Lack of Diversity Jurisdiction Sets Aside Negotiated Settlement Agreement

Lack of Diversity Jurisdiction Sets Aside Negotiated Settlement Agreement

      In a decision rendered just last week, the Federal District Court in Pennsylvania set aside the settlement of a lawsuit brought in federal court on the basis that diversity jurisdiction was actually lacking and, for that reason, the court never had jurisdiction over the dispute. GBForefront, L.P. v. Forefront Management Group, LLC, Civ. Act. No. 11-7732 (E.D. Pa. Sept. 21, 2016).

     This, as described by the court, “relatively straight-forward breach of contract action” involved not less than four years of “contentious litigation.” Ultimately, GBForefront accepted an offer of judgment from the defendants. Thereafter, on April 28, 2015, the court entered a final judgment and the case was closed. There was some subsequent back and forth with respect to the proper parties to the settlement agreement and efforts to compel its enforcement by GBForefront. In the midst of those efforts, new counsel for the defendants alerted the court that diversity jurisdiction had never been adequately pled in the matter and in fact never truly existed. On that basis, they sought to have the settlement agreement set aside.

      Whether diversity jurisdiction did or did not exist would depend upon how the citizenship of certain common-law trusts is assessed. GBForefront, seeking to preserve the settlement agreement, would argue, following Navarro Savings Association v. Lee, that only the citizenship of the trustees should be considered. The defendants responded, in reliance upon the decision of the US Supreme Court of earlier this year in Americold Realty Trust v. ConAgra Foods, Inc. and the earlier decision of the Third Circuit in Emerald Investors Trust v. Gaunt Parsippany Partners, that the citizenship of a trust is based upon that of the trustees and the beneficiaries. Adopting the reasoning of the defendants, the court determined:

I conclude that, in determining the citizenship of a trust for diversity purposes, the citizenship of both trustees and beneficiaries control.

      Disposing of alternative arguments including enforcement of a settlement, estoppel and transfer, the amended judgment was vacated and the matter was dismissed for lack of subject matter jurisdiction.

Failure to Distinguish Between LLC and its Members Dooms Appeal

Failure to Distinguish Between LLC and its Members Dooms Appeal

      A decision from the North Carolina Court of Appeals emphasizes the importance of properly distinguishing between an LLC and its members.  In this case, suit was brought under a lease signed by the members, but on behalf of the LLC, against the landlord.  Because the LLC was not a party to the lease, its appeal of an adverse verdict was rejected.  King Fa, LLC v. Cheung, 788 S.E.2d 646 (N. Ca. Ct. App. 2016).0.

      Tse and Cheung (collectively the “Tenants”) leased certain commercial property from Cheung for use as a restaurant.  While roof leak issues were identified in the property inspection, the lease was silent as to who had responsibility for making those repairs.  After another leak developed, the tenants paid for a repair, which was ultimately unsuccessful in mitigating the leak.  The tenants did reduce a lease payment to Cheung in the amount paid for that repair. Ultimately, as the leak continued, King Fa, LLC filed a complaint against Cheung on the basis of breach of contract and breach of the covenant of quiet enjoyment.  King Fa is a North Carolina LLC with the Tenants as its members; it operated the restaurant.  Importantly, this LLC was not organized until after the lease had been entered into between the Tenants and Cheung.  After some tortured motion practice with respect to who should be the parties to the action, the court awarded Cheung damages in the amount of $1,800.  Importantly, these damages were assessed against the Tenants, and not King Fa, LLC.

       Thereafter, King Fa, LLC filed an appeal.  That appeal was dismissed on the basis that King Fa was not a “real party in interest” to the matter.  Rather, judgment had been entered against each of Cheung and Tse.  They were the real parties to the appeal.  However, they were not named in the notice of appeal.  In that the parties actually impacted by the trial court’s decision had not brought an appeal, the appeal was dismissed.

The Delaware Chancery Court Addresses Inspection Rights in Delaware Statutory Trust

The Delaware Chancery Court Addresses Inspection Rights in Delaware Statutory Trust

      In a recent decision from the Delaware Chancery Court, it addressed the right of a beneficial owner of a Delaware statutory trust to inspect books and records.  Curiously, the court directed that the law of limited partnerships and LLCs would be applied in assessing the beneficial owner’s inspection rights.  Grand Acquisition, LLC v. Passco Indian Springs DST, C.A. No. 12003-VCMR (Del. Ch. Sept. 7, 2016).  

      Under the Delaware Statutory Trust Act, on certain terms and conditions, beneficial owners are entitled to inspect books and records of the trust.  In this case, the governing agreement for the trust set forth certain document inspection rights that did not include the additional terms and conditions that are set forth in the statute.  When a beneficial owner sought inspection under the terms of the governing agreement, those in control of the trust asserted that the additional conditions required by the statute had not been satisfied. Hence, the question came to the Chancery Court: Should the requirements for inspection of books and records as set forth in the governing agreement control of themselves, or should there be read into them as well the additional statutory requirements. The court would hold that the former is correct.

      Much of this decision would come down to the question of what it takes to override the default statutory rules of the Delaware Statutory Trust Act.  In this instance, the member, Grand Acquisition, asserted that the governing instrument should be looked at only within its four corners, and that the application of additional statutory requirements, in this case those set forth in Section 3819 of the Delaware Statutory Trust Act, should be excluded.  The trust, in opposition, would argue that those provisions should be read into the agreement unless they have been affirmatively rejected.  

       In determining that the statutory requirements would not apply, the Chancery Court began by treating the contractual inspection right as separate and independent from the statutory right, and then adopting prior law setting a relatively low bar to the override of default statutory rules.

This Court consistently has treated a contractual books and records right provided in a limited liability company’s (“LLC”) or a limited partnership’s (“LP”) governing instrument as independent from the relevant default statutory right.  As then-Vice Chancellor Steele held in Bond Purchase, L.L.C. v. Patriot Tax Credit Properties, L.P.,   it is not necessary for … partnership provisions to include explicit language that they are creating contractual rights separate and independent of statutory rights in order for those provisions to in fact create a separate and independent contractual right.  Rather, where a provision in a partnership agreement appears on its face to create a right separate and independent from a statutory right or a right granted in another section of the partnership agreement, the partnership agreement must explicitly state that the provision is merely clarifying or placing additional conditions on the other statutory or contractual right if in fact that is the provision’s intended purpose. Otherwise, this Court will conclude that the parties intended the provision to create the separate and independent contractual right that the provision on its face purports to create. (Footnotes omitted).

      This and related guidance is important to the application of the “unless otherwise provided in a written operating agreement” standards applied under most LLC acts. Essentially, should language be read narrowly, preserving as much is the statutory default rule as is possible in the face of the contractual agreement, or should it be read broadly to the effect that any reference to the subject matter overrides the statutory rule?

Louisiana Court Denies Retroactive Reinstatement of Dissolved LLC

Louisiana Court Denies Retroactive Reinstatement of Dissolved LLC

I      n a recent decision from the Louisiana Court of Appeals (Fifth Circuit), the court denied retroactive reinstatement of an LLC that had been affirmatively dissolved by its members.  In denying retroactive reinstatement, in effect the court affirmed the application of an atypical Louisiana statute which provides inter alia that upon voluntary dissolution the members of the LLC are liable severally for the LLC’s debts and obligations.  In re: Reinstatement of S & D Roofing, LLC, ___So.3d___, No. 16-CA-85, 2016 WL 5231860 (La. Ct. App. Fifth Cir. Sept. 22, 2016).

      Shane Dufrene and David Cain organized S&D Roofing, LLC as a Louisiana limited liability company. S&D contracted to provide roofing services to 9029 Jefferson Highway, LLC. Apparently the work was never done, because Jefferson sued S&D for breach of contract.  Cain received the service of process although Dufrene never did.  Thereafter, a default judgment was entered against S&D for $15,000. Apparently neither Cain nor Dufrene ever received that notice of the default judgment.  Some seven months after that default judgment was entered, Cain and Dufrene voluntarily dissolved S&D, and in connection therewith submitted an affidavit which provided in part that S&D owed no debts. This dissolution was pursuant to Louisiana Revised Statute 12:1335.1, which provides in part:

In addition to all other methods of dissolution, if a [LLC] is no longer doing business and owes no debts, it may be dissolved by filing an affidavit with Secretary of State executed by the members… attesting to such facts and requesting that [LLC] be dissolved.  Thereafter, the members… shall be personally liable for any debts or other claims against the [LLC] in proportion to their ownership interest in the company.

      When Jefferson sought to enforce its default judgment against Dufrene and Cain, they sought to reinstate the LLC pursuant to court order and as well to have that reinstatement be retroactive to the effect that they would not be personally liable on Jefferson’s claim.  This reinstatement was sought pursuant to a statute that provides:

The Secretary of State shall reinstate a [LLC] that has been dissolved pursuant to this Section only upon receipt of an order issued by a court of competent jurisdiction directing him to do so.

     While the court did grant reinstatement, it did not do so retroactively.  When Dufrene and Cain complained that the reinstatement was not retroactive, the court referenced a number of other Louisiana LLC statutes that do provide for retroactive reinstatement.  As the provision here relied upon did not provide for retroactive reinstatement, the court found that that was outside the statutory scope.  In addition, the court recited a number of policy reasons why retroactive treatment was not appropriate, including the ability of third parties to rely upon the public record.