Thursday, January 30, 2020
Being Bound by An Operating Agreement You Did Not Sign
In a recent decision, the Federal District Court for the Western District of Kentucky considered and rejected the assertion that a member of an LLC was not bound by its operating agreement because they had not signed it. Pure Marketing, LLC v. Got Matcha Premium Tea Co., LLC, 2020 WL 234658 (W.D. Ky. Jan. 15, 2020).
The back story of this decision is important. Pure Marketing, pursuant to a contribution agreement, made an investment in Got Matcha, becoming a member therein. The substantive rights of Pure Marketing were determined under the Got Motcha operating agreement. However, in connection with this suit, Pure Marketing apparently desired to avoid application of that operating agreement, or bring any claims under it, because it contained an arbitration clause. Pure Marketing asserted that it was not bound by the operating agreement because it never signed it.
The court first determined that any rights held by Pure Marketing were determined under the operating agreement, and not the contribution agreement; all parties had fully performed on it. Ultimately, the suit would be dismissed. In the course of doing so, the court, in reliance upon KRS § 275.275(3) and Del. Code Ann. tit. 6, § 18-101(9), would reject the assertion that a signature is necessary in an operating agreement to be bound thereby. Rather, “any member of an LLC, original or subsequently admitted, is bound by the terms of an operating agreement regardless of whether the party signed said agreement.”
Wednesday, January 29, 2020
Piercing Is A Remedy
In a recent decision from the Bankruptcy Court, the rule was again stated that piercing is a remedy. In re Bullitt Utilities, Inc. (Keats v. Cogan), Case No. 15-34000(1)(7), AP No. 17-3070, 2020 WL 214761 (Bankr. W.D. Ky. Jan. 10, 2020).
This decision was handed down in the context of giving summary judgment to an individual named in the adversary proceeding. In one of those counts, the trustee sought to pierce the veil of a corporation in order to hold the defendant, alleging that he was a director of the corporation, liable under a theory of piercing the veil. Rejecting that theory, the court noted that “that piercing” is an equitable remedy, not a separate cause of action. In support thereof, it cited both Howland v. Beads and Steeds Inns, LLC (In re Howland), 516 B.R. 163, 167 (Bankr. E.D. Ky. 2014) and Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 211 (Ky. App. 2009).
Tuesday, January 28, 2020
The Passing of Henry VIII
Today is the anniversary of the death, in 1547, of King Henry VIII. He was 56 years old and had reigned from the age of 18. By coincidence, today is as well the anniversary of the birthday of his father, King Henry VII.
Although historians can and do dispute the issue, in many respects he was a lousy king. On two occasions he sent England to war in France; in both instances the gains were minimal while the costs were huge. He as well underwrote several campaigns, including those of Maxmillian, the Holy Roman Emperor, further depleting the quite healthy treasury left him by Henry VII (to suggest that Henry VII was in the later part of his reign, especially after the death of his wife, only miserly is to suggest to much frivolity). Meanwhile, England’s greatest military victory during his reign, the Battle of Flodden Field, was won by Thomas Howard, then the Earl of Surrey, thereby earning him the return of Dukedom of Norfolk lost after his family fought for the wrong side (i.e., that of Richard III) at the Battle of Bosworth. Henry VIII was not even in England when that victory was achieved. The so called Battle of the Spurs wasn’t a battle.
Henry fancied that at least northern Europe was a tri-part division of power between England, France and the Holy Roman Emperor. While the Treaty of London, structured by Cardinal Wolsey, would reflect this division, the reflection was possible only because the Holy Roman Empire and France accommodated the fiction. In fact there were two great powers in Europe, France and the Holy Roman Empire (which at this time included Spain and the riches being collected in the “New World”), each tempered to a degree by the Papacy. England, while economically important, was not a significant diplomatic or military power.
Henry condemned Luther as a heretic in his Defense of the Seven Sacraments, earning him from the Papacy the title Defender of the Faith. How much of that work was ghost written is debated, with Sir Thomas More oft identified as the author of at least significant portions. When, however, it became convenient to do so in order to achieve the desired annulment of his marriage to Catherine of Aragon, Henry separated the English Church from communion with Rome. For that effort he was excommunicated. Unwilling to accept even silent dissent from his policies, he would procure the executions of numerous men of conscience including St. John Fisher and St. Thomas More. Hungry for assets, in concert with Thomas Cromwell, he would destroy England’s monastic communities.
While the now iconic portrait of Henry painted by Hans Holbein the Younger shows a man of dynamism and vigor (btw, what we have are copies; the original was lost when the Whitehall Palace burned), in many respects he was just not that great a king.
Monday, January 27, 2020
The following was written and distributed by Terence Cuff. It is far better than what I wrote:
Monday is just another day for most of us.
Monday is just another day for most of us.
Prior to and during the Second World War, the government of Germany adopted a policy of isolating in camps various groups, including Jews, Poles, Russian prisoners of war, the Roma, some criminals, and various other groups.Any description of the camps is much too gentle. Most of us are too delicate to know the full truths about these camps.Prisoners were isolated in large camps built to maximize security and administrative convenience and to minimize the comfort of those confined. Camps were surrounded with electrified fences and barbed wire. The perimeters and grounds were well patrolled by troops of the Schutzstaffel. Prisoners were crowded into barracks, where they slept on incredibly crowded bunks that provided little comfort and little warmth. The barracks were overcrowded practically beyond comprehension. Prisoners were provided with inadequate clothing, particularly for the cold of winter. Food rations were unappealing and had sufficiently low caloric content that prisoners usually would starve after weeks or after a few months. The prisoners were on the road to death by starvation, if something else did not kill them quicker. Sanitation was poor. Medical care was minimal. The poor living conditions resulted in a variety of illnesses – often fatal illnesses – associated with confined populations, poor nutrition, overwork, starvation, and poor sanitation. Most of the prisoners were subjected to heavy manual labor under close supervision of guards, who treated the prisoners with harsh brutality. Without going into more detail, treatment at these camps was about as harsh and miserable and cruel as the creators of the camps could conceive.Many deaths were daily events at the camps. That is how the camps were designed. That was their purpose.One of these camps was located in a town in southern Poland by the name of Oświęcim. The location was chosen on account of the available land, its isolation, and also its proximity to excellent rail transportation. The complex of camps that were built at Oświęcim were known as Auschwitz-Birkenau.Men and women were murdered at Auschwitz-Birkenau – murder on the broadest scale. Murder was the daily fare. It was not the murder of one or two. It was not the murder of a family. It was not even the murder of a small village. At Auschwitz-Birkenau, perhaps 1,100,000 men, women and children were murdered. The number is staggering beyond anyone’s comprehension. I cannot visualize or comprehend 1,100,000 deaths.We could debate the numbers. Some deny the murders or the extent of the murders. Perhaps it was only a million. After a million or so, the precise number makes little difference to me at least.The prisoners came from Hungary, Poland, France, Greece and a variety of other countries.Most were Jews.Many were non-Jewish Poles.Roughly 21,000 were Roma.Roughly 15,000 were Soviet prisoners of war.Some were homosexuals.Some were mentally ill.Some were Jehovah’s Witnesses.Some belonged to other groups.There were many ways to die at Auschwitz-Birkenau.Some were executed – shot or hanged.Many died naked in gas chambers, where the prisoners were gassed with Zyclon B, a pesticide based on hydrogen cyanide.Many were worked to death.Many perished of diseases associated with the poor living conditions and the close confinement.Many starved on account of the inadequate rations and hard forced labor. A typical day’s rations were some thin soup and a small potato – not much of a ration for people doing hard labor in the cold.Some prisoners were beaten to death by guards.Some were shot by guards.Many were whipped or beaten.Some were attacked by guard dogs.Some were killed in medical experimentation.Some will deny that any of this occurred, but I suppose that one can deny the sun, the moon, and the stars if he has a mind to do so.The complex of camps at Auschwitz-Birkenau were liberated on January 27, 1945, by advancing Soviet troops. Monday is the seventy-fifth anniversary of that liberation. As the end of the camp approached, thousands of prisoners were forced into long marches evacuating the camps. Thousands died on those marches. At the end of the marches, survivors were shipped by rail to other camps farther away from advancing Allied troops.About 9,000 prisoners remained behind at Auschwitz-Birkenau and were liberated by Soviet troops. These survivors were in appalling shape for the most part. Many did not survive for long. The human body does not handle prolonged starvation well.For many of my generation, Edward R. Murrow represented the pinnacle of news reporting. He gave one particularly notable account of the liberation of another camp. They called it Buchenwald. This account may give you just a little bit of a taste of one of the camps, an admittedly sanitized taste, since I imagine that no one would have been permitted to report on the full shock and horror of what camps like Buchenwald and Auschwitz-Birkenau were like.This is a link to the Murrow broadcast in 1945: https://www.youtube.com/watch?v=s8ffpIHnuaw. It is about ten minutes long. If you have not heard the broadcast, listening to the recording of the broadcast would be time well spent. If you do not have time to listen, that is your choice. If your children or grandchildren have not heard the broadcast, perhaps they also should, but listen to the recording yourself first and make sure to wait until they are old enough.Some of us would prefer to forget Auschwitz-Birkenau and the other camps. Many Americans alive today have never learned very much about the camps in the first place. Seventy-five years away is a distant memory. The memory of the camps will make many of us uncomfortable. They should.We may well forget Auschwitz-Birkenau, but I hope that we do not. Auschwitz-Birkenau provides us important lessons. I would like to imagine that some of us still care.The Germans who were responsible for the camps were people unfortunately all too much like us all.Auschwitz-Birkenau teaches us that we all can hate.Auschwitz-Birkenau teaches us that we all have the capacity to abuse and to kill those over whom we have the power to abuse and to kill.Auschwitz-Birkenau teaches us that we can be brutal and inhuman – inhumanity seems all too human.Auschwitz-Birkenau should remind use of these passions in each of us, and should teach us that we must control these passionsGermans of the era of the Second World War were not a uniquely immoral people. They were people just like us.Prejudices against Jews and other groups at the time of the 1930’s and 1940’s were intense in Germany, elsewhere in Europe, and in the United States.One of the dirty little secrets is how strong anti-Jewish sentiment has been in the United States in the past – a sentiment that can continue today.We Americans have the capacity to hate as well as any others. We have a history of hating just about anyone who was a little different from us in any way and available to hate.Many of us work for firms that would not employ Jews – or advance Jews – even into the 1960’s.If you work for a large law firm, look back in the files for the letterhead your firm used in the 1960’s and 1970’s. In all probability, the letterhead of the time listed all partners and associates. Why did the firms drop the names? In many cases, it was because those firms were soliciting Arab business, and they did not want to disclose that they employed Jewish attorneys. You will be hard pressed to find anyone who will admit that that is why your firm changed its style of letterhead.Some recall Auschwitz-Birkenau and read the message of never again. For me, the message is that this is behavior of which we are all capable.For me, the lesson of Auschwitz-Birkenau is its example of what we all can do if we allow our passions, our fears, and our prejudices to run wild and to take control of us.If we are not careful and if we are not willing to stand up for our values, Auschwitz-Birkenau will happen again – if perhaps in a different form.Auschwitz-Birkenau is important not because it is extraordinary, but because it is so easy to repeat.We need to defend our values, even when inconvenient and unpopular, or Auschwitz-Birkenau will merely become a model to be repeated again and again – perhaps in altered form, but with the same purpose.
Saturday, January 25, 2020
Fiduciary Duty Claim Dismissed In Absence of Proof That Defendant Was In a Position Giving Rise to a Fiduciary Duty
Fiduciary Duty Claim Dismissed In Absence of Proof That Defendant Was In a Position Giving Rise to a Fiduciary Duty
In a recent decision from the Bankruptcy Court for the Western District of Kentucky (Judge Lloyd), there was dismissed on summary judgment a claim that the defendant in the adversary proceeding owed a fiduciary duty where the plaintiff had not shown that the individual was a director or officer of the subject company. In Re: Bullitt Utilities, Inc. (Keats v. Cogan), Case No. 15-34000(1)(7), AP No. 17-3070, 2020 WL 214761 (Bankr. W.D. Ky. Jan. 10, 2020).
This adversary proceeding arose out of the failure of Bullitt Utilities, Inc. The trustee asserted that Martin G. Cogan, identified by the court as “MC”, was a director/officer all Bullitt Utilities who breached his fiduciary duties in connection with its failure. In this instance, however, the suit was dismissed because there was a failure to demonstrate that MC was in fact a director or officer of the company. The primary evidence cited by the decision was the corporation’s annual report where, at one time, MC had been listed as a director, but then had been removed from that designation. The trustee relied upon certain meeting minutes that the court discounted. It was recited that the trustee had the burden of demonstrating MC’s status as an officer or director of Bullitt Utilities. The trustee failed to do so. In that the claim for breach of fiduciary duty was premised upon MC being an officer or director of Bullitt Utilities, the claim failed and was dismissed.
Friday, January 24, 2020
You Wanted It, You Got It
In a decision from Delaware decided last year, the court held that, where the controlling shareholder caused a corporation to adopt a forum selection by-law, that majority shareholder consented to venue in that jurisdiction. In re: Pilgrim’s Pride Corp. Derivative Litigation, C.A. No. 2018-0058-GTL, 2019 WL 1224556 (Del. Ch. March 15, 2019).
The controlling shareholder of Pilgrim’s Pride orchestrated the sale of the company. Coincident with the approval of that sale, Pilgrim’s Pride’s Board of Directors amended its by-laws to provide, inter alia, that disputes with respect to the internal governance of the company must be heard in Delaware. When, after the transaction was approved, certain of the shareholders brought a derivative action in Delaware against that controlling shareholder, the controlling shareholder sought to have the suit dismissed on the basis of lack of jurisdiction. This assertion the Chancery Court rejected, observing:
On the same day that the Acquisition was approved, the Board voted unanimously to adopt a forum-selection bylaw, with the Director Defendants whom Parent controlled constituting a five-member majority of the nine-member Board. The bylaw made the Delaware courts exclusive forum for breach of fiduciary litigation involving the Company. This decision holds that on the facts alleged, Parent implicitly consented to personal jurisdiction in this court for the purposes of claims falling within the forum-selection bylaw.
Thursday, January 23, 2020
An All-To-Familiar Gesture With Her Hand and Without Four of Her Fingers Showing
While this decision from 2019 by the Sixth Circuit Cout of Appeals has nothing to do with business law, it is at least entertaining. In this case, the Sixth Circuit Court of Appeals considered whether a police officer violated a driver’s civil rights by pulling her over after she flipped him off. The court found that indeed her rights were violated. Cruise-Gulyas v. Minard, 918 F.3d 494 (6th Cir. 2019).
Minard, a police officer in Michigan, stopped Cruise-Gulyas for speeding. He however, wrote the ticket for a non-moving violation. Cruise-Gulyas, as she pulled away from the traffic stop, as described by the Sixth Circuit “made in all-too-familiar gesture to Minard with her hand and without four of her fingers showing.” Minard pulled her over again and wrote out a ticket for a moving violation.
Cruise-Gulyas sued Minard under § 1983, alleging that by pulling her over a second time and changing the non-moving moving violation ticket to a moving violation, he violated her constitutional rights. Specifically, she claimed violation of the Fourth Amendment against unreasonable search and seizure, as well as retaliation for having engaged in protected speech under the First Amendment and restriction of her liberty in violation of the Due Process Clause of the 14th Amendment. Minard sought to have the suit dismissed on the basis that he had qualified immunity for his actions. When the federal district court denied that effort, he brought this appeal to the Sixth Circuit Court of Appeals.
The Sixth Circuit would hold that Minard was in the wrong.
In pulling Cruise-Gulyas over a second time, Minard violated her rights against unreasonable search and seizure. While he may have had probable cause for pulling her over the first time, his authority to do so in connection with her having been speeding ended when that first stop concluded. Relying on prior law, flipping off a police officer is not illegal or indicative of an illegal violation.
With respect to the First Amendment issue, the court observed, again in reliance upon prior law, that “Any reasonable officer would know that a citizen who raises her middle finger engages in speech protected by the First Amendment.”
Having denied Minard qualified immunity, the case would have gone back to the District Court for further fact-finding and a decision on the merits.
Wednesday, January 22, 2020
New York Expands Member Liability for Unpaid Wages
New York has long had a statute applicable to both domestic and foreign corporations providing for the imposition of liability on the 10 largest shareholders for failure to pay wages. See New York Business Corporation Law § 630. In the same vein, in 2014 New York adopted a statute providing, inter alia, that the member that the 10 largest members of an LLC bear joint and several liability for certain unpaid wages. In order for an employee to move against the members, they must satisfy certain notice requirements and, as well obtain a judgment against the LLC that remains unsatisfied for 90 days. N.Y. LLC Act § 609(c).
As drafted, this statute has been applicable only to LLCs organized in New York. Looking at the issue from the opposite perspective, it has not been applicable to the members of a foreign LLC transacting business in New York.
Well, that is the case until February 20, 2020. That day an amendment to § 609 of the New York LLC Act will go effective, it providing, in effect, that the same rule applicable previously to the 10 largest members of the domestic LLC will be equally applicable to the 10 largest members of a foreign LLC. With this change, foreign LLCs doing business in New York need to pay even more attention to compliance with wage and hour laws. At the same time, ne'er-do-wells will not be able to use foreign LLCs as a “planning opportunity” with which to engage in wage-theft activities.
Business Planning Class at UK College of Law
Again in the spring of 2020, I am teaching the Business Planning class at the University of Kentucky College of Law. HERE IS A LINK to the announcement made by Stoll Keenon Ogden PLLC.
Tuesday, January 21, 2020
Illinois Makes Organization of LLCs More Complicated
Consequent to changes in administrative regulations effective January 1, 2020, it is now more complicated to either organize an LLC in Illinois or to qualify a foreign LLC to transact business in that jurisdiction.
With respect to LLCs organized in Illinois, if the articles of organization identify as a manager a business entity (i.e., not a natural person), the articles of organization must be accompanied by a good standing certificate issued by the state, whether that be Illinois or foreign, under which the manager-entity is organized. There is a similar filing requirement when the articles of organization are amended or an annual report is filed that adds a new entity-manager that is not already either organized or qualified to transact business in Illinois.
With respect to foreign LLCs seeking to qualify to transact business in Illinois, again, if the company has an entity-manager, the application for the certificate of authority to transact business must include a good standing certificate issued with respect to that entity-manager, whether organized in Illinois or in a foreign jurisdiction. When the application for certificate of authority is amended to add a new entity-manager, a good standing certificate from its jurisdiction of organization will likewise be required.
Saturday, January 18, 2020
Lancaster and York United
Today marks the anniversary of the marriage in 1486 of the marriage of Henry VII (House of Lancaster) and Elizabeth of York.
King Henry VII, the first of the Tudor monarchs, was, as described by the great Tudor historian G.R. Elton, “a political solution to a dynastic problem”; he was clearly not the closest claimant to the throne. Some would even argue that he had no dynastic claim on the throne. He was, however, the successful leader at the Battle of Bosworth at which Richard III, who had seized the throne from the never-crowned Edward V (one of the two “Princes of the Tower”), was killed.
The House of York had similar problems in its claim to the throne. Henry V, the victor of Agincourt, died young. His only child, also named Henry, was nine months old at the time of his father’s death. Upon his father’s death, and subject of course to a Regency, young Henry, now Henry VI, was elevated to the English throne. Henry VI’s mother was Catherine of Valois, a French princess who after Agincourt married Henry V; under the Treaty of Troyes, Henry V was to inherit the French throne. Of course, that did not come to pass as the civil war aspect of the Hundred Years War was ultimately resolved (the enemy of my enemy is my friend). So now sitting on the throne was Henry VI, whose mother was a member of the house in Valois. That particular house was troubled with some sort (today it cannot be entirely diagnosed) of mental instability. At various times in his life this instability would manifest in Henry VI. In some of the later experiences he would be effectively catatonic while at other times he would appear to have no appreciation of where he was or what he was doing. Regardless of the degree of expression from time to time, these were not characteristics of an effective medieval king. In addition, Henry VI would go on to marry Margaret of Anjou. Being French, she brought no natural allies to Henry’s household and, for herself, was generally disliked.
And so the stage was set; following the highly effective and well liked war hero Henry V, the country was plunged into a minority kingship with a regency and all of the instability that flows therefrom. The Duke of York, who had aspirations to the throne, served as a regent. Meanwhile nothing to bring stability to Henry VI’s position flowed from his marriage to Margaret of Anjou.
Ultimately, the Cousins War would erupt. York would, in one of its earlier battles, be killed (Wakefield in 1460), but ultimately his son, Edward IV, would prevail in that conflict (Towton, 1461), taking the throne and then protecting it (except when he lost it for a period) through the balance of the War of the Roses.
So out of Bosworth we have Henry VII (Tudor) whose claim to the crown was based on having won it at battle over the incumbent Richard III (York), even as York’s claim was on shaky footing, it having been based upon the usurpation of Henry VI.
So in order to support the legitimacy of the Tudor (while claiming to be of Lancaster) line to the throne, a marriage to the eldest daughter of the late Edward IV was arranged. Neither had a great claim to the throne, but together (it was hoped, ultimately successfully) there was a better political argument that the matter was resolved. Henry VII’s reign would be punctuated with several significant rebellions, but none came close to prevailing.
Thursday, January 16, 2020
Peter Mahler, in his blog New York Business Divorce, has reviewed a recent New York decision on Buford Abstention in the context of the dissolution of a non-profit corporation.
Under Burford Abstention, federal courts, although they would have the jurisdictional capability to do so, will defer to state courts with respect to matters particular to the organization of business organizations. The intent is to avoid creating conflicting law between state and federal courts. In this instance, where the common law dissolution of a non-profit membership corporation was sought, the federal court decided that it would be best for a state court to consider that question. This holding is consistent with prior New York law, reviewed by Peter, with respect to actions for a statutory judicial hearing.
The title of the posting is Another Door Closes to Federal Court in Judicial Dissolution Cases; HERE IS A LINK to it.
This decision stands in opposition to a 2019 decision of Judge Van Tatenhove of the Federal District Court for the Eastern District of Kentucky, wherein he held, on reconsideration, that Burford Abstention did not preclude him from ruling on a suit seeking judicial dissolution of a business corporation. That case was Henley Mining, Inc. v. Parton, Civ. No. 6:17-CV-00092-GFVT, 2019 WL 1048839 (E.D. Ky. March 5, 2019). HERE IS A LINK to my review of it. It, in turn, includes a link to the decision rendered prior to Judge Van Tatenhove’s reconsideration of the matter and reversal of his prior decision.
Wednesday, January 15, 2020
Thinking Through All of the Implications of the Gig Economy
In the so-called “gig economy,” workers are self-employed and work as independent contractors of any number of companies including Uber, Lift and DoorDash. Of course, the gig economy extends well beyond these transportation companies to include freelancing graphics design, artists, participants in the computer industry and even contract attorneys. For each person so engaged, they need to carefully consider what it means to be self-employed.
According to a recent newspaper story, a woman working for Grubhub learned the hard way that she had not fully considered those implications. While working on a delivery, she was, at her fault, involved in a significant automobile accident. After the driver of the other car was made whole by his insurance company, that insurance company came against her, exercising its subrogation rights. She turned that claim over to her automobile insurance provider, and there is where the problem arose. She had an ordinary, and not a commercial/business, insurance policy. On the basis that she was engaged in business (i.e., delivering for GrubHub) at the time of the accident, the insurer denied that she was entitled to coverage, a denial that extended as well to the damage to her own vehicle. She is now facing the possibility of filing bankruptcy.
As reported in the newspaper article, she believes that at least part of the fault lies with GrubHub. She presented a copy of her personal insurance policy, and they did not tell her that she needed to have a commercial policy. Whether that was really GrubHub's obligation is subject to debate. Regardless, at the time of this accident she did not have insurance that would protect her from the consequences of an accident taking place while working as an independent contractor of GrubHub.
HERE IS A LINK to that news story.
Persons involved in the gig economy need to carefully consider all of the implications of working as a self-employed independent contractor including as to the full range of appropriate insurance.
Tuesday, January 14, 2020
An Unsuccessful Effort to Steal a House
In a verdict widely reported of in the news, including in the New York Times, a man in Bartow, Florida has been sentenced to prison following his efforts to steal a house.
In connection with a residential closing, Stanley Livingston asked to defer signing the mortgage documents, even as he was somehow able to convince the other participants to go ahead and sign the deed made out to him. He grabbed that document and ran out of the closing. Two days later he filed that deed with the county land records, and then asserted he was the owner of the property free and clear.
He was convicted of grand theft for filing a false document against real property. At some point in the proceeding, that deed was declared void by the court. Now, rather than living in that house, he will spend the next 3 ½ years in prison.
Monday, January 13, 2020
The Importance of Carefully Defining What is Being Valued
I am currently working on updating a publication of the American Bar Association addressing buy-sale agreements. In the course of that work I stumbled upon a 2018 bankruptcy decision that stands for an important rule, namely that it is crucial to define what is being appraised in determining a buyout value. In re Stebnitz (Dubis v. Daniel J. Stebnitz and Gary C. Stebnitz), 586 B.R. 289 (Bankr. E.D. Wis. 2018).
Daniel J. Stebnitz, the debtor in bankruptcy, was a one-third member in an LLC along with his two brothers David and Gary. That LLC, Spirit Valley Camp, LLC, was governed by a written operating agreement signed by each of Daniel, David and Gary. The opinion suggests, but does not state explicitly, that the property held by the LLC was a vacation home. As such it did not generate income. The operating agreement provided for per stirpes descent of the membership interests amongst the three family groups and is well addressed voluntary withdrawal from the LLC (¶ 20.B), providing:
If a Membership Group wishes to withdraw from the LLC, it shall give the remaining Membership Groups written notice. The remaining Membership Groups shall purchase said departing Membership Group interest within 120 days of receipt of such notice. The purchase price shall be one-third (1/3) [of] a formal appraisal, obtained and paid for by the departing Membership Group. If the remaining Membership Groups object to said appraisal, they have the option of requiring a second appraisal, at the departing Membership Group’s cost. If an agreement cannot be reached, the Membership Groups shall obtain a third appraisal, at the cost of the departing Membership Group and the purchase price shall be the average of the three. If the departing Membership Group fails to obtain and/or pay for the appraisal, that Membership Group shall be considered in default. 586 B.R. at 293.
The opinion noted that the agreement did not define the term “appraisal.” Id.
After an adversary proceeding in which the trustee recovered to the estate Daniel’s interest in the LLC after he had transferred it pre-bankruptcy filing, the trustee gave notice of his intent to withdraw from the LLC, requiring the redemption of Daniel’s interest for $80,000. That notice included an appraisal valuing the LLC’s property at $240,000. Well within the 120 day period for closing on the put option, David and Gary’s attorney returned to the trustee a valuation of a one-third interest in the LLC. After utilizing a 15% discount for lack of control and a 20% discount for lack of marketability, valued Daniel’s interest in the LLC at $40,800. That amount was further reduced for a variety of expenses, yielding a final offer price of $25,000. 586 B.R. at 293-94. It does not appear that the third appraisal provided for in ¶ 20.B. of the operating agreement was ever sought. Rather, the trustee brought this adversary proceeding and requested summary judgment, arguing that “the [operating] Agreement’s plain language requires a formal appraisal of the Property, not a valuation of the LLC.” As the court would further note, “The problem with Paragraph 20.B is that it requires a ‘formal appraisal’ but does not specify what is to be appraised.”
The court would accept the trustee’s argument that the appraisal should be of the LLC’s property in part because the LLC, beyond holding the property, did not have a “business purpose” evidenced by, for example, renting the property or regularly buying and selling other parcels of property for profit. Ergo, the court would conclude that the “appraisal” provided for in ¶ 20.B of the operating agreement should be of the underlying asset, that being the real property. As such, the court granted the trustee summary judgment on its claim that the judgment debtor’s interest in the LLC should be redeemed by the other members for $80,000.
For myself, I find this decision entirely unsatisfactory. The court ignored the fact that the debtor did not have any ownership interest in the property. Rather, he held a one-third interest in the LLC. Ownership of an LLC does not convey to the member any ownership interest in the LLC’s property. This point was not, however, even in passing, acknowledged in the decision.
Further, in justifying its decision, the court wrote:
The defendants do not offer a reasonable interpretation of the contract provision to counter the Trustee’s reading. As noted above, the Agreement shows an intent to keep the LLC (and the Property) in the family, with interests equally apportioned between the families of the defendants and the debtor. The Agreement describes this as an intent “to provide for the transition to future generations [of the initial members] without diluting their respective ownership percentages” and instructs that the Agreement “shall be interpreted with this goal in mind.” This goal is apparent in the transfer of a member’s interest to only tow other categories of individuals: (1) the member’s designated beneficiaries; and (2) the other membership groups.
Given this stated intention, it is unreasonable to read the buy-out price of “one-third (1/3) a formal appraisal” to mean instead a valuation of an individual one-third share in the LLC that factors in deductions or discounts for “lack of control” or “lack of marketability,” as the defendants propose. The purpose of the buy-out provision in Paragraph 20.B is to allow the remaining membership groups to retain their investment positions in the family-owned property, and to allow the existing member to recapture his investment, in shares proportionate to the value of the LLC’s assets-currently, the Property. Applying any kind of discount for lack of control or similar considerations is inconsistent with the Agreement’s stated purposes, and would allow the remaining membership groups to purchase one-third of the LLC’s assets for less than one-third their appraised value, reaping a windfall at the expense of the existing family member. A discount for lack of marketability is likewise inappropriate when the Agreement obligates the remaining membership groups to purchase the existing member’s interest. In sum, the defendants’ reading of the contract is unreasonable, and therefore does not render the contractual provision ambiguous. 586 B.R. at 296-97 (citations to record and footnote omitted).
Except that happens all the time. Again, the debtor held only a minority interest in the LLC itself. He had no control over the LLC’s property; as recited in the opinion, ordinary course transactions require the approval of two-thirds of the members, with extraordinary transactions requiring unanimous approval. Rather, the application of discounts for lack of control and marketability are common in the valuation methodologies employed in operating agreements and are to be expected in the event of a voluntary withdrawal from a venture. A point made by the court, namely that minority and lack of control discounts are not permitted in corporate dissenter rights actions may be true, but is also irrelevant. The facts of this case were a voluntary withdrawal from the LLC, not a compulsory of redemption as is the case in a dissenter rights action.
Again, the only thing the debtor in bankruptcy could sell was an interest in the LLC, and the agreement should have specified that the appraisal would be of that intangible. The operating agreement’s failure to be specific as to that point allowed this decision to turn out as it did.
Sunday, January 12, 2020
LLCs Do Not Have Families
In a recent decision by a trial court in New York, it was determined that an LLC does not have a family. Bellstell 7 Park Avenue LLC v. Seven Park Avenue Corp., 2019 N.Y. Slip Op. 29402, 2019 WL 7421760 (Sup. Ct. New York County Dec. 23, 2019).
This dispute arose out of the characterization of certain unsold shares in a housing cooperative. The owner of “unsold shares” may sublet the property or assign the lease without the requirement of the approval of the cooperative’s Board of Directors or other shareholders. Rather, only the building’s managing agent’s approval is required. This case involved the question of whether the shares related to a particular unit would be characterized as unsold.
Bellstell, holding all of the unsold shares of in the cooperative, is a New York limited liability company for which the sole member is a New York corporation. That New York corporation is in turn owned by an Italian corporation named Edilverde e Beni Internazionali S.p.A. In November 2015, with the approval of the building’s managing agent, Bellstell sublet one of its apartments to Ciro Campagnoli. Campagnoli holds a 50% contingent remainder interest in Edilverde.
Under the lease agreement, unsold shares remain in that category until “the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment.” 2019 WL 7421760, *2. Bellstell would assert, in effect, that the “member of his family” language could never apply to it as it is only applicable when applied to natural persons. On the other side of that coin, an LLC or other business entity does not have family members, and therefore the proviso is inapplicable when it is the holder of the unsold shares. Conversely, 7 Park Avenue would assert that because Campagnoli is a principal of Bellstell’s ultimate owner and a member of the family that ultimately controls it, he should be treated as a member of Bellstell’s family.
Rejecting the argument of Seven Park Avenue, the court wrote:
Put simply, this court sees no principled or practical means of defining when an individual’s ties to an LLC would suffice to make them a “family member” of the LLC for purposes of determining when the individual’s occupancy of an apartment strips the apartment’s shares of unsold-share status under the lease at issue here. The court therefore concludes that as a matter of law, the only reasonable reading of “member of his family” in ¶ 38(b) of the lease is that this language does not encompass individuals connected to LLCs or corporations that hold unsold shares. Id., *4 (footnote omitted).
Friday, January 10, 2020
The Die is Cast
Today, January 10, is the anniversary of Caesar’s crossing of the Rubicon in 49 b.c., thereby precipitating the Roman Civil War and his ultimate appointment to the office of dictator for life. The Rubicon constituted the border between Cisalpine Gaul and Italy proper. No general was permitted to bring an army into our Italy; doing so was considered an attack on both the Senate and the people of Rome.
It is said that, when Caesar crossed, he observed “the die is cast.“ There is not, however, a contemporaneous report to that effect, including in Caesar’s own writings.
Apparently not realizing that Caesar had only a single legion with him, most of the leaders of the opposition, including Pompey Magnus, fled the city.
Exactly where was the river Rubicon has been lost to history.
Thursday, January 9, 2020
Pleading the Factual Basis for Diversity Jurisdiction
A pair of recent decisions stand for the proposition that facts are necessary in order to plead diversity jurisdiction or, from the other perspective, speculation is not sufficient. Those decisions are Platinum-Montaur Life Sciences, LLC v. Navidea Biopharmaceuticals, Inc., Docket No. 18-3535-CV, 2019 WL 6258632 (2nd Cir. Nov. 25, 2019) and Alanazi v. Avco Corporation, Case No. 6:19-CV-2230-ORL-28 LRH, 2019 WL 6324007 (M.D. Fl. Nov. 26, 2019).
The Platinum-Montaur case arose out of an alleged breach of contract. After the plaintiff filed suit in Florida, the defendant removed the action to the Federal District Court for the Southern District of New York. While the parties engaged in “limited informal jurisdictional discovery,” Platinum-Montaur’s citizenship was never conclusively determined. The District Court, however, proceeded on the merits on the basis that “it had no ‘good faith basis to believe there is not complete diversity.’” That basis would be reversed by the Second Circuit Court of Appeals
It was noted that one of Platinum-Montaur’s members (the other two being natural persons) was an investment fund organized as a limited partnership based in the Cayman Islands. As such, the citizenship of each of the partners, limited and general, in that limited partnership would be attributed to Platinum-Montaur in determining its citizenship. One of the limited partners in that partnership was in turn another limited partnership with some 220 limited partners, most if not all of whom would be in the United States. It was not possible, however, to determine the citizenship of each of those persons.
Noting that the diversity jurisdiction of the federal courts is limited and that questions as to removability of suit are to be resolved against removal, the Second Circuit wrote that:
A District Court may not assume subject-matter jurisdiction when the record does not contain the necessary prerequisites for its existence. Here, the District Court erred by exercising diversity jurisdiction on the basis that it did not have a “good faith basis to believe” that the parties before it were not completely diverse.
* * *
At this stage, the District Court had two options. First, it could have remanded the case to state court because Navidea had failed to allege complete diversity of citizenship or to establish diversity through discovery. Second, the District Court could have exercised its discretion to order further discovery to determine whether there was complete diversity of citizenship. ….
Here, none of the underlying state-court pleadings, the notice of removal, or the record as a whole reflected that the parties were completely diverse. Thus, the District Court erred in proceeding on the merits of this case. We therefore re-manned so that the District Court can exercise its discretion to conduct further proceedings, if any, as it deems appropriate. 2019 WL 6258632, *4 (citations omitted).
In the Alanazi decision, the plaintiff, an individual, filed an action in state court against the nine defendants, of whom three were LLCs. The defendants then removed to federal court on the basis of diversity jurisdiction. The court would remand the case because the removing defendant had failed to specify the citizenship of the plaintiff. In addition, the pleading of the citizenship of the various LLC defendants was deficient. It asserted that none of the members of those LLCs was a citizen of Florida, that being the presumptive citizenship of the plaintiff. That was rejected on the basis that “pleading that none of the members as a citizen of Florida is not sufficient to establish diversity; affirmative pleading of citizenship is required.” The court went on to write that “The citizenship of each member of each LLC must be alleged.”
In the course of its decision, the court cited an earlier opinion rendered in Wilkins v. Stapleton, 2017 WL 11219132 (M.D. Fla. Aug. 1, 2017) for the following admonition (the emphasis being in the original):
DO not allege jurisdictional facts “on information and belief.”
Wednesday, January 8, 2020
The Passing of Galileo
Today marks the anniversary of the passing, in 1642, of Galileo di Vincenzo Bonaulti de Galilei. His accolades including the father of observational astronomy, he is probably second best known for his disputes late in life with the Roman Inquisition and his work on the heliocentric system. HERE IS A LINK to his Wikipedia entry.
A recent book on his trial before the Roman Inquisition is Maurice A. Finocchiaro, On Trial For Reason: Science, Religion, and Culture in the Galileo Affair.
Of course, in the modern age he is best known for appearing in the song by queen Bohemian Rhapsody. HERE IS ALINK to it.
Which Partnership Law Applies?
In a recent decision from the Kentucky Court of Appeals, it reversed a grant of summary judgment made with respect to a claim of partnership by estoppel. It is not clear to me, however, that the correct partnership law was applied. Coppage Construction Company, Inc. v. Sanitation District No. One, No. 2018-CA-000419-MR, 2019 WL 6795706 (Ky. App. Dec. 13, 2019).
DCI Properties - DKY, LLC (“DCI”) is a private Ohio development firm. In 2005 it entered into an agreement with the City of Dayton (Ky) to develop certain land along the Ohio River. Thereafter, DCI approached Sanitation District No. One (“SD1”), a public sanitation utility operating in Boone, Campbell and Kenton counties, with respect to relocating a pipeline in its stormwater network. This decision recites that these efforts began “In the later portion of 2006.” Once DCI and SD1 had agreed to terms, DCI contracted with Coppage Construction Company, Inc. to perform the necessary work. There arose disagreements regarding performance under that agreement. Coppage gave notice of default to DCI and offered it the opportunity to cure. However, DCI chose to simply terminate the agreement and filed suit against Coppage. Coppage filed a counterclaim alleging a variety of issues including partnership by estoppel between DCI and SD1. Those allegations were dismissed on summary judgment, leading to this appeal.
On appeal the Court of Appeals reversed the grant of summary judgment as to the claim for partnership by estoppel between DCI and SD1. In discussing and allowing there to proceed a claim on that theory, the court quoted KRS § 362.225; it is there that my question arises. Again, the earliest that the alleged partnership could have come into existence was the “latter portion of 2006.” In the summer of 2006 the Kentucky UPA, which contains KRS § 362.225 and as well KRS § 362.180(1), was supplanted by the Kentucky Revised Uniform Partnership Act (2006) for all partnerships formed on or after its effective date, that being July 12, 2006.
While the elements of partnership by estoppel are not materially different between the two laws, I am uncertain how Coopage could “prevail as a matter of law under the language of KRS 362.225.” when, at least by my reading, that statute would never be applicable.
Tuesday, January 7, 2020
More on the Implied Covenant of Good Faith and Fair Dealing
In a late December ruling from the US District Court for the Western District of Kentucky, there was provided additional guidance with respect to the application and effect of the implied contractual covenant of good faith and fair dealing. In this instance, where there had been no breach of contract, there could not be a successful claim for breach of the implied covenant. Pogue v. Principal Life Insurance Company, Civil Action No. 3:14-CV-599 CHB, 2019 WL 7372433 (W.D. Ky. Dec. 31, 2019).
This dispute arose out of whether or not insurance coverage was available. The plaintiff asserted as well that the insurer had engaged in bad faith in denying the coverage. On the merits, it was found there was no coverage. The central question was whether with the denial of coverage it necessarily followed that there could be no claim for bad faith. In finding that there could not be, on those facts, a bad faith claim, the court considered several prior decisions, all cited by the plaintiff in favor of his argument that bad faith claims could survive a determination that coverage was not available. Reviewing each of these decisions, it was determined that none stood for the proposition that there could exist a valid claim for bad faith in the face of the determination that there is not coverage.
Sunday, January 5, 2020
That Is Not What Hurt You
In a recent decision from the Sixth Circuit Court of Appeals reviewing a decision out of Michigan, it focused upon the issue that, in order to prevail on a claim for breach of contract, it must be shown that the breach caused the plaintiff’s damages. In this instance, even assuming that the defendant acted improperly, that is not what caused the plaintiff’s problems. S. D. Benner, LLC v. Bradley Company, LLC, Case No. 19-1439, 2019 WL 6998154 (6th Cir. Dec. 20, 2019).
S. D. Brenner, LLC was a real estate developer in Michigan, once holding some 22 commercial properties in the Grand Rapids area. It and related companies filed for bankruptcy approximately a decade ago. In the course thereof, there was negotiated a settlement with its primary creditor, Comerica Bank, under which it would forgive the outstanding debt if paid $18.75 million within five months. Absent making that payment, Comerica had the right to seize the properties. Benner then retained Bradley to market ten of the properties, seven for sale and three for lease. Bradley was never successful in effecting a sale or lease of any of the properties. Ultimately, Benner was not being able to make the payment to Comerica Bank (even after an extension), and the properties were seized. Then, “an affiliate of Great Lakes Capital (a company that shared common ownership with Bradley) bought the bank’s rights to the properties at a significant discount.” Thereafter, Benner sued Bradley for breach of contract and breach of fiduciary duty. Summary judgment in favor of the defendants was granted, and this appeal followed.
The Sixth Circuit narrowed the question to one of causation; “to simplify matters, let's assume for the sake of argument that the companies have offered evidence of breach and damages. The problem is that there’s no evidence of causation.” From there the court wrote:
The [plaintiffs] had to show that any breach was both the but-for and proximate cause of their damages. At a minimum, then, the companies needed some evidence showing that, if Bradley had honored its contractual and fiduciary duties, then they wouldn't have lost their properties because they would have paid $18.75 million to Comerica by the settlement deadline. But the [plaintiffs] haven't offered any evidence to that effect.
Take the theory that Bradley didn’t use its “best efforts” to market the properties. The Benner companies point out that Bradley waited around two months before listing any of the properties. But the companies haven’t offered evidence that any of the properties would have been sold or leased if Bradley had listed them sooner. For instance, the companies haven’t pointed to anyone who might have been interested in the properties at the listed prices. Nor have they offered any expert testimony to show that sales would have occurred. Indeed, just a year earlier, the companies had tried to sell the very same properties—without success. Of course, someone (an affiliate of Great Lakes Capital) eventually bought the properties. But it did so during a later period and at a significant discount. So this fact doesn’t show that any of the properties could have been sold during the relevant period and at the listed prices. And without these sales, the Benner companies still would have lost the properties because they wouldn’t have paid $18.75 million by the settlement deadline.
Even so, let’s assume that there were potential buyers out there just waiting to be found. The Benner companies still haven’t shown that these sales would have prevented their default. According to their own evidence, the seven properties listed for sale were worth a bit under $11 million—at the very most. So even if the companies had sold all the listed properties, they would have owed Comerica another $7.75 million. True, the leased properties could have brought in a little more money. Unfortunately, the Benner companies haven’t offered any real evidence about how much. At best, the listings agreements—which reflect how much the companies wanted for the leases, not how much the leases were actually worth—suggest that the properties might have brought in a sum in the mid-five figures each month. Multiply that sum by four months (about how long Bradley had to lease the properties) and the companies still would have fallen millions of dollars short of what they owed under the settlement agreement.
Nor have the Benner companies offered anything else to show how Bradley’s “best efforts” might have changed matters. For instance, the companies haven’t pointed to any evidence that they would have obtained refinancing if some properties had been sold or leased. All this means that the companies haven’t shown causation. By all appearances, they would have lost the properties even if Bradley had used its “best efforts.”