in “initial capital contribution,” meant the agreed upon amount of $50,000 would be paid within six months of the execution of the LLC’s operating agreement; as such, we give effect to that intent. …. Further, under any definition of the word “initial,” [Nicolazzi’s] failure to make the required $50,000 capital contribution within a five-year time span, as the trial court found, undoubtedly constitute breach of the operating agreement. 2018 WL 6052144, * 6.
Nicolazzi Did Not Breach the Operating Agreement by Soliciting a Sale of His Interest
The LLC’s operating agreement provided that a member could not sell his or her interest in the LLC without the consent of the other member. The trial court had found that Nicolazzi, by soliciting a potential sale of his interest, had breached the operating agreement. This determination was set aside on appeal; “We find that this conclusion is an erroneous application of the law.” Id. Rather, the court found that while consent was required to actually consummate a sale or other transfer, those provisions did not prohibit or even address an attempt to sell or discussion of the sale of an interest. Id.
Nicolazzi Did Not Withdraw From the LLC; Bone is Not the Sole Member
The determination that Nicolazzi had withdrawn from the LLC was set aside on the basis that none of his actions fell within any of the statutory events that constitute a withdrawal from the LLC; the operating agreement itself did not define what would constitute a withdrawal. Specifically, it was found that while he had breached the obligation to make his capital contribution, that breach did not constitute withdrawal.
And Then the Court of Appeal Sets Up the Foot Fault
Continuing its analysis of whether or not Nicolazzi had withdrawn, the Missouri Court of Appeals unfortunately set up a foot fault as to withdrawal. As do many LLC Acts, that of Missouri, at § 347.123(4)(c), identifies the events of withdrawal as including:
Unless otherwise provided in the operating agreement whereby specific consent of all members at the time, the member … files a petition or answer seeking for himself any reorganization, arrangement, composition, readjustment, liquidation or similar relief under any statute, law or regulation.
And here’s where the problem is set up. The Court of Appeals wrote that, notwithstanding the question needs to be resolved by the trial court:
We remand this case with instructions for the trial court to determine whether [Nicolazzi’s] filing of his petition constitutes an “event of withdrawal” pursuant to § 347.123(4)(c).
First, it is unclear how the relief sought by Nicolazzi would fall within any of the categories referenced in this statute. Second, these provisions apply with respect to a member of the LLC (“for himself”) and not with respect to the LLC itself. At least two courts, namely Darwin Limes, LLC v. Limes, No. WD-06-049, 2007-Ohio-2261, 2007 WL 1378357 (Ohio Ct. App. 6th Dist May 11, 2007) and Sayers v. Artistic Kitchen Design, 633 S.E. 2d 619 (Ga. App. 2006) have already made clear that language of this nature refers to the member itself, and does not extend to actions vis-a-vie the LLC such as moving for its judicial dissolution.