Friday, November 15, 2019
When Previously Agreeing Members Disagree
Peter Mahler, in his blog New York Business Divorce, has this week reviewed a long-running dispute between the co-members of a New York LLC that owns valuable real estate. In a posting titled Operating Agreement Spawns Multiple Disputes Between 50/50 Members of Realty Holding LLC, Peter reviews the numerous decisions and appeals that have arisen in this case. HERE IS A LINK to his review.
There is an element of the most recent decisions that struck me. In this instance, at one time, each of the members agreed that a management company owned by one of the members would be in charge of the day-to-day management of the property. After the falling out, the other member (i.e., the one who did not have an ownership interest in the management company) objected to it continuing to serve in that role. My initial reaction would have been in the nature of “well, having agreed that it would be the management company, and not having imposed any time limits, it remains the management company until such time as a majority of the members decide otherwise.” And I would be wrong.
Rather, those facts, both the trial court and the appellate division held, inter alia, that the continuation of the management company in that role is subject to, in effect, one of the members deciding that should no longer be the case. Specifically:
[T]he continued decision to keep Win Win Asset Management LLC as the managing agent of the company is also a major management decision for the Company, and requires a majority vote. Given that Rubin and Baumann each hold a 50% ownership stake in the Company, the parties are deadlocked as to this fundamental decision regarding its operations.
This capacity to revoke prior agreements as to how an LLC will be operated presents, depending upon your viewpoint, great opportunities for mischief and great opportunities to reset the relationship. That said, written agreements are always recommended. If, for example, there was a written operating agreement with Win Win for a particular term, the lifting of consent would not have any impact until the end of that term and the decision of whether to renew the agreement or enter into a new agreement with a new management company. In this instance, there was apparently no written management agreement between the LLC and that management company.
In this respect, I am reminded of the decision Kirksey v. Grohmann, 754 N.W.2d 825 (S.D. 2008), it involving a four member LLC. The LLC held certain land that was used for livestock grazing and ranching activities. In this instance, the purpose of the LLC, as set forth in its operating agreement, was specific and included “to engage in the general livestock and ranching business.” Id. at 830. That property was leased by the LLC to two of the four members. Two of the members sought to terminate the lease agreements, which termination was opposed by the two members who were the beneficiaries of those arrangements. “Because Grohmann and Randall had no desire to terminate the lease or dissolve the LLC, the parties remained deadlocked.” 754 N.W.2d 827.
Still, focusing upon the intent that all of the four members (the members were all sisters) would share equally in the LLC’s management and operation, the court observed:
Although each sister has an equal vote, there no longer exists equality in the decision-making. Grohmann and Randall have all the power with no reason to change the terms of a lease extremely favorable to them. Leaving two sisters, half of the owners, with all of the power in the operation of the company cannot be a reasonable and practicable operation of the business. Id. at 831.
On that basis a judicial dissolution of the LLC was ordered, in effect allowing the two members to revoke their prior consent to leases of the LLC’s property.
Thursday, November 14, 2019
The Latest Geographic Targeting Orders
For several years now, the Department of Treasury has been issuing Geographic Targeting Orders (“GTOs”) requiring the disclosure to the Treasury of certain real estate transactions. These transactions are restricted to certain cities, and require reports filed with respect to acquisitions of residential properties where there is not a mortgage (i.e., unfinanced cash transactions). The GTOs are intended to combat money laundering.
Last week the Department of treasury issued the latest GTOs. They require reporting of transactions of $300,000 or more in a number of markets including New York, Miami, Las Vegas and Honolulu.
Wednesday, November 13, 2019
Missouri Court of Appeals Addresses “For Himself” as to Reorganization and Disassociation
In a January, 2019 decision of the Missouri Court of Appeals, Nicolazzi v. Bone, No. ED 106292, 2018 WL 6052144, 564 S.W.3d 364 (Mo. Ct. App. Div. 4 Nov. 20, 2018), it sent back to the trial court the question of Nicolazzi had withdrawn from the LLC by the act of filing a lawsuit addressing in part the LLC’s composition. 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.
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).
HERE IS A LINK to my review of that earlier decision.
In this follow on decision, Nicolazzi v. Bone, ___ S.W.3d ___, 2019 WL 5700365, *4 (Mo. Ct. App. Eastern Dist. November 5, 2019), it was held that the provision addresses the member, and not the LLC, a determination that is consistent with the decisions of a number of other jurisdictions. The court wrote:
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.
Tuesday, November 12, 2019
Illinois LLC Act Amended as to Member’s Right to Inspect Books and Records
In 2019 Illinois amended its LLC Act to provide that a (a) a member denied access to requested books and records may bring an action to enforce that right, (b) permits an award of attorney fees and costs incurred in favor of the member against the company where the LLC did not comply with the statute and (c) allows a court to impose restrictions on the access to and use of the information “based on the reasonable needs of the company and the member in question.” See 805 ILCS 180/10-15 as amended by 2019 Illinois Senate Bill No. 1495 (adding new subsection (j)), which provides:
If the company fails to provide any information required to be provided by this Section, the person entitled to the information may file an action to compel the company to provide the information and to obtain such other legal or equitable relief as may be proper. If the court finds that the company failed to comply with the requirements of this Section, the court may award the plaintiff its reasonable costs and attorney's fees incurred in bringing and prosecuting the action. The court may, in connection with any information described in subsection (h), impose such restrictions and conditions on access to and use of such information as it deems appropriate based on the reasonable needs of the company and the member in question.
Monday, November 11, 2019
New York and Identifying LLC’s Members on Transfer Tax Returns; Not for Condo Purchases
Legislation passed in 2019 in New York requires the listing of the members in the real property transfer tax return filed in connection with the purchase or sale of residential real estate of up to four units. See A.7190/S.1730; see also John Whitaker, LLCs Purchasing Real Estate Will Now Share More Information, The Post-Journal (August 9, 2019); HERE IS A LINK to that story.
In a story published in the Wall Street Journal on November 7, Condo Buyers Can Keep Purchases Secret, N.Y. Tax Officials Say in Reversal it was stated that in response to objections to needing to report the beneficial ownership of LLCs purchasing condominiums in New York, the law will be applied only to “buildings,” which will exclude condo units.
HERE IS A LINK to that story from the Wall Street Journal, and HERE IS A LINK to the equivalent article from the Gothamist.
More on the Interstate Transport of Krispy Kreme Doughnuts
Previously I reviewed an AP Wire story about Krispy Kreme’s objection to a student who was driving from Minnesota to Iowa each weekend to buy a hundred boxes of doughnuts and reselling them back home. Krispy Kreme contacted him and said he could no longer do so. HERE IS A LINK to that posting.
Well, according to a follow on story (HERE IS A LINK), Krispy Kreme has reversed course and is even donating doughnuts to the entrepreneurial student. They assert that they did not realize he was trying to earn money in order to graduate college debt free. Okay, fine, but what happened to the initial objection based upon liability?
Sunday, November 10, 2019
Day 2 of the 2019 LLC Institute
The second day of the 2019 began with a presentation by Professors Lee-ford Tritt and Peter Molk on Business Trusts and comparing them to LLCs. The discussion included the taxation of business trusts and the seeming impediments to their broader use.
The morning continued with a program chaired by Cristin Keane. Joined by Professor Gregg Polska and Warren Kean, they addressed taxation of service providers in pass-through entities. Sections 199A and 409A along with insights on ordinary and capital gains income, tax partners as employees (not) and phantom versus real interests were all reviewed.
The morning was brought to a close with the ethics program presented by Bob Keatinge, A.J. Singleton and Gerald Niesar. They focused upon issues particular to the organization of a law firm, including the “non-equity partner,” and the challenges involved in merging firms. Having independent legal counsel be charged with identifying and possibly resolving conflicts was identified as an option to be considered.
Over our lunch Garth Jacobson gave a quick report as to the status of beneficial ownership reporting, both as to where matters stand in Congress and the status of the ABA’s efforts to participate (or not) in the debate.
After our lunch meeting we held the Lightning Round. Featuring Professor Christine Hurt, Scott Ludwig, Suzanne Odom, Stuart Pachman and Tom Rutledge, the Lightning Round was a new format for the LLC Institute where each presenter gave a quick (10 minute) review of a discrete topic. Professor Hurt started us off with a presentation on unintended partnerships; she has a forthcoming article on the topic that is in the materials (and which is highly recommended to you). Scott Ludwig reviewed a recent situation on the use of remedial allocations where his client was a non-profit. As proposed his client would have suffered UBIT with no opportunity to recover upon liquidity. Suzanne Odom reviewed the LLC acts of various Indian tribes and material distinctions between them and as to the uniform and other acts with which we are familiar. Stuart Pachman, who did a piece in Business Law Today on the topic, addressed succession in what was or became a single-member LLC so as to avoid dissolution for lacking a member. Tom Rutledge addressed proposed changes to the FRCP that will if enacted make the determination of the citizenship of an unincorporated entity easier to accomplish.
The last panel on Friday was chaired by Tarik Haskins and included Marla Norton and Professor Beth Miller. They addressed developments in Delaware law (including as contrasted with the laws of other jurisdictions) as to series, to divisions and electronic signatures.
Thanks to Mark Page from the ABA for being on-site with us.
The materials and power points are posted (although as I write this we are still making sure it is only final versions) on the meeting materials link to the registration page for the LLC Institute. In maybe two weeks the audio recordings of the programs will be posted. That said, while you can no doubt learn a great deal from those materials, the greatest value of the LLC Institute comes from attending. If you were not with us in 2019, hopefully you will be in 2020.