Sunday, September 29, 2019
Presentation at UK Law from the KBA Section of Business Law
This Tuesday, several practicing attorneys will be meeting with the Business Law Society of UK Law to discuss what our practices entail on a day-to-day basis. This event is taking place in no small part thanks the organizational efforts of Tommy Staffieri, President of the Business Law Society.
The presenters and what we will address are:
· Laura Holoubek (née D’Angelo) (Dinsmore) – Equine Law;
· Laura Pentova (Valvoline) – In-House Counsel, Foreign Corrupt Practices Act;
· Maddie Schueler (Dean Dorton) - State and Local Taxation;
· Stacy Kula (Steptoe) - Alcoholic Beverage Regulation; and
· Tom Rutledge (Stoll Keenon) - Business Entities, Mergers and Transactions.
Hopefully the students will come away with an appreciation of the range of practices that fall under “business law.”
The Battle of Salamis
Today is the anniversary of the Battle of Salamis, which took place in 480 B.C.
A decade earlier Darius of Persia invaded Greece. It was the famous victory at Marathon that put an end to that venture.
Xerxes, successor to Darius, again invaded Greece. Those of you who saw “The 300” know something of how part of this invasion went. BTW, while parts of that movie conform to the sources (“then we will fight in the shade”), much of it does not. For example, Sparta had not one but two kings, and Leonidas had already fallen before the final onslaught and destruction of the Spartan force. Still they had achieved their objective, namely delaying the Persians.
At Salamis the Greek fleet attacked that of Persia and won a major victory. The Persian army, fearing that it would be trapped in Greece, largely withdrew. The remainder met the Greek army the next year at Plataea. It was at Plataea that the exhortation with which The 300 opens and closes takes place. That battle was not the set piece that is indicated in the movie, but it did result in a Greek victory.
There were no more Persian invasions of Greece.
Saturday, September 28, 2019
The Execution of Pompey Magnus
Today is the anniversary of the assassination of Pompey the Great on his (almost) arrival in
Today is also the anniversary in 1066 of the arrival of the troops of William of Normandy (soon to be “the Conqueror”) in
Friday, September 27, 2019
Dass v. Yale Is No More
Dass v. Yale, 2013 IL App. (1st) 122520, is a rather famous (infamous?) decision from Illinois holding that, because members and managers of an LLC enjoy limited liability, the manager of an LLC who knowingly misrepresented the status of a condo that he was selling could not be held liable for his misrepresentations. Reviews of the decision include Steven G. Frost, Jeff Close and Joe Lombardo, Dass v. Yale: Members and Managers of an Illinois LLC Are Not Liable for Their Tortious Conduct, J. Passthrough Entities, May-June 2014, 31.
This decision has been roundly criticized as an over-broad application of the rule of limited liability, it being argued it was never intended to protect persons from liability for their own tortious conduct. Subsequent decisions including Fifth Third Mortgage Company v. Kaufman, 934 F.3d 585 (6th Cir. 2019) ((attorney and owner of title company organized as LLC personally liable for participation in fraudulent mortgage scheme, rejecting defense of Dass v. Yale), affirming Fifth Third Mortgage Co. v. Kaufman, 2017 WL 4021230 (N.D. Ill. July 25, 2017)), have sought to avoid applying its rule.
Stepping into the void, the 2019 Illinois legislature, effective January 1, 2020, has amended the Illinois LLC Act to in effect overrule Dass v. Yale. Ill. Public Act 101-0553. To the limited liability provision of the Illinois LLC Act, 805 ILCS 180/10-10, there was added a new subsection that reads as follows:
Nothing in subsection (a) or subsection (d) limits the personal liability of a member or manager imposed under law other than this Act, including, but not limited to, agency, contract, and tort law. The purpose of this subsection (a-5) is to overrule the interpretation of subsections (a) and (d) set forth in Dass v. Yale, 2013 IL App (1st) 122520, and Carollo v. Irwin, 2011 IL App (1st) 102765, and clarify that under existing law a member or manager of a limited liability company may be liable under law other than this Act for its own wrongful acts or omissions, even when acting or purporting to act on behalf of a limited liability company. This subsection is therefore intended to be applicable to actions with respect to which all timely appeals have not exhausted before the effective date of this amendatory Act of the 101st General Assembly as well as to all actions commenced on or after the effective date of this amendatory Act of the 101st General Assembly.
On this day in the year 1590, Pope Urban VII passed away. His papacy began on September 15, 1590; he had been Pope for less than 12 days. Prior to his elevation to the Holy See he had a distinguished career as a diplomat throughout Europe, and he was eminenetly qualified for the position. He died of malaria.
He did, however,cduring his short papacy, institute a smoking ban, threatening to excommunicate anyone who “took tobacco in the porch way of or inside a church, whether it be by chewing it, smoking it with a pipe or sniffing it in powdered form through the nose.” The prohibition was ultimately repealed a century later by Pope Benedict VIII.
Wednesday, September 25, 2019
The Last Viking Invasion of England
Today is the anniversary of the battle at Stamford Bridge in 1066, it ending, for all intents and purposes, the Viking invasions of England. Beginning in the 8th century and the famous raid of Lindesfarne (June 8, 793), England had repeatedly suffered both Viking raids and invasions/migrations. King Canute II (one of only two English kings denominated “the Great”) was an aspect of this chain of events; he was himself Danish.
King Edward the Confessor died on January 5, 1066; he was childless. The crown was assumed by Harald Godwinson. His dispute with William the Bastard of Normandy over whether Harald had previously agreed to surrender the crown to William would ultimately lead to the Battle of Hastings. In the meantime, Harald Godwinson had to deal with an invasion from Norway led by another claimant to the throne, Norwegian King Harald Hardrada; Hardrada was supported in this invasion by Tostig Godwinson, Harald Godwinson’s brother.
Two factors were crucial to the resolution of the battle. First, the invading force was dispersed on both sides of the river. Thus, when the English army attacked the Norse contingent on the south side of the river, they outnumbered their opponent. Second, the intelligence of the Norse army failed; they did not realize the English army was already present and ready to launch an attack. Another factor whose weight is unknown is that the invading army has days earlier defeated an English army led by Earls Morcar (exciled Northumbrian) and Edwin (Mercia) (The Battle of Fulford), possibly leading to complacency.
It being a warm day, the invading army had left much of their armor on board their ships. Initially, the English forces largely massacred the Norse forces on the south side of the river. They then proceeded to attack over the bridge, an effort that, in what was an apocryphal story, was delayed by a single Viking yielding an ax who single-handedly killed some forty soldiers before he was himself slain. With the English having now crossed the bridge, the two armies again faced one another. Ultimately, the Norse army would collapse consequent to its lack of armor and the deaths in battle of both Harald Hardrada and Tostig. The few Normans who survived the battle entered into a truce with Harald agreeing to leave and never return. While the invading fleet filled some 300 ships, the Norse survivors of the battle were able to return home in only 24 of them.
Monday, September 23, 2019
No Conflict in Election of Remedies Between Single-Member LLC and Sole Member
A recent decision from California, Orozco v. WPV San Jose, LLC, 36 Cal. App. 5th 375, 248 Cal. Rptr. 3d 623 (2019) involved a lease entered into by an LLC and a guaranty of the lease signed by the sole member. When litigation arose, the LLC elected to affirm the lease (even though the landlord had engaged in fraudulent conduct at the time it was entered into) even as the sole member sought rescission. While the trial court held that they could not elect differing remedies, the Court of Appeals reversed and held that they could.
Orozco, on behalf of his LLC, entered into the lease for the operation of a gourmet hotdog stand in what was apparently a popular strip mall featuring a number of restaurants. In response to his inquiries, he received repeated assurances that the landlord was not looking to bring on any potential competitors. In fact discussions with a competitor were ongoing, and by the time Orozco signed the lease on the LLC’s behalf the landlord had in its pocket a signed lease from a competitor. Orozco, individually, signed a guaranty of the lease. While the restaurant was an initial success, once the competitor opened its doors approximately six months after its opening, the sales at his restaurant declined to the point it ultimately closed.
In the suit brought by the LLC and Orozco against the landlord, the LLC, rather than seeking rescission of the lease, sought damages including for lost profits. Orozco, individually, sought to rescind his guaranty of the lease. Under California law, a claim for damages and a claim for rescission are mutually exclusive and a party to a lawsuit must elect which they will seek. In this case, because the LLC had elected a claim for damages, and on the basis that the lease and the guaranty were intertwined, the trial court held that Orozco could not seek rescission of his guaranty.
Reversing the trial court, the California Court of Appeal said that the focus is not on the degree to which the agreements are interrelated, but first upon “whether Orozco and [his LLC] are legally separate entities.” From the answer to that question, it being “yes,” and as the agreements gave rise to distinct obligations, the court held that Orozco could seek rescission even while his wholly-owned LLC could seek damages.
On that basis the matter was returned to the trial court for further rulings. Also, finding that Orozco could seek rescission of the guaranty, there was returned to the trial court the determination of whether he would, under the guaranty agreement, be entitled to attorney fees.
Friday, September 20, 2019
At Least For Not, We Don’t Know
As discussed earlier this year, a question of interpretation of the South Dakota LLC Act was certified to the South Dakota Supreme Court, that question arising out of SDIF Limited Partnership II v. Tentexkota, LLC. HERE IS A LINK to that prior review.
As presented to the South Dakota Supreme Court, the certified question involved whether the grant of limited liability to the members of an LLC could preclude the enforcement of certain personal guarantees given by members for company indebtedness.
The question, at least for the time being, will not be answered. The case settled, and the Federal District Court that had certified the question has dismissed it. On that basis, the South Dakota Supreme Court deemed the certified question moot and set it aside. SDIF Ltd. Partnership II this Tentexkota, LLC, Order Rendering Certification Moot, South Dakota Supreme Court, File No. 1:17-CV 1002-CVK, # 28825 (Aug. 27, 2019).
Thursday, September 19, 2019
Theodore of Tarsus
Today marks the anniversary of the death, in the year 690, of Theodore of Tarsus. At the time of his death, he was the Archbishop of Canterbury. Probably you have never heard of him. That’s unfortunate; he led a most interesting life.
Theodore was born in Tarsus (the same city as was born Paul the Apostle) on the southern coast of what is today Turkey. He grew up at a time of conflict between the Byzantine Empire controlled out of Constantinople and the Sassanid Empire out of what was then referred to as Persia (today’s Iran). At this time, pre-the rise of Islam, most of the Sassanid Empire was Zorastrian. By the early 600s and the rise of Islam, the Sassanid Empire converted to Islam. As such, through this stage in his life, Theodore had been immersed in classical Persian and then Muslim cultures even as he studied classical Western and Christian studies. Ultimately, he relocated first to Constantinople and then to Rome, where he entered a monastery and continued his studies.
Following the death, before consecration, of a man intended to be the Archbishop of Canterbury (a certain Wighard), Theodore was chosen by the Pope to fill that vacant See. He was consecrated as the Archbishop of Canterbury in Rome, and at some point thereafter departed for England. Once in England, he took steps with respect to a variety of issues ranging from the calculation on what day Easter should be held in a variety of matters of church discipline. He is well served as a mediator in a number of political disputes. He as well founded a famous school at Canterbury. Many factors of his time as the Archbishop of Canterbury are known through Bede’s Ecclesiastical History of the English People.
He would ultimately die in Canterbury at the age of approximately 88.
So there you have it. Theodore was born in southern Turkey, lived under both the Persian Sassanid and then the Persian Islamic Empires, studied in Constantinople and then in Rome, and spent over 20 years as the Archbishop of Canterbury. This suggesting the people in the Middle Ages did not travel far from where they were born is simply not accurate.
Wednesday, September 18, 2019
Ohio Court Addresses Consequences of Resignation From An LLC
In a recent decision from Ohio, the court addressed the efficacy of a member’s resignation from an LLC, the impact of that resignation upon that now former member’s personal bankruptcy filing, and as well title ownership to certain domain names that the member had secured on the LLC’s behalf. Cutting to the chase, the resignation was effective, the efforts to undo the resignation were ineffective, the resignation and the impact thereof as defined in the operating agreement were not limited by the ipso facto clauses of the Bankruptcy Code, and the domain names belong to the LLC. In re: LaGroux (AllCare Medical Services, LLC v. Buzulencia), Case No. 17-40198, Adversary Proceeding No. 17-4045, 2019 WL 3933797 (Bankr. N.D. Ohio Aug. 19, 2019).
LaGroux had been a 25% member in AllCare Medical Services, LLC (“AllCare”). In this Adversary Proceeding, it sought rulings with respect to the efficacy of his resignation from the LLC and the impact thereof. It also sought a determination that certain Internet domain names that LaGroux had procured were the property of the LLC.
On November 3, 2016, LaGroux emailed two of the three other members of AllCare announcing that effective 6 p.m. that evening he was resigning from the company. The next day, subsequent to the effective time and date of the prior email resignation, he sent an email seeking to undo his prior resignation; the subject line of that email was “Un-resignation.” In response, he received an email from one of the other members, who was as well the chief operating officer of the company, stating that the un-resignation was rejected and that the resignation would stand. In December, 2016, LaGroux began working as a consultant for Greenleaf, a competitor of AllCare. AllCare’s operating agreement provided a member could not consult with a competitor.
On February 9, 2017, LaGroux filed a voluntary petition under Chapter 7 of the Bankruptcy Code. His Schedule A/B indicated that he held a 25% membership interest in AllCare. He did not on his initial Schedule A/B list any of the Internet domain names, and he did not bring them up at his Section 341 meeting of creditors. He subsequently amended his Schedule A/B to include the domain names. Also, he changed the passwords to the domains notwithstanding that he had previously given those passwords to Gobbi, another member of the company and its chief operating officer.
The first issue addressed by the court was the resignation/un-resignation. It was found that the resignation was effective in that AllCare’s operating agreement allowed a member to voluntarily resign. The email was found sufficient to satisfy the “written notice” of the Ohio LLC Act and specifically Ohio Rev. Code § 1705.16. That being the case, the un-resignation email was insufficient to change his status in that, at that point in time, he was no longer a member of the company and AllCare’s operating agreement provides that the addition of a new member required the unanimous consent of the then current members. In that the members other than LaGroux, now a former member, had not consented to his admission as a member, “the ‘un-resignation’ email did not reinstate LaGroux’s membership in AllCare.” 2019 WL 3933797, *5.
In what may be dicta, the court noted as well that had LaGroux actually been re-instated as a member of the company, his work on behalf of a competitor, commenced in December, 2016, would have violated the terms of AllCare’s operating agreement.
LaGroux admitted at trial that Greenleaf is in the same business as AllCare. As AllCare’s duty of loyalty provision does not allow LaGroux to invest or engage in any business with a competitor, LaGroux would have known that he would have been in violation of AllCare’s operating agreement by working as a consultant for Greenleaf. Because he likely would not have acted in violation of the operating agreement if he believe he still had a noneconomic interest in AllCare it is more likely that LaGroux believed he had only an economic interest in AllCare at that time.
As such, the time of his bankruptcy filing, LaGroux was not a member in the LLC, but rather the holder of a bare economic interest. The fact that he continued to be reflected as a member for tax purposes did not impact upon the state law effects of his resignation and the consequent loss of member status. Id.*6.
The trustee argued that the provisions of the Ohio LLC Act and AllCare’s operating agreement should be subordinated to federal bankruptcy law. Specifically, it was argued that “any provision of the operating agreement that was triggered by LaGroux filing bankruptcy and led to his disassociation is an ipso facto provision and should not be permitted to prevent the transfer of LaGroux’s interest to LaGroux’s estate.” Id. The trustee as well argued that he was not obligated to sell LaGroux’s interests pursuant to the redemption provisions of the operating agreement. Id. With respect to the ipso facto argument, it was found that the argument is inapplicable. “The court has determined that LaGroux withdrew from AllCare prior to filing bankruptcy. That means that LaGroux gave up his noneconomic interest in AllCare upon his withdrawal and only held an economic interest at the time of filing. Because LaGroux only possessed an economic interest when he filed for bankruptcy, LaGroux’s estate similarly can only hold an economic interest.” Id. There was rejected the trustee’s argument that the trustee is not bound by the right of redemption set forth in the operating agreement and the attendant of valuation provision, it was held that the trustee is bound by those provisions. As the provision was applicable to any former member, and not merely upon a member’s bankruptcy:
[T]he right of first purchase provision is in effect any time a member withdraws from AllCare and is not an ipso facto provision. At the time LaGroux withdrew from AllCare prior to his bankruptcy filing, LaGroux was required to comply with this provision of the operating agreement. Thus, the trustee in this case is not excused from complying with this provision of the operating agreement. Id.*7
Subsequent to LaGroux’s bankruptcy filing, another member in AllCare, Simmons, sold all of his interests to the remaining members. The trustee’s assertion that the estate should have been allowed to participate in that acquisition was rejected on the basis that LaGroux was not a member in the LLC on that date, and therefore could not exercise a member’s right to participate in the purchase.
With respect to the domain names, and undertaking a factual analysis, it was found that LaGroux held mere legal title. It was suggested by the court that AllCare could file a motion for an order of abandonment in LaGroux’s bankruptcy case with respect to those domain names.
Tuesday, September 17, 2019
Absent a Special Relationship, Good Faith and Fair Dealing is Not a Standalone Claim
I was recently rereading the decision rendered in Hackney v Vascular Solutions, Inc., Civ. Act. No. 3:12-CV-00170-CRS, 2018 WL 2970767 (W.D. Ky June 13, 2018), and thought it worth a note.
This dispute arose out of the construction of an employment agreement. In connection therewith, Hackney bought claims including one arising in tort for breach of the implied covenant of good faith and fair dealing. This decision addressed Vascular Solutions’ claim for summary judgment as to that allegation, which was premised on the position that Kentucky does not recognize a claim for tortious violation of the implied covenant of good faith and fair dealing. Previously, the trial court had granted, and there had been affirmed by the 6th Circuit, summary judgment against Hackney's claim for violation of the contractual obligation of good faith and fair dealing.
After noting that the obligation of good faith and fair dealing exists in every contract, the court wrote:
Breach of this covenant can also serve as the basis of a tort claim, but only where the contract at issue was entered into by parties with some ‘special relationship’ “not found in ordinary commercial settings.” To date, “Kentucky courts have only recognized the existence of such a relationship in the context of insurance contracts.” Other circumstances which may give rise to a ‘special relationship’ include where the parties bargaining power is unequal or there is some relationship of trust between them, where one party is particularly vulnerable, where the parties have nonprofit motivations for contracting. 2018 WL 2970767, *2 (citations omitted).
Finding that this what is an employment contract, not an insurance contract, dispute, the court held that there was no special relationship that would give rise to a claim in tort for breach of the implied covenant and good faith and fair dealing.
Monday, September 16, 2019
Trustee's Waiver of Attorney-Client Privilege
In the decision rendered August 29, there was affirmed the capacity of the bankruptcy trustee to waive the attorney-client privilege of the corporate debtor. United States v. Sanders, Case No. 5:19-CR-00068-JMH, 2019 WL 4125631 (E.D. Ky Aug. 29, 2019).
Trailblazers, Inc. was wholly owned by Sanders. It filed for Chapter 11 bankruptcy in August, 2013. There were subsequently found to be “multiple counts of fraudulent concealment of monetary transfers in contemplation of bankruptcy”, whereupon a Trustee, James Lyon, was appointed. The Chapter 11 was subsequently converted to a Chapter 7.
Lyon, on behalf of Trailblazers, then waived the attorney-client privilege as to Trailblazers. This decision arose out of an effort to confirm that waiver was effective for both pre-and post-petition communication between Trailblazers and its attorneys. Sanders argued that the trustee could not waive the attorney-client privilege as to communications that predated the trustee’s appointment. Relying upon Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 348-49 (1986), it was held that Lyons’s waiver was effective for pre-appointment communications. The court wrote that:
[O]nce a trustee is appointed to be the fiduciary of the corporation, the power to waive the attorney-client privilege as to its former communications cannot be ceded back to previous management.
Thursday, September 12, 2019
Athenian Forces Defeat Invading Persians at Marathon
Today might be the anniversary of the great battle, fought in 490 at Marathon, at which the forces of Athens defeated the Persian invasion sent by Darius the Great. The exact date of the battle is subject to controversy, although there is something of an alternative consensus on the 21st.
At the time of the battle, the Persian Empire extended from the western boundaries of what is today India across the Middle East, Turkey and to Southwest Europe. Darius had decided that the land we refer to today as Greece, inhabited by a variety of city-states, would be next incorporated into his empire. An invasion fleet landed its troops some 26 miles northeast of Athens at the Bay of Marathon. Working with collaborators in Athens, it was thought that the army could be drawn away and destroyed even as the collaborators led an internal revolt, taking control of the city and making it available to Darius. It would not turn out that way.
At news of the landing, Athens sent word to Sparta seeking its assistance, the Spartan hoplite troops being the strongest force in the region. Famously, the Spartans were unwilling to send their forces in light of an upcoming religious festival. In consequence, Athens would stand alone. The Athenian army, well smaller than the Persian forces, camped facing their enemy for over a week. On the 8th day, seeing that the Persians were re-embarking some troops onto ships and fearing that they intended to launch a direct assault on Athens, the Greek forces attacked. Although outnumbered, by skillful flanking maneuvers the Greeks were able to envelop the Persian forces. While the historical records recite what must be grossly inflated figures, certainly the Persians lost in excess of 6,000 men while the Greeks lost fewer than 200.
Although not recounted in the contemporary historic record, a runner took off to announce the victory to Athens. Just over 26 miles later, he entered the city, announced “nickomen” (“victory”) and dropped dead from exhaustion. Meanwhile, the balance of the Persian army embarked on their ships and set out from the Bay of Marathon with the intent of directly attacking Athens. The Athenian army force-marched itself back to the city, manning its walls as the Persian fleet approached. The Persians decided that another attack was not in their best interest and they withdrew.
A decade later, the Persian forces under Xerces, son of Darius, would again invade Greece. They would ultimately fall victim to the Spartan and allied forces at Thermopylae, the Greek naval forces at Salamis and again the allied forces at Plataea.
Wednesday, September 11, 2019
Tuesday, September 10, 2019
Battle of Thermophylae
Today, by one reckoning, is the anniversary of the climax of the Battle of Thermopylae in 480 B.C. The record is not clear – the battle may be dated to August 7-9, August 18-20 or September 8-10.
Darius, King of the Persians, had invaded Greece in 490 B.C. Meeting an almost exclusively Athenian force at Marathon, his army was decimated while the Athenian force suffered relatively few casualties. A runner (so it is said) took off to announce the victory to the population of Athens. Just over 26 miles later he entered the city, announced “Nikomen” (victory) and dropped dead from exhaustion. Meanwhile, part of the Persian fleet had broken off to attack Athens. The force at Marathon marched back to the city, manning its walls as the fleet approached.
The Persian fleet and army withdrew from Greece.
A decade later Xerces had succeeded Darius as the Persian King, and he resolved to subdue the Greeks. Gathering a huge army (said to be over a million but likely not larger than 100,000), he invaded Greece. A force led by 300 Spartan hoplites (heavy infantry) and several thousand others Greek troops, all under the command of Sparta’s King Leonidas, resolved to block the Persians at Thermopylae.
For two days the Greek forces, taking advantage of the small front, it minimizing the advantage in numbers of the Persian forces, fought them to a standstill while suffering minimal casualties. Those overwhelming numbers were, however, the basis of Dienekes’ boast, as reported by Herodotus, in response to the assertion that the Persian arrows will block out the sun, “Good, then we will fight in the shade.” Ultimately, the Persians were shown how to outflank the Greek forces, but not before two of Xerces’ brother were killed. Most of the Greek forces withdrew while the Spartan forces, along with certain others, stayed as a rear guard to hold off the Persians as long as possible. In the last day of fighting the Spartans were annihilated; some of the other Greek troops surrendered.
Notwithstanding the movie “The 300,” Leonidas did not fight in the final segment – he had already been killed. That is not, however, the largest problem in the popular understanding of the Greco-Persian Wars. The runner to Athens after the Battle of Marathon is not supported in the historic record, and is first recorded in the writings of the Roman Lucian.
Legal Ethics Program at ABA Section of Business Law Annual Meeting
This Thursday morning my law partner A.J. Singleton will be chairing a program at the Annual Meeting of the ABA Section of Business Law. The title of the program is Ethical Issues With Respect To Law Firm Ownership and Ancillary Practice. Presenting with other luminaries in the field including Robert “Bob” Keatinge, this program will consider challenges faced by the legal industry including the question of whether law firms may be owned by non-attorneys and to what degree may attorneys, without running afoul of their ethical rules and obligations, provide non-legal services to their clients?
The Crucial Relationship Between Purpose and Judicial Dissolution
Under Kentucky law, a limited liability company may be dissolved upon a showing that it is not reasonably practicable to operate the company in accordance with the operating agreement. In a case recently decided by the Kentucky Court of Appeals, it was held that as what the company is currently doing, namely holding real property for use as a parking lot, that being one of the purposes listed in the operating agreement, no bases for judicial dissolution was shown. Blue Equity Holdings Kentucky, LLC v. Cobalt Riverfront Properties, LLC, No. 2018-CA-001092-MR, 2019 WL 4127610 (Ky. App. Aug. 30, 2019). While this opinion is itself designated as “Not To Be Published,” this appears to be the first ruling of the Kentucky Court of Appeals with respect to the judicial dissolution of an LLC.
Again, KRS § 275.290(1) provides that an LLC is subject to judicial dissolution when “it is not reasonably practicable to carry on the business of the [LLC] in conformity with the operating agreement.” From there, in this decision, the court focused upon the purpose clause in the operating agreement. It found that the LLC was in fact being operated in conformity therewith. The purpose clause included operating the property as a parking lot, and that is what was being done. On that basis, the application for judicial dissolution was denied, and the Court of Appeals upheld that determination.
Peter Mahler, in his (excellent) blog New York Business Divorce, has reviewed this decision in a posting made on September 9 titled Paved Paradise, Put Up a Purposeful Parking Lot; HERE IS A LINK to his posting. As he has already set forth a well-structured analysis to this decision, I will not attempt to repeat his good work.
That said, purpose clauses are crucial provisions of operating agreements that are often passed over, the agreement reciting only that the LLC “may engage in any lawful activity.” The benefits of greater specificity are a topic I reviewed in an article titled Purpose: If You Don't Know Where You Are Going, How Will You Know If You Have Arrived; HERE IS A LINK to that article.
Monday, September 9, 2019
Operating Agreements from the Minority Perspective
This Thursday morning at the Annual Meeting of the ABA Section of Business Law, I will be moderating a program on operating agreements from the minority perspective. The formal name of the program is Operating Agreements from the Minority Perspective: Rosencrantz and Guildenstern are Dead. With me on the panel will be two leading authorities on these topics, namely Professor Robert Thompson of the Georgetown Law Center and Professor Jim Wheaton of the Boston University Law Startup Law Clinic.
As has been observed by the Delaware Chancery Court, typically the rights of a member in an LLC begin and end with the operating agreement. As between those members in the minority versus those in the majority, the allocation of rights and obligations in the operating agreement is typically zero-sum. The various LLC Acts utilize any number of rules allocating control as to a particular action (e.g., approval of an amendment to the operating agreement, approval of an organic transaction such as a merger) to either the majority owner, a super-majority or all of the members. These rules are typically modified in operating agreements.
Our program will review any number of issues and items that should be scrutinized by the minority member (and their attorney) to understand what control is being granted the majority owners versus what level of control is held back by the minority. Flipping over that coin, these same issues should be on the radar screen of the majority who wants to exercise control so that they can confirm that the operating agreement affords them that control.
Friday, September 6, 2019
An LLC Does Not Have, For Purposes of Diversity Jurisdiction, a Principal Place of Business
In a recent decision from Alabama, there was reiterated the test for what is the citizenship of an LLC. In the course of that review, it was again made express that an LLC’s principal place of business does not impact upon diversity jurisdiction analysis. Glovis Alabama, LLC v. Richway Transportation Services Inc., Civil Action 18-00521-KD-N, 2019 WL 4039626 (S.D. Ala. August 27, 2019).
In this instance, the court had to repeat (it had apparently gone over the same point earlier in the lawsuit) the rules for determining, for purposes of diversity jurisdiction, the citizenship of an LLC. The plaintiff kept looking to where an LLC has its principal place of business. Rather, only the citizenship of the LLC’s members is relevant. In this instance, the sole member of the LLC was a business corporation, and its principal place of business would be attributed to the LLC:
For diversity purposes, Glovis is a California citizen only – not Alabama. This is because the principal place of business of an LLC is irrelevant (LLC citizenship is only determined by the citizenship of the LLC’s members – not the state of the LLC’s incorporation or the LLC’s principal place of business). As such, only the principal place of business of Glovis’ member that is a corporation (Glovis America, Inc. -- Irvine, California) is relevant.
2019 WL 4039626, *6
In support of the above quoted language, there were cited a number of authorities including to Ribstein and Keatinge on Limited Liability Companies §13:6, which was quoted for the proposition that “While an LLC is a citizen of every state in which a member is a citizen, unlike a corporation, it is not a citizen of its state of organization or of its principal place of business for diversity purposes unless a member is a citizen of that state.”
Thursday, September 5, 2019
Bigfoot, Unicorns and Foreclosure Sales of Charging Orders
The evidence for Bigfoot seems to be restricted to some blurry black and white film footage, while evidence for unicorns seems to be restricted to some medieval tapestries and the Ark Encounters Theme Park in Northern Kentucky. Sightings of the foreclosure sale of a charging order are it seems only slightly less rare. Still, in a recent case from Illinois, a number of issues relating to a charging order foreclosure sale were addressed. Preservation Holdings, LLC V. Norberg, 2019 Il. App. (1st) 181136, 2019 WL 2510260 (June 14, 2019).
Norberg was one of several defendants against whom judgments had been entered in Maine; another of the defendants was Gleichman. That Maine court had also entered charging orders against Gleichman’s interest in 51 LLCs and limited partnerships. The Maine judgment was domesticated in Illinois pursuant to the Uniform Enforcement of Foreign Judgments Act, and an Illinois court issued additional charging orders against the 51 LLCs and limited partnerships. The judgment-debtor then moved for a foreclosure sale of those interests. At that time, the plaintiff Preservation Holdings held a judgment against Gleichman for about $800,000; another judgment-creditor, Promenade Trust, held a trio of judgments of some $36,440,000.00.
At the judicial sale conducted by the Cook County Sheriff, Gleichman’s interest in 46 limited partnerships were sold to Promenade Trust for $4.8 million, an amount significantly below the total judgments against Gleichman in favor of Promenade. Promenade moved to have the sale confirmed, to which Gleichman objected on bases including that “the sale price was unconscionably low.” In support of that argument, she submitted an affidavit from a Sean Hamilton, who opined that the price was too low. The Circuit Court found that the Hamilton affidavit was unpersuasive for having valued the wrong assets, namely the real estate held by the various LLCs and limited partnerships, rather than only Gleichman’s distribution interests in the partnerships. This appeal followed.
In the course of the appeal, after determining that the law governing post-mortgage foreclosure sales would serve as a useful guidepost in the absence of a deep body of law on charging order foreclosure sales, it was noted that:
Of course, in a forced judicial sale, the price will be lower than the arm’s-length ideal because the marketplace is constricted. In the forced sale setting, the seller is under judicial compulsion to sell, and the buyers may not have the ability to learn all the relevant facts regarding the asset for sale. So as the NAB Bank [v. LaSalle Bank, N.A. (2013 Il. App. 1st) 121147, 98410 N.E.2d 154 (Il. App. 1st 2013)] court observed, property sold at a for sale does not generate a true fair market value price.
2019 WL 2510260, *4.
The court then rejected Gleichman’s suggestion that the Circuit Court should have sua sponte undertaken its own analysis of the interests sold at the sale, explaining rather that “the sale is presumptively valid, and it is the debtor’s burden to show why the price is unconscionably low.” Id.
Rejecting the Hamilton affidavit as a basis for setting aside the sale, it was observed:
As the Circuit Court correctly found, Hamilton opined as to the fair market value of the real estate owned by the LLCs and limited partnerships, not the value of Gleichman’s distributional interests in them. This is a distinction with a significant difference. A bidder who acquires a distributional partnership interest at a judicial sale does not step into the shoes of his predecessor because the bidder acquires no management role and no right to receive or inspect the books and records of the partnership.
Gleichman then objected that, notwithstanding the fact that the order for the judicial sale had indicated that the various interests should be sold seriatim, in fact the sale had been accomplished as a single group. This argument was rejected on the basis that Gleichman had not raised this objection in the court below as part of the objection to confirmation of the sale and it was thereby deemed waived. Further, she could have attended the sale and there objected:
At the Circuit Court hearing on the motion to confirm sale, counsel for Promenade stated that, besides the sheriff’s staff, only he and counsel for Preservation Holdings attended the sale. The sale was open to the public, nothing prevented Gleichman from monitoring it to ensure that the sheriff conducted at in punctilious conformity with the court's order. We therefore find the point forfeited and will not disturb the confirmation of the sale on this basis.
Wednesday, September 4, 2019
And So Begin the Middle Ages
By a certain measure, today marks the anniversary of the date in 476 from which the “Middle Ages” may be dated. On this day, the last emperor of the Western Roman Empire, Romulus Augustus, who was in his mid-teens and was completely controlled by his father, Orestes, the Magister Militum of the Roman military, was deposed by Odoacer. Orestes had little standing to complain about the over-throw of his son's reign - Orestes had revolted against the prior emperor and put his son on the imperial throne. Odoacer did not bother asserting that he was another Roman emperor; he was to be simply the King of the territories under his control.
With Romulus' resignation the imperial regalia was packed up and shipped off to Byzantium. With this event, the Western Roman Empire ceased to exist, its fragments now under control of various “barbarian” tribes.
The “eastern” Roman Empire centered at Constantinople (Byzantium) would survive another millennium until it fell to the Ottoman Turks in 1453.