Friday, July 31, 2020
An LLC’s Members Have Limited Liability Except, of Course, When They Do Not
A recent decision from the Oregon Supreme Court reminds us that, while as a general rule the members of a limited liability company enjoy (it is part of the name) limited liability from its debts and obligations, there are circumstances in which that rule is set aside. In this instance, applying certain environmental laws, it was held that the members at of an Oregon LLC are personally liable for its failure to properly operate a landfill. Kinzua Resources, LLC v. Oregon Department of Environmental Quality, ___ P.3d __, 366 Or. 674, 2020 WL 3866921 (Or. July 9, 2020).
Kinzua Resources, LLC held the permit to operate the Pilot Rock landfill. That landfill was closed in 2010, and thereafter there occurred a number of fires. The Oregon Department of Environmental Quality began assessing fines for the failure to properly execute upon the closure. To that end, under Oregon law, if the operator of a landfill does not comply with the requirements for its closure, “the person owning or controlling the property in which the disposal site is located, shall close and maintain the site.” ORS § 459.268; id. § 459.205(2).
In this decision, the Oregon Supreme Court was called upon to determine how to apply the term “controlling.” In this instance, they determined that the members of the LLC were in the controlling capacity and as such could be held directly responsible to effect the proper closure of the facility.
Addressing the apparent “conflict” between this liability of the LLC’s members and the LLC Act, the court found that the limited liability provision of the Oregon LLC Act relates to vicarious liability, namely responsibility for a debt or obligation of the LLC consequent to member status. In contrast, the obligations with respect to proper closure of the landfill were held to be direct and that the environmental “obligations are premised on the person’s own authority - retained or exercise - over the site at which the permit-holder has failed to act” in completing the necessary closure of the facility.
Thursday, July 30, 2020
The First Defenestration of Prague
Today is the anniversary of the First Defenestration of Prague, an event that took place in 1419 in the midst of the Hussite rebellion. When a march of the Hussites was met (it is alleged) by a rock thrown from the city hall, the building was stormed, and seven members of the towns leadership were tossed from the windows to their respective deaths. The Hussite Wars, which lasted until 1436, would as a direct result follow.
David Tingstad on Brower v. Horner
My friend David Tingstad at the Beresford Booth firm in Seattle Washington recently posted on the firm's blog a review of the decision rendered by the Washington Court of Appeals in Brower v. Horner, 2020 WL 1282511 (Wash. App. March 17, 2020). HERE IS A LINK to that posting.
Two (now former) friends organized originally a partnership and then an LLC that operated a nightclub. Eventually they had a falling out, and one of them, Brower, on the club's Facebook page, posted that he is “no longer the co-owner of The Big Dipper.” In that same Facebook posting, he wrote as well “I am glad to be gone.”
Horner, the other member, took Brower at his word and filed with the Washington Secretary of State a filing with respect to the ownership of the LLC. But then Brower asserted he was still a member, and brought suit against Horner “refused to recognize him as having a continuing interest in a [LLC] in which both men were originally members.” The jury found in favor of Brower, and this appeal followed. Applying the Washington LLC Act and particularly RCW § 25.15, 131, it was held that Brower withdrew from the company and became his own assignee.
Again, I would recommend David's longer consideration of this decision to you.
Wednesday, July 29, 2020
Lifetime Achievement Award for Michael Bamberger
More years ago than I care to consider, I attended my first meeting of what was then the Committee on Partnerships and Unincorporated Business Entities (today it is the Committee on LLCs, Partnerships and Unincorporated Entities). The meeting was in November, and was held in the Ritz Carlton in Washington D.C. Knowing nothing of the protocol I arrived early and found myself alone in a basement conference room.
After awhile a distinguished looking gentleman arrived, and he took the seat next to me. He turned to introduce himself, saying “Hi, I’m Michael Bamberger.” At that point I knew I was way outside my weight class; Michael was a known expert in the law of LLCs, having considered cutting edge topics such as the status of an LLC doing business in a foreign jurisdiction that did not have LLCs. Such was my introduction to the ABA Committee I now consider a second home.
Since then, in recognition of his work in the field, Michael has received the Martin I. Lubaroff Award. Most recently, in recognition of all he has done “toiling in the vineyards of the law,” he has received a lifetime achievement award from the New York Law Journal. Following is the announcement circulated in Denton’s, Michael’s firm:
Congratulations to Michael Bamberger on being recognized as Lifetime Achievement Award honoree by the New York Law Journal. Michael is widely regarded as one of the nation’s leading First Amendment authorities.
The Lifetime Achievement Award honors those who have made an impact on the legal community and the practice of law over an entire career. With more than 40 years of experience, Michael has dedicated his career to the importance of free speech and has a broad background in constitutional law, intellectual property, media law, corporate law, securities law and business law. He has defended publishers in defamation actions; has counseled publishers and other media clients in their review of potentially defamatory and infringing material; and has published widely in the field.
A tireless volunteer, Michael has provided pro bono legal service to nonprofits such as the Center for Jewish History and the Leo Baeck Institute. For more than 25 years, he has served as pro bono general counsel of the Tourette Association of America. As a result of his work, Michael was named the inaugural honoree of the American Booksellers Association's Joyce Meskis Free Speech Award, which honors those "who have provided extraordinary service in defense of the First Amendment rights of booksellers and their customers,” as well as awards from the Freedom to Read Foundation of the American Library Association and the Book Industry Study Group.
Michael is also a scholar of limited liability companies and partnerships, and has taught the subject at both Cardozo Law School and the University of California, Berkeley, School of Law. He has been active on committees of the American, New York State, NY City and NY County bar associations, including serving as chair of the ABA committees on technology and intellectual property and on security interest and intellectual property, and the NY City Bar committee on civil rights.
I of course add my congratulations to this beyond well-earned recognition, and I count myself lucky to know Michael Bamberger.
Disputes Over Member Status Continue to Royal the LLC Waters
Peter Mahler, in his blog New York Business Divorce, on July 13 posted Disputes Over Member Status Continue to Royal the LLC Waters. HERE IS A LINK to that posting. I would highly recommend it to you.
Therein, Peter reviews a trio of recent decisions from New York, all involving the question of who is (or is not) a member of the LLC, particularly as contrasted with the person who owns only an economic right in the venture. Each of these decisions carries an important lesson, namely how crucial it is that contemporaneous documentation of changes in membership and economic ownership of an LLC must be maintained. Absent contemporaneous records, there will invariably be disputes requiring the intervention of a court or an arbitrator, often in years after the events in question with the resultant feeding of memories and losses of documentation.
More on Bankruptcy Remoteness
There have been developing for several years developments in bankruptcy remoteness, that is the structuring of various businesses so that a particular (and most unlikely) vote is required in order for a bankruptcy filing to be valid.
Most recently, in In Re Pace Industries, LLC, Case No. 20-10927 (MFW) (Bankr. D. Del.), a preferred investor objected to the bankruptcy filing, relying upon the provision added to the debtor’s organizational documents requiring the investor’s consent to any filing that might be made. The court held “[I]t is clear that a lack of access to the Bankruptcy Code and the Bankruptcy Courts would violate the federal public policy ... to allow a debtor to file [for] bankruptcy.”
Tuesday, July 28, 2020
The Execution of Thomas Cromwell
Today is the anniversary of the execution by beheading of Thomas Cromwell, which event took place in 1540.
Cromwell's life is a story of rags to riches. Born to an apparently abusive father in the hamlet of Putney, Thomas fled to Europe where he pursued a career as a mercenary, later joining an Italian trading/banking house as a clerk. Upon his return to England he worked with Thomas Cardinal Wolsey, then Lord Chancellor to Henry VIII. Notwithstanding Woolsey's fall consequent to his inability to secure from the Pope an annulment of the marriage to Katherine of Aragon, Cromwell remained in Henry’s good graces. Even as Sir (later Saint) Thomas More became Lord Chancellor in succession of Wolsey, Cromwell continued an apparently preconceived program of accumulating senior offices and with those offices increasing authority. Ultimately, he became the fulcrum through which Tudor policy under Henry VIII was implemented, including effecting the downfall of Henry's second wife, Anne Boleyn on spurious charges of adultery. It was, however, another of Henry's wives, Anne of Cleves, who would precipitate Cromwell's fall. Cromwell had promoted the cause of a marriage with Anne as a way of making an alliance with the Lutheran league in Europe, thinking they would serve as a counterbalance to both France and the Holy Roman Empire (and expected treaty of cooperation between them never came to pass). That marriage was, at best, a disaster, Henry having no attraction to Anne and allegedly never consummating the marriage. Anne had the good sense to accept an annulment of the marriage, a transaction supported by Cromwell in letters requested of him while already in the Tower of London. Anne of Cleves was not, however, the sole reason for Cromwell's fall. Rather, he as well fell victim to jealousy of members of the nobility who disliked the fact that a commoner had risen so high (conveniently ignoring that he had been made Earl of Essex and Lord Great Chamberlain) and charges of Protestant/Lutheran sympathies by Catholic counselors including the Duke of Norfolk (Thomas Howard) and Stephen Gardiner (Bishop of Winchester).
After the fall (there was no trial; he was attainted) and execution of Cromwell, Henry lamented his loss and accused various of his counselors of misdeeds and stripping him of one of his greatest advisors.
In recent years Cromwell's fame has increased exponentially by reason of the three-part biographical novel of him written by Hillary Mantel, the first volume having been Wolf Hall. The first and second installments of the “biography,” the second being Bring Up The Bodies, were as well made into a TV series by the BBC. The third volume, The Mirror and the Light, was released earlier this year. While those books are incredibly well written and are quite enjoyable, the true study of Cromwell's life is Diarmaid MacCulloch’s magisterial biography Thomas Cromwell: A Revolutionary Life (2018).
Friday, July 24, 2020
Control of a Single Member LLC: In re Thomas
In a decision handed down in May, a Tennessee Bankruptcy Court considered who would have control of a single-member LLC whose sole owner was in bankruptcy. In this instance it was held that the member’s bankruptcy filing conveyed both the economic and management rights of the member to the bankruptcy estate and the trustee. In re Thomas, 2020 WL 2569993 (Bankr. W.D. Tenn. May 8, 2020).
This decision was rendered in response to a motion by the trustee for an order directing that both the economic and the management rights of the bankrupt be in the estate to the effect that the chapter 11 trustee is the only authorized representative of an LLC. The debtor was the sole member of the LLC, and the Tennessee LLC Act (as do most of the acts across the country) provides that a member is disassociated (i.e., ceases to be a member and ceases to have the right to participate in the LLC’s management) upon the member filing bankruptcy. Tenn. Code Ann. § 48-249-503(a)(7)(A); id. § 48-249-505(a)(1). The only management rights that are reserved are those to participate in the LLC’s winding up is the LLC is to be terminated. The conflict was framed by the Court as follows:
At issue … is the question of a trustee in bankruptcy’s governance rights with respect to a [LLC] wholly owned by a debtor before the commencement of a voluntary bankruptcy case. The Trustee argues that by virtue of the filing of the bankruptcy petition and his appointment as Trustee, he holds both the financial rights and governance rights that make up the membership interest in TI Properties. Ms. Thomas argues that the Trustee holds only the financial rights but not the governance rights. The Debtor insists that the filing of his bankruptcy petition did not constitute a transfer of his governance rights under Tennessee law. 2020 WL 2569993, *1.
Under the Tennessee LLC Act a “membership interest” includes both the “financial rights” and the “governance rights.” Tenn. Code Ann. §§ 48-249-102(22), (11) and (13). Absent contractually agreed to limitations upon doing so, the financial rights are freely transferable, but the transferee has no right to participate in the LLC’s management. Tenn. Code Ann. § 48-249-507(b).
In reviewing the statute the court determined that in multi-member LLCs a member’s bankruptcy filing results in the transfer and therefore termination of the debtor’s governance rights, but not of the financial rights, citing In re Albright, 291 B.R. 538, n. 7 (Bankr. D. Colo. 2003). However, Thomas the court concluded that there must be something different when the subject LLC had as its sole member the person in bankruptcy:
[T]his case presents the question of governance rights when the sole member of a single-member limited liability company files a petition in bankruptcy. The Tennessee Revised Act appears to limit a trustee in bankruptcy to the exercise of only those governance rights needed to wind up the affairs of the limited liability company reserved to a member whose membership interest is terminated. The Tennessee Revised Act does not address the governance rights of a single-member limited liability company when the membership interest terminates as the result of the filing of a bankruptcy petition but the trustee in bankruptcy desires to continue the business of the LLC for the benefit of creditors of the bankruptcy estate. 2020 WL 2569993, *3.
The Trustee argued that the provision of the LLC Act stripping a member of governance rights consequent to filing for bankruptcy was an invalid ipso facto clause, and that the governance rights became property of the estate, exercisable by the trustee, just as are the financial rights. Thomas would argue that even if the financial rights became property of the estate, the non-transferable governance rights remain with the now bankrupt debtor who continues to be vested with the authority to manage the LLC. The Court would hold that in a single-member LLC, a member’s bankruptcy petition results in the transfer (under § 541(a)(1) of the Bankruptcy Code) of all aspects of the membership interest, financial and governance, to the trustee.
The Trustee is correct. Upon the filing of his bankruptcy petition, all the Debtor’s interests in property, both legal and equitable, became property of his bankruptcy estate. The Tennessee Revised Act defines the membership interest of a member in an LLC as personal property. As such, it became property of the bankruptcy estate upon the filing of the bankruptcy petition. The Tennessee Revised Act attempts to prevent this result by providing for the “termination” of a membership interest upon the filing of a petition in bankruptcy by a member. This result is preempted, however, by section 541(c)(1)(B) of the Bankruptcy Code. 2020 WL 2569993, *37.
FYI, the debtor is identified as William Thomas, and in several cases the decision uses male pronouns in refereeing to the debtor. There are however numerous references to the debtor with “Ms.” and “she.”
Thursday, July 23, 2020
The Passing of Henry Fitzroy
Today marks the anniversary of the death, in 1536, of Henry Fitzroy, the illegitimate son of King Henry VIII and Elizabeth Blount. Notwithstanding his illegitimacy, Henry may have considered Fitzroy a possible heir. As a child he had been raised to the nobility, being both an Earl and a double Duke (Richmond and Somerset); all taking place when Fitzroy was six years old. While passing on the throne to an illegitimate heir would have been extraordinary (it had never been done since the Conquest), Thomas Howard, the Duke of Norfolk and an astute (although not always effective) student of Tudor politics, must have thought it possible in that he arranged for the marriage of his daughter Mary to Fitzroy. This is the same Thomas Howard who promoted Henry’s marriages to Anne Boleyn and Catherine Howard, both his nieces. Henry VIII would later assert that the marriage was never consummated, and on that basis he sought to take back what was otherwise her dowry.
Henry would remain king until 1547, then to be succeeded by Edward VI, his son with Jane Seymour (only nine years old at the time).
Likely Fitzroy died of tuberculosis (and not the sweating sickness that was suggested in the HBO show “The Tudors”), the same malady that would likely claim his half-brother, the future Edward VI.
Wednesday, July 22, 2020
Beziers: "Kill Them All, God Will Know His Own"
Today is the anniversary of the Massacre at Béziers, an event that took place in 1209 during the Albigensian Crusade. Whether, however, “Kill them all, God will know his own” was actually uttered is open to debate.
The Albigensian Crusade (1209 – 1229) was launched early in the 13th century in response to the rise of the Cathar (“pure” – katharoi; Diarmaid MacCulloch, Christianity: The First Three Thousand Years at 387) heresy in southern France; it became the “Albigensian Crusade” because the city of Albi was a Cather center. The Cathars themselves were members of a dualistic/gnostic heresy that may be traced to the Bogomils of what is now Bulgaria, they being derived from the Paulicians of the Byzantine Empire. The heresy had been condemned in several church councils and synods. There was as well a political element; what we today conceive of as “southern France” (the Languedoc) was linguistically, culturally and politically if not independent then at least tenuously tied to the France centered in Paris and itself rather weak.
The Crusader army, not as coherent as it should have been, entered the territories in which Catharism was strong, encountering Béziers as the first significant town. Efforts to negotiate a settlement were unsuccessful, and the army began preparations for mounting a siege. Almost inadvertently, a skirmish broke out between some of the irregular troops with the Crusader army and town residents. Ultimately, those irregular troops, followed by the regular army, were able to push into the town through open gates, whereupon a general sack began. Although many of the citizens of Béziers sought to take refuge in various churches in the town, they were all broken into, and nearly all the residents were put to the sword. When discord later broke out between the regular troops of the Crusader army and the irregular troops who had successfully broken into the town, it was put to the torch. In response to the sack and the execution of the town’s residents, when asked what should be done to separate the orthodox from the heretics, Arnaud Amalric, the Abbot of Citeaux and the Papal Legate traveling with the army, is reputed to have said words to the effect of “Kill them all, God will know his own.” (“Caedite eos. Novit enim Dominus qui sunt eius.” – “Slay them all. God will recognize his own.”)
Amalric filed a letter with the Pope describing what had happened. It does not report the line quoted above. Rather, the line arises from a story told some 20 years later by Caesarius of Heisterbach. He was not, however, present at Béziers. Hence, whether the now famous line, “Kill them all, God will know his own.” was there said is open to question.
Tuesday, July 21, 2020
The 2020 Amendments to the Delaware General Corporation Law
The Delaware Legislature has passed certain amendments to the Delaware General Corporation Law. The Delaware law firm of Richards Layton & Finger has released a detailed review of these changes; HERE IS A LINK to that publication.
Monday, July 20, 2020
The 2020 Amendments to Delaware’s LLC, Limited Partnership and General Partnership Acts
As happens annually, Delaware has adopted amendments to its LLC, Limited Partnership and General Partnership Acts. Richards, Layton & Finger has prepared a summary of those amendments; HERE IS A LINK to their review. At the bottom of that publication are links to the various statutes.
Saturday, July 18, 2020
The Edict of Expulsion
Some events in history may be celebrated for the change they brought about or their ultimate impact. Other events must simply be acknowledged for the misery that flowed therefrom. The Edict of Expulsion, issued this day in 1290 by King Edward I of England, is clearly in the second category. Under the Edict, all Jews were required to either convert to Catholicism or leave the country not later than All Saints Day (November 1). Almost the entirety of the Jewish community in England, probably counting 2,000, chose the second option.
While medieval Europe with a fairly be characterized as being anti-Semitic, England was particularly so. While there appears to be no Jewish community in England until after the Norman Conquest of 1066, a community soon thrived. Precluded from owning land or engaging in most trades, many members of the community, the archetype being Aaron of Lincoln, probably the richest man in the country, turned to moneylending as a trade. Under then existing Canon Law, interest could not be charged to or by Catholics. Canon Law did not, of course, govern Jews. Jewish law permitted the lending of money on the interest between Jews and non-Jews. Meanwhile, all Jews were declared direct subjects of the king, with the effect that they could be taxed (or compelled to make “loans”) without the need to go through Parliament. Meanwhile, particularly despicable anti-Semitic views, often based upon allegations of either ritual murder of children and continuing allegations of deicide, were all too common. These views led to occasional pograms, including that in 1190 when a significant portion of the Jewish community in York was killed.
The 1290 Edict of Expulsion was only the last in a chain of events. In 1218, Jews had been required to wear a badge. By the middle of the century there were not only expanded requirements with respect to identification, but also segregation of residences. Then, in 1275, the lending of interest by Jews was forbidden, depriving the community of its primary source of income. The hypocrisy of these events was evidenced by the actions of certain nobles to buy the debt and, upon default, to seize the land of the borrowers that had been pledged as collateral. Meanwhile monasteries and abbeys were regular borrowers.
In the course of the expulsion, the Jewish community was forbidden to take much of its property, including gold, rendering them effectively penniless as they dispersed to Scotland, what is today the Netherlands, France and Poland. It was not until 1660 that is was acknowledged that Jews were permitted to return to England.
The King’s Jews: Money, Massacre and Exodus in Medieval England by Robin R. Mundill is a good review of this history.
The Edict of Expulsion was issued in 1290. Comfort should not be taken that, in the 730 years since then, that much has changed.
Friday, July 17, 2020
Validity of Bankruptcy Filing Upheld
In a recent decision from the Bankruptcy Court for the Southern District of New York, the bankruptcy petition filed on behalf of a North Carolina organized LLC, that petition being authorized by the manager of the LLC, was affirmed. In re: The Northwest Company, Case No. 20-10990 (MEW), 2020 WL 2121269 (Bankr. S.D.N.Y. May 1, 2020).
The Northwest Company, LLC, organized in North Carolina, was a manager-managed LLC for which Ross Auerbach served as the manager. After he placed the company in bankruptcy, a member, Extreme Horse Limited, asserted that the bankruptcy petition was not properly authorized and that the case should be dismissed. Extreme Horse made essentially two arguments as to why the petition was invalid, namely (i) while the manager of a North Carolina LLC may act with respect to matters in the ordinary course, the manager could not act with respect to extraordinary matters such as filing a bankruptcy petition, and (ii) a bankruptcy filing constitutes effectively a transfer of all or substantially all of the LLCs assets, and under North Carolina law that transaction requires the unanimous approval of the members and that approval was here lacking. Both of these arguments were considered in detail and rejected by the Northwest Company Court.
With respect to the argument that the manager of the North Carolina organized LLC is restricted to acting to matters in the ordinary course, the court reviewed the statute, and found no such limitation. Rather:
The North Carolina statute says generally that the manager or managers have the authority to act for the entity. See N.C. Gen. Stat. § 57D-3-20(a). There is nothing in that section that limits a manager’s authority to matters done in the ordinary course of business. The North Carolina statute separately lists certain items that can only be done with the consent of all members, and I will review that in a moment. But otherwise the manager can act on behalf of the limited liability company as a matter of North Carolina law. 2020 WL 2121269, *1.
With respect to the second allegation, namely that the bankruptcy constituted a transfer of all or substantially all LLC assets, and under the North Carolina LLC act that requires the consent of all members, the court determined that the filing for bankruptcy is not a transfer of assets. Continuing this analysis, the court considered the creation of the bankruptcy estate and a significant number of opinions of various bankruptcy courts around the country and as well a variety of decisions with respect to on-site number of decisions interpreting the North Carolina LLC Act. After a careful exposition of those decisions, the Court concluded:
Based on the language of the Bankruptcy Code, the Supreme Court’s decision in [NLRB v. Bildisco & Bildisco, 460 5U. S. 513 (1984)], and the many other authorities I have cited above, I hold that the contention that the mere filing of a Chapter 11 petition and the creation of a Chapter 11 estate automatically amounts to a transfer or a disposition of substantially all of the debt towards that property for purposes of other laws is simply wrong, particularly where the debtor continues as a debtor-in-possession and continues to exercise dominion and control over its businesses and properties. Id., *4.
Extreme Horse would also make something akin to a “substance over form” argument, alleging that the purpose of the bankruptcy filing “is to complete a sale of assets.” The court found, inter alia, that that question was not before it. Rather:
That the [bankruptcy] filing itself did not accomplish such a sale or transfer, and even if a sale is contemplated (or planned, or expected, or likely) it is not a foregone conclusion, and it is not an outcome that irrevocably follows from the bankruptcy filing itself. The issue before me is whether the filing was authorized. Whether the Debtor does or does not need unanimous consent in order to propose a sale is not an issue that is before me today. Id., *5.
Animal Cruelty and Religious Services Don’t Mix
In a recent decision from Louisiana, there was rejected the suggestion that a statute prohibiting cockfighting infringed upon the religious rights of the members of the Holy Fight Ministries. Plumbar v. Perrilloux, Case No. 3:20-CV-00361-JAB-RLB (M.D. La. July 13, 2020).
Under Louisiana law, it is illegal to “organize or conduct any commercial or private cockfight wherein there is a display of combat or fighting among one or more domestic or feral chickens and in which it is intended or reasonably foreseeable that the chickens would be injured, maimed, mutilated, or killed.” La. Stat. Ann. § 14:102.23. Plumbar and the congregation argued that this statute violated their First Amendment rights to the free exercise of religion.
Rejecting the requested injunction against enforcement of the statute, the court wrote:
The Court is not persuaded that Plaintiffs can prevail on the elements necessary to issue an injunction. They are unlikely to succeed on the merits of their claims because Defendants have provided satisfactory evidence to show that the state has a compelling interest in enacting a law banning cockfighting and because the evidence casts doubt upon the type of institution operated by Plaintiffs. In other words, the evidence suggests that the cockfighting activities were more commercial in nature than a bona fide religious ritual. The public interest and balance of harm likewise weighs in favor of Defendants. Unrestricted freedom to exercise one component of Plaintiffs’ religious practice is outweighed by the public’s interest, as reflected in duly passed legislation that aims to combat animal cruelty.
Thursday, July 16, 2020
Pigs Get Fat and Hogs Get Slaughtered; Pushing Valuation to the Extreme
Peter Mahler, in his blog New York Business Divorce, has published a review of a recent New York decision involving a forced buyout and valuation of the interest of a minority member. In this instance, the operating agreement provided that the valuation be performed by a single appraiser. Further, in its implementation, the member being redeemed was effectively precluded in participation in the valuation process. Ultimately, the court found that the appraisal could not be affirmed.
The case in question is Yakuel v. Gluck, 2020 NY Slip Op. 31251(U) (Sup. Ct. NY County May 7, 2020); the decision is not yet posted on Westlaw. Peter’s review of the decision is set forth in a blog posting entitled This Single-Appraiser Buy-Sell Agreement Was Asking For Trouble; HERE IS A LINK to that posting.
Not Really the Beginning of the East-West Schism
Today is the anniversary of the laying of a bull of excommunication upon the altar in the Hagia Sophia in Constantinople in 1054, oft cited as the event precipitating the schism between the Eastern and Western branches of the Catholic Church. The excommunication was of Michael I Cerularius, the Ecumenical Patriarch of Constantinople, the bull being delivered by a trio of papal legates, they representing Pope Leo IX. What is clear is that the presentation of the bull led to a counter-excommunication of the papal legates. It is also clear that this is not the event that led to the East-West Schism.
The Eastern and Western branches of the Church had been growing apart for centuries. Hyper-technical debates as to complex theological topics, many of them Christological in nature, served as fault lines even as the ability to discuss those topics became more and more difficult as knowledge of Greek declined in the West. In addition to these theological disputes, disputes as to practice continued to arise. As early as the Quinisext Council in the late seventh century there were sharp divides between practices in Eastern and Western churches as to matters of liturgy and clergy discipline. On the political front, as Rome and the Papacy were based in the crumbling remains of the Western Roman Empire, the Eastern Roman Empire based in Constantinople was still thriving even as it was facing significant challenges from Muslim invaders. Constantinople, from a political perspective, was not willing to play second fiddle to Rome, and expected recognition of the importance of Constantinople as an Ecumenical Patriarch of at least near equivalency with the Bishop of Rome.
While today may not be the anniversary of the schism, that it existed, and that it had long-term effects, is without doubt. It would taint efforts at cooperation in connection with the Crusades and have a significant role in the Fourth Crusade and its conquest of Constantinople itself, thereby forever weakening the Eastern Roman Empire and making it more susceptible to conquest in turn by Muslim forces.
Wednesday, July 15, 2020
Dissolved LLCs and the Attorney-Client Privilege
In recent decision from Mississippi, the court considered whether a dissolved corporation continues to enjoy an attorney-client privilege. On the facts of this case, it was held that it did not. United States v. Walters, 2020 WL 1934803 (S.D. Miss. April 21, 2020).
Walters served a subpoena duces tecum upon Jonell Beller, an attorney with the Baker Donelson law firm seeking records relating to, amongst others, Prime Care Marketing, LLC and Total Care Marketing, LLC. The exact relationship between Walters and either of these business entities was not recited in the decision, although Walters had, in 2015, filed the articles of dissolution with respect to Prime Care Marketing, LLC.
In response to the subpoena duces tecum, Beller filed a motion to quash on the basis of privilege, to which Walters responded that Beller “had no standing to assert the privilege because it belongs to the clients” and he “has authority to waive the privilege for the companies.” The court granted the motion to quash, finding that Beller had standing to assert the privilege and that Bellers had failed to demonstrate, on behalf of each of the LLCs, that he had authority to waive the privilege. That ruling led to a motion for reconsideration, which is the subject of this decision.
On reconsideration, the focus was upon the extent to which a dissolved corporation (although this case involved LLCs) enjoys a post-dissolution attorney-client privilege. Drawing a distinction between natural persons, for whom the privilege does survive death, the court cited a variety of authorities that stand generally for the proposition that a business entity, after its dissolution, notwithstanding the possibility of reinstatement thereafter, does not continue to enjoy an attorney-client privilege. For example, the court cited TAS Bistriv. Co. v. Cummins, Inc., 2009 WL 3255297 (C.D. Ill. Oct. 7, 2009) for the proposition “absent some compelling reason to the contrary, the attorney-client privilege does not survive the death of the corporation.”
On that basis, the motion to reconsider was granted, the quashing of the subpoena was set aside, and Beller was directed to produce the documents responsive to the subpoena duces tecum.
Tuesday, July 14, 2020
No Backing Out of Election to Purchase Under Buy-Sell Agreement
Peter J. Sluka, writing on Peter Mahler’s blog New York Business Divorce, has published a posting titled Consider Whether Your Buy-Sell Provision is a Call Option Before Pulling the Trigger; HERE IS A LINK to that posting. Therein, Peter reviewed the decision rendered in Walsh v. White House Post Productions, LLC, CA. No. 2019-0419-KSJM, 2020 WL 1492543 (Del. Ch. March 25, 2020).
Briefly, the employer LLC elected to exercise a call right against the membership interest of two employees/members, Walsh and Devlin, and in accordance with the operating agreement proceeded to acquire the first valuation. Again in accordance with the operating agreement, Walsh and Devlin then acquired their own appraisal of the LLC interest, it coming in significantly higher than had the first. At that point, the LLC sought to stop the process, i.e., forgo the call option. This decision focused upon whether, having started the process, the LLC could then terminate it short of closing. In this instance, the court held that they could not do so, and that the initial exercise of the option and commencing the valuation process was irrevocable.
Monday, July 13, 2020
A Case of Stolen Corporate Identity
In a decision rendered in January of this year, the Federal District Court for the Western District of Kentucky considered a dispute that included an effort to in effect steal the identity of a business corporation. Burkesville Hardwoods, LLC v. Coomer, Civil Act. No. 1:18-CV-00018-GNS-HEB, 2020 WL 353232 (W.D. Ky Jan. 17, 2020).
It requires a careful review of the opinion, including its footnotes, to put together what seem to be predicates of the dispute. Essentially, the estate of R. T. Baker leased certain lands in Cumberland County to Travis Coomer Drilling Company, a corporation (“TCD”), for oil and gas extraction. TCD was administratively dissolved on September 30, 2014, for failure to file its annual report. In the meantime, the property subject to the lease with TCD was conveyed to Burkesville Hardwoods, LLC (“Burkesville”). After TCD was dissolved, Burkesville caused there to be incorporated a new corporation under the name Travis Coomer Drilling Company (“TCD2”). Ergo, Burkesville, the property owner, created a new corporation with the exact same name of its administratively dissolved lessee. The nature of the back story of the relationship between Burkesville and TCD is not reviewed in the decision, but clearly there was something going on.
A point not addressed in the opinion is why TCD was never reinstated from its administrative dissolution under either its original name (if done before the incorporation of TCD 2 on April 10, 2017), or thereafter under a different name.
As an aside, in reviewing the records of the Kentucky Secretary of State, several notices from that office relating to the annual report and subsequent administrative dissolution were returned to the Secretary of State as undeliverable, presumably because the company had moved from that address and not updated its records with the Secretary of State. This decision is yet further admonition in making sure that those addresses are kept current.
Regardless, Burkesville filed this action against Travis Coomer individually, asserting he had no right to extract oil and gas from the leased property. Coomer brought counterclaims in order to enforce that lease, alleging as well that Burkesville had misappropriated the identity of TCD by incorporating TCD2. This decision was rendered in response to Burkesville’s application for a preliminary injunction and for summary judgment.
With respect to the requested preliminary injunction, it was rejected because the only claimed injuries could be fully compensated with monetary damages. In addition, notwithstanding an assertion to the contrary, Burkesville had made no showing that the continued extraction of the oil and gas by Coomer would have a negative impact upon its goodwill or reputation. In addition, the court found that the equities did not balance in favor of Burkesville, noting that it had interfered with Coomer’s rights under the lease (here it would seem the court conflated Travis Coomer and his dissolved corporation) and that it had acted “unscrupulously” by having “incorporated a company using Coomer’s name for no discernible reason other than disrupting Coomer’s business operations.” 2020 WL 353232, *3. As to that last point, in a footnote, the court explained and rejected the assertion that the incorporation of TCD 2 constituted a “squeeze out”, going on to explain what is an actual squeeze out transaction.
Turning to Burkesville’s motion for summary judgment with respect to the validity of the lease, the motion was resoundingly rejected. With respect to business organization law, there was rejected the assertion that TCD could not enforce the lease because it had been administratively dissolved. This assertion was rejected on the basis of KRS § 271B.14-050(2)(f), which provides that the dissolution of a corporation does not prevent the corporation from commencing a legal proceeding in its own name, and as well citing Robert W. Keats et al., Kentucky Practice Series: Methods of Practice § 14.82. Rather:
Hardwoods is incorrect when it asserts that simply because TCD was administratively dissolved that entity cannot maintain an action to enforce the Lease. Nor does administrative dissolution transfer title of the Lease in any way. KRS 271B.14-050(2)(a) (“Dissolution of the corporation shall not [t]ransfer title to the corporation’s property ….”). Because title to TCD’s interest in the Lease was not destroyed by the corporation’s administrative dissolution, Hardwoods is incorrect when it asserts that the Lease should be rendered void for unenforceability. Id.,*6.
The court went on to reject the notion that Coomer no longer owned TCD subsequent to its administrative dissolution and Burkesville’s incorporation of TCD2.
Burkesville Hardwoods, however, points to no authority supporting the assertion that filing Articles of Incorporation in an administratively dissolved entity’s former name gives the new corporation ownership over the previous entity itself. Coomer did not lose ownership of TCD simply because Burkesville Hardwoods incorporated TCD2 after TCD’s administrative dissolution. Neither does Burkesville Hardwoods point to any authority supporting its claim that a business owner loses ownership of an entity that is been administratively dissolved, nor the proposition that Burkesville Hardwoods somehow acquired an interest in the lease because it now operates under the name matching the lessee under the Lease. Id.
In addition to allowing Coomer’s counterclaim for Burkesville’s interference with contract (these being the contracts between Coomer and third parties) to proceed, the court as well allowed a claim for misappropriation of name and identity theft to proceed. Writing as to this topic, the court wrote:
Coomer’s misappropriation claim against Hardwoods for filing Articles of Incorporation under the name “Travis Coomer Drilling Company” also survives. The Kentucky Supreme Court in Montgomery v. Montgomery, 60 S.W.3d 524 (Ky. 2001), explained that the “right of publicity protects the right to control the commercial value of one’s identity.” Id. at 528. “[I]t is clearly the commercial interests in one’s identity that the appropriation prong of tort serves to protect the most.” Id. (citing Restatement (Second) of Torts § 652C cmt. a). As this Court has recognized before, the Kentucky Supreme Court adopted the principles of the invasion of privacy tort from the Restatement (Second) of Torts. Thornton v. W. & S. Fin. Grp. Beneflex Plan, 797 F. Supp. 2d 796, 813 (W.D. Ky. 2011) (citing McCall v. Courier-Journal & Louisville Times Co., 623 S.W.2d 882, 887 (Ky. 1981)). A branch of this tort is a cause of action for the appropriation of one’s name or likeness, which the Restatement (Second) for Torts defines as a claim arising when “[one appropriates to his own use or benefit the name or likeness of another....” Restatements (Second) of Torts § 652C.
Hardwoods cannot refute that Coomer’s given name is the primary component of the corporate name used by Hardwoods in incorporating the new entity. Although Hardwoods asserts Coomer is currently not legally entitled to use of the name “Travis Coomer Drilling Company,” Hardwoods cannot refute the potential commercial benefit to Hardwoods by appropriating Coomer’s name. Whether Hardwoods obtained a benefit with its use of Coomer’s name is a factual issue precluding summary judgment on Coomer’s misappropriation claim.
In sum, Coomer’s counterclaim for interference with the Lease is dismissed with prejudice, while Coomer’s misappropriation and interference with other contracts claims survive. Id. at **8-9.
Sunday, July 12, 2020
The Birth of Julius Caesar
On this day in 100 b.c., there was born in Rome Gaius Julius Caesar. Before his assassination in 44 b.c., famously on the “Ides of March,” he would serve multiple terms as a counsel of Rome and some five and a half years in the official office of Dictator. His pacification of Gaul, culminating in this victory over Vercingetorix at the Battle of Alesia, was recounted in the Gallic Wars, still required reading for students learning Latin. The First Civil War, precipitated by the “Crossing of the Rubicon,” led to the initial failure of the Roman Republic, a failure that would find its completion is the Second Civil War precipitated by his assassination and the rise of the Roman Empire under its first emperor Caesar (Octavian) Augustus, Caesar’s post-death adopted son and heir.
Erasmus — Prince of the Humanists
Today is the anniversary of the death in 1536 of Erasmus of Rotterdam, the Prince of the Humanists. Erasmus devoted his career and his mastery of Latin and Greek to translating and commenting upon sacred texts including a new translation of the New Testament 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 one of my favorites the Julius Exclusus. He wrote a “paraphrase” of the New Testament (far longer in paraphrase than was the original text) that under Edward VI (in English translation) was required to be in every English church. The future Queen Mary I (Mary Tudor) translated a portion of the Paraphrases into English. The Paraphrases feature in the third of the Kingsbridge novels of Ken Follett, the Pillar of Fire.
He and Sir Thomas More were the best of friends, and the Praise of Folly was written while he was staying with More at Chelsea.
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.
The Cloister and the Hearth is a novel of an imagined account of the lives of Erasmus’ parents. Of more recent vintage, the book Fatal Discord recounts in parallel the lives of Erasmus and Luther and their conflict over the Reformation.
Friday, July 10, 2020
It Appears He Gets to Buy a 39.65% Interest in a Bankrupt Company
In a recent decision from the North Carolina Business Court, it was held that one of the two former shareholders of a business corporation gets to buy out the other owner in the LLC notwithstanding the fact that the LLC has meantime undergone a Chapter 7 liquidation. Mason v. Mason, 2020 NCBC 42, 2020 WL 2768874 (May 26, 2020).
Julie and Richard Mason, formerly married, were shareholders in Multiflora Greenhouses, Inc. (“MGI”). While the ownership of the balance of the shares is not addressed in this opinion, Julie owned 39.65% of the outstanding shares while Richard owed 39.63% of the outstanding shares. They were as well the only directors of MGI. In the course of their divorce proceedings, Julie filed an action for dissolution of the corporation. Thereafter she and Richard entered into an agreement, and reported to the court, that Richard was to buy Julie’s shares and, subsequent thereto, they agreed to a valuation date. Thereafter, and the opinion does not address the mechanism by which approval for doing so was given, MGI entered into Chapter 11 bankruptcy, which was subsequently converted into a Chapter 7 liquidation.
As part of the motions considered in this decision, Richard sought to set aside the court orders with respect to his purchase of Julie’s shares. That the court refused to do. First, Richard’s obligation to purchase Julie’s shares was not pursuant to a court order, but rather to a private agreement between the parties. Further, notwithstanding the changed circumstances of MGI, the risk as to its position at the time of acquisition of Julie’s shares was his burden.
When Defendant agreed to purchase Plaintiff’s shares and stipulated to the date of valuation of the same, Defendant accepted the risk, and the potential benefits, of the possible future fluctuation of the value of MGI’s shares. If the value of MGI’s shares increase, Defendant stood to benefit; however, if the value of MGI’s shares decreased, it would be to Defendant’s detriment. Regardless of the “substantial change in circumstances” as described by Defendant, the Court declines to relieve Defendant from the agreement he made, with the advice of counsel, at the inception of this litigation. 2020 WL 2768874, *4.
Thursday, July 9, 2020
Lack of Capacity is an Affirmative Defense
The recent decision of the Kentucky Court of Appeals affirmed the prior law to the effect that a claim of lack of capacity to bring a suit is an affirmative defense that must be pled in the this first responsive pleading. Lamar v. Unidentified Individuals Holding Themselves Out as The Trustees of Center Street Baptist Church, an Unincorporated, Voluntary Association, No. 2018-CA-001708-MR, 2020 WL 3124678 (Ky. App. June 12, 2020).
This decision arose out of the disputes between a pastor, Lamar, and the church he was hired to serve, Center Street Baptist Church in Owensboro. After a variety of disputes and disagreements between the trustees and Lamar, the trustees filed a complaint against him. Lamar did not, on a timely basis or otherwise, file an answer to that complaint, later asserting that he did not believe he needed to do so consequent to a conversation with the plaintiffs’ counsel. Eventually, the plaintiffs moved for a default judgment, which was entered. Thereafter, acting pro se, Lamar asked the court to vacate the default judgment, which request was denied. Still later he hired counsel who again petitioned that the default judgment set aside and for the first time asserting “that the judgment was void because the church could not sue in its own name since it is an unincorporated association, not a legal person.” After a hearing, the motion to set aside the default judgment was again denied, with this appeal following.
In addition to referencing the Kentucky Uniform Unincorporated Nonprofit Association Act, Lamar argued:
That the church is an unincorporated entity which has not filed a certificate of association with the Kentucky Secretary of State. Therefore, he contends that the church is barred from the right to sue or be sued in its own name pursuant to KRS Chapter 273 As a result, Lamar claims there was no legal person acting as a party-plaintiff in the underlying action. 2020 WL 3124678, *3.
As did the trial court below, the Court of Appeals held that the argument of lack of capacity was waived, citing C.R. 9.01 and Edwards v. Headcount Management, 421 S.W.3d 403, 405 (Ky. App. 2014), the latter cited for:
[A]lthough an objection to a parties’ capacity … is not technically speaking an affirmative defense, it can be analogized to an affirmative defense and treated as waived if not asserted by an initial responsive pleading, subject, of course, to the liberal pleading amendment policy of Rule 15. To assert capacity as a defense, whether the basis of that assertion is a plaintiff’s capacity to bring suit or a defendant’s capacity to be sued, compliance with CR 9.1 is compulsory and non-negotiable. Id., (bracketed language, ellipses and italics in original).
Ultimately, the denial of relief from the default judgment was affirmed.
Wednesday, July 8, 2020
Either Yes or No: Court Rejects Efforts to Change Positions as to Diversity Jurisdiction
In a decision of the Sixth Circuit Court of Appeals from this January, it was held that judicial estoppel prevented a party from reversing its position to afford it another bite at the apple. Han v. Hankook Tire Co., Ltd., 799 Fed App’x 347 (6th Cir. 2020).
In the first lawsuit, Han filed suit against Hankook Tire. Joining her as a plaintiff was Peninsula Asset Management (Cayman), Ltd., a Caymen Islands company. The trial court awarded Hankook Tire a summary judgment on her complaint. Han appealed, and in an earlier decision the Sixth Circuit determined that diversity jurisdiction was lacking in that there were foreign corporations on both sides of the dispute. 509 F.3d 271 (6th Cir. 2007). On that basis the case was remanded to the trial court. On remand Hankook argued that Peninsula Management was a “nominal” or dispensable” party who should be dismissed, allowing the summary judgment against Han’s claim to remain in place. Part of that position was based upon the fact that Peninsula Management had ceased doing business and was being wound-down. Han would argue that Peninsula Management was “essential” to the case and that it could no be dismissed. The trial court agreed with Han, and in February, 2008, the case was dismissed for lack of jurisdiction.
Now a decade later, Han refiled the action against Hankook Tire, both for herself and as the “real party in interest” of the now dissolved Peninsula Management, described by Han as being “defunct.”
As the district court was analyzing Hankook’s motion to dismiss, it discovered that Han avoided summary judgment in the prior case by arguing that her claims could not proceed without Peninsula. Based on that fact, the district judge concluded that “allowing Han to proceed on this action without the presence of Peninsula would give Han the unfair advantage of essentially having a second bite of the apple.” To prevent that “unseemly maneuver,” the court applied the doctrine of judicial estoppel and dismissed Han’s claims with prejudice. Han filed a motion for reconsideration, which the court denied. 799 Fed. App’x at 349 (citations omitted).
From there the Sixth Circuit would review the elements of judicial estoppel (a later position that is “clearly inconsistent” with the prior position, having prevailed in the prior argument such that if they prevailed again “judicial acceptance of an inconsistent position in a later proceeding would create ‘the perception that either the first or the second court was misled,’” and unfair advantage) and found that Han’s position fell within each element. On that basis the trial court’s dismissal of the complaint was affirmed.
Tuesday, July 7, 2020
Operating Agreements Waiver of Opportunity Doctrine Does Not Waive Other Default Fiduciary Obligations
Operating Agreements Waiver of Opportunity Doctrine
Does Not Waive Other Default Fiduciary Obligations
Does Not Waive Other Default Fiduciary Obligations
In a recent decision from the Delaware Chancery Court, 77 Charters, Inc. v. Gould, C.A. No. 2019-0127-JRS, 2020 WL 2520272 (Del. Ch., May 18, 2020), while dismissing all significant portions of the allegations made and criticizing the rather unorganized and unspecific architecture of the complaint, did reject the assertion that a waiver of the opportunity doctrine constitute a waiver of otherwise applicable default fiduciary duties. On that basis, those claims were allowed to proceed.
The Morris James firm in Delaware has published a review of this decision; HERE IS A LINK to that review.
Monday, July 6, 2020
The Execution of Sir Thomas More
Today, July 6, marks the anniversary of the execution in 1535 of Sir Thomas More.
More, by training a lawyer, served as Lord Chancellor under Henry VIII from October 1529 (succeeding Thomas Cardinal Wolsey) until May 1532. He was as well a leading intellect of his age, being a close friend of Erasmus of Rotterdam; Erasmus’ Praise of Folly was largely written while resident at More’s house Chelsea, and the title is a play on More’s name. More may well have ghost written Henry’s Defense of the Seven Sacraments (Assertio Septem Sacramentorum) and More wrote The Response to Luther (Responsio ad Lutherum), it in response to Luther’s Against Henry, King of the English (Contra Henricum Regem Anglie).
Wolsey had been struck-down for failing to acquire for Henry the desired “divorce” (actually an annulment) from his first wife Catherine of Aragon. More accepted the position of Lord Chancellor on the condition that he would not have to participate in its prosecution. To the end, for example, when in 1530 a letter from certain clergy and nobles was sent to the Pope in support of the annulment, More refused to sign it. Eventually, Henry’s path moved from seeking an annulment from the Pope to declaring that the desired annulment could be had in England.
To that end the “Submission of the Clergy” was forced upon them, in effect placing the Church under royal control and as well requiring that all clergy make an oath acknowledging Henry to be the Supreme Head of the Church of England. In response, More resigned the Chancellorship and withdrew from public life. Eventually Archbishop Cranmer of Canterbury would award Henry with the desired annulment of the marriage with Catherine of Aragon, paving the way for the marriage in 1533 to Anne Boleyn. More did not attend her coronation, which Henry (and Anne) took as an insult. By 1534, after several aborted efforts to make a charge against More stick had failed, he was called upon to acknowledge the validity of the annulment, to agree as to the line of succession to the throne and to execute the oath acknowledging that Henry was the “supreme head” of the Church in England. See 26 Henry VIII c. 1. The Act of Supremacy had been quickly followed by the Treasons Act of 1534 (26 Henry VIII c. 13), which defined as treason the rejection of the Act of Supremacy. More refused to make the oath contemplated by the Act of Supremacy (although he did agree that Parliament could determine the line of succession), and was shortly thereafter taken to the Tower of London.
Unable to entice More into speaking against the King’s (purported) authority, he was charged with malicious silence in not making the Oath of Supremacy. The judges for the trial, held on July 1, included all of Anne Boleyn’s uncle (Duke of Norfolk), father (Earl of Wiltshire) and brother. More’s defense was that he had never spoken against the King’s authority or anything else as he had remained silent and under the law “silence is consent.” Perjured (undoubtedly) testimony from Richard Rich to the effect that More had denied the supremacy was introduced. Although witnesses called to corroborate Rich’s testimony were unable to do so, and notwithstanding More’s critique of Rich’s character and the unlikelihood that he would after so much time divulge his deepest thoughts to him, the panel of judges returned a verdict of guilty. The die now cast, More explained his thoughts as the supremacy, denying it outright and insisting that no temporal power could alter the structure of the Church.
Anne Boleyn would survive More for less than a year, being herself beheaded in May, 1536.
Thomas More, whose body (but not his head) was buried in the chapel St Peter ad Vincula on the grounds of the Tower of London, was canonized in 1935.