Tuesday, September 30, 2014

Planned Distribution of Assets to Satisfy Obligations Guaranteed by Management and to Leave Other Creditors Hanging Enjoined


Planned Distribution of Assets to Satisfy Obligations Guaranteed by Management and to Leave Other Creditors Hanging Enjoined

 

            It is not uncommon that when a corporation or other business entity is dissolved that the available assets will not be sufficient to satisfy all of the corporation’s debts.  Recently a North Carolina court was called in to asses a circumstance in which the corporation’s assets were to be used to satisfy only the debts personally guaranteed by members of management, leaving the claim of the other creditors unsatisfied.  The Court issued  a restraining order to preclude that from happening.  Americana Development, Inc. v. Ebius Trading & Distributing Company, No. 13-CVS-7849 (Gen. Ct. of Justice, Sup. Div., County of Wake, N.C  Aug. 28, 2014).
 

            Ebius had suffered an apparent long string of financial set-backs, losing money in each of the recent years.  Recently it had borrowed $200,000 from Wells Fargo; that line of credit was personally guaranteed by Byers and Corley, members of management.  The corporation otherwise owed $2.4 million in trade debt.


            In connection with Edius winding up, Byers and Corley sought to saell certain Ebius intellectual property and to apply the proceeds to the satisfaction of the Wells Fargo obligation, in so doing eliminating Byers’ and Corley’s obligations under the personal guarantees.


            Under North Carolina law it is clear that the directors of an insolvent and dissolving corporation owe a fiduciary obligation to the corporation, which duty is breached if they use their control of the entity for their own benefit at the expense of other creditors. 


            The Court entered a restraining order to the effect that corporation debts could be satisfied only “on a pro rata basis.”

Court Rejects Notion that Contract with Nonexistent Corporation is Void Ab Initio


Court Rejects Notion that Contract with Nonexistent Corporation is Void Ab Initio

 

In a recent decision, the court rejected an effort to declare a contract void on the basis that the alleged counter-party did not exist as a legal entity at the time the contract was entered into.  Pharmacogemetics Diagnostic Laboratory, Inc. v. Essential Molecular Testing Corp, LLC – PGXL Partners, LLC, Civ. Act. No. 3:13-CV-867-H, 2014 WL 4163859 (W.D. Ky. Aug. 20, 2014).
 
Pharmacogenetics entered into a sales representative agreement with an entity identified as “Essential Molecular Testing Corporation”; Scott Goodman signed the agreement as president and CEO. The only problem was that there was no such corporation, and no such corporation has subsequently come into existence. Rather, some time after the agreement was entered into, Goodman caused a pre-existing LLC to adopt that assumed name.
 
Ultimately, EMTC was quite successful in marketing Pharmacogenetics’ product, giving rise to substantial commission obligations. Pharmacogenetics filed suit requesting that the sales representative agreement be declared void ab initio on the basis that EMTC did not exist. As set forth by Judge Heyburn:
 
The threshold question is whether the Agreement is valid and, therefore, enforceable. This question is separate and distinct from who may enforce it and against whom.
 
He would conclude that the fact that EMTC did not exist at the time the contract was entered into did not of itself automatically render the agreement void ab initio.  Further, he found that KRS § 275.095 addresses only a liability for executing an agreement on behalf of a nonexistent entity, and does not provide that “contracts entered into in the name of the nonexistent entity are null and void.”

Let’s Stop Describing LLC’s as “Hybrids”


 
Let’s Stop Describing LLC’s as “Hybrids”
 

      Recently I published in the Journal of Passthrough Entities Let’s Stop Describing LLC’s as “Hybrids”. 

      In this article I challenge the often made suggestion that LLC’s are a hybrid of corporate and partnership law, a statement which is then typically followed by an effort to pigeonhole the particular question into the answer that would result from either partnership or corporate law. I suggest that the LLC needs to be considered as a unique organizational form not derived from either partnership or corporate law.  

      The article can be accessed through HERE IS A LINK TO THE ARTICLE.

Federal Court Finds that Minimum Contacts Were Satisfied by Informal Partnership


Federal Court Finds that Minimum Contacts Were Satisfied by Informal Partnership


A Kentucky Federal District Court recently considered the question of whether certain minimal contacts with Kentucky connected with the formation and operation of an informal partnership were sufficient to vest in that court jurisdiction over the California resident partner. The court found that the contacts were sufficient to give rise to personal jurisdiction.  Clark v. Wenger, Civ. Act. No. 1:14-CV-00002-TBR, 2014 WL 4742989 (W.D. Ky. Sept. 22, 2014).
 
Clark, based in Kentucky, and Wenger, based in California, entered into a partnership for the breeding and sale of Bernese Mountain Dog puppies.  That partnership relationship was never reduced to a written “partnership agreement.”  Still, over time Clark identified certain conduct of Wenger which she asserted violated express terms to which they had agreed  For example, it was asserted that Wenger had bred two of the partnership’s dogs in her possession and sold for her own account the puppies, and had let the male out for stud, again keeping the fees earned for herself.  Based upon these violations of the partnership agreement, Clark sued Wenger in Kentucky.
 
After the suit was removed to federal court (there was as well a dispute as to the timeliness of the removal, but that I will leave to those interested in the rules of federal removal), Wenger sought to have the suit dismissed on the grounds she did not have “minimum contacts” with Kentucky sufficient to permit her to be sued in Kentucky. 
 
The Court found what Wenger’s dealings with Clark were sufficient to confer jurisdictions. Specifically, from California, Wenger had several phone conversations with Clark as to the partnership which bred the puppies in Kentucky, and certain sale proceeds of partnership property (i.e., puppies) had been sent to Clark in Kentucky.  From there the Court concluded:
 
Wenger’s conduct pursuant to her business agreement with Clark facilitated the transaction of business in the Commonwealth of Kentucky.  Such affirmative conduct constitutes purposeful availment.
 
 
Hence Wenger could be sued in Kentucky.
 
The suit was ultimately remanded to the Kentucky state court on the basis that the amount in controversy was less than the federal jurisdictional threshold of more than $75,000 for cases in diversity. 

Monday, September 29, 2014

More on Minority Shareholder Oppression


More on Minority Shareholder Oppression

 

Peter Mahler, in his blog New York Business Divorce, has been kind enough to review my recent article Minority Shareholder Oppression? – The Problem is Not with the Answer But Rather with the Question and to place it in the context of New York Law. 

HERE IS A LINK to his posting.

            I’m grateful for his kind words.

Thursday, September 25, 2014

Minority Shareholder Oppression? – The Problem is Not with the Answer but Rather with the Question


Minority Shareholder Oppression? – The Problem is Not with the Answer but Rather with the Question

 

In a recent issue of the Journal of Passthrough Entities, I published Minority Shareholder Oppression? – The Problem is Not with the Answer but Rather with the Question.

 

            In this article, I submit that the classic formula under which the “oppression” of minority shareholders (and members of LLCs) is framed is an instance of a failure to critically consider the question before proceeding to ascertain the answer.  Rather, these cases are often simply an effort to, ex ante, rewrite the corporate agreement that is embodied in the statute and the organizational documents for the benefit of someone who failed to negotiate particularized protection for themselves at the inception of the venture?

 

            Ultimately, I suggest that claims of “oppression” should typically be rejected applying relatively straight forward principals of contract law.

 

            This article can be accessed through HERE IS A LINK TO THE ARTICLE.

Wednesday, September 24, 2014

North Carolina Business Court Applies the Apex Doctrine


 

North Carolina Business Court Applies the Apex Doctrine

 

In a recent decision, the North Carolina business court applied the “Apex Doctrine” in a discovery dispute.  Joseph Lee Gay v. Peoples Bank, 13 CVS 383, Superior Div., Court of Justice, Lincoln Cty (N.C.), Order dated September 17, 2014,

 

Typically in a lawsuit against a corporation or other business entity, it will designate a representative to, in the course of a deposition, speak on the corporation’s behalf.  The person so designated must have personal knowledge of the matters in dispute in the lawsuit.  It is not at all uncommon for the plaintiff, in addition to taking the deposition of the designated representative, to seek to depose high ranking corporate officials such as the chief executive officer and chief financial officer.  Often these depositions are viewed, at least by the defense, as being abusive as either fishing expeditions, efforts to simply inconvenience the officials and thereby perhaps increase settlement value or as grandstanding by the plaintiff’s counsel who will then crow about forcing the corporate defendant to have produced its CEO and CFO.

 

Under the Apex Doctrine, depositions of senior executives are not permitted absent the plaintiff demonstrating that the individuals in question have or may have particularized knowledge of the dispute.  Hence there will typically be disputes as to whether or not that senior executive is likely to uniquely have that particularized information.

 

In this case over alleged excess overdraft fees charged by the bank, the plaintiffs had already deposed five officers.  The plaintiff sought to depose the current COO, the former president/CEO (now retired), the current CFO and the current chief administrative officer (“CAO”).  The opinion does not recite what proffer the plaintiffs made as to what any of these persons might know that had not already been explored in the prior depositions.  In response to the effort to take these new depositions, the defendant bank argued that:



It will be very disruptive and unduly burdensome in light of the repetitive testimony to be generated to require the three top-level executive who currently work at the bank … to submit to depositions.



The Court gave the plaintiff’s a partial win.  As Wolfe was retired, it could not be argued that his deposition would interrupt the bank’s operations, and the plaintiffs were permitted to take his deposition.  They were as well permitted to take the deposition of the current chief operating officer.  At the same time they were denied permission to at this time take the depositions of the CFO and CAO.

Allocating Voting and Economic Rights in LLCs: An Invitation to Confusion


Allocating Voting and Economic Rights in LLCs:  An Invitation to Confusion


I recently published in the Journal of Passthrough Entities, I published a two part article entitled Allocating Voting and Economic Rights in LLCs: An Invitation to Confusion. 


This article explores a number of ways in which allocation of voting and economic rights in LLCs can create confusion and ambiguity, especially when contrasted with the rules required under the Internal Revenue Code for the maintenance of capital accounts.  This article as well highlights problems that can arise when the allocation of economic and voting rights is linked to capital accounts.  Considered as well as problems that arise under the LLC Acts when voting and economic rights are linked to contributed capital and the person whose rights are in question is an assignee who has never madea capital contribution to the LLC.


The article can be accessed through HERE IS THE LINK TO PART ONE and HERE IS THELINK TO PART TWO.

Friday, September 19, 2014

The Corporation of Itself Owes No Fiduciary Duties


The Corporation of Itself Owes No Fiduciary Duties

 

      In a recent decision rendered by the Delaware Chancery Court (Vice-Chancellor Glasscock), there was rejected the suggestion that the corporation itself owes fiduciary obligations to the shareholders. Buttonwood Tree Value Partners, L.P. v. R. L. Holcomb & Co., Inc., Civil Action No. 9250-VCG, 2014 WL 3954987 (Del. Ch. Aug. 7, 2014).
 
      This case arose out of a self-tender by Polk & Co. for the small minority of shares that were not held by the Polk family stockholders. Ultimately, the plaintiff shareholders would sell their shares for approximately $810 each. About six-months after that redemption there was declared a special cash dividend of $240per share, and just over 2 years later the company was sold at a price of $10,675 per share. Suit was brought, it being alleged that the plaintiffs were misled as to the value of the company when they sold their shares at $810 each. As well, the plaintiffs alleged that R. L. Polk & Co., the corporation itself, reached a fiduciary duty to the shareholders.
 
      It was this claim was dismissed by the Chancery Court. Specifically, as described by the Chancery Court:
 
The Plaintiffs allege that Polk, a Delaware corporation, “failed to meet its disclosure obligations under Delaware law as set forth in Eisenberg v. Chicago Milwaukee Corp. ... and Joseph v. Shell Oil Company ... by depriving Plaintiffs and other members of the Class of all material facts needed to determine how to respond to the Self–Tender, and specifically of the true value of their Polk stock.”
 
….  Although the Plaintiffs have not elaborated on what law set forth in these two cases supports their disclosure claims against Polk, neither of these cases demonstrates that Delaware corporations owe a fiduciary duty of disclosure to their stockholders in connection with a tender offer.
 
In fact, under settled Delaware law, “[f]iduciary duties are owed by the directors and officers to the corporation and its stockholders.” In other words, a corporation does not owe fiduciary duties to its stockholders. Thus, to the extent the Plaintiffs allege that Polk as a corporate entity breached its fiduciary duties in connection with its purported failure to meet its disclosure obligations, Count II must fail.   2014 WL 3954987, *4.

 

      In that no fiduciary duty was owed, there could not be a breach thereof.

Thursday, September 18, 2014

Bankruptcy Court Holds Trustee May Not Put the Cart Before the Horse and Strikes Down Effort to Pierce the Veil as a Cause Of Action


Bankruptcy Court Holds Trustee May Not Put the Cart Before the Horse

and Strikes Down Effort to Pierce the Veil as a Cause Of Action


      In a recent bankruptcy court decision, the Court rejected the effort by a bankruptcy trustee to utilize the concepts of “piercing the veil” in order to, ab initio, bring a third-party defendant into the action.  Rather, the Court held that piercing is a remedy, not a cause of action. Spradlin v. Beads and Steeds Inns, LLC (In re Howland), Case No. 12-51251, Adv. No. 14-5019, 2014 WL 4199637, __ B.R. __ (Aug. 22, 2014).
      The facts of this case are recited in the opinion as follows:
The following facts alleged in the Trustee’s Complaint are taken as true for the purpose of this decision.  On or about June 19, 2007, the Debtors formed Meadow Lake Horse Park, LLC (“Meadow Lake”).  On July 20, 2007, Meadow Lake purchased 133 acres of real estate in Garrard County known as 9863 Lexington Road, Lancaster, Kentucky (“Farm”) for $1,600,000 with the proceeds of a mortgage loan from United Bank & Trust Company (“United Bank”).  In late November 2010, the Debtors made a $760,000.00 payment on the mortgage loan to United Bank out of their personal income tax returns.  The Trustee asserts this payment was without consideration. 
On December 28, 2010, Meadow Lake sold the Farm for $800,000 to the Defendant Beads and Steeds Inns, LLC, which is wholly owned by Robert and Susan Hale (“2010 Transfer”).  The Defendant was formed shortly before the 2010 Transfer for the sole purpose of purchasing the Farm.  Defendant financed the full purchase price with a Mortgage Loan from United Bank in the amount of $800,000.
Subsequent to the sale of the Farm, Meadow Lake leased the Farm to the Defendant for $1,000 per month.  Meadow Lake also agreed to pay all insurance and real property taxes.  The Debtors operating the Farm as a horse boarding and training facility and a bed & breakfast and event facility both before and after the 2010 Transfer.
The Debtors filed Chapter 7 Bankruptcy on May 8, 2012.  The Debtors scheduled their interest in Meadow Lake on Schedule B and listed the value as $0.  Phaedra Spradlin was appointed Chapter 7 Trustee.
On May 6, 2014, the Trustee filed the underlying adversary proceeding seeking to avoid the 2010 Transfer as a fraudulent conveyance pursuant to § 548(a)(i)(B).  The Trustee also seeks to avoid the 2010 Transfer pursuant to KRS § 378.020 through § 544(b).  The Trustee further requests that the Bankruptcy Court disallow any claims by the Defendant pursuant to § 502(d).
      Essentially, while the bankruptcy filing was on behalf of the Matthew and Megan Howland, the Bankruptcy Trustee sought to allege that their LLC, Meadow Lake, had engaged in a fraudulent transfer which should be undone, it being posited that they (the Howlands and their LLC) should be treated as one and the same and the LLC “reverse pierced.”

      Although not cited by the Court, a member of an LLC has no ownership interest in the LLC’s property.  See KRS § 275.240(1); id. § 275.250.
      Reverse piercing is a twist on the traditional concept of piercing the “corporate” veil.  In traditional piercing, the plaintiff holding a judgment against a corporation that cannot be satisfied out of corporate assets seeks to “pierce” the corporation and hold the shareholders liable for the corporation’s debt.  In a reverse pierce, a claimant against the individual shareholders (in this case the members of the LLC) aims to access the assets held by the business entity and treat them as if owned directly by the shareholder/member.  Reverse piercing is in turn divided into two categories.  “Outsider” reverse piercing involves a claimant against the shareholder/member.  “Insider” reverse piercing involves the shareholder of the corporation or member of the LLC seeking to claim, for personal benefit, the assets of the LLC.
     After noting, consequent to the unique position of a Trustee, that this effort could be characterized as either outsider or insider reverse piercing, the court determined that categorization to not be necessary in that neither effort would be permitted to proceed.  Initially, relying on Turner v. Andrew (that decision is reviewed HERE) and Williams v. Oates (that decision is reviewed HERE), the Bankruptcy Court acknowledged that it is unclear whether a Kentucky court would accept the validity of reverse veil piercing.  That controversy did not, however, need to be addressed by the Bankruptcy Court in that it held that piercing could not be used in the affirmative approach sought by the Bankruptcy Trustee.  Rather, the court focused upon the fact that, under Kentucky’s piercing law, whatever it might be, piercing is a remedy and not itself a cause of action.  In that the Trustee sought to use reverse piercing as a theory for imposing the initial liability, rather than as a remedy by which to seek collection on primary liability, the effort was dismissed.  Specifically:
The Trustee argues that disregard of the corporate form of Meadow Lake [it was actually an LLC] would mean the 2010 Transfer is treated as if it were made by the Debtors directly.  Under this theory, it does not matter whether the Debtors or Meadow Lake committed the alleged wrongdoing.  The assets and liabilities of both parties are treated as merged both prospectively and retroactively.  This logic is not consistent with veil piercing as a remedy in Kentucky. 
Still, Beads and Steeds Inns, LLC is not off the hook.  The Bankruptcy Court afforded the Trustee the opportunity to file an amended complaint setting forth a traditional substantive consolidation claim.

Tuesday, September 16, 2014

South Carolina Supreme Court Invalidates LLC Operating Agreement's Repurchase Right After Charging Order Foreclosure

 South Carolina Supreme Court Invalidates LLC Operating Agreement's Repurchase Right After Charging Order Foreclosure


Doug Batey has reported on a recent South Carolina decision addressing:

Many LLC operating agreements contain transfer restrictions on LLC member interests. Those restrictions sometimes include the LLC’s right to repurchase the interest if a member makes a transfer in violation of the operating agreement. What’s the result if such a repurchase right applies to a transfer resulting from the foreclosure of a charging order by a member’s judgment creditor? The South Carolina Supreme Court earlier this month ruled that a foreclosure sale was valid and trumped the operating agreement’s repurchase right, and that the repurchase right could not be enforced.


His posting can be found HERE.

Monday, September 15, 2014

Court Holds There to Be No Breach of Duty of Loyalty Between Partners With Respect to Post-Term Activities


Court Holds There to Be No Breach of Duty of Loyalty Between Partners
With Respect to Post-Term Activities

 

      In Cass JV, LLC v. Host International, Inc., Cass and Host jointly bid on and were awarded the right to operate concessions at an airport for a franchise period of ten years.  During that period the relationship between Cass and Host deteriorated.  Prior to the time that solicitations were made for the concession franchise for the next ten-year period, Host advised Cass that it would not be bidding with Cass for the next period.  Host, with a new partner, was awarded the franchise for the next period, and Cass brought suit alleging breach of fiduciary duty.  Cass JV, LLC v. Host International, Inc., No. 312-CV-00359-CRS-DW, 2014 WL 3955366 (W.D. Ky. Aug 13, 2014).
      The District Court found there to be no breach of duty.  Initially, the purpose of the partnership was defined as exploitation of the concession franchise, that being defined as that for a specific ten-year period.  Second, Host had advised Cass that they would not be together bidding to receive the franchise for the next period.  On that basis there was no concealment of intentions.
 
      On this decision is consistent with a long string of court cases which have held, inter alia, that when the purpose of a partnership is defined as exploiting an opportunity for a particular term or undertaking, there is no breach of duty when one of the participants in the venture exploits those same assets and on a subsequent term or in a different undertaking see, e.g., Whalen v. Connelly, 545 N.W.2d 284 (Iowa 1996) (purpose of particular venture described as exploitation of a particular business opportunity with only the possibility, but no commitment, of expansion into other areas).

Bankruptcy Court Holds That, Even If USACafes Applies, No Actionable Breach of Duty Was Alleged

Bankruptcy Court Holds That, Even If  USACafes Applies, No Actionable
Breach of Duty Was Alleged

      In a recent decision by the Bankruptcy Court for the Eastern District of Kentucky, it considered and rejected an allegation that there was a breach of fiduciary duty by the corporate parent of an LLC when that LLC was itself insolvent.  The Liquidating Trustee of the Appalachian Fuels Liquidating Trust v. Energy Coal Resources (In re Appalachian Fuels), CIV. ACT.  No. 13-157-HRW, 2014 WL 4230877 (Bankr. E. D. Ky. Aug. 20, 2014).
      Appalachian Fuels, LLC, was an indirect wholly-owned subsidiary of Energy Coal Resources, Inc. (“ECR”). One of ECR’s directors served as the manager of Appalachian Fuels. After Appalachian Fuel’s failure, the plaintiff (the liquidating trustee) alleged that certain transactions damaged Appalachian Fuels and benefited ECR and its related companies at a time when Appalachian Fuels was insolvent. The allegations went on to assert that the approval of these transactions violated fiduciary duties owed by certain directors of ECR to Appalachian Fuels.
      The dispute would turn on whether the directors of ECR owed a fiduciary duty to Appalachian Fuels, the indirectly wholly-owned subsidiary.  In connection therewith, there was reviewed the line of Delaware cases beginning with In re USACafes, L. P. Litigation, 608 A.2d 43 (Del. Ch. 1991), which, as described in this opinion:
would hold that the human controller of an entity that manages another entity owes a fiduciary duty of loyalty to the managed entity, but that the fiduciary duty of loyalty in this context is limited to the duty not to engage in personal self-dealing.
As the second amended complaint did not allege personal self-dealing but only a violation duty of care, the directors had been dismissed. In responding to an objection to that finding, it was held that:
·         there is no contrary Kentucky common law of fiduciary duties from which a different rule could be drawn; and
·         Kentucky courts typically looked to the laws of Delaware when it comes to matters of Kentucky law on which there is not Kentucky law.
      Ultimately:
Plaintiffs claiming that the directors of a fiduciary parent company breached their fiduciary duty toward an insolvent subsidiary must therefore plead that the directors advanced themselves at the subsidiary’s expense. Here, negligence is the only thing alleged in the breach of fiduciary duty claim against the Independent Directors.

Tuesday, September 9, 2014

Arizona Court of Appeals Considers Direct Versus Derivative Distinction in LLCs and the Demand Requirement

Arizona Court of Appeals Considers Direct Versus Derivative Distinction
in LLCs and the Demand Requirement

      In a recent decision, the Arizona Court of Appeals parsed a complaint filed by a member of an LLC as to whether particular allegations were direct or derivative in nature and, as to the derivative claims, whether there had been demand made before the derivative action was brought.  The court has well addressed the capacity of a dissolved LLC to prosecute suit for collecting assets as part of its winding up.  Rose Goodyear Properties, LLC, v. NBA Enterprises Limited Partnership, No. 1 CA-CV 12-0484, 2014 WL 443 (Ariz. App. Aug. 5, 2014).
      Able Commercial Ventures was formed as an LLC by Rose Goodyear Properties, NBA Enterprises and Hohokam Acres for the purpose of developing certain real estate.  The manager was Civica Development, LLC (the opinion is unclear as to the relationship of Civica to any of the members).  Able borrowed $2 million dollars secured by its property, and loaned those funds to Hohokam and NBA.  Able then defaulted on that loan.  The property was sold for just over $1 million dollars, and Able was sued for the deficiency exceeding a million dollars.
      Consequent to certain disputes whose nature is not identified in the opinion, NBA and Hohokam caused Civica to be removed as the manager.  In turn, they formed a new LLC, Hamba, and appointed it as the LLC’s manager.  Thereafter, Rose filed its complaint alleging a variety of claims against NBA, Hohokam and Hamba.  
      At some unidentified point in the dispute, Rose underwent an administrative dissolution. Although it was apparently reinstated, the opinion focused upon its capacity to act notwithstanding reinstatement. Responding to the allegation that Rose did not have the capacity to bring either direct or derivative claims because of its dissolution, the Arizona Court of Appeals interpreted the LLC Act and specifically the provision allowing a dissolved LLC to do “all other acts required to liquidate its business and affairs” as being sufficiently broad to allow a dissolved entity to bring suit by which it may collect its assets.

  • This guidance is useful in Kentucky which, at KRS § 275.300(2)(e), authorizes a dissolved LLC to do “every other act necessary to wind up and liquidate its business and affairs.”  That said, likely this guidance is not necessary in Kentucky as KRS § 275.300(4)(a) provides that dissolution of an LLC shall not “Prevent commencement of a proceeding by or against a limited liability company in its name.”

      Turning to the derivative claims, the primary issue was whether there is been sufficient demand made upon the manager of Able prior to the bringing of the derivative action.  Note that the Arizona LLC Act contains an express provision on derivative actions, including a requirement that before bringing a derivative action a demand be made. Ariz. Stat. § 29-831(2).  In this instance, the letter upon which Rose relied nowhere demanded that Hamba cause the LLC to bring suit. Rather, the relied upon letter was merely a recitation of Rose's position as to certain matters.  Another letter meeting the demand requirements that was submitted after the complaint was filed was found to be insufficient, the statute requiring that the demand letter be tendered prior to the time the derivative action is brought. On that basis, the dismissal of the derivative aspects of the complaint was affirmed.
      The Court of Appeals did reverse the trial court as to certain counts brought in the complaint on the basis that these were direct, and not derivative, claims. Specifically, allegations based upon breach of fiduciary duty by NBA and Hohokam, the refusal to arbitrate a claim for breach of contract and for violation of the implied covenant of good faith and fair dealing (the implied covenant claim being cast as well as a tort) were found to constitute direct, not derivative, claims that should not have been dismissed for failure to satisfy the demand requirement for bringing a derivative action.

Monday, September 8, 2014

Kentucky Court of Appeals Orders Arbitration; Arbitrator to Determine Timeliness of Demand for Arbitration

Kentucky Court of Appeals Orders Arbitration;
Arbitrator to Determine Timeliness of Demand for Arbitration

 

            In a recent decision, the Kentucky Court of Appeals reversed a trial court determination to not refer a dispute to arbitration.  While the trial court had ordered discovery as to whether the demand for arbitration was timely, the Court of Appeals directed that determination is to be made by the arbitrator.  Roberts v. Molyneaux, No. 2013-CA-000044, 2014 WL 4177443 (Ky. App. Aug 22, 2014).

 

            Roberts bought a house from Talbott; Molyneaux was the realtor.  Both Talbott and Molyneaux told Roberts that the property could be easily converted into a duplex.  After closing on the property Roberts proceeded with the work to convert the property.  He received a cease and desist order as to those efforts, and was denied a conditional use permit.  In accordance with the Residential Sales Contract, Roberts sought mediation and arbitration.  The mediation took place, but no agreement was reached. When Roberts sought arbitration, Talbott and Molyneaux brought a declaratory judgment action seeking to avoid arbitration on the basis that Roberts did not seek arbitration within a year of when he should have known of the zoning restrictions on the property.  They then sought discovery as to Robert’s knowledge, which he in part refused to answer on the basis that it is the arbitrator who should rule on whether the petition for arbitration was timely.  The trial court denied the application for arbitration, and this appeal followed.

 

            Relying upon Beyt, Rish, Robbins Group v. Appalachian Reg’l Healthcare, Inc., 854 S.W.22 784 (Ky. App. 1993), the Court of Appeals affirmed that “the timeliness of tn arbitration demand is to be decided by the arbitrator.”  From there, after referencing Louisville Peterbilt, Inc. v. Cox, 132 S.W.3d 850 (Ky. 2004), the Court wrote:

 

Because Kentucky courts favor upholding arbitration agreements, we believe the present dispute is best addressed by an arbitrator, as the parties intended at the time they signed the agreement. The trial court’s order denying Roberts’s motion to compel arbitration was in error, and on remand, the trial court is instructed to compel arbitration.

Friday, September 5, 2014

Pro Se Defendant Prevails in Challenge to Service of Complaint


Pro Se Defendant Prevails in Challenge to Service of Complaint

 

Snider v. McIntosh, No. 2012-CA-001634-MR (Ky. App. Sept. 5, 2014).

 

Donald Snider brought suit against Terry McIntosh, a resident of Louisiana.  A Louisiana sheriff delivered the complaint not to Terry but to his wife.   Later, although on exactly what date was not recorded, Terry received another copy of the complaint and summons by certified mail.  When Terry did not file an answer to the complaint within 20 days of the date it was delivered to his wife Snider moved for a default judgment.  Even though an answer was filed the day the motion for default was filed, the trial court granted a default judgment in Snider’s favor.

 

            On appeal, Snider argued that the delivery of the complaint to his wife, and not to him, was not sufficient to start the clock for the 20 day deadline to file an answer.  Relying upon R.F. Burton & Burton Tower Co. v. Dowell Division of Dow Chemical Co., 471 S.W.2d 708 (Ky. 1971), which in turn cites decisions going back to 1858, the Court of Appeals easily determined that delivery of the complaint to the spouse was not sufficient to effect valid service.

 

            The Court ordered a reversal of the default judgment and further proceedings, presumably was to when service by certified mail was made.  A concurring opinion by Judge VanMeter would direct that the remand direct the matter to proceed on the merits as an answer has been filed.

Thursday, September 4, 2014

District Court Confirms that Partner is Not an “Employee” Afforded Protection Under Title VII


District Court Confirms that Partner is Not an
“Employee” Afforded Protection Under Title VII


      In a recent decision, the Western District of Kentucky denied the Plaintiff additional opportunity for discovery and held that a partner in a partnership is not an “employee” afforded protections by Title VII.  Bowers v. Ophthalmology Group, LLP, Civ. Act. No. 5:12-CV-00034-JHM, 2014 WL 4259430 (W.D. Ky. Aug. 27, 2014).
      This dispute involves allegations by Bowers, formerly a partner in Ophthalmology Group, alleging various claims including violation of Title VII, she asserting that she was mistreated consequent to her sex.  In prior decisions the courts had considered and ultimately granted a Motion to Disqualify the law firm originally hired by the Ophthalmology Group on the basis of an asserted conflict.  Having new counsel, Ophthalmology Group brought this Motion to Dismiss.
      Notwithstanding Bowers’ objections that there had been no further discovery and that the prior discovery was “tainted” by the now removed firm’s conflict, the District Court found that the Title VII claim must fail:
At the end of the day, the undisputed evidence shows that Dr. Bowers was, in fact, a partner of Ophthalmology Group, not an “employee” afforded protection under Title VII.  Dr. Bowers enjoyed partnership status through the partnership agreement, engaged in decision-making with her partners, and was compensated according to a partnership formula.  This evidence is undisputed and is not tainted.  No amount of additional discovery will change these facts. 
      Having dismissed the only federal claim, the District Court declined to exercise supplemental jurisdiction, leaving those matters to be resolved in state court.

Kentucky Supreme Court Addresses Diligence in Raising Defense of Lack of Capacity to be Sued


      Recently, the Kentucky Supreme Court issued an opinion addressing a narrow but interesting question as to the ability to sue a labor union and similar unincorporated organizations that are not susceptible to being sued in their own name.  In this case, the Plaintiff argued that the Defendant labor union was tardy in raising as a defense its inability to be sued.  On the facts of this case, the Supreme Court found that it acted on a timely basis.  United Brotherhood of Carpenters v. Birchwood Conservancy, No. 2011 SC-000659-DG, 2014 WL 2773105 (Ky. June 19, 2014).
      The Birchwood Conservancy, itself an unincorporated association, had certain discussions with members of the United Brotherhood of Carpenters labor union regarding the dismantling of an old barn and the erection of a new one.  When that work was not completed to Birchwood’s expectations, it brought suit against the United Brotherhood of Carpenters.  The initial Complaint was filed in September 2004, with an Amended Complaint filed in 2005.  In response to the initial Complaint, the union denied a contract existed.  In response to the Amended Complaint, the Union’s answer was that the Complaint failed to state a claim and therefore should be dismissed.  Finally, in March 2007, the Union filed a Motion to Dismiss on the grounds that “an unincorporated association such as a labor union, cannot sue or be sued in the name of the association.”  In response, Birchwood asserted that the union had waived that defense by failing to previously raise it.
      Perhaps uniquely, this case raised as well the issue of the capacity of the Plaintiff to bring an action.  The Birchwood Conservancy was itself an unincorporated association that lacked the capacity, in its own name, to bring suit.  Ultimately, a non-profit corporation was allowed to join the suit as a Plaintiff.
      Ultimately, the Court found that once the corporation with standing to bring suit joined the action and brought additional claims for relief, the clock for defending on the basis of lack of capacity to be sued was re-set:
Therefore, when the new plaintiffs (who did possess the authority to file suit) intervened and were allowed to substitute themselves for Birchwood Conservation Center, adding several new damage claims, it was as if an entirely new complaint had been filed.  Thus, any defenses asserted by the Union in its answer to the new plaintiff’s complaint were timely made, as this was, in effect, the Union’s first response to the new parties’ properly filed complaint with its new or substantially altered claimed damages.  (Emphasis in original.)
      Characterizing this entire dispute as between “two parties who both squandered the Court’s time and resources, in addition to their own,” the suit was dismissed.