Wednesday, August 27, 2014

Kentucky Supreme Court Strikes Down Statute Limiting Proximity of Bars/Restaurants in Louisville

Kentucky Supreme Court Strikes Down Statute Limiting Proximity of
Bars/Restaurants in Louisville

      In a recent decision, the Kentucky Supreme Court has struck down a statute that precluded certain holders of retail alcoholic drink licenses from being located within 700 feet of one another.  KRS § 241.075 precluded the issuance of a retail drink license to an applicant located in a “combination business and residential area” of a first-class city of another “establishment” was located within 700 feet of the applicant.  At the time this dispute arose, Louisville was unique in the Commonwealth of Kentucky as the only first-class city.  This statute, effectively applicable only in Louisville, was found to violate §§ 59 and 60 of the Kentucky Constitution, they precluding local and special legislation.  Louisville/Jefferson County Metro Government v. O’Shea’s-Baxter, LLC, 0085-DG, 2014 WL 4116490 (Ky. Aug. 21, 2014). 
      O’Shea’s-Baxter, LLC, doing business as Flanagan’s, applied for a retail liquor drink license to replace its restaurant drink license.  That application was denied on the basis that there were similar establishments within 700 feet.  Flanagan’s appealed that ruling on a number of grounds, including that the 700-foot requirement was unconstitutional as either special or local legislation otherwise forbidden by the Kentucky Constitution.  While the trial court rejected that notion, it was accepted by the Kentucky Court of Appeals.  There then followed an appeal to the Kentucky Supreme Court.
      Notwithstanding the fact that laws governing the regulation of alcoholic beverages are given great deference, the Supreme Court found that this statute violated the prohibition in the Kentucky Constitution against special and local legislation.  Essentially, the Court found that the purported aim of the statute, namely to reduce the concentration of establishments selling alcoholic beverages, is no different between Louisville, Lexington and other urban centers in Kentucky irrespective of whether those urban centers are located in cities of the first class.  Rather, the Supreme Court found:
[N]o rational basis is readily apparent to us by which we might presume that the circumstances associated with a concentration of liquor licenses in the “combination business and residential area” in Louisville are any different than they would be in other sizeable cities not designated as first-class or consolidated local governments, such as Lexington, Bowling Green, or Covington.  The business and residential areas in these other cities are not immune to whatever evils may flow from a concentration of retail drink licenses.  Thus, there is no reason to assume that the concentration of retail drink licenses in Louisville is “fraught with other or different consequences” than the concentration of similar licenses in other Kentucky cities.
      This was a unanimous decision of the Kentucky Supreme Court.

Friday, August 22, 2014

A Horse, a Horse, my Kingdom for a Horse

A Horse, a Horse, my Kingdom for a Horse

      Today is the anniversary of the Battle of Bosworth, the final major battle of that English civil war titled The War of the Roses.  It was at this battle that King Richard III, variously identified as the last King from the House of Plantagenet or the House of York, fell, he being the last English King to die in battle.  Henry Tudor, the victor, then became King Henry VII.
      Henry’s victory in battle was if anything surprising.  Richard’s forces outnumbered those of Henry.  Meanwhile, Lord Stanley held his own force; if combined with that of Henry, that of Richard would have been out-numbered.  At the same time, Richard held Stanley’s son as a hostage.  As battle was about to commence, Richard sent word to Stanley that if Stanley did not join with him, he would execute Stanley’s son.  Stanley replied, “I have other sons.” 
      Richard’s attack upon Henry’s position nearly succeeded, Henry’s standard-bearer William Brandon being killed at Henry’s side.  Richard’s fate was sealed when the Stanley family and its retainers, having until then not committed to either side, rode against Richard’s infantry as his cavalry was separately moving against Henry.
      William Brandon’s son Charles, ultimately Duke of Suffolk, would become the best friend of Henry VIII.
       In 2012, Richard’s remains were located in the course of excavations under a parking lot that now covers part of what was the Blackfriars (Dominican) Church in Leicester, England; early 2013 saw the announcement that testing had confirmed the remains were those of Richard.  In sad testimony to the modern age, litigation ensued as to whether Richard should be re-buried in Leicester Cathedral, apparently consistent with the terms of the agreement by which the archaeological work was performed and other British law, or in York where certain claimed descendants of Richard assert he would want to have been buried.  That question is now resolved, and Richard will be laid to rest in Leicester Cathedral.

Monday, August 18, 2014

Department of the Treasury Proposes That Banks Must Know Who Controls and Owns Business Entity Customers

Department of the Treasury Proposes That Banks Must Know Who Controls and Owns Business Entity Customers


            On June 30, the US Department of the Treasury issued a NPR (“Notice of Proposed Rulemaking") that, if put in place, would amend the Bank Secrecy Act (the “BSA”) to impose new limitations upon banks and other financial industry participants requiring that they solicit and receive information as to the ownership and control of various business entity clients.  As set forth in the summary accompanying the regulatory proposal, the Financial Crimes Enforcement Network of the Department of the Treasury:

is addressing the need to collect beneficial owner information on the natural persons behind legal entities by proposing a new separate requirement to identify and verify the beneficial owners of legal entity customers, subject to certain exceptions.

This requirement to collect information as to the persons behind legal entities is intended to address:


The abuse of legal entities to disguise involvement in illicit financial activity remains a longstanding vulnerability that facilitates crime, threatens national security, and jeopardizes the integrity of the financial system.  Criminals have exploited the anonymity that can be provided by legal entities to engage in a variety of financial crimes, including money laundering, corruption, fraud, terrorist financing, and sanctions evasion.

            Less onerous than certain other proposals for the required reporting of beneficial ownership (see, e.g., Rutledge, Requiring Disclosure of Business Entity Ownership: Proposed New Laws are Burdensome, But With the Benefit of Being Ineffective, J. Passthrough Entities (July/Aug. 2010); a copy of that article is available THROUGH THIS LINK), the rules set forth in the NPR would require, at the time an account is opened, that the bank or other financial institution collect:


  • Identifying information as to each natural person who directly or indirectly owns 25% or more of the equity/ownership interests in the client; and

  • Identifying information as to each person with “significant responsibility for managing the legal entity customer.”

This information would be collected on a form set forth in the NPR.  For each persons there wold be collected their:

  • name;
  • address;
  • date of birth; and
  • social security number (country of issuance and passport number for non-US persons).

While certain entities would be functionally exempt from the obligation to report any beneficial owners if none meet of exceed the 25% ownership threshold (at least until such time as the regulations might in the future be amended to reduce that threshold), every entity will have at least one natural person with significant management responsibility.

While the bank or other financial institution will be required to “verify” the identifying information as to the persons identified (presumably an effort to address fictitious persons), there is no obligation to verify the control position with the entity.

The rule, as proposed, is prospective only; it applies only to accounts opened after its effective date.  That said, the regulation sets a floor, and a financial institution may require the information for already existing accounts.

The NPR was published in the Federal Register on August 4, 2014; comments on the proposal are due within 60 days thereof.

Friday, August 1, 2014

Delaware Court of Chancery Applies Kentucky LLC Act, Finds No Breach of Fiduciary Duty

Delaware Court of Chancery Applies Kentucky LLC Act,
Finds No Breach of Fiduciary Duty


In a recent decision, the Delaware Chancery Court considered allegations that, in the operation of the Kentucky LLC, various fiduciary obligations had been violated. These claims were entirely dismissed on the basis that there existed no fiduciary duty which could be violated. Consequent to the absence of breach of fiduciary duty, the court likewise dismissed aiding and abetting claims and a claim for waste. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC, C.A. No. 8652-VCN, 2014 WL 2964076 (Del. Ch. June 30, 2014).
            Xcell Energy brought suit against its former member EIG alleging breach of fiduciary duty and related claims such as aiding and abetting and waste.  The Delaware Chancery Court would dismiss each of these claims for the reason that there was no fiduciary obligation that could have been violated.
            Xcell Energy was a manager-managed LLC.  Because EIG was only a member, and not a manager, of Xcell Energy, the Court found that there existed no fiduciary duty that could be violated.
A Kentucky LLC can be managed by its members or by its managers.  ….  Unless provided otherwise in the LLC’s operating agreement, if a Kentucky LLC is managed by its managers, then, by Kentucky statute, its members do not manage the LLC and thus do not owe fiduciary duties to the LLC.  Here, Xcell’s Operating Agreement does not expressly provide that its members owe fiduciary duties.  EIG, as a member of Xcell, a manager-managed LLC, thus did not owe fiduciary duties to Xcell under Kentucky law.  Slip op. at 18 (citations omitted).
            The decision gives effect to the election in the articles of organization for the LLC to be either member-managed or manager-managed (KRS §275.025(1)(d)) and the “switch” provision that appears at KRS § 275.170(4), it providing:
A member of a limited liability company in which management is vested in managers under KRS 275.165(2) and who is not a manager shall have no duties to the limited liability company or the other members solely by reason of acting in his or her capacity as a member.
If there is no fiduciary duty then there can be no claim for the breach thereof.  See, e.g., Fastenal Company v. Crawford, 609 F. Supp. 2d 650, 665 (E.D. Ky. 2009) (“In order to prevail on a claim for breach of fiduciary duty, the plaintiff must prove: (1) the defendant owes a fiduciary duty to the plaintiff….”) (citing Sparke v. Re/Max Allstar Realty, Inc., 55 S.W.3d 343, 348 n.15 (Ky. Ct. App. 2000) and Biggs v. Eaton Sales, Inc., 2011 Ky. App. LEXIS 91, 2011 WL 1901793, *10 (Ky. Ct. App. 2011) (“As our court has noted, ‘[i]f no duty is owed by the defendant to the plaintiff, there can be no breach thereof, and therefore no actionable negligence.’” (quoting Ashcraft v. Peoples Liberty Bank & Trust Co., Inc., 724 S.W.2d 228, 229 (Ky. Ct. App. 1986)).  KRS § 275.170(4) says that in a manager-managed LLC the members are not, as members, in a fiduciary relationship with the LLC or the other members – if duties are desired then they must be created in the operating agreement. 
Consequent to the absence of the basis for alleging a breach of fiduciary duty, the Court dismissed claims for aiding and abetting a breach of fiduciary duty and for waste.
            It should be noted that KRS § 275.170(4) is drawn from the Prototype LLC Act, and that other states have similar statutes.  The decisions of the other states interpreting those equivalent provisions are consistent with Xcell Energy as to its application. See, e.g., Mitchell v. Smith, 2009 WL 891908 (D. Utah March 31, 2009) (“Because Defendant's Counterclaim relies solely upon Plaintiffs status as members [of the LLC] for the existence of fiduciary duties, and because Utah law prohibits such a finding based solely upon membership, the Court finds that Defendant has failed to state a cause of action upon which relief may be granted.”); Katris v. Carroll, 842 N.E.2d 221 (Ill. App. 2005); ULQ, LLC v. Meder, 666 S.E.2d 713 (Ga. App. 2008); Ledford v. Smith, 618 S.E.2d 627 (Ga. App. 2005); Dragt v. Dragt/DeTray, LLC, 161 P.3d 473 (Wash. App. 2007).