Saturday, December 29, 2018
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 interests. 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.
Thursday, December 13, 2018
That Pesky Direct Versus Derivative Distinction
In a recent decision from Florida, the direct versus derivative distinction had the effect of the terminating the lawsuit. Home Title Company of Maryland, Inc. v. LaSalla, Case No. 2017-998, 2018 WL 6005232 (Fla. Dist. Ct. App. 2nd Nov. 16, 2018.
This dispute arose out of a two-member LLC that owned three residential property lots. One of the members, without authority to do so, directed the title company to transfer those three properties to himself and his spouse. The second member brought suit against the title company for having effected that improper transfer. He prevailed at trial. However, upon appeal, the complaint was set aside. While the suit had been brought by the second member in his name and for his own account, it was held by the court that the actions alleged in the complaint could be resolved only in a derivative action brought in the name and on behalf of the LLC. It was the LLC that had suffered the injury of the unauthorized transfers, so any resolution needed to be for the benefit of the LLC. The suit, not having been brought as a derivative action, was in consequence dismissed.
Wednesday, December 12, 2018
Additional Questions on Piercing the Veil
Yesterday, Beth Fenton and I presented an ALI webinar on Piercing the Veil. After the program, we received two questions from participants. Those questions, and the answers provided, are as follows:
You mentioned that, for LLC's, annual meetings are not required if there are written consents (as long as the operating agreement allows). Does this rule apply to corporations as well?
To my knowledge, every state allows the directors and the shareholders of a corporation to act by written consent. Sometimes the consent must be unanimous, as is the case with directors, or a majority, as is the case in Delaware for shareholders. The problem is that there are cases that state as a factor in support of piercing that all actions were done by written consent and nobody ever had a meeting. Now this is (in my opinion) an unjustified criticism as the statute expressly allows action by written consent, and typically says an action by consent should be treated the same as an action at a meeting. The remedy/response is to advise your clients to from time to time have live meetings (even by phone) so as to break the chain of actions “only” by written consent.
As for LLCs, there is typically no requirement of an annual or other meeting of the members (unless created in a particular operating agreement). If the LLC Act does not authorize actions by consent, I’d add that capacity into the operating agreement. If the operating agreement says there will be a meeting, make sure it happens whether live or by consent.
I hope that helps.
What about member's spouse trying to pierce LLC veil to collect divorce judgment? Any trends with this?
This will typically be an outside reverse pierce in which the spouse holding the judgment will seek to pierce the entity holding assets even as the former spouse pleads poverty. I can’t say that I am aware of any trends in this area, but I think family court judges are aware of the games that people will play and are able to spot former-spouses who are playing fast and loose with the rules. If I had to make a prediction it would be that the courts will often award the judgment-creditor spouse the ownership in the corporation or LLC (assuming there to be no other shareholders or members) to enforce the judgment. That said, outside reverse piercing will be rare in a multi-shareholder / multi-member situation. In the case of a multi-member LLC the judgment-creditor former spouse can get a charging order against the interest in the LLC and thereby collect on any distributions when made. Foreclosure on a charging order can be a useful approach as to single member LLCs, but not all states permit foreclosure (Del does not).
I hope that helps.
Monday, December 10, 2018
Nobody Comes Out Looking Good in this Charging Order Dispute
In a recent decision from Arizona, everybody, they being the law firm that held a charging order against a former client and that former client, came out looking good. Campbell Law Group Chartered v. Jagelski, No. 1 CA-CV 17-0032, 2018 WL 3853518 (Ariz. Ct. App. August 14, 2018).
Campbell Law Group Chartered (“CLG”) held a judgment of some $454,000 against its former client Monica Jagelski for failure to pay attorney fees. CLG sought a charging order against Jagelski’s interest in Empire Vista, LLC. Jagelski was the sole member of that LLC. It in turn owned a one-third interest in real property worth in excess of half a million dollars. Having been awarded a charging order against Jagelski’s interest in Empire Vista, CLG filed with the Arizona Corporation Commission articles of amendment to the LLC’s articles, identifying CLG as the 100% member therein. Then, CLG contacted the other co-owners of the property, claiming to be Empire Vista’s new sole member. CLG as well advised those co-owners that all proceeds from a pending sale of the property should be conveyed to CLG “In its capacity as the new sole member and manager of Empire Vista, LLC.”
Shortly after CLG obtained the charging order with respect to Empire Vista, Jagelski caused there to be formed a new LLC, Northern Mancore LLC, it owned by her children. By a mechanism not explained in the decision, Empire Vista “Then transferred the real property” to that newly owned LLC; how and what was done is unclear in that the opinion earlier says that Empire was a one third, not a 100% owner in the property. Regardless, Northern Mancore then transferred the property back to Empire Vista, whereupon Empire Vista transferred it to another LLC, Southwest Mancore, “In exchange for a promissory note in the amount of $550,000 and a deed of trust.” It is recited that “Jagelski admits the purpose of the transfer from Empire Vista to Southwest Mancore was to ‘protect the assets of Empire Vista’ from CLG.” Thereafter, CLG obtained a charging order against Jagelski’s interest in Southwest Mancore and as well sought a court ruling that CLG was in consequence the member in Southwest Mancore.
The decision would then focus upon three points, namely: (i) is the holder of a charging order a substitute member for the judgment-debtor, (ii) did Jagelski’s efforts to transfer the property from Empire Vista constitute a fraudulent conveyance; and (iii) did the property transfers violate the terms of the charging order?
The Holder of a Charging Order is a Not a Substitute Member
The court began by rejecting the assertion that the person holding a charging order is a substitute member, even for a sole member. Rather, under the statute, the holder of the charging order has only the rights of an assignee.
The court did not address the penalty to be suffered by CLG for, without authority, amending the articles of Empire Vista.
Transfers Done to Avoid Creditor Claims are Fraudulent
With respect to the various transfers of property amongst the LLCs, the court found that they did constitute a fraudulent conveyance in that they were undertaken for the purpose of thwarting the claims of CLG. Balancing the equities, the court wrote:
Though arguably undertaken as a practical means of thwarting CLG’s own unlawful efforts to take over control of the LLCs, the transfers were no less fraudulent. The fraudulent transfer statutes contain no exceptions for debtors faced with malfeasant creditors. Debtors faced with unlawful attempts at collection may seek emergency relief from the court - they may not violate the law in the name of self-help.
The Property Transfers Did Not Violate the Charging Orders
The court rejected the suggestion that the transfers of property amongst the various LLCs, beginning with Empire Vista, violated the charging order CLG had been awarded with respect to Jagelski’s interest therein. While fraudulent, the transfers did not result in any distribution to Jagelski that was not properly diverted to CLG pursuant to the charging order.
Don’t Sign a Contract on Behalf of a Corporation or LLC Until the
Corporation or LLC is Organized
If you sign a contract for a corporation or an LLC before it is organized, you can be held liable on that obligation. This rule has long existed under the law of agency, and is expressly set forth in many corporation and LLC statutes. Still, people do exactly what they should not and get held liable, as evidenced by a recent decision from Idaho. KDN Management, Inc. v. WinCo Foods, LLC, 164 Idaho 1, 423 P.3d 422 (Idaho July 30, 2018).
Here, an individual entered into an agreement for certain maintenance services at grocery stores. He entered into the agreement prior to formation of the corporation. When the relationship went south, and the corporation could not satisfy its debt, the court held that the individual would be held jointly and severally liable with the corporation on the subject obligation, citing Idaho Code § 30-29-204.
“Because KDN was not incorporated until after the contract with WinCo was formed, the District Court’s holding that Nelson was jointly and severally liable with KDN under the theory of pre-incorporation liability is affirmed.”
Friday, December 7, 2018
The Assassination of Cicero
Today marks the anniversary of Cicero’s assassination in 43 B.C. A lawyer, politician, writer and orator, his letters serve as both a source for the goings-on in a tumultuous period in Rome and as guidance for the art of letter writing. The discovery of his letters by Petrarch was a, and some would argue the, event that precipitated the Renaissance.
After the assignation of Julius Caesar, thinking Marc Antony to be little more than a thug, Cicero took the additional step of detailing his views in a series of speeches, hoping to reduce Antony’s influence for the benefit of Octavian, Caesar’s heir. When, however, Octavian and Antony joined forces in the Second Triumvirate, Cicero’s days were numbered. Ultimately he was “proscribed” (i.e., ordered executed and his property seized). While the depiction of his execution as portrayed in the HBO series Rome was true to his character, it in fact took place on a road with Cicero riding in a litter; he did not resist.
Tuesday, December 4, 2018
Partner in LLP Is Not the LLP’s Employee
There is now pending before the Eighth Circuit Court of Appeals a suit that may turn on whether the relevant question, namely whether an LLP’s partner is an employee of the LLP, has already been determined by a state court. In that underlying judgment, the Circuit Court of Cole County, Missouri, issued a judgment dated October 9 18, 2017 in the case Joseph S. Vaughn Kaenel v. Warren, Case No.: 15 AC-CC 00472. That judgment provided in part:
As an equity partner of Armstrong Teasdale, LLP, [Kaenel] is not a covered employee protected by the Missouri Human Rights Act.
Whether a partner in an LLP, or a member in an LLC, can as well be an “employee” of the venture is a question that is contextual and as well highly fact dependent. For tax purposes it is clear that they are not. Here, in the context of employment discrimination law, we are told they are not. What is the rule in other cases needs to be addressed under the law governing that situation.
Monday, December 3, 2018
Enforcing Capital Contribution Obligations
A recent trio of cases have addressed, in the context of an LLC that was losing money, the enforcement of a member’s agreement to contribute additional funds to the company. These cases, as well as additional thoughts with respect to capital contribution obligations, are addressed in an article co-authored by Professor Bradley Borden and myself, Interest Dilution and Damages as Contribution-Default Remedies in Failing LLC’s and Partnerships. This article appears in Business Law Today; HERE IS A LINK to that article.
Sunday, December 2, 2018
California’s Law Governing Gender Composition of Boards of Directors
Previously, I reviewed a recently passed California statute that mandates, with respect to publicly traded companies either organized in or having the principal place of business in California, a requirement of a minimum board composition of women. HERE IS A LINK to my review of that statute.
There is been recently released in Business Law Today an article questioning the legitimacy of this statute, namely An Unconstitutional Mandate? California’s Gender-Based Board Law and Its Uncertain Legal Future. HERE IS A LINK to that article.