Tuesday, December 31, 2019
The Governor and Company of Merchants of London Trading into the East-Indies
Today constitutes the anniversary of the founding, in 1600, of the company originally chartered as the “Governor and Company of Merchants of London Trading into the East-Indies,” which came to be known as the British East India Company and, at times, simply “the Honorable.” Technically it was a joint stock company rather than a corporation.
Originally formed to engage in spice trading, its affairs would ultimately be focused upon India even as it maintained outposts throughout the world. Its operations in India were in effect a private territory of the company where it would maintain a private army exceeding 250,000; at that time, the British Army comprised some 125,000. It was only after the 1856 rebellion that the British government assumed direct control of India.
The Company was dissolved in 1874. The Company-State, by Philip J. Stern, is an excellent review of its activities. HERE IS A LINK to the text of the original charter.
Sunday, December 29, 2019
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 (Henry’s Angevian Empire encompassed substantial possessions 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 by some accounts 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.
Sunday, December 22, 2019
The Death of Richard Plantagenet
Today marks the anniversary of the death in 1550 of the obscure man known as Richard Plantagenet. He may have been the illegitimate son of King Richard III.
The legend is that he was raised with no knowledge of his father’s identity until he was some 16 years old. Then, on the eve of the Battle of Bosworth, he was brought to the Yorkish camp where he met Richard the Third. Richard is purported to have told him that he was his son, and that after the battle he would be so acknowledged. As Richard was a widower, his wife Anne Neville having died, he was a king without an heir. As matters would come to pass, of course, Richard fell at the battle of Bosworth Field, allowing Henry Tudor, to be Henry VII, to assume the thrown.
There is an alternative story in which Richard Plantagenet was one of the two Princes in the Tower, the sons of Edward IV. For myself this is unlikely. Richard’s reign was dependent upon the illegitimacy of the Princes; elsewhere each had a better claim to the monarchy than did he. Only with them out of the way would his reign be safe; a living son of Edward VI was a threat to his legitimacy, evidenced by Henry VII’s issues with Edward Plantagenet, Lambert Simnel, Perkin Warbeck, etc.
Richard would lead an obscure life as a bricklayer.
Wednesday, December 18, 2019
Professor Christine Hurt to Appear on Jeopardy
Professor Christine Hurt is a co-author of two of the leading treatises on partnership law. She is as well a great person; I cannot count the times she has helped me along in my research.
But she is not just a law professor and author; she is as well a Jeopardy contestant.
HERE IS A LINK to the story.
Divorce Decree Not Enforceable Against Assets of Spouse’s LLC
A recent decision from Alabama offers yet another example of the rule that the members of the LLC do not have an ownership interest in the LLC’s assets. In Re: Raymond & Associates, Case No. 15-1883-JCO, 2019 WL 6208660 (Bankr. S.D. Ala. Nov. 20, 2019).
Raymond and Candace were married; Raymond was the sole member in Raymond & Associates LLC. Raymond and Candace began divorce proceedings in 2011. In 2015, Raymond, individually, filed for a Chapter 11 bankruptcy, which bankruptcy was ultimately converted to a Chapter 7 proceeding. After Raymond filed for personal bankruptcy, she was granted relief from the automatic stay in order that the divorce case could proceed. Ultimately, in 2016, a divorce decree was granted that, in part, afforded Candace certain rights in BP/Deepwater Horizon settlement proceeds that were to be paid to Raymond & Associates. Ultimately, the Chapter 7 trustee would object to the proof of claim she filed in the LLC’s bankruptcy, asserting that all of the LLC’s assets, including the to be collected funds from BP, would need to be applied to paying the creditors of Raymond & Associates, leaving nothing for her.
This decision would focus upon the question of whether Candace, the former spouse, is entitled to a priority claim in connection with the LLC’s bankruptcy.
The court would find that the clear wording of the divorce decree, specifically its reference to “after bankruptcy claims have been adjudicated by the bankruptcy court” and a claim on the “net” of the claim against BP indicates that all creditors of the LLC are first to be paid. But even if it did not include this language, the court held that a domestic support obligation (“DSO”) is enforceable against only the former spouse and not the LLC:
Ms. LaForce’s … fails to meet the statutory requirements for treatment as a DSO in the Corporate Case. Ms. LaForce is the former spouse of Raymond LaForce, an individual, although Ms. LaForce may be a DSO Creditor of Raymond LaForce, she is not a DSO creditor of the Debtor, an Alabama limited liability company. Ms. LaForce’s claim does not fall within the plain language of the definition of a domestic support obligation in this case as described in 11 U.S.C. § 101(14A)(A)(i). Ms. LaForce is not a spouse, former spouse or child of the Corporate Debtor. Hence, the Divorce Decree does not entitle Ms. LaForce to a priority claim in this bankruptcy.
Further, the court would cite the decision of the Alabama Supreme Court rendered in Whaley v. Whaley, 261 So.3d 386 (Ala. 2017) for the principle that:
[The] divorce court’s award to wife of limited liability company’s real property, equipment, contractual rights, intellectual property … went beyond awarding wife the husband’s transferable interest in the LLC, i.e. his right to receive distributions, which under the LLC statute was the only interest of member that was transferable.
Tuesday, December 17, 2019
Series LLC Lacks Standing to Pursue Claim of One of its Series
In a recent decision rendered by the Federal District Court for the Northern District of Ohio, it considered and rejected the suggestion that a series LLC has standing to pursue a claim belonging to one of its series. MSP Recovery Claims, Series LLC v. Phoenix Ins. Co., Case No. 5:19 CV 00436, 2019 WL 6770981 (N.D. Ohio Dec. 12, 2019).
The LLC Acts of Delaware and of certain states (including Ohio but not including Kentucky) allow the formation of an LLC that may in turn have series, which is thereafter designated a “series LLC.” A series is used to segregate assets and liabilities. Although the use of series in operating companies has only lately begun (and raising significant problems), series have been with us for quite some time; it is how you organize an investment company/mutual fund. This case arose out of certain claims originally held by MSP Recovery Claims, Series LLC that it, in turn, had assigned to one of its series. Notably, under the Delaware LLC Act, an individual series has the ability to sue and be sued.
This decision, rendered in response to a broad motion to dismiss, addressed whether the series LLC, as well as the individual series, could be plaintiffs in this action. On the basis of the language employed in the Delaware LLC Act and commentary from Delaware to the effect that a series is similar to a subsidiary, the court held that the series LLC could not be a party to the action, applying the rule that “parent corporations lack standing to sue on behalf of their subsidiaries.” 2019 WL 6770981, *10. On that basis, the series LLC itself was dismissed from the action.
Monday, December 16, 2019
Dissolution of LLC Upon a Member’s Death Waived
In his blog New York Business Divorce, Peter Mahler has reviewed a decision from New York where dissolution of an LLC was sought based upon the death of the member. This LLC’s operating agreement dictated that upon a member’s death the LLC would dissolve unless the remaining members agreed to continue the company within 180 days after that death. Here, where the members waited some 11 years, that effort was rejected. The case is Sternlicht v. Daniel Z. Rappaport Associates, L.P., 2019 NY Slip Op 08141, 2019 WL 5876099 (N.Y. App. Div. Nov. 12, 2019). The posting as to this decision is titled LLC Survives Member’s Death. Dissolution Petition Doesn't; HERE IS A LINK to Peter’s review.
This case arises out of the efforts by certain minority members in the LLC to compel its liquidation in order that they can capture its value, they having rejected offers from the other members to redeem their interest at what they alleged to be a “steep discount, far below its value.” Initially, notwithstanding the death of the original member, it was found that his interest in the company had been transferred to a niece and a nephew, each of whom fell within the scope of a “family member” to whom interest could be transferred without the requirement of satisfaction of any other transfer limitations in the operating agreement.
Also, in that the death upon which the plaintiffs relied had taken place some 11 years prior, the court noted that they had not in that period of time acted as if the LLC had been dissolved. Further, upon a subsequent death, the plaintiffs and the other incumbent member purchased the interest of that now deceased member, which the court took as evidence that they saw the LLC as continuing.
I would recommend to you Peter’s review and for a more detailed analysis. Further, I would adopt and endorse the last paragraph of his posting, it provide:
A well-designed buy-sell agreement is one that allows continuation of the business with minimal (or at least tolerable) economic disruption while allowing departing owners to liquidate their interest at a fair appraised value or pursuant to a reasonable formula. And, of course, the optimal and likely last best chance to devise a fair buy-sell agreement is at the outset of the venture, when no one knows for sure whether ultimately they’ll be a buyer or a seller.
Friday, December 13, 2019
Kentucky Court of Appeals Considers the Effect of “Gift Letter”
In a recent decision from the Kentucky Court of Appeals, it rejected reliance upon a “gift letter” issued in connection with residential financing. In this instance, it was characterized “a financial maneuver and not a true gift.” Kelien v. Kelien, No. 2019-CA-000045-MR, 2019 WL 5681417 (Ky. App. Nov. 1, 2019).
Lance and Angela married in October, 2013; by April 2018 they were separated. Prior to the marriage, Angela owned a house in her own name. She sold that house, receiving net proceeds of $47,067.40. The same day she sold that house, Angela and Lance bought a new house. Essentially the entirety of the down payment was the amount Angela had received from the sale of her prior home. However, Angela, due to being disabled and not having regular income, was not a party to the financing note and mortgage. Rather, Lance was the only borrower (still, both of their names would appear on the deed). In order that Lance would have the funds to make the down payment, Angela executed a “gift letter” evidencing her gift of the proceeds of her house to Lance. When the marriage ultimately dissolved, the Family Court ordered the sale of the marital residence, with Angela to receive first from the proceeds the $47,067.40, traced back to the sale of her own house, as non-marital property. As characterized by the Court of Appeals:
The [family] court determined that the “gift” from [Angela] to [Lance] was a financial maneuver and not a true gift, and that the gift letter “was done solely because the bank required it to be done for [Lance] to qualify for the bank loan to the parties could purchase the marital residence.”
From that determination, Lance brought this appeal.
Lance's argument would boil down to the position that the gift letter was a contract, and that the parol evidence rule precluded looking outside of its express terms. On that basis, he argued those funds were his non-marital property. The Court of Appeal set aside this argument, finding that because the gift letter does not constitute a contract, the parol evidence rule was not implicated. Freed of the limits of the parol evidence rule and able to look at extrinsic evidence, the court found that the:
Funds used for the down payment on the [marital] house was [Angela's] nonmarital property, which can be traced to the equity she received from [her nonmarital] house. In fact, those funds could not be more easily traced, as the check received from the sale of the non-marital home was endorsed as the deposit on the marital home. The Greenup Family Court properly characterize these funds as [Angela's] non-marital property, and we find no error.
Thursday, December 12, 2019
Delaware Limited Partnership Judicially Dissolved Where General Partner Was Unwilling to Pursue its Business
Delaware Limited Partnership Judicially Dissolved Where General Partner Was Unwilling to Pursue its Business
, No. CV 2018-0840-SG, 2019 WL 3713844 (Del. Ch. Aug. 7, 2019).
White, the initial general partner, organized a variety of entities to operate nursing homes. He was, however, apparently not very good at doing so. The court found that he engaged in “unsatisfactory practices” including failure to send bills and failure to cash checks received. Eventually, the nursing homes in which the investments were made were unable to pay their staffs or buy food for the patients. In prior rulings in this dispute, a receiver was appointed to operate the companies. The plaintiffs then brought this action for judicial dissolution of the limited partnerships on the basis that it could not fulfill its purpose.
The Delaware Limited Partnership Act, at section 17-802, provides for dissolution of a limited partnership “whenever it is not reasonably practicable to carry on the purpose of the business in conformity with the partnership agreement.”
The court found that the standard was here met. Initially, the limited partnership had not been successful under White’s control. Once the receiver (over time, there were actually two), was appointed, White refused to cooperate with them in operating the business.
While the court noted that dissolution is an extraordinary remedy that is not to be lately invoked, on these facts it was held that judicial dissolution of the limited leadership was appropriate.
After this ruling, there were additional efforts to compel White to appear for related depositions. The latter decision with respect to compelling White’s appearance at depositions is set forth at 2019 WL 4096855.
Wednesday, December 11, 2019
The University of Kentucky College of Law Has Been Renamed the University of Kentucky J. David Rosenberg College of Law
The University of Kentucky College of Law Has Been Renamed the University of Kentucky J. David Rosenberg College of Law
The University of Kentucky College of Law, in light of a $20 million gift, has been renamed that University of Kentucky J. David Rosenberg College of Law. HERE IS A LINK to the announcement.
Kentucky’s New Business Courts Featured on the Business Courts Blog
Lee Applebaum, who maintains the Business Courts Blog, has today posted about Kentucky’s new Business Court Docket here in Jefferson County. HERE IS A LINK to his posting
The Direct Versus Derivative Distinction in Limited Partnerships
In a recent decision from Alabama, the Court considered and applied the direct versus derivative distinction in the context of a limited partnership. In this instance, as the injury suffered by the plaintiff limited partner was separate and distinct from any injury to the limited partnership itself, the court found that the suit was direct, not derivative, and on that basis allowed it to proceed. Mid-South Tax Credit Partners 1 v. Junkin, Case No.: 6:19-CV-496-RDP, 2019 WL 4277365 (N.D. Ala. Sept. 10, 2019).
Plaintiff Mid-South and others were limited partners in Fayette Properties, Ltd., a limited partnership organized in Alabama. The defendant Junkin was a general partner, along with Oswalt, in Fayette Properties. Junkin and Oswalt caused Fayette Properties to receive, in settlement of certain disputes, $184,912.20. As alleged by the plaintiffs, Junkin and Oswalt then misappropriated the limited partners’ share of those settlement funds. When the plaintiffs learned of this alleged diversion, demand was made upon Junkin and Oswalt, who in the meantime had withdrawn and disassociated from the partnership, for the return of the funds. The plaintiffs settled their dispute with Oswalt, and initiated this action against Junkin for the balance due and owing.
In response, and apparently inartfully, Junkin sought dismissal of the complaint on the basis that it needed to be brought as a derivative action, and that, necessarily, a derivative action would involve the limited partnership as a party, thereby destroying diversity jurisdiction. Hence, whether the court could consider the merits of the case would depend upon whether the plaintiff's claim was characterized as direct or derivative.
Applying the distinction between direct and derivative distinctions as set forth by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin & Jenrett, Inc., 845 A.2d 1031 (Del. 2004), and applying as well the pre-Tooley decision rendered in Anglo A.M. SCC. Funds, L.P. v. S.R. Globe Int’l Fund, L.P., 829 A.2d 1043, 1049 (Del. Ch. 2003), the court looked to who had been injured and considered as well the question of preventing a windfall to those not injured by the alleged wrongful conduct. In this instance, because in part of the particular wording of the relevant operating agreements, it was found that the alleged diversion of the settlement funds injured only the plaintiffs in their capacity as limited partners, but not the partnership as a whole.
As the claims were direct, the limited partnership need not be joined as a necessary party to the action, so diversity jurisdiction was retained.
Tuesday, December 10, 2019
The Demise of The Apostrophe Protection Society
The Apostrophe Protection Society was founded in 2001 to, as reported by the BBC, “defend the ‘much abused punctuation mark’, waging war against advertisements for ‘ladies’ fashions’ or the much maligned grocer’s’, used to sell apple’s and pear’s.”
Sadly, as reported on the BBC article Do apostrophes still matter?, The Apostrophe Production Society is no more. HERE IS A LINK to that article.
More on Service of Process by E-mail
In a recent decision from California, service of process by email was authorized against a company selling allegedly infringing baseball cards through eBay. Panini America, Inc. v. KollectorsVault, LLC, Case No. 19-CV-03800-LB, 2019 WL 6311414 (N.D. Ca. Nov. 25, 2019).
The plaintiff, Panini, makes a variety of sports memorabilia including trading cards. It alleged that defendants Stephen Teani and KollectorsVault, LLC were selling infringing products through eBay. When they failed to cease those activities after demand, Panini filed this lawsuit under a variety of theories including federal trademark infringement.
Apparently there were no problems filings the complaint and summons upon Mr. Teani individually. He alleged, however, that he had no association with KollectorsVault and that he was the victim of identity theft. The plaintiffs then engaged in a variety of efforts to ascertain the facts, including a subpoena on the police department with respect to Teani’s alleged identity theft, upon eBay for information with respect to KollectorsVault’s; registration, and upon the USPS seeking information with respect to KollectorsVault’s P.O. Box. After these efforts, Panini sought permission from the court to serve the complaint upon KollectorsVault at its Yahoo address.
The court, finding that Panini had undertaken significant efforts to locate information with respect to KollectorsVault, ordered that service of the summons and complaint could be affected through KollectorsVault’s Yahoo email address that it maintained on its eBay profile.
Service of a Complaint by E-mail
In a recent decision from the Federal District Court in Washington state, it considered and, in part, allowed the plaintiff to serve the complaint on certain Chinese based companies and individuals via email and through their respective Amazon storefronts. However, finding that the plaintiff had taken insufficient efforts to serve certain other defendants, the motion to serve them via email was denied. Rubie’s Costume Company, Inc. v. Yiwu Hua Hao Toys Co., Ltd., Case No. 2:18-CV-01530-RAJ, 2019 WL 6310564 (W.D. Wa. Nov. 25, 2019).
Rubie’s developed and holds the copyright on a “highly-recognizable and very popular full-body Inflatable T-Rex costume.” In this lawsuit, they allege that the defendants were creating knockoffs of that copyrighted intellectual property, selling the infringing costumes through an Amazon seller account. Rubie’s filed its complaint against numerous defendants, and then began efforts to effect service of process on each defendant. In the course thereof, they were able to obtain certain information from Amazon, but when they attempted to effect service of the complaint, they were unable to find the relevant individual “suggesting that Defendants provided false addresses to Amazon.” From that circumstance, the plaintiff asked the court for its permission to serve the defendants with the complaint and summons by email.
The court, in its analysis, reviewed the rules for effecting service of process other than by the traditional hand delivery or registered mail, and as well reviewed China's participation in the Hague Convention. The court noted a significant number of decisions allowing, on particular facts and circumstances, service on residents of China by email. On the facts of this case, the court denied the effort to make service of process by email on the basis that (so would appear from the complaint) that efforts to effect service via the Hague Convention had not yet been undertaken. However, with respect to defendants where the physical addresses were false or could not be ascertained, service was authorized by email and through the relevant Amazon seller account.
Monday, December 9, 2019
Complicated Organizational Structure of Defendant Precludes Finding of Diversity Jurisdiction
In a recent decision from the Federal District Court for the District of Columbia, it remanded a case to state court where, after removal by the defendant, that defendant’s citizenship could not be affirmatively ascertained so that the court could confirm that, in fact, diversity jurisdiction existed. C.F. Folks, Ltd. v. MCP II Jefferson, LLC, Civ. Act. No. 1:19-CV-01024 (CJN), 2019 WL 6464975 (D. D.C. Dec. 2, 2019).
This case involved a dispute between a restaurant, Folks, and its landlord, Jefferson. Folks was a District of Columbia corporation, and therefore a citizen of DC. As such, diversity jurisdiction could exist only if Jefferson was not a citizen of the District of Columbia (the other requirement, namely that the amount in dispute exceeded $75,000, was not at issue). After having ordered two rounds of briefing on the question, the court was not able to come to a final conclusion as to Jefferson’s citizenship rather:
MCP, however, is an LLC. As noted above, LLCs are citizens of all states of which their members are citizens. MCP’s sole member happens to be another LLC, the sole member of which is a Maryland real estate investment trust (“REIT”). A Maryland REIT is a citizen of all states of which its trustees and its shareholders are citizens. This particular REIT has (A) trustees who are all Massachusetts citizens and (B) shareholders who own two classes of stock, one type of which is wholly owned by a limited partnership. The general partner of that partnership is an LLC, and that LLC’s two members are a Massachusetts corporation and yet another LLC.
In turn, that LLC—which is five ownership steps removed from MCP—has several dozen members, including individual investors, pension funds, major universities, and other institutional investors. But among that group, the Court counts at least sixteen trusts and ten LLCs. On top of that, the other class of the Maryland REIT’s shareholders is comprised of 125 individuals, among whom number at least nine trusts.
The Court therefore faces a situation in which, to determine whether diversity exists between a tenant and its landlord …, it must investigate the membership of more than a half dozen layers of unincorporated associations and their members, partners, trustees, and shareholders. But that inquiry has simply yielded more unincorporated associations. While each has a mailing address somewhere other than the District of Columbia, it is nearly impossible to determine where the inquiry ends. So far, it appears that for diversity purposes MCP is a citizen of at least Massachusetts, Delaware, Maryland, Ohio, Tennessee, Pennsylvania, New York, Connecticut, New Hampshire, North Carolina, Florida, Illinois, Colorado, Rhode Island, New Jersey, and Oklahoma. Every LLC yields yet another LLC as its member; every trust yields yet another trustee or beneficiary, and they themselves turn out to be more trusts and LLCs. 2019 WL 6464975, *3 (citations omitted).
On the basis that Jefferson, the removing party, could not affirmatively demonstrate that the diversity jurisdiction existed, the suit was remanded to state court.
Tis Better to Rule in Hell Then to Serve in Heaven
Today is the anniversary of the birth in 1608 of John Milton, author of (among many other works) Paradise Lost (released in 1667). He was as well an important political commentator, arguing against censorship and licensing of publication in Areopagitica.
In Paradise Lost, Milton describes the battle with the fallen angels, their expulsion from Heaven and the three-day fall that brought them to Hell (referred to as Tartarus). The quotation “Tis better to rule in Hell then to serve in Heaven.” appears in Book 1 at line 263, part of a monologue by Satan.
Saturday, December 7, 2019
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.
Thursday, December 5, 2019
The Justinian Plague Was Not as Virulent as the Great Mortality
The bubonic plague that ravaged Europe 1348-1350, referred to at that time as the “Great Mortality” and today oft referred to as the “Black Death” killed between 33 1/3% and 50% of the population of Europe, at least that is the best estimate that is available. The black death of 1348-50 was not, however, the only Western experience with the bubonic plague. For example, there was a significant resurgence in 1666 that, at least within London, was interrupted by the Great Fire of that same year. To this day there are outbreaks of plague, particularly in China and, from time to time, in the American Southwest.
An earlier onset of the bubonic plague took place during the reign of Justinian I; hence it is referred to as the Justinian Plague. Previously, it had been suggested that the Justinian Plague was nearly as fatal as the Black Death, and that it’s decimation of the population of the Eastern Mediterranean precipitated the final collapse of that region of the Roman Empire and the onset of the Middle Ages. This viewpoint is evident from the title of a book on the Justinian Plague, namely William Rosen, Justinian’s Flea: The First Great Plague and the End of the Roman Empire (emphasis added). Still, Rosen acknowledged that prior suggestions that the Justinian Plague killed one hundred million “is at least three times too high.” Id. at 209.
Even that analysis is now been brought into dispute. In a paper published in the Proceedings of the National Academy of Sciences of the United States of America titled The Justinianic Plague: An Inconsequential Pandemic? (HERE IS A LINK to the article), it is argued, based upon the utilization of mutually supporting methodologies, that “a massive plague mortality is all but invisible in the contemporary quantitative data sets. We contend that this is sufficient evidence to reject the current scientific and humanistic consensus of the [Justinian plague] as a major driver of demographic change in the 6th century Mediterranean region.” They go on to acknowledge that the evidence available does not permit a determination of the actual impact of the Justinian Plague upon population.
Wednesday, December 4, 2019
Retailers, Premises Liability and Federal Diversity Jurisdiction
Just before Thanksgiving, a decision was handed down by the Federal District Court for the Eastern District of Kentucky (Judge Van Tatenhove) addressing what would otherwise appear to be a run-of-the-mill premises liability claim. However, in this decision, the potential liability was expanded beyond the big-box home improvement store to include, as an individual, the store manager. Justice v. Lowe’s Home Centers LLC, Civ. No: 7:19-CV-00051-GFVT, 2019 WL 6310724 (E.D. Ky Nov. 25, 2019).
The plaintiff, Justice, alleged that he was injured when, apparently, a door or doors fell on him at the Lowe’s store in Pikeville Kentucky. Justice filed suit against not only Lowe’s, but also James Little, the store manager. Specifically, he alleged that the defendants “permitted an unreasonably unsafe hazard or condition to exist upon the premises … when it failed to secure doors on the shelves or left unattended unsecured doors on the shelves without a posted notice or warning.” In addition, it was alleged that Little, the store manager and a certain unknown employees were guilty of “creating an unreasonable risk of harm to customers of the store and failing to otherwise exercise due care.”
The suit was originally filed in state court, and Lowe’s removed it to Federal Court on the basis of diversity jurisdiction. In the course thereof, Lowe’s alleged that Little was improperly joined in the lawsuit on the basis that he could not be held liable for Justice’s injuries. This decision was rendered in the course of Judge Van Tatenhove granting a motion to remand, which involved necessarily a determination that Little was not improperly joined.
In reliance upon Grubb v. Smith, 523 S.W.3d 409 (Ky. 2017), it was observed that “Kentucky law has long recognized that an employee who, in the course of employment, breaches his or her independent tort duty to a third-party can be held liable for resulting injuries.” In this instance, it was alleged that Little and the as of yet unidentified other employees of Lowe’s created the condition that that led to the plaintiff's injury. As such, recovery against Little is conceivable, and his joinder was not improper.
On that basis, diversity jurisdiction was absent, and the case was remanded to state court for further consideration.
With this decision, plaintiffs, who typically desire to keep their suits in state court rather than have them either filed in or removed to federal court, have more of a roadmap as to what allegations may be made against defendants with Kentucky citizenship, thereby precluding removal.
Monday, December 2, 2019
Agreeing to Disagree
Recently, Professor Jonathan Fershee, Dean of Creighton Law, published an essay in which he suggested that especially strict standards should be applied with respect to significant modifications and waivers of the default duty of loyalty. Specifically, he argues that in the context of an operating agreement that may be amended by less than all of the members, the duty of loyalty should be subject to modification or amendment only if the right to make that modification is expressly reserved in the operating agreement.
I published a short dissent to that position on a variety of grounds including ultimate unworkability, principles of freedom of contract and a reluctance to create a hierarchy in which a waiver of duty of loyalty is of greater importance than other contractual provisions that could have an equal or more significant impact upon minority members. HERE IS A LINK to that dissent, it containing as well a link to Dean Fershee’s initial post on the Business Law Prof Blog.
Yesterday, and again on the Business Law Prof Blog, Dean Fershee posted Dissent Duly Noted: LLCs, Private Ordering, and Ample Notice, wherein he (kindly) noted my rejoinder to his piece. HERE IS A LINK to that posting. I agree that we may have to agree to disagree, but ultimately, I am not sure how far apart we are. On the one hand, clearly, he would elevate concerns with respect to the waiver of the duty of loyalty, where I would not. I am not aware, however, that we are in disagreement with respect to my critique of the practical limitations of his proposed solution. And while I believe implied by both of our arguments, we are in agreement that any modification or waiver of the default standard of loyalty needs to be clear and obvious.
More Controversy as To Kentucky Vanity License Plates
Recently, on the Religion Clause Blog, that was reported a decision of the federal district court requiring the Kentucky transportation Cabinet to issue the license plate “IM God”; HERE IS A LINK to my review of that posting
As reported on the Religion Clause Blog, another dispute has arisen with respect to Kentucky vanity license plates. In this instance, the holder of the plate “INFDL” sought to transfer it to a different vehicle after holding it for some 12 years. The Kentucky transportation cabinet rejected that offer effort, on the basis that the plate “violates the ban on personalized plates that discriminate, represent a political belief or promote a specific faith, religion or anti-religion.” A lawsuit has now been filed challenging that determination.
HERE ISA LINK to that posting on the Religion Clause Blog.
Tuesday, November 26, 2019
Court Applies “Reality Check” to Valuation of Minority Interest in LLC
In a recent decision from Ohio, the court applied a “reality check” to the evaluation of a minority interest in LLC, the court rejecting the suggestion that a 25% interest therein held a negative value. Kapp v. Kapp, 2019 Ohio 4097, 2019 WL 4894057 (Ohio Ct. App 2nd Dist. Oct. 4, 2019).
Jessica and Tyler Kapp had previously been married; this decision arose out of the divorce decree entered by the trial court. For purposes of this review, she alleged that the value attributed to her interests in two self storage businesses was in error. Tyler and Jessica were each 25% members of Home Road Self-Storage and in Key and Lock of Enon. The balance of the interests in the companies were held by Tyler’s sister and her husband. The trial court, after determining that the interest in each of the LLCs had, as to Jessica, negative discounted present value, had awarded those interests to Tyler without any offsetting compensation to Jessica.
Tyler’s appraiser began by doing an appraisal of each company, dividing that by four to reach the pro forma value of a 25% interest therein. He then applied a 35% discount to each interest. Then, he deducted from that value 25% of the mortgage indebtedness, an action which drove each of the values negative. Jessica objected to this approach by noting that, while her interest in each company had been discounted, no discount had been applied to the mortgage debt.
In contrast to the trial court’s approach, Jessica argues that it first should have determined the net market value of her interest by subtracting all debt from Horner’s appraised market value of the properties. She asserts that the result would then have been divided by four to determine the market value of her interest, which then should have been discounted by 35%. According to Jessica, if this methodology had been followed, the discounted market value of her interest in the two companies would be nearly $80,000.
This the court did not accept, writing:
It is not clear to us, however, why the debt should be discounted. Appraiser Horner explained why it was necessary to discount the market value of Jessica’s 25 percent interest in Home Road and Key and Lock. Most significantly, the value of her minority interest in the two companies is impaired by a lack of marketability or control. To determine what a buyer would pay for her share of the companies, Horner had to consider these impairments, which reduce the market value of what Jessica owns. The same is not true for the mortgage debt. Marketability or control issues impact the value of Jessica’s interest in the companies, but such issues have no impact on the companies’ debt. No lender would reduce the existing mortgage debt by 35 percent in recognition of the discount applied to Jessica’s ownership interest in the companies. As a practical matter, then, a prospective purchaser would be buying Jessica’s discounted ownership interest, which remains encumbered by the full, undiscounted pro rata share of the companies’ debt. There may be some explanation for discounting the debt in this case, but it is not found in the record before us. Therefore, we cannot say the trial court erred in failing to adopt Jessica’s valuation approach. 2019 WL 4894057,*4 (footnotes omitted).
However, notwithstanding that rebuttal of her argument, all was not lost for Jessica. Rather, the court wrote:
Despite the foregoing conclusion, we agree with Jessica that the trial court acted unreasonably in assigning no positive actual value to her 25 percent interest in the two companies. The record reflects that Home Road and Key and Lock are successful and profitable businesses. The undiscounted net market value of the two businesses, after subtracting their debt, is roughly half a million dollars. Certified public accountant Mike Fissel testified that Home Road was projected to have free cash flow of $20,518.86 over the upcoming year after servicing its debt and making one-time capital expenditures of $48,000 for needed repairs. The Key and Lock property was projected to have free cash flow of $3,379 after debt service. But an anticipated capital expenditure for driveway resealing was expected to reduce free cash flow to negative $1,621 for the upcoming year. In any event, the two businesses together easily were cash-flow positive after all debt servicing and capital expenditures. In addition, based on a current accelerated debt-repayment schedule, the Home Road property, which itself appraised for $920,000, is expected to be mortgage free by December 2026. Paying off the mortgage will allow the company to retain an additional $6,841.43 per month based on the current payment schedule. In short, the record establishes that relatively soon the two companies, which currently are paying for themselves, together will have equity in excess of one million dollars and will be generating substantial free cash flow. We find it unreasonable to conclude that Jessica’s 25 percent ownership interest in this enterprise is worthless and, in fact, is worth less than zero. The apparent value of Jessica’s interest is reflected in the fact that both she and Tyler desire ownership of it. Jessica testified at trial that if she were not awarded at least “book value” for her interest in the two companies, then she would prefer to keep her interest. At trial, the companies’ accountant, CPA Fissel, determined that the book value of Home Road was $97,533.60, and the book value of Key and Lock was $81,446.66. The combined book value of these businesses was $178,980.26. Jessica’s attorney calculated that 25 percent of the combined book value was $44,744.92. Jessica testified that she was agreeable to transferring her interest in the companies to Tyler for at least that amount. Otherwise, she wanted to retain her interest in Home Road and Key and Lock. Id. (citations to record and footnote deleted).
From there, turning back to the company’s operating agreement, it was silent as to divorce and expressly excluded its application with respect to “transfer by sale, gift or bequest between or to current Members.” Still, the court made reference to the “fair market value” methodology set forth therein, one which valued Jessica’s interest $44,744.92. The court as well noted that as Tyler was already a 25% member of the company and, apparently, one of its only two managers, her interest was to him more valuable than it would be to a “hypothetical prospective purchaser,” the court observing “Because the ‘purchaser’ in the present case is a person who will own fifty percent of the companies and who shares control with only one other person, Jessica’s interest reasonably should have more value to him than to a random person.”
From that assessment, the court turned to the crux of its decision, namely:
Based on the foregoing reasoning, we hold that the trial court abused its discretion in finding Jessica’s interest in Home Road and Key and Lock to have a negative market value and in awarding that interest to Tyler without any compensation to her. Such a disposition was not reasonable based on the record before us. Although a trial court in a divorce proceeding should endeavor to disentangle the parties financially when possible, we believe the most appropriate resolution in the present case is for the trial court to give Tyler a choice. He can give Jessica $44,744.92 for her interest in the two companies and have that interest transferred to him. Or he can decline to do so, and she can keep her interest. Although it may be preferable to separate the parties’ business affairs, Jessica should not be compelled to give her interest in the companies to Tyler without any compensation, which is what the trial court ordered. If Tyler truly believes Jessica’s interest has no current market value, as he argues on appeal, then he can allow her to keep that interest, which she testified has financial value to her. Because Tyler and his sister enjoy decision-making control, Jessica essentially would remain a silent partner. The first assignment of error is sustained. Id., *6.
Monday, November 25, 2019
Respectfully, I Dissent: Dean Fershee and Elimination of Fiduciary Duties
Dean Fershee recently circulated of a short paper titled An Overt Disclosure Requirement for Eliminating the Duty of Loyalty; HERE IS A LINK to the posting he made on the Business Law Prof Blog with respect to this short paper. Therein, at the risk of oversimplifying his argument, he suggests that the various LLC and other unincorporated entity statutes should be amended to provide, inter alia, that a post-formation amendment of the controlling agreement, he being focused in this context on LLC operating agreements, that would either reduce (even to the point of elimination) or expand the duty of loyalty would be permissible if and only if expressly provided for in the operating agreement or, otherwise, with the unanimous consent of the participants. He wrote that “it would be appropriate to me for Delaware to adopt a requirement that, to change or eliminate a fiduciary duty, there must be agreement of all parties or an expressed and clear statement as to what it requires to change that.” He would not allow such a modification to proceed under language providing only “This operating agreement can be modified or changed via majority vote.”
As outlined below, I must respectfully dissent from this view. Generically, absent bespoke private ordering to the contrary, where either the controlling state law (examples being Kentucky and New York) or the operating agreement itself permits modification by less than a unanimous vote of the participants in the venture, they have placed themselves at the mercy of the agreement as amended. With precise drafting, the operating agreement may protect a minority participant protection from what might, ex post, be considered an abusive or oppressive amendment, that protection is, as it should be, the product of negotiated private ordering. Recall that the test is for whether the participants to an agreement understood the agreement they were entering into (i.e., this agreement may be amended by less than all of the participants in the venture.) and not all of the implications of the agreement into which they have entered (i.e., the duty of loyalty owed under this agreement is subject to subsequent modification, waiver or elimination.).
In short, I do not believe there is justification for protecting people from the consequences of the contracts into which they enter.
Second, I do not see the application of a rule such as that espoused by Dean Fershee could practically be applied as there would be myriad questions as to its scope. Admittedly, it would control with respect to a proposed amendment to the operating agreement of “notwithstanding [cite duty of loyalty provision of controlling LLC Act], and to its exclusion, no member/manager in the Company shall be bound by or subject to any duty of loyalty.” Okay, fine, but let us now assume an LLC organized for real estate development purposes that is the current title owner of 234 Chestnut Street. May whatever threshold of the members is defined in the operating agreement as being able to amend it [the “Majority Members”] change the purpose clause of the LLC to provide “the sole and exclusive purpose of the Company is to own, develop, lease and ultimately sell the improved real property located at 234 Chestnut Street. The Company will engage in no other activities.”? With this amendment to the operating agreement the scope of the duty of loyalty that might otherwise apply has been constrained, thereby allowing the members to be engaged in other real estate project without violation of the opportunity doctrine or an obligation to not be involved in activities that are competitive with the LLC. May the Majority Members amend the operating agreement to provide, inter alia, that they are permitted to engage in self-interested transactions with the LLC without the requirement of a disinterested vote, and that in any challenge thereto the minority members will bear the burden of proof as to the impropriety of the transaction? May the Majority Members amend the operating agreement to provide mandatory advancement of expenses in the event of any challenge to any transaction they undertake vis-a-vie the company and as well first dollar indemnification for any ultimate liability that does not involve a knowing violation of law? May the Majority Members amend the operating agreement to provide that, in the event of any direct or derivative action challenging an action undertaken by a member of the majority with the company, it shall be referred to a special litigation committee that need not be appointed on a disinterested basis? Alternatively, may it be provided that any direct or derivative challenge to an action undertaken by a member of the company and the LLC shall be subject to mandatory arbitration? Last, but without meaning to suggest that this listing exhaust the possible options, may the majority members amend the operating agreement to provide that they have the capacity to set their own compensation for services rendered to the Company?
Ultimately, what constitutes a restriction on the duty of loyalty is open to dispute.
There is a separate and distinct mechanism that needs to be considered. Assume that the LLC is organized in a state that allows a merger to be approved by less than all the members or, in the alternative, that the LLC’s operating agreement grants a similar capacity. Assume as well that neither the controlling act nor the operating agreement provide for dissenter rights in the event of a merger. In that circumstance, without triggering a liquidity opportunity for the minority members, the Majority Members have the capacity to merge an LLC that does not restrain the otherwise applicable duty of loyalty into an LLC in which the duty of loyalty is expressly waived. While the argument should ultimately fail, no doubt the minority members, in an LLC organized in a state that is adopted Dean Freshee’s suggestion would argue that the merger is nothing more than an amendment to the operating agreement.
Last, I question whether modifications of the duty of loyalty are really that important in typical business organizations. While we read a great deal from Delaware about fiduciary waivers, typically in the instance of fund cases, it is striking how little litigation we see on the point in other jurisdictions. Maybe this is consequent to the fact that those states that have adopted an incarnation of the Uniform LLC Act do not allow a complete waiver of the duty of loyalty, thereby restricting the number of states in which such of provision may appear in the operating agreement. I would submit that rather than being concerned with waivers of the duty of loyalty, minority members in LLCs should focus their efforts at protecting against the elimination of a liquidity right that they might otherwise enjoy, the imposition of a drag-along right or the elimination of a mandatory tax liability distribution. In most circumstances, it is these sorts of modifications in the operating agreement that are more likely to have a true impact upon the minority member’s enjoyment of the benefits of being a member in a particular venture.
Ultimately, I am of the view that entering into an operating agreement that may be amended without the approval of a particular member constitutes that member placing themselves almost entirely at the mercy of those with the capacity to amend the operating agreement, a point addressed in An Amendment Too Far?: Limits on the Ability of Less Than All Members to Amend the Operating Agreement, 16 Florida State University Business Review 1 (Spring 2017) (with Katharine M. Sagan). Persons entering into those arrangements certainly have the ability to negotiate for any of a number of protections. But when they do not, I do not see it as proper for those members and other participants to be protected from the consequence of the decision they have made.
The Sinking of the White Ship
Pillars of the Earth is in my view an excellent book both for its description of events “from the ground level” of the period of English history known as the Anarchy as well as its treatment of medieval as people just like those of the modern era who are just trying as best they can to make it through each day.
The fulcrum of the macro-political events described in the book is The Anarchy, the contest between the Empress Matilda, daughter of King Henry I (and former spouse of the Holy Roman Emperor, hence her title “Empress”), and Stephen of Blois, Henry’s nephew (just to keep things confusing Stephen’s wife was named Matilda) for the English throne after Henry’s death. The expected heir to Henry I was his son William, the only legitimate male child to have survived to adulthood. William, however, drowned on this day in 1120 in the sinking of the White Ship, thereby affording Follett the pivot around which to write Pillars of the Earth.
The Anarchy, wich lasted some 18 years, was resolved by Stephen holding the throne for life and appointing Matilda’s son Henry his heir. That Henry would be Henry II, one of England’s great kings.
Friday, November 22, 2019
A Local Sighting of the Limited Liability “Corporation”
Recently there was filed a complaint alleging that the Louisville “fairness ordinance” infringes upon the rights of the owner of an LLC in the wedding photography and related businesses. This complaint has been reviewed in numerous places, including the Religion Clause Blog; HERE IS A LINK to that posting.
On page 8 of the complaint, it is asserted that the plaintiff is the sole member of a “limited liability corporation.”
Professor Larry Hamermesh Delivers the 35th Annual F. G. Pileggi Distinguished Lecture
Recently, Prof. Larry Hamermesh, of whom I am fortunate enough to count as a friend, delivered the 35th Annual F G. Pileggi Distinguished Lecture in Delaware, wherein he recounted his some 40 years in experience as first a practicing attorney and then a professor at the Widener College of Law in Wilmington Delaware. HERE IS A LINK to a posting from the Delaware Corporate & Commercial Litigation Blog highlighting this presentation.
Not mentioned in that presentation is that Larry’s service as included as the reporter for the Corporate Laws Committee of the Section of Business Law of the American Bar Association, where he had the pen for the drafting of the Model Business Corporation Act (Third), a project to which he continues to contribute, including in the preparation of the annotated version thereof.
Thursday, November 21, 2019
LLCs Are Not Corporations
Professor Joshua Fershee, now the Dean of the Creighton Law School, collects cases in which LLCs are incorrectly referred to as a “limited liability corporation.” In a recent posting on the Business Law Prof Blog, he posted Dear Florida: LLCs Are Still Not Corporations. Therein, he reviewed a decision from Florida, it assessing whether or not there existed diversity jurisdiction. That blog posting was made on November 18, 2019; HERE IS A LINK to that posting.
Wednesday, November 20, 2019
Nevada Supreme Court Holds That Member is Entitled to Books and Records of LLC’s Subsidiary
In a recent decision rendered by the Supreme Court of Nevada, it was held that a member was entitled to access to certain business records of a wholly-owned subsidiary of the LLC. Turnberry/South Strip, L.P. v. The Eighth Judicial District Court of the State of Nevada (Centra Park, LLC, Real Party in Interest), No. 77317, 2019 WL 5858938 (Nev. Nov. 7, 2019).
Turnberry and Centra owned Turnberry/Centra Development, LLC (“TCD”) with Centra being a 30% owner and Turnberry the 70% owner. In addition, Turnberry was the managing member of TCD. In turn, Turnberry/Centra Office Quad, LLC (“Office Quad”), a Delaware LLC, was wholly-owned by TCD. Office Quad in turn had a wholly-owned subsidiary named Turnberry/Centra Office Sub, LLC (“Office Sub”).
In 2013, Office Sub signed a confidential settlement agreement with Lehman Brothers and others regarding a loan. That settlement agreement resulted in the seizure of certain assets as collateral for those loans. Centra made a written request for copies of that agreement and related documents. TCD, controlled by Turnberry, refused to provide the requested documents. Ultimately the trial court would order the disclosure of the settlement agreement to Centra, whereupon this appeal followed.
Applying Delaware law, the court began its analysis by noting the rule that LLC Agreements should be construed like other contracts, citing in support Kuroda v. SPJS Holdings, LLC, 971 A.2d 872, 880-81 (Del. Ch. 2009), then turned its attention to the provisions of the operating agreement of TCD addressing the right to access company books and records. In doing so, the court rejected the efforts by Turnberry to restrict Centra to the narrow “books of account,” highlighting as well that the operating agreement afforded the members access not only to the books of account, but also to “all correspondence, papers and other documents.” It also rejected the suggestion that those other documents were available only if they were related only to TCD itself and not any of its subsidiaries, characterizing any contrary result as being “absurd.”
The court also rejected the suggestion that Centra should not be entitled to review the settlement agreement on the basis that it was not a party to it and it contains as well a confidentiality agreement.