Tuesday, December 29, 2015

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.  Eventually he would return to Canterbury.

            While in France and 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. 

Suit Dismissed; Plaintiff Hoist on the Petard of the Direct versus Derivative Distinction

Suit Dismissed; Plaintiff Hoist on the Petard of the Direct versus Derivative Distinction

            A recent decision from the Kentucky Court of Appeals reinforces the importance of understanding and properly pleading a derivative (as contrasted with a direct) action  In this instance the efforts of one shareholder/director to bring a direct action against the other shareholder/director were set aside because the cause of action was in fact derivative.  Gross v. Adcomm, Inc., No. 2014-CA-001031-MR, 2015 WL 8488900 (Ky. App. Dec. 11, 2015).

            Sam Gross and Christopher Pearson formed Adcomm in 2001; each was a 50% shareholder and a director.  Gross was appointed president while Pearson was elected vice president.  In 2004 Pearson submitted to the Secretary of State documents identifying himself as the corporation’s president and as well changing the corporation’s registered agent to himself.  In 2005, a complaint by Adcomm as the plaintiff was filed against Gross alleging financial misconduct, seeking an accounting, and seeking as well an order removing Gross from all positions with Adcomm.  This suit was initiated “at the direction and upon the authority of Pearson as its ‘director and vice-president.’” I guess Pearson forgot about his 2004 filing saying he was the corporation’s president.

In response,

Gross moved to dismiss Adcomm's complaint for lack of standing. Specifically, Gross pointed out that no resolution from the board of directors had appointed Pearson as the president of Adcomm; authorized Adcomm to engage in litigation that was effectively against half of the directors on its own board; or authorized Adcomm to hire an attorney to prosecute its suit. Gross would later reassert this argument, or variations of it, in several other motions to dismiss Adcomm's suit or to disqualify Adcomm's counsel from prosecuting its suit over the course of the next several years of litigation that would follow. Nevertheless, on the only occasion that the circuit court made a ruling upon one of Gross's motions to this effect, the circuit court denied it without further explanation.

Slip op. at 2-3.

Various counter-claims were as well filed, and eventually the matter was referred to a master commissioner to effect an accounting.  This appeal was from that master commissioner report.

            On appeal, Gross argued two points, namely:

(1) Adcomm lacked standing to file suit against him so this litigation should have been dismissed at its inception; and (2) Adcomm's counsel, Jeffrey Stamper, has had a irreconcilable conflict of interest from the inception of this twelve-year-long litigation and should have been disqualified.

Slip op. at 6.

After classifying the various claims and counter-claims as belonging to Adcomm and its assets and noting that corporate officers and directors owe their fiduciary obligations “to the corporation, not the shareholders” (Slip op. at 6), it was observed that a corporation may initiate legal action on its behalf pursuant to to vote of a majority of the board of directors.  From there the Court of Appeals characterized the question as:

Who is entitled to assert and litigate the rights of an aggrieved corporation when, as here, the party who allegedly injured the corporation is a 50% shareholder, controls half of the corporation's board of directors, and does not want the corporation to pursue litigation? 

Slip op. at 7.

Pearson/Adcomm claimed that Pearson had the capacity to initiate the suit in the basis that Gross had a conflict of interest as to whether or not the suit should be brought against himself which precluded him from taking part in that determination.  As Pearson was the only non-conflicted director, so went the argument, he acting unilaterally was a majority of the board and could direct the corporation.  In support thereof there was cited KRS 271B.8-310(4), which precludes an interested director from voting as to whether to approve a related party  transaction.

After noting that KRS § 271B.8-310 relates to the ability of a corporation to avoid a conflict of interest transaction, the Court of Appeals wrote that the statute is not mandatory and has no impact upon the decision making structure of a corporation:

Nothing in KRS 271B.8-310 alters the manner in which a corporation decides to exercise and vindicate such a right (i.e., through a majority vote of its directors at a meeting of its board).  Likewise, nothing in KRS 271B.8-310 disqualifies any director—self-interested or otherwise—from voting against the corporation exercising such a right.

Slip op. at 9 (footnote omitted).

            From there the Court considered an argument based upon the futility of making a demand upon the board for it to bring suit against Gross, noting that he would never endorse a suit being filed against himself.  All of that may be well and good, but the Court of Appeals observed in response that “the most noticeable flaw of Adcomm’s argument is that it misunderstands the posture of this case.”  Slip op. at 11.  Rather, this was a direct action by Adcomm against Gross, not a derivative action.

With this in mind, Sahni and its interpretation of the rule regarding the "futility" of making a demand for suit upon a board of directors have no bearing upon whether Adcomm had standing to sue Gross. This is because the "futility" rule applies to derivative actions, not direct actions. And, despite Adcomm's insinuation that "Pearson" had a "position regarding [Gross's] Motion to Dismiss," Pearson did not file a derivative action against Gross on behalf of Adcomm. Rather, Adcomm purported to file a direct claim on behalf of itself, and Pearson (as reflected in his several depositions, his testimony before the master commissioner, and in Adcomm's multitude of pleadings in this matter) repeatedly stated that he was acting at all times as Adcomm's authorized representative in causing Adcomm to file the instant litigation.  Further underscoring this point are the facts that (1) "Adcomm, Inc." has always been the sole individual plaintiff suing Gross during the twelve years of this litigation; and (2) Adcomm hired its own attorney to prosecute its case against Gross and to defend this appeal. Consequently, this argument also does not support that Adcomm had standing to directly sue Gross. Instead, as italicized above, it demonstrates that Adcomm does not appreciate the difference between a direct corporate action and a derivative corporate action.

Slip op. at 13 (footnote omitted).

            Which brings us to the culmination of this dispute, namely:

Who is entitled to assert and litigate the rights of an aggrieved corporation when, as here, the party who allegedly injured the corporation is a 50% shareholder, controls half of the corporation's board of directors, and does not want the corporation to pursue litigation?


Which was answered as follows:


[T]his action purported to be a direct corporate action. There is no resolution of Adcomm's board of directors that authorized Adcomm to file the instant litigation against Gross, or to hire and pay any attorney to prosecute it. In light of Gross's twelve years of objections to this litigation; his 50% interest in Adcomm; and his role as the second of Adcomm's two directors, it is also obvious that no such resolution would have ever been forthcoming. Absent such a resolution, Adcomm lacked authorization to file this litigation, was never properly a party to it, and its claims should have been dismissed as a matter of law.

Slip op. at 14-15.

            This decision needs to be carefully considered by both attorneys and the bench when considering lawsuits by and among business entities and their constituents.  The waste of corporate and other assets, as well as the time of the courts, that has followed from this 12 year journey, ultimately for no resolution, is unjustified and unjustifiable.  Precise pleading of claims as either direct or derivative, and clear demonstration of authority to bring them, should be an enforced obligation, and interlocutory appeal of those determinations should as well be allowed in order to avoid the time and expense of improperly plead actions.


Monday, December 28, 2015

Your Ways Are Not Our Ways

Your Ways Are Not Our Ways

“Your ways are not our ways” are words said by Dracula in the movie Bram Stoker’s Dracula; Transylvania and Victorian London being rather dissimilar.  They apply as well today when assessing the law of other states; different states can have entirely different, but each equally legitimate, rules.  This principle applies when assessing a recent decision out of New York and considering if the same result would happen in Kentucky.

Peter Mahler, in his excellent New York Business Divorce blog, recently reviewed a New York decision on minority shareholder oppression, Matter of Digeser v. Flach, 2015 NY Slip Op 51609(U), a case in which the heirs of the founders of a pair of companies had a falling out.  The minority shareholder found his management position and employment in the corporations terminated, and brought suit seeking judicial dissolution on the basis of oppression.  Flach, the majority shareholder, also terminated the employment of Digeser’s sons and engaged in a variety of other actions that Digeser asserted were oppressive.  Ultimately both the trial court and the court of appeals would determine that oppression had taken place, allowing the action for judicial dissolution of the corporations to proceed. Peter excellent review of the case, through which the decision itself can be assessed, is available AT THIS LINK.

But is this good law in Kentucky?  Probably not.  The New York law governing corporations includes, at § 1104-a(1), “oppression” as a basis for seeking judicial dissolution.  Kentucky, at KRS § 271B.14-300(2)(b) does not include oppression as a basis for dissolution.  In fact, when this provision was drafted, the MBCA included “oppression” as a basis for dissolution; that term was removed from the final Kentucky act.  While no Kentucky court has yet addressed the matter, it would seem that whether or not particular conduct is “oppressive” as to the rights of a minority shareholder is a pointless determination; even in the face of oppression there is no statutory basis for judicial dissolution.

Jury Finds Breach of Fiduciary Duties Where Corporation Used as Personal Piggy-Bank of 51% Shareholder

Jury Finds Breach of Fiduciary Duties Where Corporation Used as Personal
Piggy-Bank of 51% Shareholder

As reported in the Kentucky Trial Court Review, a jury found that a corporate director and 51% shareholder violated his fiduciary obligations by, inter alia, using the corporation’s assets as his personal piggy-bank.  Liberty Rehabilitation v. Waide, 19 KTCR 10 at 7 (October 2015).

Forrest “Ben” Waide was the the 51% shareholder in Liberty Rehabilitation; Lawrence Holmes and Jason Myers were the minority shareholders therein.  Waide was elected to the Kentucky General Assembly in 2010 and reelected in 2012.  Also in 2012 Holmes and Myers became concerned about how corporate funds were being used.  For example, the company paid for Waide to attend the Republican National Convention, a trip to St. Louis with his wife, and some $20,000 went to Waide’s reelection campaign. Ultimately Waide’s diversion of corporate funds to his campaign led to his indictment for campaign finance violations; he pled guilty and resigned from the General Assembly.  See KRS § 121.025 (forbidding corporate contributions to political campaigns); see also http://state-journal.com/local%20news/2015/04/14/forrest-ben-waide-pleads-guilty-avoids-jail-sentence.

Holmes and Myers initiated a derivative action on behalf of Liberty Rehabilitation seeking to recover $504,304 of diverted funds.  Waide argued that (a) there were benefits to the corporation at least sought in the trip to St. Louis and (b) while there were errors, they were not sufficient to justify a finding that he violated his fiduciary obligations.  The jury was apparently having none of that.  It awarded compensatory damages in the amount of $456,500 and punitive damages of $225,000. 

At this juncture I do not know if an appeal has been filed.

This decision should be a wake-up call to corporate officers and directors and all others charged with fiduciary obligations.  A fiduciary is obligated to use the entrusted assets for the benefit of the principal, and it is the fiduciaries obligation to be able to make that demonstration.  A personal benefit is a red flag, and a failure to disclose is doubly a red flag.  Had Waide sent to Holmes and Myers an email before the St. Louis trip saying “I’m going to St. Louis, taking my wife along, to try to get work from Peabody Coal.  Trip expected to cost $______.  Let me know if you have a problem with me doing so.”, at least that aspect of the dispute likely could have been avoided.  That is not to say that prior approval is required; it is, however, an easy way to diffuse any subsequent question.



Termination for Non-Performance Upheld

Termination for Non-Performance Upheld

In a recent decision, the Sixth Circuit Court of Appeals upheld the termination of the executive director of a non-profit corporation when she failed, over several years, to balance the budget.  In doing so her assertions that she was terminated on the basis of her sex and that she was held to a stricter standard than was her male successor were rejected.  Gunn v. Senior Services of Northern Kentucky, No. 15-5320 (6th Cir. Dec. 7, 2015).

Gunn was in 2000 hired as the Executive Director of Senior Services of Northern Kentucky (“SSNK”); eventually she as well accumulated the titles of President and CEO.  By 2006 the corporation was operating at a deficit; losses were being covered by a related endowment.  In 2006 the operating deficit was $101,000 and in 2008 it was $81,653. The Board, in June, 2008, directed that management’s goal was “to react to the [funding] cuts and achieve a balanced budget in 2009.”  Slip op. at 2.  Instead, in 2009 the deficit was $93,000, and the estimate for the 2010 budget was estimated to be as high as $150,000.  The Board reiterated its direction that a balanced budget needed to be achieved. In July, 2010 a new Board Chair told Gunn that her number-one priority is a balanced operating budget.  Still, on May 25, 2011 an operating budget deficit of $183,223, along with a projected deficit for the year of $281,417, were reported to the Board.  Gunn submitted a 2012 budget showing a $164,000 deficit, an action “That signaled the end of Gunn’s tenure at SSNK.”  Slip op. at 4. Gunn responded by bringing suit under the Civil Rights Act of 1964 and Kentucky’s similar law, asserting, inter alia that she was terminated on the basis of her sex.  SSNK moved for summary judgment, which was granted by the trial court.  That determination would be upheld by the Court of Appeals.
Claims of discrimination on the basis of sex move through a three stage analysis: first, does the plaintiff make out a prima facia case of discrimination; second, does the defendant offer a legitimate, non-discriminatory basis for the action taken; and third, can the plaintiff demonstrated that the proffered legitimate basis is a pretext?  Slip op. at 6, citing McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973).

In this case SSNK pointed to the repeated failures to achieve a balanced operating budget as a nondiscriminatory basis for Gunn’s termination.  In response thereto the burden shifted to Gunn to establish pretext, which requires that the plaintiff show:

[T]hat (1) the employers stated reasons for terminating the employee have no basis in fact, (2) the reasons offered for terminating the employee were not the actual reason for the termination, or (3) the reasons offered were insufficient to explain the employers action. Imwalle v. Reliance Med. Products, Inc., 515 F.3d 531, 545 (6th Cir. 2008). “[A] reason cannot be a pretext for discrimination unless it is shown both that the reason was false, and that discrimination was the real reason.” Seeger, 681 F.3d at 285 (alteration omitted) (quoting St. Marys Honor Ctr. v. Hicks, 509 U.S. 502, 515 (1993)). Thus, regardless of which rebuttal method a plaintiff uses, “he always bears the burden of producing sufficient evidence from which the jury could reasonably reject the defendants explanation and infer that the defendant intentionally discriminated against him.” Id. at 285 (alterations omitted).

Gunn attempted to proceed under the second option, namely that “the reasons offered for terminating the employee were not the actual reason for the termination.”    This she was not able to do.  While she profered favorable evaluations, they largely pre-dated the declining economic health of SSNK.  Positive comments on balanced projections did not alter the fact that those projections did not come to pass and the deficits were the reality.  Assertions that she was not afforded enough time to fix the problem were likewise rejected; in fact she had been told for several years that achieving a  balanced budget was her obligation. 

A back-up argument that SSNK failed to follow its own internal discipline procedures failed when it was noted that they did not apply to the executive director. 

As for the claim that her male successor was not treated the same way, while he continued to operate SSNK at a deficit, he reduced the $200,000 deficit of Gunn’s last year to a deficit of $65,000 in his first year and projected only a $14,000 deficit in the next year. 

In closing, the Sixth Circuit observed:

“Time and again we have emphasized that [o]ur role is to prevent unlawful [employment] practices, not to act as a super personnel department that second guesses employersbusiness judgments.” Corell v. CSX Transp., Inc., 378 F. Appx 496, 505 (6th Cir. 2010) (first alteration in original). The evidence cited by plaintiff shows an organization struggling to make ends meet, a Board of Directors looking to their chief executive for answers, and an executive who was ultimately unable to produce tangible results. It does not, however, demonstrate pretext.



Wednesday, December 2, 2015

Recent Developments in Diversity Jurisdiction for LLCs and Other Unincorporated Forms

Recent Developments in Diversity Jurisdiction for LLCs
and Other Unincorporated Forms
      The Journal of Passthrough Entities has just released my article Recent Developments in Diversity Jurisdiction for LLCs and Other Unincorporated Forms. This article addresses a trio of developments.
      First, it reviews the decision of the Third Circuit Court of Appeals rendered in Lincoln Benefit Life v. AEI Life, LLC, it providing important guidance as to how diversity may be plead on “information and belief” and facial challenges thereto.
      Second, it reviews a number of decisions addressing how to classify a non-US entity as being either incorporated or unincorporated, that classification in turn determining which test will be utilized in assessing citizenship for purposes of diversity.
      Third and last, there is considered a proposal from the American Bar Association that Congress amend the diversity jurisdiction statute to apply the current rule for corporations to, as well, unincorporated entities.
      HERE IS A LINK to this article.

Friday, November 27, 2015

The Problem With S-Corp LLCs

The Problem With S-Corp LLCs

While I do not disagree with Warren Kean that an S-Corp LLC may at times be a viable format based upon particular facts, I continue to view this structure as more often than not a “solution in search of a problem.”  See generally Rutledge,  S Corp LLCs – Planning Opportunity or Solution in Search of a Problem?, 15 J. Passthrough Entities 37 (July/Aug. 2012).

While is a highly-lawyered transaction the form may have a place, I see them in hugely unsophisticated deals and written by people who really do not understand what they are doing.

By way of example, I was recently sent for review an operating agreement which provides in part:

Section 4.4.  Counterpart of Code to Apply in Event of Subchapter S Election by Company

All references in this Operating Agreement to any provision found in Section 700 of the Code, including but not limited to references to same in Sections 4.2 and 4.3, supra and 5.7, infra, of this Operating Agreement shall be deemed references to the applicable Code provisions dealing with subchapter S corporations for such period of time as the Company is operated as a subchapter S corporation rather than as a partnership. 

My note as to this provision reads:

This section 4.4 should be deleted in its entirety. If this company is going to be governed by subchapter S rather than subchapter K, this agreement needs to be entirely rewritten. There is no general equivalency between subchapter S and subchapter K which could be carried over. Further, if this company were to elect to be an S corporation, there are provisions outside of 4.2, 4.3 and 5.7 which would in effect violate the S corporation rules, resulting in the LLC being classified, for tax purposes, as a C corporation.

Further, one of the original members to the LLC  is a corporation, and an S-corp with a corporation as one of several members will not be able to make an S-corp election.

That does not even get to “any provision found in Section 700 of the Code” – there is no such section.

Monday, November 23, 2015

Whose Attorney?

Whose Attorney?

      A lawyer for a business organization needs to be careful in identifying both who they serve and to make express who they do not serve.  Confusion as to these points has important implications in a variety of contexts including the related (albeit not co-extensive) realms of the attorney-client privilege and an attorneys obligation of confidentiality and who has standing to assert a malpractice claim against the attorney.
      These issues can be especially fraught in the area of small businesses, and the outcome of the analysis can turn on questions of organizational form.  Historically, the attorney for a corporation and the consequent obligations are owed to the corporation, that “person that exist in the mind of the law,” itself and not to any of the constituents thereof such as directors, officers, employees and shareholders.  While it is possible for an attorney to enter into an attorney-client relationship with both the corporation and a constituent thereof, proper disclosure and preferably written documentation of the existence and parameters of the parallel relationships is important.
      In contrast, while there has been law to the contrary, an attorney for a partnership has traditionally been deemed to be the attorney for every partner. 
      Between those two poles, what then is the treatment of the LLC; should the corporate model apply, should the partnership model apply, or should there be developed a model unique to this organizational form.  To date, most of the courts that have considered the question have applied the corporate model and deemed counsel for the LLC to not in consequence thereof be as well counsel for any of the constituent members or managers.  That apparent agreement has been brought into question by a recent decision from California. 
      Sprengel v. Zbylut, 194 Cal.Rptr.3d 407 (Ca. Ct. App. 2 Dist. Oct. 13, 2015; modified Oct. 29, 2015), arose out of the falling out between Jean Sprengel and Lanette Mohr, the two members in Purposeful Press, LLC.  Sprengel field an action for dissolution of the LLC, and Mohr hired counsel, including Zbylut, to represent the company; in retaining counsel she acted as a manager of the LLC.  After that suit was resolved Sprengel brought a malpractice action against Zbylut and the other attorneys:

“violated the duty of loyalty they owed to her under the Rules of Professional conduct by pursuing Mohr’s interests in the underlying dissolution and copyright actions.  Sprengel alleged she had an implied attorney-client relationship with each defendant based on her status as a 50 percent owner of Purposeful Press.”

            The attorneys sought dismissal of the suite based upon the California anti-SLAPP suit statute, it basing asserted that the representation of the LLC was “constitutionally protected petitioning activity.” and other law including the direct/derivative distinction.  Springel asserted as well that:
“several factors support[ed] a finding that there was an [implied] attorney client-relationship between [them],” including” (1) the limited “size of [Purposeful Press][, which] suggest[ed] an individual representation of the [company’s] members”; (2) the defendants’ legal services were paid with funds that belonged to Sprengel; (3) the subject matter of the representation involved Sprengel’s copyrights and her intellectually property rights; and (4) the district court’s order in the copyright action had specifically found that Purposeful Press had no interests independent of its two members.  Sprengel also argued that the litigation privilege did not provide a defense to her claims because the privilege was inapplicable where “a client has asserted claims against an attorney for breaches of duties…and conflict of interest.”
            The anti-SLAPP defense was rejected, and this appeal followed.

            Ultimately, the denial of dismissal on the basis of the anti-SLAPP statute was upheld, so maybe (hopefully) all else is dicta, but it is disturbing that the court did not ab initio reject:
·                     the assertion that an implied attorney-client relationship exists between counsel to an LLC and its members, especially a member who is seeking the dissolution of that LLC (i.e., its legal death); or
·                     the suggestion that counsel engaged in malpractice “by accepting Sprengel’s funds to pay for their legal services without her consent.”
      As to the first point, if counsel to an LLC are as well counsel to each member, including a member who has already brought an action against the LLC, then no LLC can ever successfully hire counsel to defend itself.  Rather, counsel who considers the matter will never agree to accept the engagement without the plaintiff’s consent, and the plaintiff is never going to consent. The same outcome will result if the LLC is the plaintiff against a member.
      As to the second point, the funds the LLC used to pay its legal counsel was never Sprengel’s money.  Rather, it was the LLC’s money.  A member of an LLC has no ownership interest in the LLC’s property. Only if a distribution had been declar4ed and then those funds had been diverted to pay legal bills would “Sprengel’s money” have been used to pay for legal services.  But until a distribution was declared, it was the LLC’s money.


Maybe I Am a Nerd After All

      Rumors that I am a nerd have been challenged (SEE HERE), but at the same time on a recent flight I was writing an addition to a book chapter on fiduciary duties, and I was pretty excited to stumble upon an opportunity to cite Frank Herbert’s Dune and his God Emperor of Dune. 
      On second thought, as I have already cited both Star Wars and The Hitchhikers Guide to the Galaxy in other law review articles, maybe the nerd label has already been well earned.

Monday, November 16, 2015

The 2015 LLC Institute

The 2015 LLC Institute
Apparently I am a wonk, and not a nerd

      Last week the 2015 LLC Institute was held in Arlington Virginia.  Notwithstanding a few hiccups, the Institute was a success, that being attributable to great work of the program chairs.
      After the Institute, Professor Joan Heminway wrote an interesting post on it for the Business Law Professor Blog.  Based thereon, I'm glad to know that in fact I am not a “nerd,” but rather am a “wonk.”
     HERE IS A LINK to Professor Heminway’s post.

Sunday, November 15, 2015

The Sad Passing of "Big" Lew Kaster

It is with beyond a heavy heart that I report to you the passing of our colleague, friend and mentor “Big” Lew Kaster.

Of late Lew was dealing with a number of health challenges, and we have missed his presence.  Still, last Thursday evening, at the Lubaroff Award Dinner, a glass was raised to him with the hope that he would soon rally and return to our merry band.  We did not then know that earlier that day had been his time to “shuffle off this mortal coil.” 

Lew was the 2010 recipient of the Martin I. Lubaroff Award.  Here is what was written in connection with that event:

The 2010 Martin I. Lubaroff Award to be Presented to Lewis R. Kaster


This year's recipient of the Martin I. Lubaroff Award is Lewis R. Kaster, of counsel in the New York office of Bryan Cave LLP.  Lew has been an active member of our committee for many years. Lew’s practice includes real estate joint venture negotiation; legal issues concerning partnerships; LLCs and other non-corporate business entities; and tax advice to pension plans and other exempt organizations investing in real estate. Lew is a member of the adjunct faculty of Columbia Law School, lecturing on partnerships, limited liability companies and other non-corporate entities—Lew has been lecturing on unincorporated entity issues since the early 1950’s. Lew has been a frequent writer on real estate issues for publications such as The Journal of Taxation, the Practicing Law Institute’s Issues and Answers, the ABA Real Property and Probate Trust Journal and the Real Estate Review, and was the editor of the Real Estate Department of The Journal of Taxation. He has served on the Board of Governors of the American College of Real Estate Lawyers and has been actively involved over the years in The Association of the Bar of the City of New York, the New York State Bar Association, the National Association of Real Estate Investment Managers, and numerous civic and charitable activities.

Vincent Alfieri - In the late 1960’s, Lew Kaster joined what was then the firm of Robinson Silverman Pearce Aronsohn Sand & Berman as a young tax lawyer.  (In 2002, Robinson Silverman merged with Bryan Cave, where Lew continues to practice as Of Counsel.)  As a result of the firm’s significant real estate practice, Lew developed particular expertise in real estate tax law and structuring real estate transactions.  In structuring real estate transactions, the choice of appropriate entities was important, so Lew also became extremely knowledgeable with respect to the law regarding the formation, use, operation and tax consequences of general and limited partnerships and limited liability companies.  He became the “go to” attorney in the firm with respect to matters relating to these unincorporated entities.  He was also an enthusiastic mentor to younger attorneys.  He broadened his knowledge and reputation by reading cases, maintaining a dialogue with other attorneys serving on bar association committees, lecturing and writing.  He was well recognized for his intelligence, knowledge, creativity and practicality in resolving issues.  He became a valued resource not only for our firm but for lawyers and clients throughout the country.  We are proud of his achievements and his long association with the firm, and we congratulate him on the well-deserved recognition of being the 2010 recipient of the Martin I. Lubaroff Award from the ABA’s Committee on LLCs, Partnerships, and Unincorporated Entities.

Bill Callison - I was particularly pleased several years ago to notice that Lew edited an article I wrote for the same publication in early 1987.  Lew did this quite a few years before we knew one another and he became my friend.  It was pretty much a career starter for me in the affordable housing area (I was then into my 5th year as a lawyer).  I remain eternally grateful for life's favors, such as this one by Lew Kaster.  Bill Callison

Tom Rutledge – I must confess to not being able to identify the exact meeting at which I met Lew Kaster, but it is my impression that as long as I have been attending Committee meetings, he has been there.  Over the years, we have both spoken a panel together and co-authored a short piece that appeared in Corporate Counsel Weekly.  Of far greater importance, Lew has often been both a professional advisor helping me think through troubling problems and more importantly simply a great friend whose wealth of experience at life (in the broadest sense) has benefited me, probably more than he knows.  Lew Kaster is a master of partnership law, of the tax code, of the law of governing real estate and of the bankruptcy code; any of us should aspire to master any one of those subjects.  More importantly, Lew is a master of life, and we should certainly aspire to follow in his footsteps.

Lauris Rall - I have had the pleasure of knowing Lew for over a decade.  Although our paths did not cross frequently in the Big Apple, the center of the legal universe, I was well aware of his scholarship in the alternative entities field, particularly partnership taxation.  As the lawyer to many high net worth individuals and family firms, using a pass through entity for sophisticated tax planning was an art form under Lew's tutelage.  I am well aware that his reputation in our legal community has been that of an intellectual, but yet practically minded counselor, whose negotiating acumen is, how shall we say, persistence. 

For most of my career I have enjoyed being a "backroom" lawyer, as it never seemed useful to me to be out front with the paparazzi any more than absolutely necessary.  However, Lew asked me to help his partner as an expert witness in a New York partnership law case in federal court.  It was an opportunity to see a side of the practice that I had not seen before, and I am forever grateful for that experience.   

It has only been in recent years that I have had the pleasure to get to know Lew on a more personal level, and that has been rewarding many times over.  Lew has stories from every stage of his life and career, and I have been fortunate during dinners and other times to have heard at least a few of them.  Listening to these stories has instructed me well on one facet of Lew's character - he is a keen observer of the human experience.  Lew has learned from his life and Lew has and continues to teach us much about that broad subject AND about the law of alternative entities.  He is a classic and I am glad to call him my friend. 

Congratulations Lew on this wonderful honor, well deserved.

Elizabeth Miller - On my bookshelf in my office are two out-of-print treatises, and these two old treatises are among my most prized possessions.  They are Crane and Bromberg on Partnership (1968) and Rowely on Partnership (2d ed. 1960).  Taped to the outside of each treatise when they unexpectedly arrived in my mail about five years ago were handwritten notes from Lew Kaster which I have tucked into each book and which evoke warm feelings in me each time I open the books and remember his kindness in passing along these treasures.   It seems that Lew was “cleaning out” as he prepared to phase out of his practice and thought I might make use of these reference works.  They have indeed been precious gifts in more than one sense.  I certainly did not foresee when I first encountered the learned Professor Kaster that I would one day receive such a touching gift from his library and that I would view him as such a gentle man as well as a gentleman.  The truth is I was quite intimidated by him after witnessing his passionate, booming argument on some bankruptcy issue that was under discussion at one of my first PUBO Committee meetings.  Sometime later I was tremendously flattered and a bit nervous when he contacted me and asked permission to use some of my materials for his class at Columbia.  Naturally, those feelings of intimidation and nervousness long ago gave way to great affection – what other outcome could possibly have resulted given Lew’s charm, wit, and kindness?  Admiration, of course, is a feeling that has transcended my entire acquaintance with Lew.  What a tireless student of the law of partnerships and unincorporated entities he is.  Since he sent me those books five years ago, I cannot tell that he has slowed down much.  I still regularly receive emails from him regarding a recent case or other development of interest.  I don’t think he knows how to stop contributing to this area of the law, and he certainly is a most deserving recipient of the Lubaroff Award.

Scott Ludwig - With respect to Lew, I can tell you that I first met Lew approximately 17 years ago--about the time I joined this committee.  Lew was then as he is now an imposing figure in the law.  Lew’s knowledge of real estate, tax, unincorporated entities and bankruptcy fascinated me and I knew immediately that Lew was one of those lawyers that you need to listen to carefully so that you absorb as much knowledge as possible while you were in his presence. 

     Shortly after joining the committee, I was asked to make a presentation and at the time I began preparing summaries on cases, rulings and other matters pertaining to the state taxation of LLCs and cases on professional unincorporated entities.  This combined effort was a daunting task for me and so when I made my first presentation and I saw Lew Kaster rise from his chair and move to the microphone I nearly swallowed my tongue.  I immediately jumped to the conclusion that I was about to receive the hardest question, one which was calculated to have no answer and one which was calculated to remind this poor dirt farmer that he was just that.  Instead of what I had imagined, Lew threw me a softball and then with a wink sat down.  In that single moment my impression of Lew Kaster changed from hardnosed stern New York lawyer, adjunct professor Columbia University and other scary monsters of the night to that of a gentle man who was attempting to help his peer.  After that experience, I began to know a different Lew Kaster than what I had imagined Lew to be.  I began to know the real Lew that everyone else knew and that I had, for whatever reason, placed on a pedestal and held at a distance out of fear. 


     What Lew taught me was that no matter how good you are or how preeminent you may be in your field, the practice of law is a profession in which we should extend courtesy and kindness to our fellow professionals and in which we should extend a hand to help guide those who may be less experienced or less knowledgeable then ourselves.


     I can think of no better legacy to leave in the practice of law than teaching fellow lawyers who aspire to be preeminent in their field to remain approachable and open to new lawyers in that field and to be willing to teach and educate those less experienced lawyers in order that the law and the legal profession is advanced.


In 2014 Dan Cullen of Bryan Cave presented at the LLC Institute.  While he was doing his final preparation in the lobby I interrupted to ask if he worked with Lew.  Dan put his materials aside and shared of his many experiences of working with Lew, including as to his expectations of precision in written product, whether it be a contract or an article, and his both ability and willingness to provide guidance to younger attorneys.

            Earlier today Scott Ludwig wrote

This is indeed sad news.  Lew was a wonderful person, lawyer and mentor – but more importantly, he was a devoted friend with an unbelievably big heart

The subject line of an email received earlier today from Bill Callison was simply “Tears.”

The obituary appears in today’s New York Times, and there is a guest book to which you can post any thoughts you may want to share.   http://www.legacy.com/obituaries/nytimes/obituary.aspx?n=LEWIS-KASTER&pid=176508763

            These words are far too little by way of acknowledgement of who was Lew Kaster to our shared area of interest and what his friendship meant to so many of us. I will close with the words that Ira Meislik wrote to me earlier today:


May his memory be for a blessing.

Tuesday, November 10, 2015

Conflicting Views as to the Unfinished Business Doctrine

Conflicting Views as to the Unfinished Business Doctrine

I, along with Tara McGuire, an associate here at Stoll Keenon Ogden, have recently published in the Texas Journal of Business Law an article titled Conflicting Views as to the Unfinished Business Doctrine.  In this article we consider a pair of recent decisions from New York and Colorado that come to opposite conclusions as to the application of the Unfinished Business Doctrine.  We address as well the validity of the Doctrine as a means of protecting partnership creditors, including retired partners, and explain why the Doctrine does not raise ethical issues as to the capacity of clients to select the attorney(s) of their choice.

The article can be accessed AT THIS LINK.




      On October 30 (the eve of Halloween), the SEC approved the long awaited Crowdfunding rules.
      Several of my law partners and I who practice in the area of securities regulation have prepared a short review of the Crowdfunding rules.  HERE IS A LINK to that document.
       Hopefully you will find this review of interest.

Thursday, November 5, 2015

Hoist on the Petard of a General Purpose Clause

Hoist on the Petard of a General Purpose Clause


In a recent decision out of New Jersey, an LLC, itself taxed as a disregarded entity and wholly-owned by a 501(c)(3) corporation, was denied a property tax exemption with respect to improved real property it leased to another charitable organization because the LLC’s articles of organization provided that it could engage in any lawful activity permitted an LLC. 1785 Swarthmore, LLC v. Township of Lakewood, No. A-4701-13C 4 (N. J. App. Div. Oct. 28, 2015).

Oorah, Inc., a New Jersey non-profit corporation, was classified by the IRS as a public charityunder section 501(c)(3). After acquiring a piece of improved real property, Oorah formed 1785 Swarthmore, LLC and re-deeded the property to it. As such, Swarthmore was wholly-owned by a 501(c)(3) corporation; Swarthmore was, for federal income tax purposes, classified as a disregarded entity. Swarthmore’s operating agreement provided that its purpose was for conducting any legal business enterprise.Thereafter, Oorah leased a portion of the property to Lakewood Chedar School. Regardless, after the lease was entered into, Oorah, in its capacity as the sole member of Swarthmore, applied for a property tax exemption with respect to at least that portion of the property being leased to the school. That application would be denied by the municipal tax assessor, reasoning that Swarthmore, being the organization claiming the exemption,” was not recognized by the State of New Jersey as a nonprofit organization.  That denial would be upheld by both the Tax Court and the Court of Appeals.

Under New Jersey law, a property tax exemption is available for property that is:

(1) “actually owned and exclusively used for [a] tax-exempt purpose;

(2) the operation and use of the property is not conducted for profit”; and

(3) where the property owneris organized exclusively for tax-exempt purpose”.

N.J.S.A. § 54:4-3.6.

Even while the court recognized that, under the Internal Revenue Code, Swarthmore’s activities as a disregarded entity are treated as those of its parent, under New Jersey law, federal income tax standards do not govern state law as to property tax exemptions. In this case, it was necessary that the landowner be organized for the nonprofit purpose, and:
Swarthmore did not specifically limit its stated purposes to any extent in its Certificate of Formation. In that certificate, as we have already noted, Swarthmore’s stated purpose was very broad: to engage in any activity within the purposes for which Limited Liability Companies may be formed pursuant to the New Jersey Limited Liability Company Act.(emphasis in original). Hence, Swarthmore could have been formed and operated for any number of non-exempt purposes and thus has not satisfied the organizational purpose requirement under the statute.
Slip op. at 21.
The careful crafting of the purpose clause for any business entity is important. For example, the purpose clause can impact upon the scope of the fiduciary duties binding the members/managers of an LLC. This case is another illustration of the need to carefully consider that provision and, often, if not always, forgo the use of the simple any lawful purposeformula.
Thanks to Stuart Pachman for the lead on this decision.