Chutzpah Too Far

Chutzpah Too Far

            A recent decision of the Eight Circuit Court of Appeals, it interpreting the Illinois LLC Act, held that a member of an LLC cannot extract 30% of the value of the venture when they did not put up 30%. of the risk-capital.  Lincoln Provision, Inc. v. Puretz, No. 14-1028, __F.3d __ (8^th Cir. Jan. 5, 2015).

            Lincoln Provision and Aron Puretz agreed to form Hasting Acquisition, LLC; Puretz was to put up 70% of the required capital while Lincoln was responsible for the 30% balance.  They were otherwise to be equal owners.  The purpose of the LLC was to bid for and hopefully acquire from a bankruptcy sale two cattle processing plants in Nebraska.  Hastings needed to post a $250,000 earnest-money deposit in order to bid; Lincoln put up $100,000 and Puretz the balance of $150,000.  Hastings put in the successful bid of $3,900,000 for the two plants.

            Even as Hastings was successful in the bid its two members were unable to come to agreement as to the terms of the operating agreement.  Puretz advanced to Hastings all of the $3.9 million purchase price; Lincoln did not put up anything toward the purchase except the $100,000 it put up toward the earnest money deposit.

            After negotiations had entirely broken-down, Lincoln, through counsel, withdrew from the LLC.  Under the Illinois LLC Act, if a member withdraws and the LLC does not dissolve, the withdrawing member is entitled to the fair value of their interest in the LLC.  ILCS § 180/35-60(d)-(e).  The trial court awarded Lincoln $880,000 as follows: 50% of $3.9 million ($1,950,000) less the 30% of the purchase price Lincoln did not contribute ($1,170,000) plus the $100,000 Lincoln paid toward the earnest money deposit.

            There followed this appeal.  The Court of Appeals rejected the trial court’s calculation of Lincoln’s value, finding that there was ample evidence of the parties’ agreement that distributions would be first to repay contributed capital before other distributions.  As Lincoln had contributed only $100,000, as of the date of its dissociation that was all it was entitled to receive.

            Initially, this case is a warning against entering into an LLC before the operating agreement has been agreed upon.  Further, it cautions against admitting a member to the LLC based upon future capital contributions obligations unless admission is made contingent upon full performance of those obligations (i.e., make full performance upon the contribution obligation a condition precedent to member status). Why "Chutzpah"?  Well, if the classic definition is murdering your parents and then throwing yourself on the mercy of the court because you are an orphan, then I think it applies as well to defaulting on the obligation to contribute to the venture but then insisting that you are entitled to a share of its value.

Suit Against Property Owner Dismissed When Not Filed Within Statute of Limitations

Suit Against Property Owner Dismissed When

Not Filed Within Statute of Limitations

 

            Earlier this month the Kentucky Court of Appeals affirmed a trial court ruling dismissing various claims arising out of a slip and fall. What is most telling about this suit is that the plaintiff (or at least her attorney) knew who the landowner was, but failed to bring suit against them within the statute of limitations.  Vickie Landell v. The Kroger Company, No. 2013-CA-001637-MR (Ky. App. Jan. 16, 2015)

            Landel fell in the parking lot of the Northbridge Shopping Center in Russell Springs, Kentucky; that happened on March 10, 2011.  On November 2 of that year she filed suit against Kroger.  On November 11 (nine days after the complaint was filed and still 4 months before the statute of limitations would run), Kroger sent Landel written notice that Northridge Shopping Center was the owner of and the party responsible for maintaining the parking lot; Kroger even provided her a copy of the lease agreement “that identified Northridge as the landlord responsible for the common area, which includes the parking lot, of the shopping center.”  Slip op. at 2.

            On March 21, 2012, eleven days after the one-year statute of limitations had run, Landel sought to amend her complaint to add Northridge as a defendant. Landel responded on the basis that the amendment was too late.

            Northridge was dismissed from the suit in November, 2012.  Thereafter Kroger sought and was ultimately awarded dismissal of the suit on the basis that it was not Kroger’s responsibility to maintain the parking lot.  Landel then appealed.

            As to the effort to amend the complaint after the statute of limitations had run to add the Northbridge Shopping Center, the Court of Appeals began by noting that the applicable statute of limitations is one year (see KRS  § 413.140(1)).  Landels efforts to have the statute of limitations tolled were rejected as there was no fraudulent concealment or misrepresentation of the responsible party. Rather, that “information was known to Landel roughly four months prior to the expiration of the statute of limitations.”  Slip op. at 7.

            As for the dismissal of Kroger (Landel’s apparent destination at the shopping center), as it was the landlord who undertook the obligation to maintain the parking lot, Kroger could not have breached a duty to Landel as to its condition.  Hence there could be no breach of a duty by Kroger.  There being no duty to breach there could be no negligence, and on that basis the dismissal of Kroger from the suit was upheld.

Postscript

Another blog, reviewing this decision, raises the question of whether the statute of limitations for slip and falls should be extended from beyond one year, noting how in this case the plaintiff was unable to identify the responsible party.  HERE IS A LINK TOTHAT BLOG POSTING.  I do not think that is the case, and in fact would argue that this decision supports the existing one-year statute of limitations.

Within the specifics of this case, some four months before the statute of limitations ran, counsel for the plaintiff was advised in writing as to the name of the responsible landlord and provided a copy of the lease. Why they did not promptly amend the complaint based on that information is a mystery.  Regardless, this case does not highlight the difficulty of a plaintiff identifying the responsible party; they were given that information.

Further, in the case of a slip and fall accident, the location is always known.  It is always possible to check the county land records to determine who is the owner of the property. Those records will provide at minimum the identity of the party who can advise as to the identity of the responsible party.

Tax Scam

Tax Scam Targets Kentucky and Tennessee

       The Treasury Department has warned that tax scammers are targeting Kentucky and Tennessee.  A copy of the press release IS AVAILABLE AT THIS LINK.

      I received one of these messages.  It requested I call a 202 area code number (D.C.), which I thought to be a nice touch.  My law partner Doug Brent was able to determine that the number was assigned to "magic jack"; there is no telling where the call would have been answered had I actually made it.

Proper Venue for Suits Against Domestic Corporation, Long Arm Jurisdiction

Proper Venue for Suits Against Domestic Corporation, Long Arm Jurisdiction

 

A decision rendered last week by the Kentucky Court of Appeals addressed both the proper venue for a suit against a domestic corporation and as well the application of the Kentucky long arm statute to Indiana corporation. Cooper v. Nair, No. 2013-CA-001746-MR (Ky. App. January 9, 2015).

 

Cooper brought suit against Dr. Agith Nair, Kentuckiana Pain Specialist, PSC and Metro Specialty Surgery Center, LLC, all in connection with allegations of negligence in affording Cooper treatment for lower back pain. Kentuckiana Pain Specialist is a Kentucky professional service corporation with its office in Louisville. Cooper was treated by Nair numerous times at that office. In addition, Nair performed a surgical procedure on Cooper at the Metro Specialty Surgery Center, that being an Indiana LLC without any operations in Kentucky. The suit filed by  Cooper was filed in Jefferson Circuit Court.

 

In response the complaint, Metro Specialty Surgery Center asserted that the Jefferson Circuit Court lacked personal jurisdiction over it. Dr. Nair and Kentuckiana Pain Specialist answered the complaint alleging improper venue. The Jefferson Circuit Court would ultimately dismiss Metro Specialty Surgery Center based on the lack of personal jurisdiction, and thereafter granted the joint motion of Dr. Nair and Kentuckiana Pain Specialist seeking to dismiss based upon improper venue. Both of these holdings were appealed.

 

With respect to the dismissal of Dr. Nair and Kentuckiana Pain Specialist, it appears the trial court granted the motion to dismiss based upon choice of law and forum non conveniens issues. The Court of Appeals rejected these bases, noting that what is the proper venue for an action is determined by Kentucky statutes, specifically KRS § 452.460(1), it providing that the action shall be brought in the county in which the defendant resides or in which the injury was done. In addition, KRS § 452.450 provides that a corporation may be sued in the county in which its place of business is located.  It being uncontested the Dr. Nair resided in Jefferson County, and likewise that Kentuckiana Pain Specialist had an office in Jefferson County, the suit against both of them was properly filed in Jefferson Circuit Court. For that reason, dismissal of the claims against these two defendants was set aside.

 

Turning to Metro Specialty Surgery Center, the Indiana LLC, the court applied the Kentucky long arm statute (KRS § 454.210). In connection therewith, the plaintiffs sought to engage in discovery with respect to contacts with Kentucky. Conversely, Metro Specialty relied upon the fact that Cooper did not allege a basis for the court to exercise personal jurisdiction. Referencing Caesar's Riverboat Casino, LLC v. Beach, 336 S.W.3d 51 (Ky. 2011), the court found that the Indiana LLC does not conduct business in Kentucky and it did not cause any tortious injury to Cooper in the Commonwealth. For those reasons, the dismissal of Metro Specialty Surgery Center from the suit was affirmed.

Another review of this decision appears AT THIS LINK.

New York Court Denies Marketability Discount in Dissenter Rights Action

New York Court Denies Marketability Discount in Dissenter Rights Action

 

      In the original decision in this dissenter right action, it having been delivered on October 6, 2014, the court determined that a discount for lack of marketability would not be applied to the sharers held by the dissenters, it being determined that the application of such a discount would be equivalent to imposing a minority interest discount, that already forbidden by New York law.

 

      Ruling on December 22 in connection with a motion for reconsideration, the judge again I determined that a discount for lack of marketability is not, at least in this instance, appropriate. Zelouf International Corp. v. Zelouf, Index 653652/2013 (Dec. 22, 2014).  Peter Mahler, in his blog New York Business Divorce, has reviewed these developments; his discussion can be accessed THROUGH THIS LINK.

Kentucky has already moved its law ahead of that in New York with respect to minority and lack of marketability discounts in dissenter rights actions. In Shawnee Telecom Resources, Inc. v Brown, 354 S.W.3d 542 (Ky. 2011), the Kentucky Supreme Court reversed Ford v. Courier-Journal Printing Co. and held that, in the context of a dissenter rights action, neither a minority nor a lack of marketability discount should be applied with respect to the shares of the dissenting shareholder.

Arbitration Clause Excluded Equitable Relief, So Action for Accounting and Judicial Dissolution Would Proceed in Court

Arbitration Clause Excluded Equitable Relief, So Action for Accounting and Judicial Dissolution Would Proceed in Court

 

            In a decision rendered last week, the California Court of Appeals interpreted the arbitration clause in an LLC operating agreement that provided in part:

Notwithstanding the foregoing, no arbitrator shall have the power to render equitable relief of any kind, and requests for such relief shall be referred to a court of competent jurisdiction.

In the face of this language, the court held that an action for an accounting and judicial dissolution of the LLC was not subject to arbitration.  Bachrach v. Compagno, No. B252454, 2015 WL 78143 (Ca. Ct. App. 2^nd Dist. Jan. 6, 2015).

            The plaintiffs held 25% of the LLC.  Initially they sued Compagno for three torts and as well for an accounting and for judicial dissolution.  After the suit was filed Compago’s counsel sent to the plaintiff’s a demand for arbitration, which they refused.  When Compagno sought a court order of arbitration the plaintiffs dropped the three tort claims.  They then argued that as an accounting and judicial dissolution are equitable in nature they are not subject to arbitration, a position that the trial court accepted.  Compagno appealed.

            The Court of Appeals would affirm the trial court. While arbitration agreements are to be enforced, there can be no enforcement of an agreement that was never made.  Here the agreement was to arbitrate disputes that did not involve equitable relief.  As an accounting and dissolution are equitable relief, the denial of the order seeking to arbitrate the matter was properly granted.

Delaware Chancery Court Holds That Former Member Has No Right To Inspect LLC's Books and Records

Delaware Chancery Court Holds That Former Member Has No Right To

Inspect LLC's Books and Records

 

The Delaware limited liability company act affords a member the right to inspect the LLCs books and records. Del. Code Ann. tit. 6, § 18-305(a). In a recent ruling, the Delaware Chancery Court held that a former member of an LLC did not have the right to inspect books and inside those books and records. Prokupek v. Consumer Capital Partners LLC, C. A. No. 9918-VCN (Del. Ch. December 30, 2014).

 

Prokupek had been the CEO of Smashburger Master LLC. His service as CEO was terminated, and pursuant to various agreements his interess in the LLC were redeemed. He challenged the valuation attributed to his various units in the company. As part and parcel thereof, he sought to inspect certain books and records of the LLC in accordance with section 18-305(a) of the Delaware LLC act, it affording document inspection rights to “each member of a limited liability company.”

 

After parsing the substantive agreements to determine that the units in the LLC had been redeemed notwithstanding the continuing dispute as to their valuation, the Court turned to the language of the Delaware LLC Act (it not having been modified in the operating agreement) with respect to the right to inspect books and records. In this instance, the Court found that as the Act affords “members” the right to inspect books and records, and as Prokupek was a former, and not a current member, it held that he had no right to inspect books and records hence, there was no right he could exercise.

 

The Kentucky LLC act, at  KRS § 275.185, affords the right to inspect LLCs books and records to a “member.” As such, the Kentucky LLC act is similar to that in Delaware, and this holding to the effect that former members do not have the right to inspect booking and records should be equally applicable in Kentucky.

Both Yes and No to an LLC's Petition for Bankruptcy Protection

Both Yes and No to an LLC's Petition for Bankruptcy Protection

 

In a recent decision from the bankruptcy court for New Jersey, the ability of a particular LLC to file for bankruptcy protection was affirmed. At the same time, it was determined that the application lacked a legitimate basis. In re: Crest By The Sea, LLC, No.: 14-31681-ABA, 2014 WL 7366200 (Bankr.. N.J. December 23, 2014).

Initially , it should be noted that this decision, while making clear that the debtor was a limited liability company, the several times to the LLC as being "incorporated."  Clearly these statements are inaccurate.

 

The LLC originally had five members, but one of them declared bankruptcy.  At the time of filing of the bankruptcy petition, only three of the members had approved it.  It was open to debate whether the operating agreement allowed a simple majority of the members to approve the filing of a petition for bankruptcy, or whether unanimity was required.  The court indicated that a fair reading of the operating agreement was that only a majority vote of the members was required.  However, the court found that the post-filing approval of the bankruptcy petition by the last member was sufficient to give rise to unanimous approval if that was required.  Either way, the court did give effect to the provision of the New Jersey LLC act providing, inter alia, that a member is dissociated (i.e., lose of the right to participate in the LLC’s management) by reason of bankruptcy. 

 

Having determined that the bankruptcy petition was validly filed, the court then turned its attention to its intrinsic legitimacy.  In this instance, the court was able to determine that the bankruptcy petition was filed for the purpose of delaying certain state court actions and that no conceivable reorganization of the entity could take place.   Finding there to have been bad faith in the filing as evidenced by numerous errors in the petition and the related schedules, admission that it was filed in order to delay the state court proceedings and the failure of the signatory of the petition to appear at an evidenciary hearing:

[T]he court find that the Debtor abused the provisions, purpose and spirit of bankruptcy law in filing its bankruptcy petition. As such, the court has no choice but to dismiss the Debtor’s bankruptcy petition for cause under Section 70 (a) of the Bankruptcy Code.

Nerve Center Test Not Applicable to Determine Citizenship of LLC

Nerve Center Test Not Applicable to Determine Citizenship of LLC

In a recent decision from Missouri, although the statement is likely dicta, there was rejected the suggestion that an LLC would have the citizenship of the jurisdiction in which it has its principal place of business as determined under the nerve center test.  West v. Missouri Metals, LLC, No. 4:14CV01296 AGF, 2014 WL 5605617 (E.D. Mo. Nov. 4, 2014).

This action was filed alleging claims based upon environmental contamination of the plaintiff’s property.  One of the defendants, an individual, was resident in Missouri, as was the plaintiff.  Missouri Metals, LLC, another defendant, is a Delaware limited liability company (sic -  the opinion refers to it as a "limited liability corporation") whose sole member is an Indiana corporation.  The principle place of business of that corporation is not set forth in the opinion.

The defendants removed the action to federal court on the basis of diversity, maintaining that the individual was fraudulently named as a party in order to defeat diversity jurisdiction.  In response the plaintiff maintained that the individual was not fraudulently joined.  In addition, the plaintiff argued that Missouri Metals should be deemed a citizen of Missouri as that is its principal place of business.

 

Most of the opinion is devoted to the question of fraudulent joinder of the individual defendant, the court ultimately determining that fraudulent Joinder was not apparent, and on that basis determining the diversity did not exist.  Before closing the opinion, the court noted that the principal place of business of an LLC does not determine its citizenship for purposes of diversity, writing:

Although the court need not address Plaintiff’s alternative argument for remand, namely, that Missouri Metals should be considered a citizen of Missouri, this argument is without merit.  Defendants are correct that for diversity purposes a limited liability company does not have its own citizenship; rather, its citizenship is the citizenship of all of its members, in this case, Indiana.