Sunday, June 30, 2019
Cesare Cardinal Baronius
Today marks the anniversary of the death in 1607 of Cesare Cardinal Baronius. Responding to the work of Copernicus, Galileo and others who challenged, on scientific grounds, a biblical earth-centric structure for the cosmos, he is said to have observed “The Bible teaches us how to go to heaven, not how the heavens go."
Friday, June 28, 2019
US Supreme Court Addresses Regulation of Alcoholic Beverage Industry
In a decision rendered on Wednesday, the United States Supreme Court for the first time in over a decade waded into the question of the degree to which a state may, in regulating its alcoholic beverage industry, impose requirements that have the effect of favoring local enterprise versus businesses based in another jurisdiction. Holding that a residency requirement imposed by Tennessee upon prospective retailers discriminates against interstate commerce in violation of the Commerce Clause of the U.S. Constitution, the Supreme Court affirmed the rule that, notwithstanding section 2 of the 21st Amendment, states may not interfere with interstate commerce. Tennessee Wine and Spirits Retailers Assn. v. Thomas, No. 18-96, 2019 WL 2605555, ___ U.S. ___ (June 26, 2019).
Tennessee had adopted a variety of requirements imposed upon licensees, including that they be residents of Tennessee for two years before applying for a license, another requirement that imposed a consecutive ten-year residency requirement upon anybody seeking to renew a license, and the requirement that any corporation applying for a license have only Tennessee resident directors, officers and stockholders. When two prospective licensees who did not satisfy these requirements sought licenses, the Tennessee Attorney General issued an opinion that these requirements were unenforceable. A trade association of existing licensees filed suit when the state alcoholic beverage regulators indicated licenses would be issued. The Sixth Circuit Court of Appeals struck down all of these requirements on the grounds that they constituted “violations of the Commerce Clause.” Only the two-year residency requirement was appealed to the U.S. Supreme Court, with the trade association arguing that section 2 of the 21st Amendment, which ended Prohibition at the national level, “gives each State leeway in choosing the alcohol-related public health and safety measures that its citizens find desirable.” Responding to this position, the U.S. Supreme Court wrote:
§ 2 [of the Twenty-first Amendment] is not a license to impose all manner of protectionist restrictions on commerce in alcoholic beverages. Because Tennessee’s 2-year residency requirement for retail license applicants blatantly favors the State’s residents and has little relationship to public health and safety, it is unconstitutional. Slip op. at 2.
A bit of background. The Constitution contains the Commerce Clause, which provides that “[t]he Congress shall have a Power … [t]o regulate Commerce among the foreign Nations, and among the several States, and with the Indian Tribes.” This provision has been interpreted to be both an affirmative grant of power to Congress to regulate such commerce, but as well to prohibit state laws that, even where Congress has not spoken, restrict interstate commerce. This latter aspect of the Commerce Clause is referred to as the “Dormant Commerce Clause.”
Also in play is section 2 of the 21st Amendment, that being the amendment that ended nationwide Prohibition. Section 2 of the 21st Amendment provides “the transportation and importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” Over the years there has existed a conflict between the grant of authority to the states under section 2 of the 21st Amendment to regulate the alcoholic beverage industry and Congress’ powers under the Commerce Clause, and especially the Dormant Commerce Clause - particularly the latter’s application to prevent barriers to interstate commerce so as to avoid the “economic balkanization” of the various states. Generally speaking, early after the adoption of the 21st Amendment, it was held to control over the Commerce Clause. In more recent years, as exemplified in the 2005 decision rendered in Granholm v. Heald, 544 U.S. 460 (2005), section 2 of the 21st Amendment has been held subject to the states’ obligation to not interfere with interstate commerce; effectively, provisions of alcoholic beverage law that favor local interest over interstate interest will be struck down as unconstitutional.
The analytic path is as follows; does state regulation of the alcoholic beverage industry burden interstate commerce? If the answer to that question is yes, the next question is whether that burden is a legitimate exercise of the state’s powers under section 2 of the 21st Amendment? If the burden does not effectuate a legitimate state interest, then the statute is unconstitutional under the Commerce Clause. Crucial for this decision, it has been repeatedly held that protectionism in favor of in-state interests versus out-of-state interests is not a legitimate state interest under section 2 of the 21st Amendment. For example, Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984), the Court struck down a state tax provision that favored pineapple wine made in Hawaii, it being enacted only to “promote a local industry.” Likewise, in the Granholm decision, the Supreme Court struck down direct wine shipment laws that favored in-state wineries over those located out of state.
Turning to the particular question at hand, and focusing upon the in-state two-year residency requirement for an initial license, the Supreme Court wrote:
Recognizing that §2 was adopted to give each State the authority to address alcohol-related public health and safety issues in accordance with the preferences of its citizens, we ask whether the challenged requirement can be justified as a public health or safety measure or some other legitimate nonprotectionist ground. …. [W]here the predominant effect of a law is protectionism, not the protection of public health or safety, it is not shielded by §2. Slip op. at 32-33.
Answering that question, the Court held that the residency requirement “expressly discriminates against nonresidents and has at best a highly attenuated relationship to public health or safety.” Id. at 33. Arguments that, for example, the residency requirements render the applicants directly subject to the state courts and afford the state a better opportunity to determine their fitness to sell alcohol were rejected on grounds including the ability to require that the applicants designate an agent for service of process and consent to suit in the Tennessee courts and the ability to investigate the background of persons irrespective of where they are located. In addition, it was noted that, with respect to any store that would be licensed, they would be physically located within the state and could thereby be monitored “through on-site inspections, audits, and the like.” Id. at 35. The Court as well rejected the proposition that a retailer with local ownership, “a responsible neighborhood proprietor,” would be more likely to cut off a patron abusing alcohol because no evidence had been entered in support thereof. Further, it was observed that this otherwise laudable goal would be effectuated not by the license holder, but rather the person actually making the sale. Ultimately, finding that the residency requirement does not advance interests protected by section 2 of the 21st Amendment, the Court held:
[T]he Association has fallen far short of showing that the 2-year durational-residency requirement for license applicants is valid. Like the other discriminatory residency requirements that the Association is unwilling to defend, the predominant effect of the 2-year residency requirement is simply to protect the Association’s members from out-of-state competition. We therefore hold that this provision violates the Commerce Clause and is not saved by the Twenty-first Amendment. Slip op. at 36.
Immediately, this decision renders void provisions of the laws in many states that favor, within the alcoholic beverage industry, local interest over those from other states. Longer-term, this decision at least opens the door for greater interstate competition in the alcoholic beverage industry. The rationale of this decision may be cited in support of greater flexibility in the interstate shipment of alcoholic beverages for both retailers and ultimate consumers. In that regard, the Supreme Court cautioned against reading too much into the Granholm decision’s endorsement of the three tier (manufacturer/wholesaler/retailer) system utilized in most states with respect to alcoholic beverages, cautioning that section 2 of the 21st Amendment does not sanction “every discriminatory feature that a State may incorporate into its three-tiered scheme.” One application may be efforts to open up the ability of retailers to purchase from wholesalers who are located out of state. Another application may be to expand direct to consumer shipment opportunities.
Thursday, June 27, 2019
Venue Clauses and Fiduciary Duties
A recent decision from the Federal District Court in North Carolina provided useful guidance on a number of points including venue clauses and fiduciary duties. In this instance, while the plaintiff filed an action in state court, and then challenged the defendant’s removal to federal court, it was found that the venue clause was not violated. In addition (and there are other points perhaps of interest in the decision), it was held that claims arising out of the sale of perishable food products to a restaurant, for which payment was not made, could give rise to a claim under the Federal Perishable Agricultural Commodities Act (“PACA”), which, at least at the stage of a motion to dismiss, could support a claim for breach of fiduciary duty. Sysco Charlotte, LLC v. Comer, No. 1:18CV247, 2019 WL 1359635 (M.D. N.C. March 26, 2019).
After Sysco filed its complaint against certain LLCs and the guarantors of a line of credit that have been used to purchase food, but which had not been satisfied, the action was removed to federal court. Here considering a motion to remand on the basis that the venue clause of the subject agreements did not permit removal, the court parsed the language of the agreement. In this instance, it read:
The parties agree to designate the federal and state courts of North Carolina as the exclusive place of venue and jurisdiction for any dispute between them, and Customer waives any right Customer may have to transfer or change venue regarding Customer’s obligations to Sysco ... Applicant and guarantors agree to waive exemptions from execution and agree that venue shall be proper in any forum selected by Sysco.
The personal guarantees executed in connection with the line of credit contained a similar language.
While acknowledging that contractual forum selection causes are enforceable absent fraud or bad faith, the burden of proving that the transfer of the case to federal court was improper would lie with Sysco, it alleging it was enforcing the clause and citing prior law to the effect that the forum selection clause blocking removal is in the nature of an affirmative defense. Characterizing the clause here at issue as being “permissive,” it was held that the transfer to federal court was not a change of venue, and that a transfer between the federal and state courts of North Carolina was not precluded by the contractual language.
From there, and in determining that the court would have jurisdiction pursuant to the PACA, one question addressed, here at the stage of a motion to dismiss, was whether a claim for breach of fiduciary duty could stand. Finding that the proceeds of the sale must be held in trust pursuant to 7 U.S.C § 499(e)(c)(2), the court "Finds Plaintiff’s allegation sufficient to plausibly infer that Plaintiff was entitled to the PACA statutory protections, which impose a fiduciary duty upon the PACA trustee."
Tuesday, June 25, 2019
The Mississippi LLC Act and the Rights of a Deceased Member’s Estate
In a decision rendered earlier this month, the Mississippi Court of Appeals considered and applied a provision of the Mississippi LLC Act that provides, inter alia, that the estate of the deceased member may, with respect to the LLC, continue to exercise the decedent’s right to participate in the LLC’s management. As applied, those continuing rights have the effect of forcing the LLC’s property into foreclosure and, it is anticipated, the LLC’s members will have to perform on certain personal guarantees of that debt. Coast Plaza LLC v. RCH Capital LLC, No. 2017-CA-01036-COA, 2019 WL 2428751 (Miss. Ct. App. June 11, 2019).
Coast Plaza LLC, organized in Mississippi, had as members Michael J. Thompson and Milton L. Gagnon. The LLC’s only asset was a strip mall. It served as security for a promissory note that was in turn personally guaranteed by each of Thompson and Gagnon. RCH, at the times here relevant, was the holder of the note. Gagnon died in mid-2016. Later that year, RCH issued a notice of default for undefined failures to perform under the promissory note.
There then followed a number of email exchanges with respect to a possible resolution of foreclosure by the voluntary surrender of the property which, if accomplished, would as well result in no deficiency judgment to which the guarantees would be subject. Those efforts did not, however, go smoothly for a variety of reasons including questions as to title and whether the proposed settlement had been approved by the members of Coast Plaza. At this juncture, the somewhat atypical Mississippi LLC Act came to bear; the LLC itself had no separate operating agreement. First, the Act requires the approval of at least a majority of the members for any sale or other disposition of the assets that “would leave the [LLC] without a significant continuing business activity.” Miss. Code Ann. §§ 79-29-233(a),(c); 2019 WL 2428751, *6, ¶ 21. In addition, the Mississippi LLC Act provides, inter alia, that after the death of individual member, the personal representative of the estate “may exercise all rights for the purpose of settling the estate, including the governance rights that were held by such member at the time of the member’s death and any other power under an operating agreement of an assignee to become a member. Miss. Code Ann. § 79-29-709(2); 2019 WL 2428751, *6, ¶ 22. Most states do not afford the estate of a deceased member the right to exercise management rights in the LLC.
RCH eventually revoked the offer to settle. Coast Plaza sued to enforce the alleged settlement agreement. After the chancery (trial) court determined that there had been no settlement agreement reached between the parties, this appeal followed.
The Court of Appeals was able to dispose of the argument that there existed an agreement to settle the dispute by surrendering the property on the basis that there existed no binding agreement, on behalf of Coast Plaza LLC, to enter into such agreement. Rather:
Pursuant to section 79-29-233(c), the LLC needed the approval of both Thompson and the Gagnon Estate to agree to dispose of its sole asset via a deed in lieu of foreclosure to RCH. Nothing in the record shows that the Gagnon Estate voted to accept RCH’s offer, consented in writing to accept RCH’s offer, or timely authorized Thompson to vote as its proxy. Rather, the record reflects that the LLC lacked the necessary authority to accept RCH’s offer on November 30, 2016. Accordingly, the LLC could not validly accept RCH’s offer, and there was no agreement for the Chancellor to enforce.
2019 WL 2428751,*8, ¶ 27.
As additional grounds, it was noted that consequent to the timeline for resolution of the Gagnon Estate, the LLC would not have been in a position to deliver the deed in lieu of foreclosure for several years. Id., ¶ 28. There being no contract that could be enforced, claims for violation of the implied covenant of good faith and fair dealing were likewise set aside. Id., ¶ 29.
Monday, June 24, 2019
The Death of the 17th Earl of Oxford
Today is the anniversary of the death in 1604 of Edward de Vere, the 17th Earl of Oxford and Lord Great Chamberlain of England. Having inherited one of the great landed estates of England, he squandered it, ultimately relying upon a pension from Queen Elizabeth.
Notwithstanding the movie Anonymous, he almost certainly was not the author of Shakespeare’s works.
Challenging an Individual’s Domicile
A recent decision from the Federal District Court for the Eastern District of Michigan reviewed the factors and the burdens of proof applied in determining what is the domicile of an individual for purposes of diversity jurisdiction. In this instance, it was determined that the defendant is domiciled in Michigan (and not in Florida as the plaintiff asserted), so diversity did not exist and the complaint was dismissed. Art Van Furniture LLC v. Zimmer, Civil Act. No. 19-CV-10880, 2019 WL 2433245 (Ed. Mich. June 11, 2019).
Art Van Furniture filed suit against Zimmer, who reading between the lines of the opinion appears to have been a former employee thereof, as well as several other furniture companies for whom Zimmer is now working. In its complaint, Art Van identified itself as being a citizen of Michigan, the other defendant companies as citizens of Wisconsin, and Zimmer as a citizen of Florida and New York. Zimmer sought to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6) on the basis that in fact he is a citizen of Michigan and diversity jurisdiction does not exist. Shortly before this action was filed, Zimmer began working for defendant Kingswere Furniture, LLC in Tampa, Florida, where he resided in an apartment. On that basis, it was asserted that he was a citizen of Florida. In the alternative, it was pointed out that he owned property in New York and had there as well filed tax returns and registered a car; on that basis, it was asserted that he could be a citizen of New York. In opposition, Zimmer filed a series of declarations explaining that, while he might be working in Florida, his family remains in Michigan and that it is to Michigan that he intends to ultimately return.
On the facts, it was held that the plaintiffs had not met their burden of demonstrating that Zimmer is domiciled in Florida (as contrasted with merely resident there from time to time). The court went on to observe that:
But residency, minus intent to remain permanently, does not equal domicile. Nor do the facts that Zimmer owns property in, or that he is paid taxes in, or that he has a driver’s license from another state shed any light on the critical question of where he permanently resides and intends to remain.
In contrast, Zimmer avers that he is currently registered to vote in Michigan, that he lives in Florida only during the week and only for work purposes, that Michigan is his and his family’s home and the place of his primary residence, and that he intends to remain in Michigan indefinitely.
On that basis, it was held that Zimmer is a citizen of Michigan. There being no diversity jurisdiction, the suit was dismissed.
Friday, June 21, 2019
Federal District Court Addresses Derivative Actions, Allows Case to Proceed
In January 2018, the Federal District Court for the Eastern District of Kentucky (Judge Reeves) dismissed, without prejudice, a lawsuit brought in connection with a number of family-owned business entities, it being alleged that those in control had manipulated the structure to divert to themselves nearly $75 million. The primary bases for that dismissal was the absence of demand upon those in control of the corporations and LLCs to take action. See Smith v. Tarter, 305 F.Supp.3d 733, 2018 WL 506227 (E.D. Ky. Jan. 22, 2018). HERE IS A LINK to my review of that decision.
In what may be fairly characterized as “Round II” to this dispute, the plaintiffs have re-filed the action after taking a variety of actions including calling board meetings and submitting written demands for action. With the case now pending before Judge Caldwell, she has generally found the complaint is sufficient to proceed. C-Ville Fabricating, Inc. v. Tarter, Civ. Act. No. 5:18-CV-379-KKC, 2019 WL 1368621 (E.D. Ky. March 26, 2019).
Judge Caldwell noted that in the prior action, it had been concluded that an individual shareholder does not have standing to bring a direct cause of action when the only injury being asserted is dimunition in the value of the corporate shares. 2019 WL 1368621, *5, citing 305 F.Supp.3d at 739. Likewise, Judge Reeves had held that the plaintiffs had not demonstrated that the futility exception applied. 2019 WL 1368621, *5, citing 305 F.Supp.3d at 742-44.
Since then, the plaintiffs have taken a number of actions. First, they sent a round of demand letters to the current directors and managers of the various companies that “explicitly requested the Boards of the corporations and the member/managers of the LLCs to vote on the specific issue of whether to sue the Defendants - Joshua Tarter, Thomas Gregory, and QMC for their supposed misdeeds.” 2019 WL 1368621, *5. Secondly, the plaintiffs called a meeting of the Board of Directors of Tarter Industries that passed a resolution authorizing the corporation to bring suit against the defendants. They then filed this new action. As described by Judge Caldwell, “the Plaintiffs argue that the standing deficiencies of their first complaint have been cured, pointing to the newly issued demand letters and the Tarter Industries Board resolution.” Id. *6. In response, defendants brought a number of motions to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).
Initially, with respect to the plaintiffs’ assertions that they individually had standing to pursue the claims, as they had been in the initial action, those claims were dismissed.
With respect to the direct action authorized by Tarter Industries against the defendants, they challenged the resolutions authorizing those suits on a variety of basis including who received notice and assertions of bad faith and inherent conflict of interest. Factually, it was found that the proper persons received proper notice of the meeting. The charge that one of the parties to that vote had a conflict of interest based upon the assertion that, if one of the defendants were found liable he would be required to give up his shares and shift them to her side of the family, thereby giving them control, was found to be speculative and at least at this stage of the dispute insufficient to require an abstention. On those bases, the direct suit by Tarter Industries against the defendants was allowed to proceed.
With respect to a derivative standing, the defendants began with an assertion that the plaintiff actors “are not the ‘fair and adequate’ representatives of the other shareholders of the Tarter Companies, citing Federal Rule of Civil Procedure 23.1(a), under which a derivative proceeding “ ‘may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members who are similarly situated in enforcing the right of the corporation.’” 2019 WL 1368621, *9. The court recited the eight factors utilized in the Sixth Circuit, as set forth in Davis v. Comed, Inc., 619 F.2d 588, 593-94 (6th Cir. 1980). Judge Caldwell would find that the claims that the plaintiffs were not “fair and adequate” representatives were unavailing and that “on balance, [ ] the plaintiffs have adequately pleaded that they are fair and adequate representatives of the shareholders of the Tarter Companies.” Id., *10. The plaintiffs then went on to challenge the demand letters on the basis that they were sent to those who “might be Directors” this was found to be unavailing. Rather, while there was some confusion as to who might be directors and officers of various companies, a consequence of numerous failures to hold annual meetings and elect directors, the sending of demand letters to every possible recipient was the appropriate approach. An assertion that the failure to take action by the Board of Directors should be protected by the Business Judgment Rule was rejected because of an absence of a showing of any investigation.
From there the court turned to a variety of defenses under Rule 12(b)(6) with respect to RICO, Defend Trade Secrets Act and Kentucky Uniform Trade Secret Law. A claim for misappropriation under the Defend Trade Secrets Act was upheld even as claims for aiding and abetting breach of the DSTA were dismissed on the grounds that it does not provide for aiding and abetting liability. Likewise, a claim for conspiracy to misappropriate under the DTSA was struck down on the basis that there is no claim for conspiracy to misappropriate. A direct claim under the Kentucky Uniform Trade Secrets Act was allowed to proceed while aiding and abetting and conspiracy claims thereunder were dismissed. Likewise, RICO claims were allowed to proceed. The court found that, for example, the predicate act of money laundering had taken place. In addition, a faithless servant doctrine claim was set aside, there being a lack of authority for the proposition that the Kentucky Supreme Court would adopt that doctrine when presented with the opportunity.