Saturday, December 31, 2011

Thomas T. Johnson dies at 88; judge ruled that Holocaust was a fact

Thomas T. Johnson dies at 88; judge ruled that Holocaust was a fact

Not that this has any bearing on business entity law, but Judge Johnson was a graduate of the U of L Law School.
I'm not even going to start in on Holocaust Deniers

Friday, December 30, 2011

Personal Guaranty Ruled Invalid

Personal Guaranty Ruled Invalid

      In a decision rendered in early November by the Kentucky Court of Appeals, a shareholder’s personal guaranty of a corporate obligation was held invalid for failure to expressly refer to the obligation guaranteed. Brunswick Bowling & Billiards v. Margaret L. Ng-Cadlaon, No. 2010-CA-001844-MR, 2011 WL 5244971 (Ky. App. Nov. 4, 2011).

      Ng-Cadlaon was a shareholder in and officer of R&S Enterprises, d/b/a “Blue Ribbons Lane.” It financed certain equipment purchased from Brunswick via a loan from Deutsche Financial Services Corporation. Ng-Cadlaon and the other R&S shareholders personally guaranteed this debt. When R&S defaulted, Bruswick filed a complaint against both R&S and the individual guarantors. Ng-Cadlaon moved for summary judgment on the basis that the guaranty was unenforceable for failure to satisfy the requirements of KRS § 371.065.

      The guaranty at issue was not part of the obligation being guaranteed and it did not specifically recite either the maximum aggregate liability of the guarantor or the date on which the guaranty would terminate. That being the case, the statute requires that the guaranty “must expressly refer to the instrument or instruments being guaranteed in order to be enforceable.” Slip Op. at 4. The guaranty provided that it would apply to:

          One or more security agreements, including but not limited to conditional sales agreements, leases,  chattel and/or real estate mortgages, notes or other deferred or time payment paper, and any and all agreements relating to the purchases of such paper or documents (all of the foregoing hereinafter called “Security Obligations”)….   Slip Op. at 3.

While it was Brunswick’s position that there was no doubt as to the obligation Ng-Cadlaon agreed to secure, she contended that the guaranty, containing “a generalized laundry list of potential present and future obligations of varying types” (Slip Op. at 4) was insufficient to satisfy the requirements of KRS § 371.065. Rejecting Brunswick’s assertion, the Court held that:

The fact that the note at issue falls within one of the categories of obligations listed in the guaranty is insufficient in itself to constitute an express reference.  Slip Op. at 5.

Thursday, December 29, 2011

Will No One Rid Me of This Turbulent Priest?

Will No One Rid Me of This Turbulent Priest?

            Today marks the anniversary of the murder in 1170 of Saint Thomas Becket.  This murder has always been the most serious stain upon the reign of King Henry II

            Of Norman descent (the movie Becket inaccurately has Henry referring to Becket as a Saxon), Becket rose to be appointed Lord Chancellor of England.  While Chancellor Henry nominated Becket (who at this time was not a priest) to the position of Archbishop of Canterbury, clearly hoping that Becket would use his power as primate of England to mold ecclesiastical policy in favor of royal interest.  Becket failed to do so, rather becoming an ascetic and placing the interests of the Church over those of the crown.  Eventually he was forced to resign as Lord Chancellor.

            The contest of wills between Henry and Becket over the Constitutions of Clarendon, they seeking to increase the power of the civil state over the Church and its constituents, led to a final break in the relationship, with Becket even fleeing England for France. 

            Likely well into his cups, Henry made a statement (exactly what was said is lost to history – there are conflicting accounts) that was interpreted by four knights as a direction to kill Becket.  They crossed the Channel and challenged Becket in Canterbury Cathedral, there killing him.  Becket was canonized barely three years later, and the four assassins were excommunicated and ordered to go on pilgrimage to the Holy Land (at least one of them thereafter became a Templar).  Henry would later do public penance at Becket’s shrine in Canterbury Cathedral.

            There is a passing reference to Becket in The Lion in Winter. 

Ohio LLC's Incentive Compensation Creates Partnership With Former Employee

Ohio LLC's Incentive Compensation Creates Partnership With Former Employee

Doug Batey's excellent review of this decision out of Ohio deserves a careful review. Better drafting as to the nature of the desired realtionship could have avoided this problem.

Tuesday, December 27, 2011

Larry Ribstein - A Short Remembrance

As already noted, Larry Ribstein passed away this past Saturday.  The various blogs are replete with thoughts and remembrances of Larry.  He was a giant in the field.  Anyone who thinks they can be involved in the fields of unincorporated business entity law without relying upon his thoughts is simply delusional.  The effects of his various treatises, Bromberg and Ribstein on Partnership and Ribstein and Keatinge on LLCs, permeat the thinking on the fields.  The cases and even the statutes often incorporate the guidence there provided.  Larry's input as Reporter on the 1992 Prototype LLC Act further influenced the manner in which nearly all LLC statutes were constructed and the rules set forth therein.

Some found Larry to be abrupt or domineering and unwilling to consider views at odds with his own.  Even accepting that view, he was in my experience always willing to discuss any theory and we as well always supportive of those of us joining the field.  I took it as a special indication that I was doing (in at leat one instance) something right when Larry cited one of my articles in a piece he wrote.

Larry will be missed, and the shoes he so well filled will likely remain empty for a long time.


The Kentucky Business Entity Filing Act

The Kentucky Business Entity Filing Act
Effective January 1, 2011, the Kentucky Business Entity Filing Act went into effect.  The review of that legislation, co-authored by myself and Laura K. Tzanetos, formerly with Stoll Keenon Ogden PLLC and now in-house counsel with Affiliated Computer Services, Inc., has just been released by The Northern Kentucky Law Review.  That article can be accessed HERE

The 2010 Amendments to Kentucky's Business Entity Laws

The 2010 Amendment to Kentucky’s Business Entity Laws
My review of the 2010 amendments to Kentucky’s various business entity laws has just been released by the Northern Kentucky Law Review.  That article can be accessed HERE.

Thursday, December 22, 2011

Fiduciary Standards for Corporate Directors

Kentucky Court of Appeals Hold That Business Corporation Act Sets Forth
An Exclusive Standard for Director Fiduciary Obligations

       Last Friday, the Court of Appeals issued an important decision on the interpretation of fiduciary duty provisions of the Business Corporation Act. The New Lexington Clinic, P.S.C. v. Cooper, ___ S.W.3d ___, 2011 WL 6260442 (Ky. App. Dec. 16, 2011).

        Cooper, a physician and director of The New Lexington Clinic (the “New Clinic”), while still a director, entered into negotiations with Baptist Hospital with respect to moving his practice. He entered into a letter of intent to make that move, and as well began negotiating, on Baptist’s behalf, with other New Clinic employees about likewise moving. After the move was announced, the New Clinic brought suit against Cooper and others alleging breach of various fiduciary duties, citing in support thereof Steelvest and Aero Drapery. The complaint did not, however, cite the Kentucky Business Corporation Act and specifically KRS § 271B.8-300. Summary judgment was granted the defendants on the basis that the New Clinic sought to bring its action under now defunct common law claims rather than relying upon the statutory standards set forth in KRS § 271B.8-300. Ultimately, the summary judgment has been reversed on the basis that the complaint was sufficient to set forth a claim for breach of fiduciary duty and on the basis that insufficient discovery had been completed prior to the dismissal.

       In my mind, the most important aspect of the case is the Court’s explication of the relationship of the common law fiduciary duties and the statutory standards. To that end, the Court wrote:

"At issue is whether KRS 271B.8-300 supplants the common-law claim as the circuit court found, or whether the common-law claim remains viable for the reasons articulated by NLC. We must conclude that the General Assembly intended for KRS 271B.8-300 to apply in all circumstances where money damages are sought in a claim of breach of fiduciary duty against a corporate director. The Legislature stated in clear and unambiguous language that “any action taken as a director, or any failure to take any action as a director, shall not be the basis for monetary damages . . . unless . . . [t]he director has breached or failed to perform the duties of the director’s office in compliance with this section[.]” (Emphasis added). KRS 271B.8-300(5). Using mandatory “shall” language, the General Assembly went on to state in section (6) that a “person bringing an action for monetary damages . . . shall have the burden of proving by clear and convincing evidence the provisions of subsection (5)(a) and (b) of this section, and the burden of proving that the breach or failure to perform was the legal cause of damages suffered by the corporation.” (Emphasis added).

In examining whether this language evinces the Legislature’s intent to supplant the competing common-law claim of breach of fiduciary duty, we look to James, supra, which held that a common-law claim may not be repealed by implication, and that the statutory intent to abrogate the common law must be clearly apparent. KRS 271B.8-300(5) provides that any action taken as a director or any failure to take action as a director shall not be the basis for a claim of monetary damages unless the director breached a duty under this section. In enacting this section, the Legislature cast a wide net which addresses any claim for monetary damages arising from a director’s alleged breach of fiduciary duty. The conclusion is bolstered by the inclusion of section (6), which sets out the mandatory burden of proving a breach by clear and convincing evidence — a burden which the parties acknowledge is greater than that of the common-law claim. Aside from this heightened burden of proof, KRS 271B.8-300(5) tracks the common law very closely. The Legislature has merely meticulously set forth the claims and remedies available under common law. We cannot say that the change in the burden of proof indicates an intent to abrogate the common-law claim entirely. Rather, it merely increases the burden of proof."

     Ergo, the General Assembly having comprehensively and in exclusionary language addressed the subject matter, the prior common law has been supplanted.

        This decision having been rendered just last week, there is no word yet on whether one side of the other will seek review by the Kentucky Supreme Court.

      IMHO, should there be an appeal, the decision of the Court of Appeals with respect to the exclusivity of KRS § 271B.8-300 should be upheld. As I have written previously (see, e.g., my posting with respect to the 1400 Willow v. Ballard, Sept. 29, 2011), the common law of fiduciary obligations is and should be applicable only where there exists a gap or where it is intended by the legislature, such as in the case partnerships, that the common law still apply. Where, in contrast, the legislature has comprehensively addressed the topic, such as here addressing the standards by which culpability for a breach of a duty is assessed, it is the statutory language that must control. However, the ultimate decision of the Court of Appeals (and the trial court) needs to be reversed.  While it is true that the statute is the exclusive recitation of the direcotor's fiduciary duties, it is exclusive as to actions taken as a director or any failure to act as a director.  Drs. Cooper et al.were not acting as directors when they engaged in discussions of joining a competing venture, decided to do so, and solicited company employees to leave with them to thereafter compete with the New Lexington Clinic.  As such the question is not whether 271B.8-300 is exclusive (which it is within its scope of application), but whether it is applicable as to conduct not on behalf of the venture.  To that latter question the answer is no.

Monday, December 19, 2011

Improper Personal Benefit - Two Models

Improper Personal Benefit: Is Benefit Dependent on the Presence of a Loss?

       Recent newspaper stories with the respect to the activities of an official of a California stadium authority serve as an interesting backdrop for a consideration of the distinction that exists between the law of corporations and the law of partnerships as to deriving personal benefit from venture assets.

      According to the various stories, a stadium official, when the stadium was otherwise engaged in an upgrade, made orders for high-end sound equipment, charging them to his personal credit card. In turn, he was reimbursed by the stadium authority. There is no suggestion that the ultimate price paid by the stadium authority was any higher than it would have been had the vendor been paid directly with the authority’s check. What did happen, however, is that the stadium official racked up significant bonus credits on his personal credit card, sufficient, by one newspaper’s calculation, to pay for several days at the Ritz-Carlton or several first class international plane tickets.

      Even as the stadium authority was in no worse position than it otherwise would have been, there has been a public uproar at the fact that the stadium official personally benefitted from these transactions. Apparently, the view of those detractors is that, even though the authority was in no worse position, it was inappropriate for the official to come out in a better position.

      This story got me thinking about the distinction that exists between the laws of corporations and partnerships as to the personal benefit derived from the use of venture assets.

      In the context of a business corporation, it would seem that the stadium official’s conduct would not be subject to sanction. In that paradigm, the utilization of corporate assets for personal benefit is permitted so long as the terms of the transaction are “fair to the corporation.” KRS § 271B.8-330(1)(c). Where, as is apparently the case with respect to the purchases of the high-end sound system equipment for the stadium, the venture has neither lost nor been deprived of anything it could have otherwise had, the terms are fair to the corporation (assuming, of course, that the corporation has neither a credit card nor an interest in flying first class or staying at the Ritz-Carlton) and there exists no injury.

      In contrast, the law of partnerships looks not to whether the transaction was “fair” to the partnership, but looks simply to whether a partner, utilizing partnership assets, personally benefitted. See, e.g., UPA § 21(1); KRS § 362.250(1). Thereunder, a partner who utilizes partnership assets and in so doing derives a benefit is obligated to hold that benefit in trust for the partnership. It matters not whether the partnership in any manner lost anything on the transaction, but only whether the individual partner realized a gain. For that reason, the fact that the transaction was “fair” to the partnership, i.e., that at minimum, the partnership was not worse off than it otherwise would have been, is not a defense to the charge of having derived an improper personal benefit.

      These different mechanisms for assessing personal benefit cases are simply different from one another; neither, on an objective basis, is more “correct” than is the other. What is important is that the distinctions between them be appreciated in a particular application and insuring that the appropriate test is applied.

Thursday, December 8, 2011

Why Corporations?

Why Corporations? 
            Although often vilified in the current “Occupy Wall Street” environment, the corporation is a tool of long vintage created to solve a particular problem, namely the ownership of property for longer than the lifetime of a particular person.  While limited liability, the principle that the owners of the venture are not, beyond their investments made, liability for the debts and obligations of the venture, is oft cited as the raison d’ĂȘtre of the corporation, such was a much later development.

            Property jointly held underwent, especially upon the death of a co-owner, a disruption in its ownership and the risk that at least a portion of the corpus would be alienated from the venture.  That risk was addressed by the creation of an artificial being, the corporation, it holding title independently of its constituent owners.  As described in a venerable treatise, namely James Grant, A Practical Treatise on the Law of Corporations in General as well Aggregate as Sole 16 (T & J.W. Johnson 1854):

“A corporation is an institution calculated for and capable of duration as long as the world lasts, though it may be brought to a termination by certain accidents or by certain defaults of duty on the part of its members at any period; but however long its duration, the corporation continues the same; and the same rights, privileges, duties and liabilities attach to is as it had at the first moment of its creation; precisely as though it were an individual.  Personae vice fungitar.

This unbroken personality, this beautiful combination of the legal characters of the finite being with the essentials of infinity appears to have been the primary object of the invention of incorporations, - an invention which, perhaps more than any other human device, has contributed to the civilization of Europe, and the freedom of its states.”
            You must appreciate the quality of the language, one of the reasons I enjoy the treatises of this era.

Wednesday, December 7, 2011

The Assassination of Cicero

The Assassination of Cicero

            Today marks the anniversary of Cicero in 43 B.C.  A lawyer, politician, writer and orator, his letters serve as both a source for the goings-on in Rome and its empire and as guidance for the art of letter writing.  Thinking Marc Antony to be little more than a thug, Cicero took the additional step of detailing his views in a series of speeches, hoping to reduce Antony’s influence for the benefit of Octavian, Caesar’s heir.  When, however, Octavian and Antony joined forces in the Second Triumvirate, Cicero’s days were numbered, and he was “proscribed” (i.e., ordered executed and his property seized).  While the depiction of his execution as portrayed in the HBO series Rome was true to his character, it in fact took place on a road with Cicero riding in a litter; he did not resist.

Tuesday, December 6, 2011

Diversity Jurisdiction and LLCs

Diversity Jurisdiction and LLCs
            In a recent decision, the Eastern District of Kentucky has again addressed diversity jurisdiction with respect to LLCs.  Citizens Bank v. Plasticwear, LLC, 2011 WL 5598883 (E.D. Ky. Nov. 17, 2011). 
            Most of this decision deals with the proper alignment of parties in a lawsuit as either defendants or plaintiffs in determining whether diversity jurisdiction exits.  Before moving on to that point of analysis, the Court addressed how the citizenship of a limited liability company should be assessed.  The plaintiff sought to ascribed to Plasticwear citizenship in (and apparently only in) Kentucky on the basis that its principal place of business, determined utilizing the “nerve center” of Hertz Corp. v. Friend, 130 S. Ct. 1181 (2010), is in Kentucky.  “Citizens Bank contends that Plasticwear LLC’s principal place of business is determinative of citizenship as it is for corporations,” citing 28 U.S.C. § 1332(c)(1).  It bears noting that this recitation of the test utilized for the corporation is incomplete.  In fact, a corporation has potentially two citizenships, that of its principal place of business and that of its jurisdiction of organization.  Based upon the Secretary of State’s website, Plasticwear is a Delaware LLC.
             The Court (correctly) noted that the principal place of business of an LLC “is not relevant to its citizenship determination.”  2011 WL 5598883, *3.  An LLC is not subject to the citizenship test that applies to a corporation, rather having the citizenship of each of its members.  Id., citing Homfeld II, LLC v. Comair Holdings, Inc., 53 F. App’x 731, 732 (6th Cir. 2002) and JMTR Enterprises, LLC v. Duchin, 42 F. Supp.2d. 87, 93 & n. 2 (D. Mass. 1999).

Monday, December 5, 2011

Doug Batey on Meyer v. Christie

Kansas Court Broadens Charging Order Against Single-Member LLC

Here if Doug Batey's review of the Meyer v. Christie decision on a charging order against the sole member of a Kansas LLC.

Friday, December 2, 2011

Landlord Not Protected by Exclusive Remedy of Workers Compensation

For Every Action there is an Equal and Opposite Reaction,
and What is it With Funeral Homes?

        A recent case from the Nebraska Supreme Court highlights a perhaps negative consequence of a common structure employed in closely held businesses.  The structure at issue is as follows:  a group of owners organize a business corporation or LLC to be the operating company.  They as well organize, typically in the form of a partnership or LLC, a parallel company that will own the real estate and facility in which the operating company operates.  Lease payments from the operating company cover the real estate company’s borrowing costs and, assuming that piercing is not an issue, protect the accumulated value in the real estate company from claims by the creditors of the operating company.
        It was this structure that was employed in the case under review in Nebraska.  Howsden v. Roper’s Real Estate Company, 2011 WL 5105810 (Neb. Oct. 28, 2011).  Howsden was an employee of Roper & Sons, Inc., a funeral home.  That funeral home operated from a facility owned by Roper’s Real Estate Company, Inc.; both Roper & Sons and Roper’s Real Estate had the same ownership.  Howsden, an employee of the funeral home company, was injured on the property, falling down a seldom-used elevator shaft.  In connection therewith, she received workers’ compensation benefits pursuant to the policy of the operating company.  From there, she brought as well a negligence action against the real estate company based upon improper maintenance of the elevator.
        The real estate company defended on the basis that Howsden’s rights under workers’ compensation coverage were the sole and exclusive remedy available to her, in effect arguing for consolidation of the operating and real estate companies.  This effort was unsuccessful.  The Court recognized that setting up separate business structures for different parts of an operation is entirely legitimate.  At the same time, the Court noted that doing so has consequences.  One of the consequences is, necessarily, that the different business ventures, absent circumstances justifying piercing, will be treated as distinct from one another.  Under Nebraska, law, piercing is not available absent fraud or a significant equitable basis, and the Court here found that there was neither fraud in the structuring nor an equitable basis for ignoring the legal distinctiveness of the different operation, stating that it would be at best near impossible for one to structure different operations in difference corporations and then argue, on an equitable basis, that they should be consolidated.  Ergo, Howsden’s suit against the real estate company could proceed, in not being barred by the exclusivity provision of Nebraska’s workers’ compensation statute; the real estate company was not her employer.
        Curiously, the Kentucky courts have considered a strikingly similar factual situation and came to a similar conclusion.  Jessie v. Dermitt, No. 2005-CA-0011961-MR (Ky. App. Dec. 8, 2006) (Not To Be Published).  Therein, the plaintiff fell through a hole in the floor of a funeral home that was being remodeled.  The operations of the funeral home venture were structured as an LLC; the real property was owned separately by the LLC’s members.  The real property owners defended on the basis of the exclusivity provision of the workers’ compensation law.  For essentially the same reasons as those applied in the Howsden decision, that effort was in Kentucky was rejected.  “[The owners] have cited no legal authority to this Court that permits the exclusive remedy provisions of the Workers’ Compensation Act to be extended to a landlord who owns the premises where the employer’s business is operated.”  Jessie v. Dermitt, slip op. at 7.

Thursday, December 1, 2011

Membership in a Nonprofit Corporation

The Kentucky Court of Appeals Again Addresses
Membership in a Nonprofit Corporation
          The Court of Appeals has again addressed the questions of membership in a nonprofit corporation and obligations owed to the members.  Fenley v. Kamp Kaintuck, Inc., 2011 WL 5443440 (Ky. App. Nov. 10, 2011) (Not to be Published).  This decision follows upon, in various aspects, 1400 Willow Council of Co-Owners, Inc. v. Ballard (reviewed here on September 29) and Tinsley v. Wildwood Country Club (reviewed here on October 4).
        The Fenleys were members of Kamp Kaintuck, Inc., a Kentucky nonprofit corporation.  Under KKI’s bylaws, all active members were required to attend once every three years.  There was no dispute that the plaintiffs did not do so.  On that basis, KKI’s Board of Directors terminated the plaintiffs’ memberships.  They in turn sued for wrongful termination of membership status, made allegations of breach of fiduciary duty, sought an accounting of KKI’s assets and as well its liquidation.
        As to the first complaint, namely that the Fenleys were wrongfully terminated from member status, the Court easily dismissed that count.  They were terminated for violation of the bylaw requirement that they attend the camp at least once every three years.  In support of this conclusion, the Court cited 14A C.J.S. Clubs § 14 (2011).  While no doubt this authority supports the proposition for what it was cited, it is curious that the Audubon County Club decision (785 S.W.2d 501 (Ky. App. 1990)), it having been relied upon by the Wildwood County Club court, was not cited.
          As to the count for breach of fiduciary duty, and consistently with the decision rendered in 1400 Willow v. Ballard, the Court stated that the fiduciary duties run to the corporation and the shareholders/members as a whole.  “Hence, a Board member or officer owes no common-law fiduciary duty directly to an individual shareholder/member,” citing 18B Am.Jur.2d Corporations § 1462 (2011).  From this position, the Court determined that any action for enforcement of those fiduciary duties, whether existing at common law or based upon statute, must be brought in the form of a derivative, rather than a direct, action.  To the extent that the plaintiffs sought to bring a derivative action, in that their membership status had already been terminated, the Court held that they lacked standing to do so.  With respect thereto, the Court cited Bacigalupo v. Kohlhapp, 240 S.W.3d 155, 157 (Ky. App. 2007) for the continuous ownership standard that is applicable in the context of a business corporation.  See also KRS § 271B.7-400(1).  Purely as an aside, why do courts, in addressing statutory requirements, cite cases that talk about the statute rather than directly citing to the statute?  The Court set forth its position that, in any derivative action involving a nonprofit corporation, a similar requirement would be applied, but specifically sidestepped the question as to whether derivative actions exist in nonprofit corporations.  2011 WL 5443440, *3, note 2.
           With respect to the claims for an accounting and for judicial dissolution, the Court held that, as the Plaintiffs were no longer members of KKI, they lacked standing to seek either of those remedies.