Saturday, July 4, 2020

The Battle of Hattin

The Battle of Hattin

      Today marks the anniversary of the Battle of Hattin.  Fought in 1187 in what is today northeast Israel and to the west of the Sea of Galilee, the battle pitted the bulk of the Crusader forces against the army of Saladin.

      Two months before Hattin, at the Battle of Cresson, the Knights Templar lost some 150 knights and 300 foot soldiers.  This lose significantly weakened the Crusader forces. The Templars were never a numerically significant portion of the Crusader forces.  They were however highly trained and experienced.   The forces that would clash at Hattin were in the range of 18,000 Crusaders against 40,000 under the leadership of Saladin.  By various attacks, Saladin as able to draw the Crusader army away from a fortified position with water sources (La Saphorie) into the open.

      The battle was a rout.  The forces under Saladin harassed the Crusader forces and kept them from accessing water sources.  Meanwhile they were relatively well supplied.  On the night of the 3rd grass fires were started around the Crusader camp, the smoke irritating already parched throats.  On the morning of the 4th the Crusader army was not an effective force.  Thousands were killed and thousands captured; it was reported that only 3,000 were able to escape.  With the exception of the Grand Master of the Templars, all captured Templars and Hospitillars were executed. The King of Jerusalem, Guy, was among those captured, as was Balion of Ibilin. There may have been as few as 300 free knights left to defend the country. It was reported that Pope Urban III died of shock upon hearing a report of the battle.

      It was the beginning of the end.  The Crusader forces were dead or captured, and the various fortresses had been stripped of their garrisons.  Saladin would move on to capture towns and castles throughout the Crusader states (with the exception of Tyre), including Jerusalem which fell on October 2.

            The Fall of Jerusalem would precipitate the Third Crusade.

Friday, July 3, 2020

Claim for Breach of Fiduciary Duty of “Good Faith” Survives in the Face of “Sole and Absolute Discretion” Clause

Claim for Breach of Fiduciary Duty of “Good Faith”
Survives in the Face of “Sole and Absolute Discretion” Clause

      In a recent appellate decision from New York, claims for breach of fiduciary duty were allowed to proceed notwithstanding that the defendants were vested with “sole and absolute discretion” with respect to the complained of conduct. Shatz v. Chertok, 180 A.D.3d 609, 117 N.Y.S.3d 239 (N.Y. Sup. Ct. App. Div. 1st Dept. 727, 2020).

      While the underlying facts are somewhat spotty, it appears that the plaintiff Shatz it was one of a member of investment funds controlled by Chertok and other defendants. Apparently, the fund in which Shatz was an investor was afforded a particular acquisition opportunity. Chertok and others apparently caused that opportunity to be diverted to another investment fund that they controlled, but one in which Shatz was not a participant. Shatz then brought this derivative action asserting claims for breach of fiduciary duty arising out of that diversion. 

      The defendants defended on the basis that the organic agreement of the investment fund vested in Chertok and others “sole and absolute discretion” with respect to a variety of matters including whether to pursue a particular investment. The court would reject the suggestion that the sole and absolute discretion shielded the defendants, at least at the level of a motion to dismissal, from potential fiduciary liability. Rather, in reliance upon Richbell Info. Servs. v. Jupiter Partners, 309 A.D.2d 288, 765 N.Y.S.2d 575 (1st Dept. 2003), cited for the principle that discretionary contract rights cannot be exercised in bad faith so as to deprive the other party the benefits of the bargain, the suit was allowed to proceed.

      It is perhaps noteworthy that the court is treating the exercise of the discretion in bad faith as giving rise to a fiduciary claim for self-dealing. The court separately addressed a claim for breach of the covenant of good faith and fair dealing, and noted that it could be pled in the alternative or in addition to a fiduciary duty claim.

Thursday, July 2, 2020

New York Court Applies Business Judgment Rule to Protect Decisions of Member Appointed Liquidator

New York Court Applies Business Judgment Rule
to Protect Decisions of Member Appointed Liquidator

      In a recent posting on the New York Business Divorce blog, Peter Mahler has reviewed what appears to be the first decision from the New York Court interpreting section 703 of New York’s LLC Act, it addressing receivers and liquidating trustees for LLCs. The case in question is Matter of FGLS Equity LLC, 2020 WL 2557877, 2020 NY Slip Op 31476(U) (Sup. Ct. NY County May 20, 2020). Peter’s review is set forth in a posting titled Business Judgment Rule Prevails and Fight Over Liquidation Plan for Dissolved Madoff Feeder Fund.  HERE IS A LINK to that post.

      In light of Peter’s excellent review, I will simply refer you to his discussion. I would add to his “Take Away” only the suggestion that, in drafting orders with respect to the appointment of receivers and liquidating trustees, it may be prudent to address the standard by which their decisions will be made and whether a particular portion or percentage of the members of the LLC may, in effect, endorse and confirm a particular plan of action or, in the alternative, require a reassessment.

California Court Upholds $1 Valuation of Interest in LLC

California Court Upholds $1 Valuation of Interest in LLC

In a recent decision from California, the Court of Appeals upheld a decision that a member who sought judicial dissolution would be bought out for $1.00.  As it did so it upheld apportioning more then $40,000 of appraisal costs to that member, and refused to apply a provision of the operating agreement alleged to have required that he be released of all personal guarantees of the LLC’s debt.  McNaughton v. Newport Harbor Offices & Marina, LLC, No. G056743, 2020 WL 3468002 (Cal. Ct. App. June 25, 2020).

      The LLC in question, Newport Harbor Offices and Marina, characterized by the court as a “litigation incubator,” was owned equally by Kenneth McNaughton and Paul Copenbarger.  McNaughton sought the judicial dissolution of the LLC.  In response, Copenbarger sought to buy out McNaughton’s interest in the LLC pursuant to the LLC Act and specifically California Corporations code 17707.03(c) et seq. The court appointed a panel of three appraisers to value McNaughton’s interest in the LLC. They determined that the LLC had only nominal value ($1.00) as of the valuation date. “The court entered an order valuing McNaughton's interest in NHOM in accordance with the appraisers' unanimous report, and ordered the parties to split the expense of the report, with McNaughton responsible for paying $44,025 of the $64,025 total, and Copenbarger responsible for paying $20,000.”  McNaughton appealed, arguing that “the appraisers' report was fundamentally flawed because (1) it assigned no value to the improvements existing on the property leased by NHOM; (2) it erroneously projected NHOM's expenses; (3) it relied on flawed accounting data; (4) it failed to count NHOM's cash on hand; (5) it failed to properly assess NHOM's debt; and (6) it failed to assign value to the liability release provision in NHOM's operating agreement.”  Copenbarger appealed as well, arguing that none of the costs of the appraisal should have been his obligation. All of these arguments were rejected.

      As for the alleged deficiencies in the appraisal report, the LLC held a land lease that was due to expire in only two years.  Hence the valuation was done entirely on a case flow basis.  That case flow was negative as to the LLC’s existing debt secured by the underlying property. Various other challenges as to the sufficiency of the records upon which the appraisal was performed were rejected as not satisfying pleading standards.  Also, because he had not early in the valuation process raised the alleged requirement that he be released from personal guarantees of the LLC’s debts, but rather had waited to raise the issue until a post-appraisal supplementary brief, the point was deemed at minimum waived.

In refusing to address the issue on the merits, the court stated, “McNaughton cannot properly seek a ruling from the Court on a disputed issue of contract interpretation ... in an opposition brief to a motion to set the valuation of NHOM pursuant to the Corporations Code. That issue is not properly before the Court on Copenbarger's Application/Motion. Indeed, it is not clear to the Court that this issue is even the subject of the Complaint in this Action.” Because McNaughton ignores the court's actual ruling in his appellate brief, he has waived any claim that the court erred in making its ruling. 2020 WL 3468002, *6.

            The allocation of the costs of the appraisal were as well upheld.

Wednesday, July 1, 2020

The Ignominious Demise of the Unfinished Business Doctrine

The Ignominious Demise of the Unfinished Business Doctrine

      In a decision rendered by the United States District Court for the Northern District of California dated June 15, 2020, the various lawsuits filed in connection with the collapse of the Howrey LLP law firm against the firms to which various of its attorneys had transferred then existing matters, was brought to an end by the reversal of the bankruptcy court’s order denying dismissal. This ultimate resolution was granted on the basis of the decision of the District of Columbia Court, Diamond v. Hogan Lovells US LLP (Howrey II), 224 F.3d 1007 (D.C. 2020) holding ultimately that the Unfinished Business/Jewel Doctrine is inapplicable in the case of work being performed on an hourly basis.

      This most recent decision is Hogan Lovells US LLP v. Howrey LLP, Case No. 14-CV-04882-JT (N.D. Ca. June 15, 2020). As of yet, this decision is not been posted on Westlaw.

      Still, I remain of the view that the string of cases rejecting the Unfinished Business/Jewel Doctrine in the case of hourly matters have been wrongly decided by the application of a patina of legal ethics to what is a question of business organization and particularly partnership law.

Shell Games and Series

Shell Games and Series

            In a decision handed down the second week of March (i.e., pre-pandemic lockdown), an Illinois court rejected an effort to play shell games and avoid the consequences of a ruling by a late assertion that its was a series of an LLC, and not the LLC itself, that was the owner of the property that was the subject of the dispute.  City or Urbana, Illinois v. Platinum Group Properties, LLC, 2020 Il. App. (4th) 190356, __ N.E.3d ___, 2020 WL 1164502 (Ill. Ct. App 4th Dist. March 11, 2020).

After the City of Urbana sued Platinum Group for property maintenance code violations, a judgment of $473,700 was entered.  That decision was appealed, and the code violations judgment was affirmed. However, the monetary judgment was in part reversed and the balanced remanded for reconsideration.  A new judgment of $45,000 was entered.  Thereafter the City moved to amend the record to reflect the name of the defendant as “Platinium Group Properties, LLC-Sunnycrest Series.”  The defendant objected, but the court entered the requested order.  After entering a special appearance to object that the court had no personal jurisdiction over it, the court denied it the requested relief, leading to this appeal.

            As recited by the Court of Appeals:

In November 2018, the City filed its misnomer motion, seeking to amend the record to reflect “Defendant by its full name, ‘Platinum Group Properties, LLC-Sunnycrest Series’ rather than its short-form name, ‘Platinum Group Properties, LLC.’” The City asserted (1) it intended to sue Sunnycrest since it was the owner of the three building and the real party in interest, (2) the City served Sunnycrest's agent and manager with the summons, (3) the summons and complaint used a shortened form of Sunnycrest's name because that is what Sunnycrest used when communicating with the City prior to the lawsuit, and (4) Sunnycrest was put on notice of the lawsuit. The City also attached numerous exhibits to its misnomer motion, one of which was a printout of the Secretary of State's website page for the Platinum Group. The printout stated the Platinum Group had four series LLCs, including Sunnycrest.

The Platinum Group filed a memorandum in opposition to the City's section 2-401(b) motion, asserting Sunnycrest was an independent entity from the Platinum Group. It further claimed service had never been made on Sunnycrest and this was a case of the plaintiff suing the wrong entity and not misnomer. The Platinum Group did not attach any exhibits to its response.

The City filed a reply, noting the Secretary of State's website listed Harold Adams as the registered agent for Sunnycrest and Paul Zerrouki as the manager of Sunnycrest. The City also noted the Platinum Group vigorously defended the lawsuit for more than three years and represented to the court it was the real party in interest by admitting it owned the buildings at issue in this case. The City attached Zerrouki's trial testimony to its reply. 2020 WL 1164502, **2-3; slip op. ¶¶ 11-13.

      After reviewing the “misnomer” statute that permits the correct identification of a defendant over whom the court has personal jurisdiction, which may include voluntary submission to the court’s jurisdiction, the court turned its attention to the series provisions of the Illinois LLC Act. Given that the defendant never presented to the court a copy of the series certificate or designation and never cited section 37-40 of the LLC Act, the series:

failed to establish to the circuit court that it was a separate entity from Platinum Group. Given the numerous requirements of section 37-40 and its provisions stating what is conclusive evidence of the series legal formation under the Act, a mere statement of series LLC is a separate entity from the LLC is insufficient to establish such According, we find the circuit court did not err in denying Sunnycrest’s motion to vacate. 2020 WL 1164502, *6; slip op. ¶ 34.

The Court of Appeals would go on to hold that even had the burden of showing separateness been carried, estoppel would have barred it from relying upon the original failure to identify the series.

Here, Sunnycrest and the Platinum Group had the same agent for service and the same manager. Moreover, Sunnycrest's name is the same as the Platinum Group with the addition of two words, “Sunnycrest Series.” The title holder of the properties charged with ordinance violations was Sunnycrest. While the complaint and summons listed the Platinum Group, manager Zerrouki appeared at trial and testified. He testified the properties in question were “part of the company called Platinum Group Properties.” Zerrouki further testified he and his wife were “the principal owners of Platinum Group Properties.” He also testified he bought the properties in 1998 or 1999. Moreover, after the conclusion of the evidence in August 2015, the parties filed written memoranda supporting their respective positions. In its memorandum, the Platinum Group admits it is the owner of the properties at issue and cites Zerrouki's aforementioned testimony at trial. As manager of both Sunnycrest and the Platinum Group, Zerrouki knew which of his corporate entities held legal title to the properties in question. Thus, as in Marsden, Zerrouki's testimony and the Platinum Group's memorandum indicate Sunnycrest conceded there was a misnomer. Accordingly, Sunnycrest would be estopped from asserting no misnomer. Like Marsden, absent the admission of ownership at trial and in the memorandum, this would be a case of mistaken identity and not misnomer. 2020 WL 1164502, *7; slip op. ¶ 38.

Tuesday, June 30, 2020

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?