Wednesday, April 30, 2014
Just Because it Passed Spell-Check Does Not Mean it is Correct
A substantial portion of my practice involves the review of operating agreements. While I certainly will not suggest that I am immune from the problems of bad drafting, I am still amazed at the level of deficiency I oft see.
Recently I was called into a dispute involving a Kentucky-organized LLC and was provided copies of both the original and amended and restated operating agreement of the company, both written by a local firm who, as a matter of discretion, I will not name.
Initially, the lead-in paragraph of both the original and amended and restated operating agreement recited that the agreement has an effective date of December 1, 2011. The subject LLC was not formed, however, until September, 2012. In effect, this firm had written an operating agreement that purported to be effective over nine months before the LLC was formed.
Another curiosity in this operating agreement was that it provided that the company would be dissolved and its affairs wound up upon a series of events including the “filing of a certificate of dissolution by the Secretary of State under KRS § 275.295.” Now keep in mind that this is operating agreement for a company organized in September, 2012 with a purported effective date of December 1, 2011. Irrespective of which date is correct, this provision in the operating agreement is nonsensical in that KRS § 275.295 was repealed effective January 1, 2011.
Last, as a dispute resolution mechanism, this operating agreement called for “binding mediation.” In trying to puzzle through what could be “binding mediation,” I found interesting the statement of Judge Simpson in Reid v. Swift Pork Co., 2010 WL 1795533, *1 (W.D. Ky. May 4, 2010), in which he observed that “while there is no description whatsoever of what ‘binding mediation,’ it seems almost a contradiction in terms….”
Just because it passes spell-check does not mean that it is correct.
Monday, April 28, 2014
Defense That Suit Was Brought Under Assumed Name Was Waived
In a January opinion from the Court of Appeals, it rejected the defendant’s assertion that a lawsuit, initiated by the plaintiff under its assumed, not its real, name was invalid. Edwards v. Headcount Management, 2014 WL 346070 (Ky. App. Jan. 31, 2014).
Staff Corp. and Headcount Management entered into a Master Service Agreement (“MSA”) pursuant to which Headcount Management provided payroll processing and personnel services to Staff Corp. “Headcount Management” was an assumed name of Arrow Funding Corp. Staff Corp.’s obligation under the MSA were guaranteed by Debbie Edwards, Amanda Wood and Russell Wood, III. Ultimately, Headcount Management, under that name, would bring suit against Staff Corp. and each of the guarantors for payment on an open account of some $22,467.65.
Neither the motion to dismiss nor the answer filed by the defendants raised the issue that Arrow Funding was attempting to proceed under its assumed name, Headcount Management, rather than its real name. Ultimately, in response to a motion for summary judgment brought by Headcount Management, the defendants then for the first time raised the issue that Headcount Management is not itself a legal entity, but rather only an assumed name of Arrow Funding. The circuit court granted Headcount Management’s motion for summary judgment, which, in the words of the Court of Appeals, thereby “tacitly reject[ed] Edwards’s capacity defense.” After additional motion practice at the trial court level, this appeal followed.
While noting that there does not appear to be either a Kentucky statute or case to the effect that it is not possible to bring suit under an assumed, as contrasted with a real, name, the Court found that even if that defense was available, it is in a nature of an affirmative defense that was waived when not raised in either the motion to dismiss or the answer:
Here, Edwards wholly failed to assert capacity as a defense, by motion or responsive pleading, in a timely manner. Edwards faced two opportunities to raise a capacity defense: first in her pre-answer motion to dismiss, and second in her answer. No mention of capacity was asserted in either. At no point did Edwards seek leave to amend her answer. CR 15.01. Indeed, Edwards concedes the defense of capacity was first raised during the March 2011 summary-judgment hearing, several months after Edwards filed her responsive pleading. Therefore, we conclude that Edwards waived the defense of lack of capacity. 2014 WL 346070, *3.
Friday, April 25, 2014
A Curious Louisiana Statute on the Formation of LLCs
It is axiomatic, or least we thought it to be, that an LLC cannot enter into an agreement prior to the LLC’s formation. It is also taken as axiomatic, or at least it was, that the existence of an LLC cannot commence prior to the filing of the Articles of Organization (however denominated) by the appropriate Secretary of State. To that end, a contract entered into on behalf of a not yet formed LLC (a) binds the purported agents of the LLC as principals in that the purported principal did not yet exist; (b) the LLC will have any interest in that contract only if assigned by the purported agents; and (c) the LLC lacks the capacity to ratify, as contemplated by § 4.02(1) of the Restatement (Third) of Agency, the transaction.
It turns out there is at least one exception to these rules. Louisiana has a most curious statute, L.S.A. § 12:1310.1, which provides:
Retroactivity of company's existence; acquisition of immovable property prior to limited liability company's existence
Whenever any immovable property is acquired by one or more persons acting in any capacity for and in the name of any limited liability company which has not been issued a certificate of organization as provided by law, and the limited liability company is subsequently issued a certificate of organization in accordance with the provisions of R.S. 12:1304, the limited liability company's existence shall be retroactive to the date of acquisition of an interest in such immovable property, but such retroactive effect shall be without prejudice to rights validly acquired by third persons in the interim between the date of acquisition and the date that the limited liability company was issued the certificate of organization.
By my reading of the statute, but not having engaged in any other investigation, it is not required that the real property by in Louisiana, something to think about if ever caught in this situation.
Still, this is a circumstance that should avoided.
Wednesday, April 23, 2014
Discovery in Support of Jurisdiction Denied
In a recent trial court decision from New Jersey, a life insurance company brought suit against certain parties including LLCs, seeking a determination that two life insurance policies were invalid. While the amount in controversy was certainly not at issue, each policy being in the amount of $6.67 million, the plaintiff did not plead the domicile of any of the members of the LLC. The LLCs in turn moved to dismiss for the plaintiff’s failure to meet its requirements to demonstrate the existence of diversity jurisdiction. Rejecting the plaintiff’s request for jurisdictional discovery in order to support its complaint, the court wrote:
For the foregoing reasons, this Court finds that the Complaint, on its face, does not assert the complete diversity of Plaintiff and Defendants required to establish the subject matter jurisdiction of the federal courts under 28 U.S.C. § 1332. Defendants ALS and AEI are limited liability companies, whose citizenship is established by the domiciles of their members. The Complaint fails to include any such information about the members, and the Plaintiff, in briefing, admits that it brought the action without knowing any such information. While Plaintiff has requested jurisdictional discovery as an alternative to dismissal, the Court finds that in the context of subject matter jurisdiction, factors of judicial economy and the Federal Rules’ allocation to Plaintiff of the burden for establishing the court’s jurisdiction counsel in favor of dismissal.
Lincoln Benefit Life Co. v. AEI Life LLC, __ F.Supp.2d __, 2014 WL 1343266, *8 (D. N.J. April 4, 2014)
A similar ruling was issued in Osborn & Barr Commc’ns, Inc. v. EMC Corp., 2008 U.S. Dist. LEXIS 8430, 2008 WL 341664 (E.D. Mo. Feb. 5, 2008). There is however authority to the contrary. See, e.g., Carolina Casualty Ins. Co. v. Team Equipment, Inc., 741 F.3d 1082 (9th Cir. 2014).
Tuesday, April 22, 2014
Minnesota Adopts a New LLC Act
Minnesota has been famous as having one of the most curious LLC acts in the country, it providing, similar to those of North Dakota and Tennessee, for a board-management structure.
Effective August 1, 2015, Minnesota has adopted a new LLC act, this one based upon the Revised Uniform Limited Liability Company Act (“RULLCA”).
While there are certainly questions and issues with respect to RULLCA (I say that having been a member of its drafting committee), and although this act has never received the approval of the ABA’s Committee on LLCs, Partnership and Unincorporated Entities (is this what they mean by damning with faint praise?), the adoption of a standard act by Minnesota will have to be a step forward for that state.
Here is a LINK to a more detailed report on this development.
Proposed Amendments to Delaware’s Business Corporation Act
The Committee in charge of proposing amendments to the Delaware Business Corporation Act has released its 2014 proposal. A brief introduction thereto provided by the Morris Nichols firm out of Delaware, to which is linked the text of the proposal, can be accessed through this LINK.
Assuming passage (likely a foregone conclusion), the proposed amendments will become effective in August of this year.