Tuesday, May 24, 2016
“I Use Series LLCs to Save on Filing Fees” and Other Really Silly Things People Have Said
The series LLC is a highly complicated organizational form that, conceptually, allows the segregation of debts and obligations within a series thereof, protecting the LLC and any other series from liability thereon. Series are not available under the Kentucky LLC Act, but they are available under the Kentucky Statutory Trust Act. With respect to the series provisions of the Kentucky Statutory Trust Act, see Rutledge, The Kentucky Uniform Statutory Trust Act (2012): A Review, 40 Northern Kentucky Law Review 93 (2012-13); HERE IS A LINK to that article. With respect to the structuring of series organizations and the myriad questions that are not yet resolved as to this organizational form, see, for example, Rutledge The Man Who Tells You He Understands Series Will Lie To You About Other Things As Well, 16 J. Passthrough Entities 53 (March/April 2013) (HERE IS A LINK to that article) and Rutledge Again, For the Want of a Theory: The Challenge of the “Series” to Business Organization Law, 46 American Business Law Journal 311 (2009) (HERE IS A LINK to that article).
It has been asserted by some that they use series, which typically do not require their own state filing and filing fee, in place of single-member LLCs, which do require a state filing and filing fee. Having recently given the issues some additional thought from the perspective of the requirements to maintain the liability shield between series, that explanation simply fails.
Under the various series acts, in order to achieve limited liability between the series and as well between each individual series and the LLC itself, property must be “associated” with either the correct series or the LLC. The “association” of property can be a time intensive issue, requiring that the relationship of the series and the property be reflected on the books and records of the LLC. Essentially, every time it is intended that a series receive property, that property must be associated with the series.
Consider an LLC that has 12 pieces of rental property, each of which is associated with an individual series. Each month, the tenants pay on their leases in the amount of $2000 per tenant. All else being equal, where Property A is associated with Series One, the $2000 received on that lease needs to be associated with Series One; if that association does not take place then those funds are available to satisfy claims against any of the other Series Two through Twelve or to satisfy an obligation of the LLC. That has to be done every month for each payment made to each series; we now have 144 bookkeeping entries to be accomplished each year.
Now, let's assume that, with respect to Property C that is associated with Series Three, in March the washing machine goes out. The LLC calls its usual handyman, who runs over to the local big box home improvement center, picks up a replacement dishwasher that is charged to the LLCs account, and installs it in Property C. For the reasons recited above, that dishwasher now needs to be associated with Series C or it is available to satisfy claims against the other series. The same happens when, in October, the water heater in Property L, which property is already associated with Series Twelve, fails and needs to be replaced.
Mind you, if each of these properties were in a single-member LLC wholly-owned by a master LLC, association would not be a problem. Rather, for example, when the tenant of Property A pays on the lease, even to a common payment agent, those funds are the property of the SMLLC A without the need for further action.
So let's get back to avoiding filing fee. Assume that in any particular state in which LLCs are allowed to set up series, there is no filing fee to set up a series but there is a $100 filing fee for each LLC. In the series structure outlined above, only $100 in filing fees would need to be paid. If, conversely, the were a master LLC with 12 SMLLCs underneath, each holding one property, $1300 in filing fees would have to be paid. If that differential of $1200 is not spent each year as the additional cost in associating property to each of the various series, that association is probably not being done properly.
Furthermore, had a string of single-member LLCs, rather than series, been used in this structure, there would have been no risk of assets not being associated in order to achieve asset partitioning. Rather, it would have happened simply by virtue of the LLC Act.
Combine the de minimus nature of filing fees against the incurred cost of association of property with the uncertainty that exist as to secured financing, bankruptcy, veil piercing, etc., and I submit that the claimed reduction in filing fees dwarfed by additional costs incurred and legal uncertainty undertaken.
The Judgment of Paris
For those of you who from time to time enjoy a good wine, today is the anniversary of the Judgment of Paris, the competition in 1976 between the then still young California wine industry and the venerable French vintages. The competition was sponsored by a seller of French wines and was intended to reinforce their position as the dominant vintners.
It did not turn out so well. Overall the California wines (including one of my favorites Stag’s Leap) prevailed. Some of the judges (they were all French) tried to recover their score cards.
George Tabor wrote a book about the competition that includes background information of some of the wineries involved and the (generally dismal) history of wine production in the US after Prohibition. Since then the story has changed.
Sunday, May 22, 2016
Arizona Charging Order Held Subject to Garnishment Limits
Applying Arizona law, it has been held that a charging order is limited by the 25% threshold applied as to wage garnishments. United States of America v. Alexander, No. CR-05-00472-001-PHX-DGC, 2016 WL 2893406 (D. Ariz. May 18, 2016).
Alexander, the sole member of an LLC, owned millions of dollars in restitution (the opinion does not address that nature of those claims. In order to collect on that debt, the government sought a charging order against the distributions made to Alexander by his single-member LLC. Alexander responded that the charging order could not attach to more than 25% of the distributions, an argument accepted by the court:
But the charging order is limited to the garnishment permitted by Arizona law. The fact that a charging order is entered, however, “does not deprive any member of the benefit of any exemption laws applicable to his interest in the limited liability company.” A.R.S. § 29-655(B). Arizona law limits garnishment to 25 percent of a garnishee’s disposable earnings. A.R.S. § 33-1131(B). “Earnings” are defined broadly to include “compensation paid or payable for personal services, whether these payments are called wages, salary, commission, bonus or otherwise.” A.R.S. § 12-1598(4). “Disposable earnings” is defined as the “amount remaining from the gross earnings for a pay period after the deductions required by state and federal law.” A.R.S. § 12-1598(3). As the sole member of E-Logic, Defendant receives distributions equivalent to the LLC’s annual income. These are provided as compensation for his personal services to E-Logic. These distributions qualify as earnings and are protected by the personal property exemption. The charging order therefore cannot deprive Defendant of more than 25 percent of his disposable earnings. (footnote omitted).
Although no Kentucky court has yet addressed the question, likely this result would not happen in Kentucky.
Friday, May 20, 2016
A Pair of “Recent” Decisions on Successor Liability
A pair of recent (well, relatively recent) decisions remind us that successors may be liable for unassumed obligations of their predecessors. Pontacolini v. Dailybreak/CP, LLC, 2016 Mass. Super. LEXIS 24 (March 21, 2016) and Louro v. Pedroso, 2015 WL 3495330 (Super. Ct. N.J. June 4, 2015), review denied December 15, 2015.
When two companies merge or consolidate, the company surviving the transaction is liable for all debts and obligations of each party to the transaction. In contrast, in a purchase/sale of assets, the general rule is that the purchaser is liable only for the seller obligations it assumed in the purchase/sale agreement; liabilities not assumed by the buyer remain those of the seller, and need to be satisfied out of the seller’s assets. Of course, those assets include the consideration received for the assets that were sold.
That is all well and good if the seller has sufficient assets to satisfy the retained liabilities. But what happens when that is not the case? The law has developed “successor liability” principles that determine whether the purchaser can be held responsible for those unassumed liabilities.
The Pontacolini decision arose out of the application for summary judgment filed by Dailybreak/CP, LLC seeking a determination that, as it had not assumed the liabilities of Dailybreak, Inc. to Nicholas Pontacolini, it was not liable thereon. That motion for summary judgment would be denied.
In June, 2013, Nicholas Pontacolini became an employee of Dailybreak, Inc., serving as the regional sales director. His compensation was a combination of salary and commission. Within four months, however, that relationship broke down, and by October 7, 2013, Pontacolini was no longer employed by Dailybreak, Inc. Thereafter discussions took place with the resolution of claims for earned but unpaid commissions. After making an application to the Attorney General's Fair Labor Division, Pontacolini was given a right to pursue an action against Dailybreak, Inc.
In the meantime, however, on September 4, 2014, Dailybreak, Inc. and Dailybreak/CP, LLC entered into an asset purchase agreement pursuant to which the corporation sold all of its assets to the LLC for $175,000 plus certain earn-out rights. The LLC agreed to assume certain liabilities of Dailybreak, Inc. and entered into certain covenants, including the funding of an operating deficit, the subleasing the corporation’s office space, and that all employees of the corporation would be terminated by the corporation but then immediately rehired at the same compensation by the LLC. Pontacolini would bring his action for unpaid commissions against the LLC, asserting it to be the successor-in-interest to the corporation.
While Massachusetts follows the generally applicable law that the purchaser of assets is not liable for unassumed debts and obligations of the seller, it does what it characterizes as a “de facto merger” analysis for imposing liabilities on a successor, looking to:
1) whether there is a continuation of the enterprise of the seller corporation so that there is continuity of management, personnel, physical location, assets, and general business operation; 2) whether there is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation; 3) whether the seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible; and 4) whether the purchasing corporation assumes those obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation. Milliken & Co. v. Duro Textiles, LLC, 451 Mass. 547, 557, 887 N.E.2d 244 (2008).
While Dailybreak/CP LLC would rely upon the express terms of the asset purchase agreement, “alleging that the Agreement has immunized itself from liability as against Mr. Pontacolini's claim.”, the court found it to be insufficient. Rather, applying the factors of the Milliken decision, the court found that Dailybreak/CP, LLC could be found to be the successor-in-interest of Dailybreak, Inc. Therefore, the claim for the unpaid commissions could proceed forward.
The Louro v. Pedroso decision involves a business transaction far less sophisticated than that considered in the Pontacolini case.
Pedroso, an attorney, was the sole shareholder of Pedroso Law Firm, P.C. That professional corporation was the tenant of certain property located on Jefferson Street in Newark New Jersey. After Victor and Jennifer Louro acquired that property following a foreclosure and sheriff sale, they brought an action to expel Pedroso and his firm from the property, and as well sought to be compensated for unpaid rent for the use of that property. Before the damages were determined, the court issued an ejection order from the Jefferson Street premises. Undisclosed to anybody, Pedroso established a new LLC, Pedroso Legal Services, LLC, and in its name relocated his practice to Wilson Avenue in Newark.
At trial, it was alleged that Pedroso, on behalf of Armando Pena, the prior owner of the property and a relative of Pedroso, prepared a pair of leases. One lease provided for a monthly rate of $2500, while the other provided for monthly lease payments the amount of $425. There was testimony that the second lease, at the $425 rate, was prepared once it became clear that the building was going into foreclosure and was allegedly put in place in an effort to defraud any subsequent purchaser.
Ultimately, the jury would award damages at the rate of $1500 per month for 14 months of uncompensated occupancy of the Jefferson Street property. After trial, the plaintiff submitted a judgment in that amount, as well as interest and cost, seeking that it be issued against both the Pedroso Law Firm “and any subsequent law firm created by Felipe Pedroso.” Pedroso disputed that the judgment could be entered against anyone other than Pedroso Law Firm, P.C. (the entity he had already abandoned). The trial court determined that Pedroso’s new LLC would be included as a named defendant against whom the judgment would be entered.
Pedrosa challenged that determination on appeal, all to naught. Rather, the judgment against the LLC would be affirmed.
In the face of incomplete and evasive answers from Pedroso as to when he had organized the LLC and why he had done so, the trial court “concluded that the LLC is simply the new name of Pedroso’s law firm, which has continued in business.” In addition, focusing upon the fact that this case involved a law firm, the Appellate Division wrote:
Here, Pedroso believes he can evade the payment of a judgment for rent arrears on the office space his law firm occupied simply because he has decided to “rejuvenate” and to change the “image” of his firm under a new name and at a different location. The legal profession is not so disdainful of the rights of creditors that it would allow Rules 1:21-1A and -1B to be thus misused by a member of the New Jersey Bar. The Rules of Professional Conduct for lawyers in this State do require general honesty. See RPC 8.4(c).
Here, Judge Dumont found that the LLC is merely a continuation of the law firm under its prior corporate identity. Pedroso’s license to practice law in this State was used in conducting the business of the prior law firm just as it is now used to conduct the business of the successor LLC. Appellant offered no credible evidence that the LLC is not a continuation of the law practice of the prior firm.
A few take-aways. First, sequentially organizing business organizations for the purpose and effect of avoiding liabilities will not work. Not considered in either of these decisions, but always a factor, is whether doing so will give rise to liability under fraudulent conveyance statutes. Second, asset buyers, seeking to limit their exposure for seller obligations, should ascertain the manner in which the seller will satisfy, and as necessary compromise, those obligations from the sale proceeds or other assets. Leaving the seller unable to satisfy its obligations invites a claim against the buyer.
Thursday, May 19, 2016
Once Again, a “Partner” is Not an “Employee”
Previously, the Western District of Kentucky denied an effort by a partner in a partnership to have herself recharacterized as a “employee” afforded protections under Title VII. HERE IS A LINK to that review. Earlier this week, the Sixth Circuit Court of Appeals affirmed that determination. Bowers v. The Ophthalmology Group, LLP, No. 14-6196 (6th Cir. May 16, 2016).
As recounted by the Sixth Circuit, Title VII prohibits the firing of an employee based upon their sex. The statute protects the rights of employees. In that, however, partners are not employees, Title VII does not protect partners. As to this last point, the court cited Simpson v Earst & Young, 100 F.3d 436, 441 (6th Cir. 1996). Whether a person is a partner or an employee for purposes of Title VII is typically a question of law to be determined by the court. Applying the factors set forth in the Simpson decision as well as those set forth in Clackamas Gastroenterology Associates v. Well, 538 U.S. 440 (2003), the Sixth Circuit was able to set aside Bowers’ assertion that she was only formally a partner and was in actuality a nominal partner who should be treated as an employee. Rather, the court found:
· Bowers bought into the partnership;
· The partnership bought out Bowers interest when she was expelled;
· Bowers signed the partnership agreement;
· Bowers signed the LLP's statement of registration with Kentucky Secretary of State;
· Her expulsion was in accordance with the terms of the partnership agreement;
· Bowers shared in the partnership’s profits;
· Bowers received additional compensation based upon her own production;
· Bowers was issued a Form K-1 instead of a Form W-2;
· Bowers received certain payments when additional physicians joined the practice;
· Bowers participated in a vote as to whether one of those new partners could spread out his buy-in-payment over three months;
· Bowers attended partnership meetings and meetings were held at her request;
· Bowers participated in equipment purchases;
· Bowers “participate[d] in decisions to alter the formula by which profits were divided”;
· Bowers requested and received the partnership’s confidential financial information;
· Bowers requested the certain patients not be scheduled with her and otherwise made request as to her scheduling; and
· Bowers requested and received her own group of partnership employees with whom to work.
The Sixth Circuit as well affirmed the trial court issuance of summary judgment even as Bowers alleged additional discovery was necessary and it's declining to exercise supplemental jurisdiction over state law claims.
Partners are Not Employees, Even of the Partnership’s LLC
It is an axiom of the law of partnerships, irrespective of whether your perspective is that of state law or tax law, that one who is a partner is treated as an owner and not as an employee. It is for this reason, for example, that partners are not covered by Title VII and that they report the income received from a partnership as self-employment income. The same rule applies in LLCs that are treated as partnerships; each member is treated as being self-employed.
One structure that has been utilized by partners seeking to convert their status, at least in part, into that an employee has been to have the partnership organize a single member LLC (“SMLLC”) and for at least certain of the partners in that partnership to then claim to be employees of that SMLLC. In that the SMLLC is treated as a disregarded entity (and not a partnership) for tax purposes, those partners asserted that they may be employees without running afoul of the rule that partners are not employees.
The IRS, in recently released regulations (T.D. 9766, May 3, 2016), has put a stop to this practice. Essentially, the structure was arguably permissible only because it was not addressed in certain of the examples provided with respect to the rules for employment taxes with respect to disregarded entities. In the commentary released with the new regulations, the Service made clear that simply because a fact situation is not discussed in the examples, it does not fall outside the scope of the substantive regulations. In turn, the substantive regulations make clear that the owner of a disregarded entity is not an employee with respect thereto, but rather is self-employed. In turn, if a partnership owns an SMLLC that is disregarded for tax purposes, and a partner in that partnership render services on behalf of the SMLLC, any distributions made with respect thereto are self-employment income.
Because these structures were oft put into place in order to take advantage of certain employee benefit plans (e.g., cafeteria plans) and there needs to be significant time in order to “unwind” those structures, the delayed effective date runs into 2019. However, for transactions not involving a plan, the new regulations are effective August 1, 2016.
HERE IS A LINK to the regulations and the related release.
The Fall and Execution of Anne Boleyn
Today, May 19, marks the anniversary of the execution in 1536 of Anne Boleyn on spurious charges of adultery and therefore (by one argument) treason. While she would be included in Foxe’s Book of Martyrs, a 16th century effort at Protestant hagiography, all indications are that Anne died a Catholic; it is difficult to otherwise understand her request that the Eucharist be placed in her chambers at the Tower of London in the days before her execution.
It was a convoluted process that brought Anne to execution.
Previously, Henry VIII had been married to Catherine of Aragon. That marriage would ultimately sour on the fact that only one of the children of Henry and Catherine survived infancy, that being Mary. England was not, it was feared, ready to be ruled by a queen. The only example of it doing so, that being the reign of the Empress Matilda (daughter of King Henry I) was referred to as the “Anarchy.” Seeking to perpetuate the dynasty and avoid the possibility of civil war after his death, Henry pursued the Divorce (it was actually what we would refer to today as an annulment) so that he could marry Anne Boleyn.
The Divorce could not easily be had consequent to at least a pair of factors. Initially, on theological grounds, the basis for the Divorce was weak. Second, Eleanor’s nephew, Charles V, was King of both Spain and the Netherlands and as well Holy Roman Emperor. He was able to delay any decision on the Divorce, thereby depriving Henry of the one thing he did not have, namely time. Ultimately, Henry would schism the English church from Roman communion (an act which earned for Henry his very own bull of excommunication). The marriage to Catherine of Aragon was then annulled by Thomas Cramer, Archbishop of Canterbury. Now “single,” Henry proceeded to marry Anne Boleyn. She, already pregnant at the time of the marriage, would be the mother of Elizabeth. Elizabeth would be their only child. Henry was now in no better position than he was before; two potential female heirs to the throne did not address the perceived need for a male heir. Anne’s fortunes would ultimately be destroyed consequent to a series of events whose genesis is still greatly debated, but it is clear that the charges of adultery and incest for which she was convicted and executed were entirely fabricated. Regardless, by some means Thomas Cromwell was told to make it happen, and he did.
On April 30, 1536 Mark Smeaton, a court musician and hanger-on, was arrested, this being the first overt step in Cromwell’s plan to bring down Anne Boleyn. According to one source, Cromwell had Smeaton brought to his own house and there tortured him. Eventually, Smeaton would be racked and confess to have committed adultery with Anne Boleyn. Some five additional men would be arrested on similar grounds. One of them, Wyatt, was not ultimately charged.
The first trial (albeit indirect) of Anne Boleyn took place on May 12, 1536. Anne, however, was not a participant in the trial. Rather, at this trial each of Mark Smeaton, Henry Norris, William Brereton and Francis Weston were charged with multiple acts of adultery with the Queen. Sadly, no transcript of the proceedings, if made (and that is doubtful), survives. All were found guilty, thereby sealing Anne’s fate. She did not attend the trial; rather, at that time she was confined in the Tower of London. Her father, Thomas Boleyn, did sit on the jury – his vote in favor of their conviction sealed the fate of his children.
On May 15, 1536, Anne Boleyn as well as her brother George were tried on allegations of adultery and incest. As to Anne, the conclusion of this “trial” was a foregone conclusion. Four of the men with whom Anne was accused of having engaged in adultery, Mark Smeaton, Henry Norris, William Brereton and Francis Weston, had already been convicted on May 12, and, so goes the adage, it does take two to tango. George was convicted on the charges against him.
Although some incomplete notes of this trial do survive, sadly no transcript is available; it would no doubt make interesting reading. It is clear that both Anne and then George (George’s trial was separate and held after that of Anne) denied all charges against them. Those denials (as well as the expected denials of the other men charged with having committed adultery with Anne) must be accepted at face value. As has been demonstrated by several scholars, most conclusively Eric Ives, the author of the definitive biography of Anne, Anne and her various co-conspirators could not have been guilty of the charges made – even with the incomplete records available to us today, it can be demonstrated that in numerous instances Anne and a particular gentleman were charged with having committed adultery at a particular time and place when, in fact, either or both of them were at a different place or even two difference places. The truth, however, was not the issue; the outcome of the trial was a foregone conclusion before it ever started. Henry was tired of Anne, and Cromwell had been charged to bring about her fall. End of story.
On May 14, Cramner, Archbishop of Canterbury, had declared the marriage of Henry and Anne to have been invalid ab initio, possibly (the papers as to his determination have been lost) on the basis of her prior contract of marriage to Henry Percy the son of the then Fifth Earl of Northumberland (this Henry would be the Sixth Earl). An alternative basis was that Mary Boleyn, Anne's sister, had been Henry's mistress, and on that basis the marriage could have been invalid based upon consangruity. Regardless as to why, Anne would not die as the Queen of England, having never been validly married to Henry, and their daughter Elizabeth (the future Queen Elizabeth I) was rendered illegitimate.
All of Mark Smeaton, Henry Norris, William Brereton and Francis Weston, along with George Boleyn, would be executed on May 17. Anne’s death would not take place until May 19.
Famously, Anne was executed not with the traditional English ax, but rather by a French swordsman. I have never found a satisfactory explanation as to why the swordsman was requested over the axeman; Friedmann (another biographer of Anne) suggested, and Ives admits it as a possibility, that it was at Anne’s request, she desiring the French manner of execution in light of her having been raised in the French court. There is, however, a problem of chronology. Anne was consigned to the Tower on May 2, her alleged partners in adultery (other than her brother George) were tried on May 12, and she was tried on May 15. The swordsman, normally resident in Calais, may have been ordered to come to England before Anne’s trial. If so, there is further evidence that the trials were for show and the verdicts were pre-determined; even though her trial had not yet taken place, the manner of her dispatch may have already been selected. Still she came out ahead (no pun intended); her sentence was commuted to beheading – the regular sentence for a woman convicted of treason was burning at the stake.
Anne was buried in St. Peter ad Vincula, the church on the grounds of the Tower of London. There she joined Sir (now Saint) Thomas More, another of Henry’s victims.
Henry would marry Jane Seymour, his third wife, on May 30. She shortly thereafter became pregnant, ultimately delivering a son who would survive infancy. That child was Edward VI. Jane would die of complications from childbirth. While Henry would go on to marry three more times, namely to Anne of Cleves, Catherine Howard and Catherine Parr, none of them would have children by him. Edward VI would die, probably of tuberculosis, in his mid-teens. Mary and then Elizabeth, the girls Henry feared could not rule, would in turn rule England. As observed by Peter W. Hogg, Succession to the Throne, 33 Nat'l J. Const. L. 83 (2014):
[W]hile Henry VIII was engaged in his obsessive quest for a male heir he could not know that his daughter Elizabeth by Anne Boleyn (the second of his six wives) was destined to become the greatest monarch England had ever known. She became Elizabeth I (Good Queen Bess, as she was known), and ruled for 45 years (1558-1603, England's "golden age"). Henry should have stopped worrying and settled down with Anne Boleyn instead of beheading her.
Monday, May 9, 2016
Kentucky Supreme Court Affirms Finding of No “Up The Ladder” Liability for Workers’ Comp Coverage
In a decision rendered last Thursday, the Kentucky Supreme Court affirmed the determination that there would not be “up the ladder” liability with respect to Workers’ Compensation liability. At the same time, they affirm the determination that it was the corporation, rather than its shareholders that was the employer. Nonetheless, closer attention to the corporate structure could have avoided many of the items here in dispute. Uninsured Employers’ Fund v. Crowder, 2015-SC-000362-WC, 2016 WL 2605624 (Ky. May 5, 2016).
In 2009, Eugene Davis and James Dick purchased a Quizno’s franchise. They did this in their individual names. Only later did they organize a corporation, Pulaski Franchises, Inc. While neither the franchise agreement nor the assets of the restaurant were ever transferred to the name of Pulaski, the company’s receipts were deposited into its accounts, and disbursements for wages, taxes and royalty payments due to Quizno’s were paid therefrom.
Tyler Hibbard was hired to manage the restaurant, and he in turn hired Darlene Crowder to serve as an assistant manager. She began work on April 3, 2010. Just 12 days later, she was severely injured on the job. Unfortunately, the Workers’ Compensation policy, which had been issued in the name of Pulaski, and as of the date of injury lapsed.
As to efforts to impose up the ladder liability on the franchisor of the Quizno’s restaurants, that being QFA Royalties, LLC (“QFA”), there was testimony that QFA was exclusively devoted to licensing of Quizno’s Restaurants, making all of its profits from franchise fee and monthly royalties. Ultimately, QFA is not in the business of making sandwiches or operating any restaurants. Notwithstanding the detailed requirements set forth in the franchise operating manual, the Supreme Court affirmed the determination below that QFA was not in the business of "making and selling sandwiches to customers.". Further, it found that the role of QFA vis-a-vie an individual Quizno’s restaurants is indistinguishable from the situation reviewed by the Kentucky Supreme Court in Doctors’ Associates, Inc. v. Uninsured Employers’ Fund, 364 S.W.3d 88 (Ky. 2011). In furtherance thereof, the Supreme Court wrote:
In this matter, the ALJ’s determination that QFA does not have up-the-ladder liability is supported by substantial evidence. The ALJ found that QFA is in the business of granting and overseeing franchisee agreements and that, unlike the Quiznos in Somerset, making and selling sandwiches to customers is not a regular and recurrent part of its business. This finding is supported by the fact that QFA did not actually operate any Quiznos restaurant. While the franchise agreement and operating manual do provide detailed instructions on how to manage the restaurants on a day-to-day basis, these guidelines were instituted to protect the brand which QFA sold. Keeping the brand strong is a critical part of QFA’s purpose because it derives its revenue from franchise fees and royalties. Additionally, while the success of individual franchises does benefit QFA, its primary focus is making Quiznos franchises attractive to investors. Thus, since QFA is not in the business of making and selling sandwiches to customers and the Quiznos in Somerset was engaged in that work, QFA cannot be considered the contractor, and does not have up-the-ladder liability in this matter.
From there, the Uninsured Employers’ Fund had argued that, in addition to treating Pulaski as Crowder's employer, Davis and Dick should likewise be treated as the employers through means of a joint venture. Applying the factors of Huff v. Rosenberg, 496 S.W.2d 352 (Ky. 1973), the administrative law judge had found that no such joint venture existed. This determination was affirmed by the Kentucky Supreme Court. Although the language employed by the court could have been more express, it found that Davis and Dick were as to each other involved in a joint venture, but that Pulaski had been created in order to effect that objective even as it shielded Davis and Dick from personal liabilities arising out of the business.
The court went on to note that the real question is whether Pulaski was Crowder's employer notwithstanding that the assets of the restaurant in the franchise agreement had never been transferred to Pulaski. “If Pulaski is Crowder's employer, then Davis and Dick are shielded from being jointly and severally liable for the Workers’ Compensation benefits.”
Based upon facts including that neither Davis nor Dick had any involvement in Crowder's hiring, that Pulaski was incorporated to operate the Quizno’s, and that Crowder was paid from Pulaski's bank account and, had the policy been in place, would've received to Workers’ Compensation benefits from an insurance policy held in Pulaski's name, the record that Crowder was Pulaski's employer was found to be sufficient and affirmed.
Friday, May 6, 2016
The Sack of Rome and the Papal Swiss Guard
Today marks the anniversary of the Sack of Rome in 1527 by troops of Charles V, Holy Roman Emperor.
Since the late 15th Century Italy (or at least the region we today identify as Italy – the notion of the region as a nation was long in the future) had been repeatedly invaded by forces from Northern Europe, each seeking to claim dominion over one area or another. Rival claimants to the crown of Naples caused as much trouble as did anything, but economic rivalry between for example Genoa and Venice did nothing to calm the waters. Pope Alexander VI gave command of the papal army to his son/nephew (which is a matter of dispute) Cesare in order to bring some order, and Pope Julius II would actually don armor and lead his army into battle, again in an effort to bring some stability to the situation. While Erasmus would condemn Julius for doing so, he did ignore the fact that the targeted cities surrendered to him.
But back to the Sack of Rome. Charles’ forces were at this point battling the League of Cognac, it being comprised of France, Milan, Venice, Florence and the Papal States (keeping track of the various Leagues through the Italian Wars is a troubling task; the League of Cambrai was initially formed against Venice by the Papacy, France, Spain and the Holy Roman Empire. Later the initial members would be allied against France with Venice as an ally. Later Venice and France would be against the Papacy, Spain and the Holy Roman Empire). After a significant victory over the French army the troops were restive in that they had not been paid – most were mercenary. Pillaging Rome would be a way of paying the troops. The city was not well defended, although its formidable walls did need to be and were breached. Their commander having fallen in the course of the attack, discipline immediately broke down among the troops, and a sack of over three days began.
The Pontifical Swiss Guard, created only in 1506 under Pope Julius II, rose to the occasion. Of its then number of 189, 147 would fall defending Pope Clement VII, affording him time to take refuge in the Castel Sant’Angelo (Hadrian’s Mausoleum). In recognition of this event, new members of the Pontifical Swiss Guard are sworn in on May 6. Earlier today, in the continuation of that tradition, Pope Francis I officiated at the swearing in of a number of new Swiss Guards.
There was in 2013 an event unique to the Guard, namely the recognition of a Pope’s retirement. Benedict XVI left the Vatican as Pope, flying to the Castle Gandolfo. The Swiss Guard accompanied him to the castle and there stood guard. When the moment his resignation became effective, and Benedict became not Pope but Pope Emeritus, the Guards left their station at the castle and returned to Rome. While the Vatican has its security forces, and they no doubt continued to provide protection for Benedict, the Swiss Guard serve the Pope.
Of course this was not the only sack of Rome – it had fallen many times in its long history. It fell to the Normans in 1084, in 546 by the Ostrogoths, in 455 by the Vandals, in 410 by the Visigoths and in 387 BC by the Gauls.
Tuesday, May 3, 2016
Confusion as to Charging Orders; Personal Jurisdiction Over LLC Not Required
Recently, I reported on a Alabama decision in which the court would not issue a charging order against you with respect to the judgment-debtor’s interest in LLCs organized outside of Alabama, that refusal based upon the court’s lack of personal jurisdiction over those foreign LLCs. HERE IS A LINK to that discussion. Demonstrating that very little with respect to charging orders is settled, a recent Magistrate Judge decision from the Federal District Court in Arizona came to the opposite conclusion, and rejected lack of personal jurisdiction over the LLC as a basis for not issuing a charging order. Dream Games of Arizona Inc. v. PC Onsite LLC, No. CV 03-00433-PHX-DLR (ESW), 2016 WL 1567180 (D. Arizona March 24, 2016).
Dream Games of Arizona, Inc. was the judgment creditor against Casey Hagon, the judgment debtor. Dream Games sought a charging order against Hagon’s interest in C&D Consulting LLC, a Texas limited liability company. On behalf of C&D Consulting, Hagon objected to the charging order on the basis that (i) the court lacked personal jurisdiction over C&D and (ii) certain required financial reporting by C&D was inappropriate.
As to the question of jurisdiction, the court, as a factual matter, found that C&D Consulting had sufficient contacts with Arizona to give rise to general jurisdiction. In a footnote, the court rejected the notion that jurisdiction over the LLC in which the Judgment-Debtor has an interest is necessary. Rather, at footnote 4, it wrote:
Moreover, the Court does not need personal jurisdiction over C&D Consulting to issue an order charging Judgment Debtor’s interests in C&D Consulting. Personal jurisdiction over Judgment Debtor is sufficient. See Vision Marketing Resources Inc. v. McMillin Group, LLC, No. 10–2252–KHV, 2015 WL 4390071, at *3–5 (D. Kansas July 15, 2015) (concluding that the court “need not have jurisdiction over the LLC entity itself in order to issue a charging order, when it has jurisdiction over the LLC member because the LLC has no right or direct interest affected by the charging order. Rather it is the judgment debtor’s interest in and right to future distributions of the LLC that is being charged”). Judgment Debtor has waived any defect in personal jurisdiction over him in this action. See Fed.R.Civ.P. 12(h)(1).
As to the question of financial reporting, the proposed charging order required that C&D Consulting:
Provide Judgment Creditor with quarterly financial statements and an accounting of all disbursements to Judgment Debtor, or for the benefit of Judgment Debtor, within 21 days after the conclusion of each calendar quarter, from the date of this Order until the Judgment is fully satisfied.
On the basis that the Arizona LLC act’s charging order provision “does not explicitly prohibit a court from requiring regular disclosure of financial information pertaining to the Judgment Debtor’s interest in the LLC,”, the court found that the requested financial disclosure “will aid in the satisfaction of the Judgment.” On the basis, this magistrate recommended that the proposed form of charging order be approved.
Delaware Supreme Court Addresses Collaborative Nature of Board of Directors
In the decision rendered earlier this week in which the Delaware Supreme Court affirmed a long and complicated decision of the Court of Appeals, it provided some overarching comments on a variety of topics, including the collaborative functioning of the Board of Directors. Optimiscorp v. Waite, No. 523, 2015 (Del. April 25, 2016).
Addressing a less than forthcoming notice of the meeting of the Board of Directors, it concealing the fact that an item on the agenda was the proposed amendment of the shareholder agreement that would strip certain parties of the right to elect a defined portion of the Board of Directors, the court wrote:
As important, we are reluctant to accept the notion that [Delaware corporate law] vindicates the board’s right to govern the corporation to encourage board factions to develop Pearl Harbor-like plans to address their concerns about the company’s policy directions or the behavior of management. Rather, it has long been the policy of our law to value the collaboration that comes when the entire board deliberates on corporate action and when all directors are fairly accorded material information. The Court of Chancery’s opinion can be read as indicating that a board faction may engage in deception toward other board members in giving notice of what a special meeting should address so long as the faction subjectively believes that its intended end is good for the corporation. Nothing in our affirmance should be read as endorsing that view, or as expressing any view on a line of fact-specific rulings where inequity was found in deceiving a director about the action intended to be taken at a board meeting.