Thursday, October 31, 2019

Might Diversity Jurisdiction be Simplified?

Might Diversity Jurisdiction be Simplified?

In any lawsuit involving an unincorporated business organization such as a limited liability company, it can be difficult to determine whether or not the suit may be brought in or removed to federal court on the basis of “diversity jurisdiction.” This difficulty arises from the fact that whether or not diversity jurisdiction is available is dependent in part upon who are the members of the LLC, information that is typically not available. This difficulty in determining the LLC membership (the same problem arises in connection with, for example, general and limited partnerships) has at times led to gamesmanship; essentially, one of the parties asserts “you have to say who all of our members are but we don’t have to tell you.”

Earlier this year that was proposed an amendment to the Federal Rules of Civil Procedure that would require each party to a lawsuit to disclose the information necessary to determine its citizenship. Chris Schaefer and I have recently published a short article on this topic in Business Law Today, that article titled Proposed Change to Federal Rules of Civil Procedure Could Reduce Questions as to Federal Diversity Jurisdiction. HERE IS A LINK to that article. We hope you find it of interest.

Wednesday, October 30, 2019

An LLC is Not a Corporation

An LLC is Not a Corporation

In a recent decision from Indiana, the court made clear that, where a specific statute referred to a corporation, it did not as well extend to a limited liability company. Agee v. NewTek Business Services HoldCo 5, Inc., No. 1:18-CV-02641-JRS-TAB, 2019 WL 4737070 (S.D. Ind. Sept. 27, 2019).

This dispute arose out of the purchase/sale of an LLC and the employment and related agreements entered into by the former owner and the new owner. In connection therewith, the former member, as to claims arising under the employment agreement, sought to enforce a lien under Indiana Code § 32-28-12-1. On the basis that this statute refers to “corporationsand not to limited liability companies, the court rejected that effort. Specifically:

Under Indiana law, employees of a corporation doing business in Indiana “may have and hold a first and prior lien ... for all work and labor done and performed by the employees for the corporation from the date of the employees’ employment by the corporation” Ind. Code § 32–28–12–1(a). As another district court in the Seventh Circuit has held, by the express terms of the statute, this lien “applies only to corporations, which means it is ineffective and invalid against ... a limited liability company.” Fritz v. Coffey, No. 1:07-CV-115-TS, 2008 WL 2444552, at *4 (N.D. Ind. June 16, 2008). As the Fritz court reasoned, “[t]he plain text mentions only ‘corporations’ and includes no references to other business entities in general or particular examples, such as limited liability companies or partnerships. This approach is reinforced by the inclusion of limited liability companies and other business entities in other Indiana lien statutes.” Id.

 Banc-serv, however, is not a corporation; it is a limited liability company. Agee argues that the law is dated, that LLCs are “a relatively new creations of statute,” (Pl.’s Resp. 15, ECF No. 14), and the Court should extend its protection to LLCs. Agee cites no case interpreting the lien statute in this manner, and the Court is unaware of any such authority. Also, as noted by the Fritz court, the Indiana legislature has included limited liability companies in other lien-related statutes, but did not include LLCs in this statute. 2008 WL 2444552, at *4. Furthermore, under Indiana law, a court attempts to give effect to legislative intent only when the statute is ambiguous; the employees’ lien statute is not ambiguous: it applies only to employees of corporations. Agee’s employee’s lien is invalid and ineffective, and she has failed to state a claim to enforce an employee’s lien. So the motion to dismiss should be granted as to Count VI. 2019 WL 4737070, *9.

Tuesday, October 29, 2019

Texas Decision Highlights “Fraudulent Joinder” and the Need for an Independent Claim

Texas Decision Highlights “Fraudulent Joinder” and the Need for an Independent Claim

A recent (and short) decision from Texas illustrates the rules with respect to “fraudulent joinder” and diversity jurisdiction. In doing so, it makes clear that a plaintiff must have an independent cause of action against each defendant. Hopkins v. Family Dollar Stores of Texas, L.L.C., Civ. Act. No. 2:19-CV-243, 2019 WL 5293488 (S.D. Tx Oct. 18, 2019).

One basis on which a suit may proceed in federal court is that there is “diversity jurisdiction” under 28 U.S.C. 1332. In order for diversity to exist, not only must the suit seek damages exceeding $75,000, but as well no defendant may have the same citizenship as does any plaintiff. In this decision, the court found that it could ignore the citizenship of one of the defendants because she had been “fraudulently joined.”

The plaintiff, Hopkins, alleged a suit based upon a slip and fall in a Family Dollar Store. She named not only the LLC that owned and operated the store, but also Linda Wright, a Texas citizen who was the store manager. After Hopkins filed her suit in state court, Family Dollar removed it to federal court. The subject of this opinion was Hopkin’s effort to have this suit returned (“remanded’) to the state court in which she had filed it, apparently believing that to be a court system that would be more favorable to her claim.

She alleged that as she is a Texas citizen, and so is Wright, diversity jurisdiction did not exist. That determination would be rejected by the court, and remand was denied. One basis by which a person can be found to be fraudulently joined to a suit is where the plaintiff has no cause of action against them. In this instance, while Hopkins named Wright as a defendant, she failed to identify any basis for a claim against her. Rather, the court wrote that Wright had no duty to Hopkins “separate and apart from her employment and role as manager in control of the store at the time of the events of the lawsuit.” Applying the law to these facts:

In Texas, individual liability against an employee arises only when the employee owes an independent duty of reasonable care to the injured party apart from the employer’s duty of care. …. Because Plaintiff has not alleged facts to implicate a breach of duty by the store employees separate and apart from the duty owed by the store, Linda Wright was improperly joined. Her non-diverse Texas citizenship does not destroy diversity.

The Laundromat: A Review

The Laundromat: A Review

There was recently released on Netflix the movie The Laundromat, an adaptation of the book Secrecy World: Inside the Panama Papers, it being based on the Panama law firm Mossack Fonseca
Not having Netflix, I have not seen it. However, Professor Ann Lipton has, and she has posted a review of the movie on the Business Law Prof Blog. HERE IS A LINK to that posting.

Monday, October 28, 2019

Erasmus - Prince of the Humanist

Erasmus — Prince of the Humanist
     Today is the anniversary of the birth of Erasmus of Rotterdam, the Prince of the Humanist.  Erasmus devoted his career and his mastery of Latin and Greek to translating and commenting upon sacred texts including a new translation of the Bible and non-sacred literature such as the writings of Seneca.  Along the way he wrote the Colloquies and the Adages, social commentary such as the Praise of Folly and on the need for internal reform of church practices including the Julius Exclusus.  
     He and Sir Thomas More were the best of friends, and the Praise of Folly was written while he was staying with More.
     It’s not that I think a lot of Erasmus, it’s just that I have copies of his portrait hanging in both my house and my office.
     While we are sure that October 28 is the date of his birth, we are not sure of the year.  Strong cases can be made for 1466 and 1469.

Shake Up At the Delaware Supreme Court

Shake Up At the Delaware Supreme Court

      Early this fall, Chief Justice Leo Strine of the Delaware Supreme Court announced that he would be retiring. Last week, Delaware Governor John Carney announced that he would nominate Justice Collins Seitz Jr. to become the Delaware Supreme Court’s next Chief Justice.

On that same day, Governor Carney announces that he would nominate Tamika Montgomery-Reeves, who currently sits on the Delaware Court of Chancery, to take Seitz’s seat as a Justice on the Supreme Court.

No announcement has been made as to who might be nominated to the Court of Chancery in place of Montgomery-Reeves upon her elevation to the Supreme Court.

Diversity Jurisdiction and Labor Unions

Diversity Jurisdiction and Labor Unions

A recent decision from Indiana repeated the rule with respect to the citizenship of labor unions and other unincorporated membership associations for purposes of federal diversity jurisdiction. IUE-CWA, Local 901 v. Spark Energy, LLC, Case No. 1:19-CV-00389-HAB-SLC, 2019 WL 5206067 (N.D. Ind. Oct. 16, 2019).

Labor unions, being unincorporated membership associations, will be deemed to have the citizenship of each of the participants therein. As set forth by this decision:

Similar to the citizenship of an LLC, a membership association such as a “a labor union has the citizenship of every member” of the association. Fellowes, Inc. v. Changzhou Xinrui Fellowes Office Equip. Co., 759 F.3d 787, 788 (7th Cir. 2014) (citing United Steelworkers of America v. R.H. Bouligny, Inc., 382 U.S. 145 (1965)).

Friday, October 25, 2019

Saint Crispin’s Day and the Battle of Agincourt

 Saint Crispin’s Day and the Battle of Agincourt

       Today is the anniversary of the Battle of Agincourt, taking place in 1415 (604 years ago) between the forces of France and her various allies and the invading English forces under the command of King Henry V. Shakespeare, by having his character Henry V repeatedly refer to the day of the battle as St. Crispin’s Day, otherwise saved this obscure saint from being lost, save for experts in hagiography, to the mist of history.

            Agincourt was the third of a trio of famous battles in the course of the 100 Years War; the other two were Crecy (1346) and Poitiers (1356).  The English won all three of these battles.  In the end they lost the war.  If you should want a comprehensive review of the 100 Years War, the four volume treatment by Jonathan Sumption (The Hundred Years War I – Trial by Battle; The Hundred Years War II – Trial by Fire; The Hundred Years War III – Divided Houses; and The Hundred Years War IV – Cursed Kings) is authoritative.

      The English forces, likely numbering in the range of 7,000, were compelled to do battle with a numerically superior French force likely numbering in excess of 20,000. All else being equal, the English force should have expected to be annihilated. As is typical in the case of significant historical events, however, all things were not equal. The French and their allies were disorganized, and overall command of the battlefield was never achieved.  Rather, individual nobles led their own contingents forward in a disorganized and sometimes conflicting manner.  The terrain favored the English in several ways.  The French “artillery,” crossbowmen (largely Pisan mercenaries) were not effectively deployed, and they had the unenviable task of shooting uphill.  That same terrain required the French forces, both mounted and on foot, to attack uphill over a recently plowed field that, consequent to the recent rain, was more mud than dirt. The French knights and men at arms, slogging their way uphill, were a “target rich environment” for the rain of arrows let loose by the English longbows; assuming Henry’s forces numbered 7,000, likely 5,800 were longbowmen, each releasing four to six arrows a minute.

      Another factor was that the very size of the French force worked to its disadvantage in that those behind continued pressing forward, hoping for their moment of glory, even while those at the front were being slaughtered. It was not quite the situation suffered by the Romans at the hands of Hannibal at Cannae, but then likely it was not hugely better.

      While comparative casualty figures are effectively impossible to ascertain, it is clear that the French were badly mauled with significantly more casualties than the English. Further, a significant number of French nobles fell in contrast to only two English nobles. Also, a significant number of French knights who has been captured in anticipation of being ransomed were executed.  The validity of the execution order, given by Henry V, is to this day debated.

      For an excellent review of the battle, see Juliet Barker's Agincourt. It is also covered in volume four of Sumption’s treatise.

      As invented by Shakespeare in Henry V, Scene iii, the St. Crispin’s Day speech would immortalize Henry V:

WESTMORELAND. O that we now had here

But one ten thousand of those men in England

That do no work to-day!

KING. What’s he that wishes so?

My cousin, Westmoreland? No, my fair cousin;

If we are mark’d to die, we are enow

To do our country loss; and if to live,

The fewer men, the greater share of honour.

God’s will! I pray thee, wish not one man more.

By Jove, I am not covetous for gold,

Nor care I who doth feed upon my cost;

It yearns me not if men my garments wear;

Such outward things dwell not in my desires.

But if it be a sin to covet honour,

I am the most offending soul alive.

No, faith, my coz, wish not a man from England.

God’s peace! I would not lose so great an honour

As one man more methinks would share from me

For the best hope I have. O, do not wish one more!

Rather proclaim it, Westmoreland, through my host,

That he which hath no stomach to this fight,

Let him depart; his passport shall be made,

And crowns for convoy put into his purse;

We would not die in that man’s company

That fears his fellowship to die with us.

This day is call’d the feast of Crispian.

He that outlives this day, and comes safe home,

Will stand a tip-toe when this day is nam’d,

And rouse him at the name of Crispian.

He that shall live this day, and see old age,

Will yearly on the vigil feast his neighbours,

And say “To-morrow is Saint Crispian.”

Then will he strip his sleeve and show his scars,

And say “These wounds I had on Crispin's day.”

Old men forget; yet all shall be forgot,

But he’ll remember, with advantages,

What feats he did that day. Then shall our names,

Familiar in his mouth as household words-

Harry the King, Bedford and Exeter,

Warwick and Talbot, Salisbury and Gloucester-

Be in their flowing cups freshly rememb’red.

This story shall the good man teach his son;

And Crispin Crispian shall ne’er go by,

From this day to the ending of the world,

But we in it shall be remembered-

We few, we happy few, we band of brothers;

For he to-day that sheds his blood with me

Shall be my brother; be he ne’er so vile,

 This day shall gentle his condition;

And gentlemen in England now-a-bed

Shall think themselves accurs’d they were not here,

And hold their manhoods cheap whiles any speaks

That fought with us upon Saint Crispin’s day.

 HERE IS A LINK to Kenneth Branagh’s masterful rendition.

            Not recited in the list of nobles who were part of the battle was Edward of Norwich, the Duke of York (a grandson of Edward III)   He was killed while defending the king.

            In 1420 Isabeau of Bavaria, queen to the incapacitated Charles VI, signed the Treaty of Troyes, granting the French Crown to Henry V and his heirs in place of her son. Further to that treaty, Henry V married Catherine of Valois; she would be the mother of Henry VI with the Valois inherited mental instability that would contribute to the Cousins War (a/k/a the War of the Roses); HERE IS A LINK to a discussion of that situation. Henry V died in 1422. Joan of Arc would join the fray in 1429; while she would be in the field was than a year and a half she helped turn the tide, and the 100 Years War would end with England holding only the region of Calais.


Today is also the anniversary of the storied “Charge of the Light Brigade” in the Battle of Balaklave during the Crimean War (1854). That particular engagement was, for the English forces, significantly less successful.

Thursday, October 24, 2019

Indiana Court Addresses Personal Jurisdiction

Indiana Court Addresses Personal Jurisdiction

A recent decision from the Indiana Court of Appeals considered and rejected the suggestion that certain business organizations had sufficient contacts with Indiana to be sued in connection with the fatal crash of a helicopter. Cadorath Aerospace Lafayette, LLC v. Hicks, Court of Appeals Case No. 18 A-CT-2953, 2019 WL 5250829 (Ind. Ct. App. Oct. 17, 2019).

This case arose out of a helicopter crash, it being alleged that the various business entities were negligent in repairing its engine. Several of the defendants moved to have the complaint against them dismissed for lack of personal jurisdiction, arguing that they did not have “sufficient minimum contacts” with Indiana such that they may be sued in Indiana. The court would ultimately agree with these assertions and dismiss them from the lawsuit.

One of the defendants, Cadorath Aerospace Lafayette, LLC is organized and functions in Louisiana. It in turn is owned by Cadorath Aerospace, Inc. a company organized in Canada with its principal place of business in Winnipeg. Neither performed services, had employees or agents, or had a facility in Indiana. Another defendant, H-S Tool & Parts, Inc. is a Canadian company with its principal place of business in British Columbia. Again, it did not have an office, employees or agents in Indiana.

It may be inferred that the lawsuit was initially filed in Indiana because that is the location of the operations of Rolls-Royce, the manufacturer of the engine that allegedly failed.

The defendants seeking dismissal from this action would highlight the various facts outlined above, which added up, ultimately, to a de minimis relationship with Indiana. The plaintiffs would rely upon the fact that those defendants had entered into certain agreements with Rolls-Royce for certain repairs involving certain engines. As those agreements with Rolls-Royce provided that disputes would be resolved in Indiana, the plaintiffs alleged that each of the defendants had agreed to be subject to the jurisdiction of the Indiana courts. Specifically:

H-S Tool and Cadorath took purposeful action to establish a decades-long contractual relationship with Rolls-Royce in Indiana, and in doing so they consented to Indiana jurisdiction for suits arising from that relationship. These personal-injury claims arise from that relationship. H-S Tool and Cadorath should have reasonably anticipated being haled into Indiana courts to answer claims related to work performed under those contracts. 2019 WL 5250829, *5.

The Court of Appeals would reject those claims. Initially, it found that the representatives of the persons killed or injured in the helicopter crash were not parties to those agreements with Rolls-Royce and could not claim any rights thereunder. The second basis, in reliance upon guidance from the United States Supreme Court, is that general activities in the state are insufficient to give rise to the minimum contacts necessary for specific jurisdiction. Rather, it would be necessary for the plaintiffs to show specific conduct in the state relating to the claims, and that was absent. The court would ultimately hold:

In sum, Indiana does not have personal jurisdiction over this matter. We recognize the financial and pragmatic strain that this decision places on all parties involved. However, we will not find personal jurisdiction when it is plainly not present. Additionally, we have neither the necessary information nor the judicial authority to decree exactly where the parties should litigate this matter. We only find that the evidence of legal arguments proffered by all parties lead us to one similar conclusion: the trial court erred [in finding that personal jurisdiction existed]. Id, *6.

There was a dissenting opinion pursuant to which one judge would find that the contractual relationship between Rolls-Royce and the various dismissed defendants would have been sufficient to constitute sufficient contacts to exercise personal jurisdiction.

Wednesday, October 23, 2019

Is an LLC a Necessary or a Nominal Party To the Action For Its Judicial Dissolution?

Is an LLC a Necessary or a Nominal Party To the Action For Its Judicial Dissolution?

In his blog New York Business Divorce, Peter Mahler has reviewed the various cases addressing whether an LLC is a necessary or a nominal party to a lawsuit seeking its judicial dissolution.

One implication of this determination will control as to whether or not the lawsuit can be heard in federal court under the rules of diversity jurisdiction. If the LLC is a necessary party to the lawsuit it will have the citizenship of the member who is moving for judicial dissolution, thereby destroying diversity jurisdiction. Another consequence of this determination is the degree to which the LLC is involved in the dispute, which will give rise to the question as to who is to direct the LLC’s involvement. If the LLC is a mere nominal party to the action, presumably it should not require legal representation and, as such, will not be applying its assets, presumably in opposition to the dissolution action. Conversely, if it is a necessary party to the action, it will need to have legal representation. That raises, however, the question of how that representation will be controlled. Assume a 50-50 split in the members; from which side is the attorney for the company to take instruction?

In a posting titled LLCs as Nominal Parties in Dissolution Cases: An Uncertain Portal to Federal Court Jurisdiction (October 21, 2019, Peter has collected the few cases that have addressed the question. HERE IS A LINK to his posting. As he notes therein, some of the courts say “yes” while others say “no.” As he also noted, these decisions cannot be reconciled.

Tuesday, October 22, 2019

Judicial Dissolution of LLC Denied

Judicial Dissolution of LLC Denied

In a recent decision rendered by the Supreme Court of South Dakota it reversed a holding of the trial court granting judicial dissolution of an LLC. Rather, on the facts and applying the “no longer practicable to operate in accordance with the operating agreement” standard, it was found that there did not exist a basis for dissolution. Dysart v. Dragpipe Saloon, LLC, 2019 S.D. 52, ___ N.W.2d ___, 2019 WL 4197232 (2019).

At the time of this action, the LLC had four members. The operating agreement identified the purpose of the LLC as:

To engage in all lawful activities, including, but not limited to, owning, purchasing, taking, leasing, or otherwise holding or acquiring real property and any interest or right in real property and any improvements thereon, and to hold, own, operate, control, maintain, manage and develop such property and interests in any manner that may be necessary, useful or advantageous … [to the] company. 2019 WL 4197232, *1.

In addition, the operating agreement provided that any member could withdraw and receive the fair market value of their interest in the company.

The LLC owned 74 acres of land, upon which had been built a bar that is open only 10 days a year during the Sturgis Motorcycle Rally. The part of the property not utilized by the bar had been leased for farming. Also, after having been in operation for several years, the LLC organized a campground on its property, initially making it available for free to participants in the Rally; charges for using the campground were instituted in 2013. Having been formed in 2003 and granted a malt beverage license in 2004, the company was first profitable in 2015, posting “modest profits” in 2016 and 2017. Although not explicit in the opinion, it appears that through 2015 the members had funded the amounts due on the mortgage for the LLC’s property.

When a planned sale of the interests of two of the members, Dysart and Heinrich, fell through, and after one of the members refused to sign a listing agreement for the property, the plaintiffs in this action (Dysart and Heinrich) filed this action for judicial dissolution. While they would prevail in the trial court, that decision was reversed by the South Dakota Supreme Court.

Under the South Dakota LLC Act (SDCL § 47-34A-801(a)(4)), an LLC may be judicially dissolved on the application of a member if:

·         “the economic purpose of the company is likely to be unreasonably frustrated;” or

·         “it is not otherwise reasonably practicable to carry on the company’s business in conformity with the articles of organization and the operating agreement.”

Providing caution as to the application of this capacity, the court wrote:

An involuntary judicial dissolution represents an exceptional level of intervention into the otherwise private agreement of an LLC’s members. It should be unavailable merely to resolve disagreements among owners or relieve an owner of an investment decision later regarded as improvident. Rather, judicial dissolution is permitted only in those instances where it is expressly authorized under our statutes. Id., *3 (citation omitted).

From there, the court held:

In this case, we believe the circuit court incorrectly concluded that compulsory judicial dissolution was permitted under SDCL 47-34A-801(a)(4)(i) and (iii). As to the latter basis, we believe the circuit court’s findings fail to support the legal conclusion that it is no longer practicable for Dragpipe to continue to operate in accordance with its operating agreement. The operating agreement broadly states Dragpipe’s purpose as “owning, purchasing, taking, leasing, or otherwise holding or acquiring real property” and to “hold, own, operate, control, maintain, manage and develop such property and interests in any manner that may be necessary, useful or advantageous[.]” Here, Dragpipe did, in fact, “purchas[e] ... real property” that it now “hold[s], own[s], operate[s], maintain[s] [and] manages[s.]” Continuing to do so is no less practicable now than it has been throughout Dragpipe’s history of operation.

The fact that the Appellees believe it to be a prudent time to sell Dragpipe’s real property and realize the gain from their investments does not mean Dragpipe is unable to continue to operate in accordance with its stated purposes. Nor do the historic losses or Dragpipe’s failure to return income distributions to its members render its operation impracticable. In more recent years, Dragpipe’s performance has improved and yielded profitable results, if not large cash returns, for its members. It may well be that the Appellees have grown weary of Dragpipe’s lukewarm revenue outcomes over the years, but that does not, itself, mean that Dragpipe is not “carry[ing] on the company’s business in conformity with ... the operating agreement[.]”

A similar analysis applies to the circuit court’s separate determination that “the economic purpose of the LLC is likely to be unreasonably frustrated.” Relying again upon the circuit court’s findings contained in this record, we believe the court erred in its legal conclusion. In the absence of an order directing judicial dissolution, Dragpipe will continue to operate more or less as it has since its inception. Even if, as the circuit court found, the principal means of making money for Dragpipe’s members will ultimately be through the sale of the real property, that does not mean that the members’ failure to reach a consensus about a proposed sale here is likely to frustrate Dragpipe’s economic purpose.

Under the plain and unambiguous terms of the operating agreement, the Appellees can resign and receive the fair market value of their interests. In the event the members do not agree upon the fair market value, the operating agreement states that the value will be determined by an independent appraiser. Yet, the Appellees have not availed themselves of this option. Nor does it appear they have continued in their efforts to sell their interests outright. The other two members do not object to such a sale and, in fact, the prior sale of Weast’s interest to Kerwin was successful without the need for judicial intervention or dissolution.

Beyond this, there is no “impenetrable deadlock” and no indication that a member or member-faction is benefitting from the disagreement regarding the proposed sale of Dragpipe’s real estate to the prejudice of the other members. The circuit court’s determination that the members were “at a standstill” is attached to the implicit legal conclusion that Dragpipe must sell its real estate now. However, we do not perceive the same degree of urgency when we interpret the text of Dragpipe’s operating agreement and consider the legal standards for judicial dissolution. Id., *3-4.

As have other decisions, including Blue Equity Holdings Kentucky, LLC v. Cobalt Riverfront Properties, LLC, 2019 WL 4127610 (Ky. App. Aug. 30, 2019), this decision highlights the importance of the “purpose” clause of an operating agreement. In this decision, as was as well the case in the Blue Equity Holdings decision, it was found that the company was acting entirely within its defined purpose and, on that basis, judicial dissolution should not be awarded. With respect to purpose clauses generally, see, e.g., Rutledge, Purpose: If You Don’t Know Where You Are Going, How Will You Know If You Have Arrived, J. Passthrough Entities (Nov./Dec. 2017) 37. HERE IS A LINK to that article.

Peter Mahler, in his blog New York Business Divorce, reviewed this same decision in a posting titled Chicken Sh*t Bingo Fans Rejoice: The Dragpipe Saloon Survives a Dissolution Scare (September 23, 2019).  HERE IS A LINK to that posting.

Monday, October 21, 2019

Co-Manager and CEO of LLC Properly Removed; The Partial Assignors Retained Voting Rights

Co-Manager and CEO of LLC Properly Removed; The Partial Assignors Retained Voting Rights

In a recent decision from the Federal District Court in Washington state, there was considered the question of whether the co-manager and CEO of an LLC had been removed by the 80% vote required by the operating agreement. That co-manager and CEO asserted that certain members could not participate in the vote because they had partially assigned their interest in the company. Based upon the operating agreement at issue and the Washington LLC Act, that assertion was rejected, and it was held that the co-manager and CEO had been removed. Braddock v. Zaycon Foods, LLC, C-16-1756 TSZ, 2019 WL 3974355 (W.D. Wash. Aug. 22, 2019).

Braddock had been the co-manager and CEO of Zaycon Foods, LLC.

Zaycon’s operating agreement provided for two managers and that a manager could be removed by the members holding at least 80% of the Class A units. Braddock would assert that certain transfers of membership interests that took place prior to the time he became the manager in effect stripped the voting rights in that none had been properly approved in accordance with the operating agreement. On that basis, fewer than 80% of the units had been voted for his removal.

Concluding that none of the transfers had been effective and were therefore improper. As to the effect of those invalid transfers, the court wrote:

Such conclusion does not, however, end the analysis. Although § 8.4 [of the operating agreement] makes clear that, in the event of an invalid transfer, the purported transferee obtains no voting rights and becomes merely an "Assignee" who holds only an "Economic Interests," the provision does not explicitly indicate whether the purported transfer or retains the voting rights associated with the units that were not effectively transfer. Thus, to understand the consequences to the transferor of assigning only an "Economic Interest,", the Court must look to the statutes governing limited liability companies organized under Washington law. 2019 WL 3974355, *5.

Under the Washington LLC Act, where a member transfers less than all of their interest in the LLC, they retain all rights related thereto except with respect to the economic rights that are transferred. RCW § 25.15.251(3). As characterized by the court:

[a]n LLC member may transfer a portion of the right to receive distribution without conferring on the recipient the right to vote or make decisions on behalf of the LLC.  In such circumstance the statute fills in the gap left by the Operating Agreement’s silence, and the transferor continues to have all of the rights of a member, other than the rights to receive the assigned distributions, including the right to vote. Id., *6.

On the basis that the transferor members retain the rights to vote the transferred interests, the 80% threshold had been satisfied and the plaintiff in this action was properly removed as the member and the manager.  The court found as well that the company had otherwise properly complied with the terms of a related employment agreement.

A variety of other claims and counter-claims will survive for trial.

In closing, it should be noted that the court suffered a small foot fault in describing the basis for restricting the ability of an LLC member to transfer governance rights. The court described that basis as it “helps ensure that the LLC is taxed like a partnership by avoiding one of the four characteristics of a corporation, namely ‘free transferability of interests.’” While this statement was certainly at one time true, including at the time of the cited law review article, it became incorrect as of January 1, 1997 and the adoption of the so-called “Check-the-Box” classification regulations.

Saturday, October 19, 2019

A Bad Day in the History of Carthage

 A Bad Day in the History of Carthage

       Today is the anniversary of two significant events in the history of Carthage. Neither, at least from the perspective of Carthage, was positive.

      The first of these events was the Battle of Zama, the climactic battle of the Second Punic War and a crushing Roman victory. The Battle of Zama took place in 202 BC.

      The Second Punic War had started off looking pretty good for Carthage. Hannibal Barca, beginning in what is now Spain (then Carthaginian territory) had famously moved his army  and his elephants across the Alps, gaining allies as he moved into what is now Italy. There they had a number significant victories against the Roman forces, including the battle of Cannae, famous for its encirclement and complete destruction of the Roman legions. It was during this period that Cato the Elder famously ended every speech in the Senate, irrespective of the topic  he was addressing, with “And Carthage must be destroyed.” {"Carthago delenda est"}.

      Ultimately, the tables would turn, and Rome got the upper hand. That turn of fortune culminated at Zama, where having taken the battle back to Carthage, Hannibal’s forces were ultimately defeated. Under the terms imposed by Rome, Carthage, previously a significant naval power, was limited to ten ships, and forbidden to raise an army without the permission of the Roman Senate.  A good recent book on the topic is Richard Miles, Carthage Must Be Destroyed: The Rise and Fall of an Ancient Civilization.

      The other significant event in the history of Carthage would not take place until 439 AD. The Vandals, under Gaiseric, had been pushed out of what had been their homeland in what we today consider Spain, transporting themselves to North Africa (they had started in the region we today call Poland). From there, they proceeded east. On this day, they captured and sacked Carthage. Ultimately, the Vandals would invade Italy proper, sacking the city of Rome in 455 AD.

     Again, it’s just not a good day in the history of Carthage.

Friday, October 18, 2019

Another Sighting of the Limited Liability Corporation

Another Sighting of the Limited Liability Corporation

          The Sealed Indictment of Lev Parnas, Igor Fruman, David Correia and Audrey Kukushkin (S.D.N.Y.) (¶ 2) charges them with “laundering foregin money thorugh bank accounts in the names of limited liability corporations.”

The Destruction of the Holy Sepulchre

The Destruction of the Holy Sepulchre

       Today marks the anniversary of the destruction, in 1009, of the Holy Sepelchre in Jerusalem, done under the orders of the the Fatimid Caliph Al- Hakim bi-Amr Allah. 

      The site of the  Sepulchre had been venerated since the early Fourth Century, its location having been determined by St. Helen, mother of Roman emperor Constantine I.  A church constructed upon the site had became a popular pilgrimage destination.  Al-Hakim's order of destruction was carried out to the point that the church was eliminated down to and including its foundations.

       The destruction of the Holy Sepulchre, along with later attacks upon pilgrims, was at the end of the 11th Century cited as the basis for the Crusades.  After the capture of Jerusalem the current Church of the Holy Sepulchre (the so called “Crusader Church”) was constructed; it remains in place today although it has been rebuilt in various parts in response to collapses occassioned by fires or earthquakes.

The Battle of Dyrrhechium – Don’t I Know You From Somewhere?

The Battle of Dyrrhechium – Don’t I Know You From Somewhere?

      While the story of the Battle of Hastings (October 14) usually continues with a discussion of the Norman-French political and to a certain extent cultural conquest of England, it is interesting to consider the fate of certain of those who fought for the losing side of Harold. 
      The core of Harold’s army was a corps of household troops named the housecarls.  They fought with the Norwegian/Viking battle ax, sometimes with a shaft of four feet in length.  While it is true that in the Middle Ages it would not be surprising for a person to be born, live and die within a few miles of the same spot, all too often it is assumed that such limited travel was typical.  Likely it was not.

      After Hastings, some of Harold’s housecarls traveled to Byzantium and there joined the Byzantine Emperor’s Varangian Guard.  According to some sources, some of those housecarls, now as members of the Varangian Guard, fought at the Battle of Dyrrhachium on October 18, 1081, a battle which took place in modern day Albania.  Where they were opposing Norman invaders (the Normans had invaded and made a kingdom in Southern Italy and Sicily and were seeking to expand their reach).  According to those same sources, certain of the troops who had fought as mercenaries for William (now the Conqueror) in England in 1066 now faced off against the now Varangian  former housecarls of Harold. 

      Normans versus Saxons, this time in Albania.  Not everyone stayed close to home.

      BTW, the Normans won the battle.

Wednesday, October 16, 2019

The Agenda for the 2019 LLC Institute

LLCs, Partnerships and Unincorporated Entities Committee

2019 LLC Institute

November 7 – 8, 2019

(as of 10/2/19)

(The ABA will seek 15.75 hours of CLE credit, including 2.0 hours of ethics credit, in 60-minute states and 18.8 hours of CLE credit, including 2.4 hours of ethics credit, in 50-minute states for this program. Credit hours are estimated and are subject to each state’s approval and credit rounding rules.)



Stetson Tampa Law Center

1700 N Tampa St.

Tampa, Florida

Wednesday, November 6, 2019
5:30 p.m. – 7:00 p.m.
Welcome Reception at Holland & Knight, LLP
100 N Tampa St #4100, Tampa, Florida 33602
The Welcome Reception is made possible by the generous support of Holland & Knight, LLP
(Through the registration page, please indicate whether you will attend, number of guests, etc.)
Thursday, November 7, 2019
7:20 a.m. - 8:00 a.m.
Breakfast (included in registration)
8:00 a.m. - 8:15 a.m.
Welcome; Housekeeping
8:15 a.m. - 10:15 a.m.
Program (2 hrs.) Case Law Update (Non-Delaware)

Prof. Elizabeth “Beth” Miller (Baylor Law School, Waco, Texas); Kelley Bender (Chapman & Cutler, Chicago, Illinois); Sean Ducharme (Hunton Andrews Kurth LLP, Richmond, Virginia); Dan Sheridan (Stark & Stark, Lawrenceville, New Jersey)
This panel will discuss recent LLC and partnership cases other than from Delaware on various topics of significance, including cases dealing with fiduciary duties and veil piercing and cases illustrating pitfalls in drafting operating agreements.
10:15 a.m. - 10:30 a.m.
10:30 a.m. - 12:00 p.m.
Program (1.5 hrs.) Delaware Case Law Update

Lou Hering (Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware); Tammy Mercer (Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware); Prof. James J. Wheaton (Boston University School of Law, Boston, Massachusetts)
This panel will discuss recent LLC and partnership cases from Delaware on various topics of significance, including cases dealing with fiduciary duties, the implied covenant, dissolution, application of the void and voidable doctrine and cases illustrating issues arising in drafting operating agreements. Jim Wheaton will provide an update on recent bankruptcy decisions of interest.

12:15 p.m. - 1:30 p.m.
Luncheon & Keynote Address (included in registration)
Keynote Address by Donald J. Weidner, Dean Emeritus and Alumni Centennial Professor at Florida State University College of Law and Reporter on the Revised Uniform Partnership Act (1994)
1:30 p.m. - 3:30 p.m.
Program (2 hrs.) Contribution Default Remedies in LLC Operating Agreements
Prof. Bradley T. Borden (Brooklyn Law),  Michael D. Soejoto
(Pircher, Nichols & Meeks LLP, Los Angeles, California)
This panel will discuss the economic, tax, and legal aspects of contribution-default remedies, which often appear in LLC operating agreements. Such remedies include member-to-member loans, member-to-entity loans, interest dilution, and distribution offsets. Some agreement mix and match remedies. The economic and tax effects of contribution-default remedies can vary significantly from remedy to remedy. The dilutive effect can be either natural or punitive and latent or patent. Despite the ubiquity of such remedies, they have received relatively little attention in commentary or seminars. Although contribution-default remedies appear to be drafted with hopeful prospects of profitability in mind, the few cases that have considered their legal effect relate to failed arrangements. This panel will also discuss those cases and drafting ideas that can addresses the legal doctrines that emerged from the case law.
3:30 p.m. – 3:45p.m.
3:45 p.m. - 5:45 p.m.
Program (2 hrs.) LLC Agreements That Went Wrong, and How to Fix Them: Case Studies and War Stories
Peter A. Mahler (Farrell Fritz, P.C., New York, New York); Ladd Hirsch (Winstead, Dallas, Texas); Prof. Meredith R. Miller (Touro Law, Central Islip, New York, New York); Louis T.M. Conti (Holland & Knight LLP, Tampa, Florida)
This panel will examine recent case law involving LLC member disputes involving interpretation of operating agreement provisions which were not carefully considered, properly drafted, or which resulted from unequal leverage; as well as how the panel members have addressed those issues in counseling their clients, including a few war stories from the trenches.
7:00 p.m. - 8:00 p.m.
Cocktail Hour
8:00 p.m. - 10:00 p.m.
Lubaroff Award Dinner - (ticket price included in registration)
Friday, November 8, 2019
7:30 a.m. - 8:00 a.m.
Breakfast (included in registration)
8:00 a.m. – 9:15 a.m.
Program (1.25 hrs.)  Re-Imagining the Business Trust as a Sustainable Business Form
Prof. Lee-ford Tritt (University of Florida College of Law); Prof. Peter Molk (University of Florida College of Law)
By drawing upon trust law and corporate law, this program will articulate and discuss an interdisciplinary, systematic application of business trusts as an alternative organizational form to corporations for the socially-conscious business management construct.
9:15 a.m. – 10:45 a.m.
Program (1.5 hrs.) Federal and State Tax Issues Relating to Compensation and Pass-Through Entities
Cristin C. Keane (Carlton Fields, P.A., Tampa, Florida); Prof. Gregg Polsky (Univ. of Georgia, Athens, Georgia); Warren P. Kean (Shumaker, Loop & Kendrick, LLP, Charlotte, NC)
This panel will discuss the current state of taxation of service providers to pass-through entities, including choice of entity issues, incentive compensation structures, equity-based compensation, carried interests, treatment of LLC members as limited partners for self-employment tax purposes, Section 83, and Section 409A.
10:45 a.m. – 11:00 a.m.
11:00 a.m. – 1:00 p.m.
Program (2.0 hrs.) Ethics
A.J. Singleton (Stoll Keenon Ogden PLLC, Lexington, Kentucky); Robert R. Keatinge (Holland & Hart LLP, Denver, Colorado); Gerald V. Niesar (Niesar & Vestal LLP, San Francisco, California)
This program will address  a lawyer practicing in a law firm has duties to clients, partners, and self that must be balanced.  These relationships and interests are governed not only by the law of the particular entity, but also very much by the Rules of Professional Responsibility. This program will consider the interaction of the ethical, professional liability, and business law rules to which attorneys who practice as partners or members of a law firm face in the organization, operation and dismemberment of a law firm.  Among the topics that will be discussed are balancing fiduciary duties to clients with fiduciary duties to partners, the ethical considerations attendant to novel relationships within the firm such as the non-equity partner, non-lawyer time keepers, issues surrounding dissociation from, and dissolution and merger of, a law firm.
1:00 p.m. - 1:30 p.m.
Luncheon: Working Committee Meeting (included in registration)
1:30 p.m. - 2:30 p.m.
Program (1.0 hrs.) The Lightning Round
Professor Christine Hurt (Brigham Young University, Provo, Utah); Scott E. Ludwig (Bradley Arant Boult Cummings LLP, Huntsville, Alabama); Suzanne C. Odom (Montgomery & Andrews, PA, Santa Fe, New Mexico); Stuart L. Pachman (Brach Eichler LLC, Roseland, New Jersey); Thomas E. Rutledge (Stoll Keenon Ogden PLLC, Louisville, Kentucky)
This lightning round panel will address a variety of topics, each presenter spending no more than 10 minutes on a discrete recent development or issue. For example, Stuart Pachman will address his recent article on succession in single-member LLCs, Suzanne Odom will address LLCs formed under Tribal Laws, and Tom Rutledge will address recent developments in diversity jurisdiction and unincorporated entities.
2:30 p.m. – 2:45 p.m.
2:45 p.m. – 4:15 p.m.
Program (1.5 hrs.) Developments in Series LLC’s, Divisions and Other Organic Transactions
Tarik Haskins (Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware); Marla Norton (Bayard, P.A., Wilmington, Delaware); Prof. Elizabeth “Beth” Miller (Baylor Law School, Waco, Texas)
This program will examine recent amendments to the Delaware LLC Act regarding series LLCs and panelists will discuss some of the issues confronted by practitioners in using series LLCs and how practitioners can draft provisions in their LLC Agreement to improve the likelihood that the applicable horizontal liability shield will be respected outside of the jurisdiction of formation of the series LLC.
4:15 p.m. - 4:30 p.m.