Saturday, April 24, 2021

Beware Greeks Bearing Gifts


Beware Greeks Bearing Gifts

      Today marks the anniversary of the traditional Fall of Troy in 1184 B.C., thereby bringing to its culmination the Trojan War.

      The Fall of Troy is not recounted in Homer’s Iliad, the iconic epic, it rather covering only a period of ten days to two weeks within the supposed ten-year span of the war.  The Fall of Troy through the subterfuge of the Trojan Horse is briefly mentioned in the Odyssey and is referenced in several other Greek sources.  The story would not find, however, its full development until Virgil’s Aeneid.

      Some modern historians have attempted to explain the story as an analogy, suggesting that an earthquake – Poseidon, whose portfolio included horses, was as well the god of earthquakes – was the reason for the fall of Troy’s walls.  I, for one, would rather retain the literal interpretation.

      Regardless it is a great story, especially the fall of Achilles to Paris after the former killed Hector.  Speaking of which, the movie Troy misstated the story, likely because they wanted to keep Brad Pitt on the screen.  Achilles was killed before the fall of Troy; he never entered the city.

            Some might consider the Trojan War to be ancient history.  It’s all matter of perspective.  At the time of the Fall of Troy the Egyptian civilization had been flourishing already for 2000 years.

Wednesday, April 21, 2021

Kentucky’s COVID-19 Anti-Liability Law


Kentucky’s COVID-19 Anti-Liability Law

Kentucky’s Senate Bill 5, passed by both chambers of the General Assembly and effective notwithstanding the absence of a signature from the Governor, provides broad protection to businesses against allegations that employees and customers contracted the COVID-19 virus thereat.

My law partners Harry Dadds and Benjamin Fiechter have published a review of this new statute; HERE IS A LINK to that review.

Monday, April 19, 2021

The Corporate Transparency Act


The Corporate Transparency Act

Previously on the SKO website I published an introduction to the Corporate Transparency Act (the "CTA") and its requirements that most small businesses report to a new federal database information on “beneficial owners.”  HERE IS A LINK to that introduction.

Last Friday a significantly longer and more detailed review to the CTA and its challenges was published by Business Law Today, a publication of the Section of Business Law of the American Bar Association.  That article, authored by Scott Ludwig, Laurie Smiley, Bob Downes and myself, is titled The Corporate Transparency Act – Preparing for the Federal Database of Beneficial Ownership Information; HERE IS A LINK to that article.

Wednesday, April 14, 2021

Remembering “Big” Lew Kaster


Remembering “Big” Lew Kaster

         In November, 2015, we lost “Big” Lew Kaster.  He was a giant of the bar, and a great friend and mentor. Today would have been his 89th birthday.  HERE IS A LINK to what was posted shortly after his untimely passing.

Friday, April 9, 2021

A Collection of Important Guidance on LLC Law: CC Operations

A Collection of Important Guidance on LLC Law:  CC Operations

      In a decision from the U.S. Bankruptcy Court for the Western District of Kentucky, the court was called upon to determine whether certain members of an LLC, it being in bankruptcy, owed to the LLC fiduciary duties. Applying KRS § 275.170(4) which provides, inter alia, that in a manager-managed LLC the members, as members, do not owe fiduciary duties, and the section generally, which allows fiduciary duties to be modified or eliminated in a written operating agreement, it was held that the defendants in the action, the LLC’s members, owed no fiduciary duties. In addition, the court applied the express terms of the operating agreement waiving any liability for breach of a fiduciary or other duty. In re: CC Operations, LLC (Wheatley v. McCarty), Case No. 17-33389-THF, Adv. No. 19-03034-THF, 2020 WL 1970509 (Bankr.  W.D. Ky. April 23, 2020).

      CC Operations, LLC, the debtor in bankruptcy, was a Kentucky limited liability company that, in its articles of organization, elected to the “manager-managed.” Throughout the LLCs existence, while from time to time there had been other members, Chris McCarty and Lewis Pomerance were members, but not managers, of the company. After the company suffered a variety of setbacks, it filed for bankruptcy protection. In this suit, the trustee sought to hold McCarty and Pomerance liable for a variety of claims including breach of fiduciary duty, a variety of theories of fraudulent transfer and piercing the veil.

KRS § 275.170 Says What It Means and Means What It Says

      As “Defendants were only members of the LLC, and in Kentucky, a member of a manager-managed LLC does not owe fiduciary duties to the LLC or its members”, citing KRS § 275.170(4);

Because Debtor’s Amended and Restated Operating Agreement provided that CC Operations was a manager-managed LLC managed by someone other than Defendants, this Court finds further statutory grounds to reject the contention that Defendants, as members, owed any fiduciary duty to CC Operations at any point in time. 

The Operating Agreement Waived Liability

      Addressing liability for the alleged fiduciary duty violations, the Court found that the operating agreements at issue (there were an original and an amended agreement, although the trustee contested whether the amended agreement was properly adopted) waived any fiduciary duties. Specifically, Section 10.2 of the operating agreement provided:

Members of the Company will not be liable to the Company or the other Members for monetary damages for conduct as Members except to the extent the [LLC Act] ... prohibits elimination or limitation of member liability. (bracketed language and ellipses in original).

       In furtherance of KRS § 275.180(1), which as described by the Court provides that “‘A written operating agreement may … [e]liminate or limit the personal liability of a member or manager for breach of any duty provided for in KRS § 275.170.”’, the Court held this language sufficient to have waived any fiduciary duties that might have otherwise been owed the LLC. The Court did clarify, later in its opinion, that this waiver was technically of liability for breach of duties, rather than waiver of the duties themselves.

Adverse Domination Does Not Apply in LLCs

      Turning to the various allegedly improper transfers, with the exception of one tax distribution, the court found that all of the other alleged fraudulent transfers, if indeed fraudulent, had taken place outside the applicable statute of limitations, either two years under the Bankruptcy Code or five years under Kentucky fraudulent conveyance law. Where the trustee had sought to toll the statutes by virtue of the doctrine of adverse domination, the court found that it is applicable to LLCs nor applied outside the discovery rule context.

Adverse domination, a doctrine that tolls the statute of limitation when tortfeasors dominate and control a corporation so as to prevent the corporation from bringing a timely claim against them, is “merely a corollary of the discovery rule, applied in the corporate context.” Notably, the present case deals with an LLC rather than a corporation; this Court is unaware of any Kentucky decision applying the theory of adverse domination to LLCs, and other courts have expressly held that the theory is inapplicable in the LLC context.

      As to the assertion that adverse domination should toll the statute of limitations with respect to any claim for breach of fiduciary duty (and necessarily setting aside the court’s determination that no duties were owed by the individual defendants), the Court wrote:

The Court notes that adverse domination would also not toll the limitations period for any untimely breach of fiduciary duty claims. Under Kentucky law, the doctrine of “adverse domination” does not toll the statute of limitations for breach of fiduciary duty claims, because the “discovery rule” does not apply to claims for breach of fiduciary duty. 

Piercing is a Remedy and Not a Cause of Action

      The trustee’s complaint against McCarty and Pomerance set forth a count for “piercing the veil” to, in effect, hold them individually liable for certain claims against CC Operations and other business entities. This count was rejected on two bases. First, it was noted that “veil-piercing is a remedy for enforcement of a judgment and not an independent cause of action in and of itself, a distinction Trustee does not dispute. Kentucky does not permit veil-piercing as a means of consolidating entities to try and create assets for the debtor company, which is what Trustee apparently seeks to do.” In addition, the Court found that the necessary precedents of a piercing claim, namely “both an ‘egregious failure to follow corporate formalities,’ and ‘a high degree of control over the corporation’s day to day operations and decisions,’” were absent.  Rather:

Trustee fails to establish any such level of control or egregious action by either Defendant; on the contrary, Trustee’s complaint acknowledges that CC Operations had an operating agreement in place, filed separate tax returns, maintained a separate bank account, prepared separate financial statements, and produced regular annual reports, suggesting corporate formalities were indeed followed.

Trustee at no point alleges that either McCarty or Pomerance possessed a controlling membership interest in CC Operations, managed or supervised the LLC or its employees, or was in any way responsible for or involved in its daily operations. Assuming all allegations in the complaint to be true, the evidence of either and “egregious failure to follow corporate formalities” or “a high degree of control over the corporation’s day to day operations and decisions” by either Defendant remains tenuous and inadequately set forth. 

As a point of disclosure, this writer and Stoll Keenon Ogden represented Chris McCarty in this litigation. 

Wednesday, April 7, 2021

Business Law Associations Institute

The 2021 Business Law Associations Institute


       With CJ Donald of SKO’s Lexington office, this morning I presented at the UK CLE/KBA Section of Business Law seminar, the 2021 Business Associations Law Institute. We addressed topics including the Business Court Docket of the Jefferson County Circuit Court, the federal Corporate Transparency Act and a variety of recent decisions from across the country including decisions from Delaware and here in Kentucky.

Tuesday, April 6, 2021

Charging Orders and Foreign LLCs


Charging Orders and Foreign LLCs

A recurring issue in LLC law is whether a court has the capacity to issue a charging order as to the LLC interests of the judgment-debtor when the LLC that issued those interests is not of itself subject to the jurisdiction of the court.  Consider a court sitting in Jefferson County, Kentucky. The judgment debtor, domiciled in Kentucky, holds a membership interest in an LLC that is organized in Colorado; the LLC is not a party to the lawsuit.  Can the Jefferson Circuit Court issue a charging order as to the judgment-debtor’s interest in the Colorado LLC?  The courts disagree as illustrated by a pair of recent decisions.

   In Oberg v. Lowe, 2021 WL 495043 (D. Kan. Jan. 4, 2021), the court cited Professor Carter Bishop (Id., note 7, citing Carter G. Bishop, LLC Charging Orders: A Jurisdictional & Governing Law Quagmire, 12 No. 3 Bus. Ent. 14, 21 (May/June 2010)) for the proposition that there are “three ways a court can have jurisdiction to enter an LLC charging order: (1) Personal jurisdiction over the member, (2) In rem jurisdiction over the LLC membership interest to be charged, or (3) Personal jurisdiction over the LLC itself.”  On that basis it was recommended that the court had jurisdiction to issue the requested charging orders in that “Defendant is a citizen of Kansas. If Defendant were not a citizen of Kansas, the Court would have in rem jurisdiction over his interests in the various limited liability company interests, all of which were formed in Kansas.” 2021 WL 495043, *2 (footnotes omitted).

In contrast is the decision rendered in Steamfitters Union, Local 420 Welfare Fund v. Direct Air, LLC, 2020 WL 6131163 (E.D. Pa. Oct. 10, 2020),  wherein the court sitting in Pennsylvania determined it did not have jurisdiction to enter a charging order as to the judgment-debtors interests in a New Jersey LLC. See also id. at note 18 (suggesting that the judgment-creditors could domesticate the judgment in New Jersey and from a court in that state request the charging order). The judgment-creditors argued the Pennsylvania court had that capacity:

 The question is whether a Pennsylvania court can charge a transferable interest in a New Jersey limited liability company. The plaintiffs contend that jurisdiction over a foreign limited liability company is not required to enter a charging order against its members’ transferable interests. They argue that because we have personal jurisdiction over SCST’s members, our jurisdiction over them extends to their personal property, wherever it is located. They rationalize that because a judgment creditor, as transferee, obtains only limited rights of a member, the charging order will affect only the member’s transferable rights and will not affect SCST itself.

See id. at *3.  Notwithstanding this invitation the court found that the New Jersey LLC did not have minimum contacts with Pennsylvania sufficient to assert jurisdiction, and on the basis the requested charging order was denied.  Id. at *6 (“Because we lack authority under the PULLCA to charge the defendants’ transferable interests in the New Jersey limited liability company over which we have no jurisdiction, we shall deny the plaintiffs’ motion for entry of a charging order.”).