Tuesday, February 26, 2013

KRS § 275.250 Says What It Means and Means What It Says

KRS § 275.250 Says What It Means and Means What It Says

      A 2012 decision of the Sixth Circuit Court of Appeals, it reversing the decision of the District Court for the Eastern District of Kentucky, confirmed that KRS § 275.250 both says what it means and means what it says.  Lairsen v. Figuerado, 466 Fed. Appx. 480, 2012 WL 762887 (6th Cir. Mar. 9, 2002).
      Mike Lairsen brought suit against Jim Figuerado and Mike Neves claiming compensation for having facilitated their acquisition of a limited liability company that in turn owned a marina.  The District Court granted Figuerado and Neves summary judgment, holding that as the LLC held real property, the transaction was subject to both the statute of frauds and Kentucky’s law governing the licensing of real estate agents.  In that the agreement that Lairsen sought to enforce involved real property owned through an LLC, the trial court held that the statute of frauds governing transfers of real property applied.  Further, in that Lairsen was not licensed as a real estate broker, Kentucky law precluded his claim for services.  2010 WL 1740881 (E.D. Ky.).  Both of these determinations were reversed on appeal.
       KRS § 275.250 provides that an interest in a limited liability company is personal property.  Although not cited by the Court of Appeals, it should be noted as well that KRS § 275.240 provides, inter alia, that the LLC’s property is its own and not that of the members.  In that the transaction sued upon involved the conveyance of interest in an LLC, rather than a transfer of the underlying real property, the transaction did not fall within the requirements applicable to the licensing of real estate brokers.  “Thus, the proposed transaction facially involved a sale of personal, not real, property, and a transaction of personal property generally would not require a real-estate broker’s license.”  2012 WL 762887, *3.
      Recognizing the great uncertainty that would apply were the decision of the District Court to stand, the Court of Appeals wrote:
Finally, the district court’s interpretation of Kentucky’s real-estate-brokerage law would lead to problematic results. Since many businesses have some real-property holdings, under the district court’s reasoning many business transactions would require a licensed real-estate broker. For example, such reasoning would require a stock broker attempting to buy or sell shares of a company that owns real property in Kentucky to possess a Kentucky broker’s license. This would create a significant burden on commercial transactions that involve companies with a presence in Kentucky. There is no authority that this is the intent of the Kentucky legislature or Kentucky courts, nor does the text of Kentucky law support such an interpretation.

Wednesday, February 20, 2013

What You Write is What You Get – Option to Acquire Interest in LLC Enforced as Written

What You Write is What You Get – Option to Acquire
Interest in LLC Enforced as Written

      On Valentine’s Day the New York Court of Appeals gave a significant gift to the holder of an option to acquire an interest in an LLC and not otherwise requiring compliance with the terms of the LLC’s operating agreement.  Long Term Care Holdings, LLC v. Cammeby’s Funding, LLC, 2013 NY Slip Op 00951 (Feb. 14, 2013).
      Cammeby’s Funding LLC (“Funding”) is managed by Robin Schron (“Schron”).  Fundamental Long Term Care Holdings LLC (“Fundamental”) is owned by Grunstein and Forman.
      SWC Property Holding, LLC (“SWC”), originally controlled by Schron, had in 2003 acquired 26 nursing homes.  In 2006, Grunstein and Forman, through Fundamental, acquired those nursing homes.  While Fundamental had only $100 of contributed capital ($50 each from Grunstein and Forman), it borrowed the $10 million needed to buy the nursing homes.  Some six months after the sale of the nursing homes to Fundamental, it and Funding entered into an option permitting Funding to acquire a one-third interest in Fundamental for $1,000.  The option as well provided that upon its exercise Funding would be admitted as a member of Fundamental and contained a merger clause.
      Upon Funding’s delivery of its notice of exercise of the option, including a $1,000 certified check, Fundamental responded that Funding would as well need to pay the fair market value of a one-third interest in Fundamental, relying upon § 3.3 of its operating agreement, it providing in part:
Upon the issuance of any additional Interests, the Person to whom such Interests are issued shall make a capital contribution to the Company in respect of such issuance in an amount equal to at least the fair market value per Interest so issued.
That fair market value of a one-third interest was estimated to be $33 million.  Fundamental initiated a declaratory relief action to the effect that Funding had to comply with § 3.3 of its operating agreement.
      Noting that the option agreement was entered into between sophisticated parties, the Court of Appeals affirmed both the trial court and the Appellate Division.  The operating agreement, interpreted by its terms, set the acquisition price of $1,000.  It could have been provided that the complete exercise was dependent as well on satisfaction of the terms of the operating agreement, but it did not.  As for the argument that the sale of a $33 million interest for $1,000 is commercially unreasonably, the Court wrote that issues of reasonableness arise only when the contract is ambiguous, and this one was not.

Tuesday, February 19, 2013

Connecticut Court of Appeals Upholds Separateness of Single-Member LLC

Connecticut Court of Appeals Upholds Separateness of Single-Member LLC

      A recent decision of the Connecticut Court of Appeals has (yet again) affirmed that an LLC and its member(s) are separate, and that claims belonging to the LLC are not as well claims of the members.   O’Reilly v. Valletta, 55 A.3d 583 (Conn. App. Nov. 20, 2012).
      Hub Associates, LLC and its sole member, O’Reilly, brought suit against Robert Pformer with respect to the use of certain real property leased by the LLC from a condominium association of which Pformer was a board member.  Those claims were dismissed by the trial court.  For reasons that are not entirely clear, O’Reilly, but not the LLC, initiated an appeal of the trial court’s ruling.  Pformer, in addition to arguing on appeal that the decision of the trial court was substantively accurate, as well argued that O’Reilly lacked standing to bring the appeal, and that it should be dismissed for lack of jurisdiction.
       Notwithstanding that O’Reilly was the sole member of the LLC, the Connecticut Court of Appeals held that a “member or manager … may not sue in an individual capacity to recover for an injury based on a wrong to the limited liability company.”  Id. at 587.  On that basis the appeal was dismissed.
      The principles identified in this decision are equally applicable in Kentucky as evidenced by the recent decision of the Court of Appeals in Chou v. Chilton.  Other cases rendering the same result include:
·                     Zipp v. Florian, 2006 WL 3719373 (Conn. Super. Nov. 13, 2006) (member of an LLC lacked standing to bring suit based upon damage to property owned by LLC);
·                     Finley v. Takisaki, 2006 WL 1169794 (W.D. Wash. April 28, 2006) (members of an LLC lacked standing to assert a claim for injury to the LLC);
·                     Carey v. Howard, 950 So.2d 1131 (Ala. 2006) (members of LLC lacked standing to sue for declaratory relief with respect to option agreement between LLC and third-party);
·                     Northeast Realty, LLC. v. Misty Bayou, L.L.C., 920 So.2d 938 (La. App. 2006) (members of an LLC lacked standing to intervene in an action against an LLC to quiet the tax title because claim of ownership of property in dispute belonged to the LLC); and
·                     Cortellesso v. Town of Smithfield Zoning Board of Review, 888 A.2d 979 (R.I. 2005) (sole member of LLC lacked standing to appeal zoning decision on property that the sole member had conveyed to the LLC).

Court of Appeals Addresses Damages Arising from Breach of Lease

Court of Appeals Addresses Damages Arising from Breach of Lease

      The Kentucky Court of Appeals has issued helpful guidance with respect to the interpretation of commercial lease agreements.  Nohr v. Hall’s Rentals, LLC, ___ S.W.3d ___, 2013 WL 462004 (Ky. App. Feb. 8, 2013). 
      Adrian Nohr, an individual, leased office facilities for the operation of a chiropractic practice from Hall’s Rentals, LLC.  The lease, with a five-year term, provided rent in the amount of $5,000 due on the first of each month.  The lease did not contain a provision accelerating all rent due under the term of the lease upon its breach.
      By early 2010 (the opinion is not more specific) Nohr was in default of his obligations to Hall’s.  On February 24, 2010, the District Court entered a forceable detainer judgment against Nohr, allowing him to remain in the property for forty-five days provided a payment of $10,000 was made to Hall’s.  That payment was made and Nohr vacated the property at the end of the forth-five day period.  Since that time Nohr has not had possession of the property, and Hall’s undertook maintenance and similar obligations that were to have been performed by Nohr.  Nohr as well undertook certain activities to re-let the property, all of which were ultimately unsuccessful.

      Hall’s as well filed suit against Nohr, seeking damages under the contract for accrued but unpaid monthly payments, maintenance obligations performed by Hall’s and attorneys’ fees.  Nohr defended on the basis that, with Hall’s successful eviction of him from the property, he had no further obligations under the agreement, arguing that the “term” of the agreement had been terminated thereby.  Hall’s, in response, noted that the contract language contemplates that upon default there may be recovery for monthly rental expenses that accrue in the future.  The contract provided:
DEFAULT.  If default is made in any payment of said rent, or any part thereof, within thirty (30) days from the date said payment is due, or in fulfillment of any of the covenants or agreements herein specified to be fulfilled by the Lessee, or if any waste be committed or unnecessary damage done upon or to said premises, the Lessor may, after thirty (30) days’ written notice to the Lessee and the Lessee has not corrected said default, declare the said term ended and enter into possession of said premises and sue for and recover all rent and damages accrued or accruing under the lease or arising out of any violation thereof….
      The trial court granted Hall’s summary judgment with respect to its calculation of damages due and owing under the lease and as well determining that Hall’s had engaged in activities appropriate to mitigate damages.  Nohr appealed to the Court of Appeals.
      With respect to Nohr’s assertion that his obligations under the lease were terminated by Hall’s taking possession of the property, the Court of Appeals, as had the trial court, easily disposed of that argument, finding that the default provision of the lease clearly contemplated that the lessee’s obligations would continue.  In this respect, the court found that the use of the term “accruing” to be important:
We agree with the trial court as we believe that the language of [the default clause] plainly allowed Hall’s to seek recovery of any future rent obligation as it accrued under the terms of the lease.  In our view, the fact that the lease authorized Hall’s to “declare the [lease] term ended did not cancel its right to pursue “all rent … accruing under this lease.”  Instead, that language merely allowed Hall’s to take action to evict Nohr and to pursue a claim for rent and damages against him.  The fact that the word “and” is used as a conjunctive term between the specified remedies supports the conclusion that they are not intended to be exclusive to one another.  Moreover, the fact that the lease allows for the collection of rent “accruing” even after eviction and repossession indicates that Nohr’s requirement to satisfy his contractual rent obligation did not cease once same occurred.
      Turning, however, to the question of mitigation, the Court of Appeals, while indicating its agreement with the trial court, held that a determination on summary judgment that there had been sufficient efforts to mitigate damages was inappropriate.  “Thus, while we are inclined to believe that Hall’s efforts to mitigate were sufficiently reasonable, such is not our determination to make.”  On which basis, it reversed the similar determination by the trial court and directed that determination be made by the finder of fact.

Monday, February 18, 2013

The Death of Michelangelo

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 the 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.

      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.  In the next few weeks, the Cardinals of the Roman Catholic Church will gather under those paintings to elect the next Bishop of Rome.

      Michelangelo had also been commissioned (although the work was never put in place) to provide a new fa├žade 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.

     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, ….

Saturday, February 16, 2013

Charging Order Extends to All, and Not Only Cash, Distributions from LLC

Charging Order Extends to All, and Not Only Cash, Distributions from LLC
      In a recent decision of the Superior Court of Connecticut, it was confirmed that the rights of a judgment-creditor holding a charging order apply to all distributions made by the LLC to the judgment-debtor and not only distributions of cash.  Metkoff v. NCT Group, Inc., 2012 WL 6901181 (Conn. Super. Dec. 20, 2012). 
      Michael J. Parella, Sr., the judgment-debtor, was in turn a member in Pardev, LLC.  The plaintiffs sought a charging order against Parella’s interest in Pardev in satisfaction of the judgment.  Parella objected to the scope of the charging order, asserting it should not extend beyond the distribution of money from the LLC.  In response, the judgment-creditor asserted that “a charging lien must lawfully apply to the member’s right to any and all distributions of assets from the LLC to its members, including its rights to contracts and intellectual property.”
      Noting that (i) the holder of a charging order has the rights of an assignee of the member’s LLC interest, (ii) that an assignee is entitled to receive the distributions to which the assignor would be entitled, and (iii) that an LLC interest as defined, in part, as encompassing a member’s right to receive the distribution of “assets” from the LLC, the court was able to easily conclude that the charging order attaches to all distributions of LLC assets, and is not limited to distributions of cash.

Delaware Addresses Jurisdiction Over Non-Partner Manager of a Partnership

Delaware Addresses Jurisdiction Over Non-Partner Manager of a Partnership

      In New Media Holding Co., LLC v. Brown, C.A. No. 7516-CS (Del. Ch. Nov. 14, 2012), the court considered whether it would have jurisdiction over the manager of a limited liability partnership where (i) that manager was accused of breach of his fiduciary duties to the partnership but where (ii) the manager’s actions were not done in Delaware.  On those facts, the court determined it could not exercise jurisdiction over that manager. 
     The partnership in question, a Delaware limited liability partnership, had initially been formed as a Delaware LLC; subsequently it converted into the LLP form.  After the conversion into the LLP, the plaintiff purchased 50% of that venture.  Thereafter, it was alleged that the manager improperly diluted the plaintiff from 50% to 1%.  The manager was based outside the U.S.
       The court noted that, while other organizational forms provide that the Delaware courts would have jurisdiction, there is no Delaware law providing statutory jurisdiction over the manager of an LLP.  See, e.g., Del. Code Ann. tit. 10, § 3104(c)(1).  As the manager had not acted in Delaware, general long-arm jurisdiction likewise failed. 

Tuesday, February 12, 2013

Barrels of Fish and the Rise of a Maid

      Today marks the anniversary in 1429 of the so called "Battle of the Herring," of itself an unimportant event in that misnamed contest of wills identified as the 100 Years War (by the accepted measure it lasted 116 years).

      English forces were laying siege to Orleans (they already held Paris), and a supply convoy was brings additional armaments and food. A joint French and Scottish force attempted to intercept, but in the ensuing battle they took significant casualties.  In that the food supplies were made up in part of herring, the battle received its rather non-illustrious name.  Crecy and Agincourt have come down thru history as momentous events; not so Herring.

       Still, this small battle would have a significant impact upon the path of the war.  It was at this time that the young woman who would come down through his tory under the name Joan of Arc was first seeking an introduction that would lead to meeting the Dauphin.  She was making little headway, and the illiterate peasant was not likely to have found her way through the byzantine rules of the French court.  That is, until, one of her visions allowed her to tell of the losses at the Battle of the Herring, news that had not yet reached that part of France.  With that revelation she began her journey to the head of the French army and the ultimate relief of Orleans.