Monday, August 31, 2020
LLCs As “Accredited Investors”
Last week the Securities and Exchange Commission approved amendments to Rule 501 of Regulation D to expand the definition of who is an “accredited investor.”
Effective late October, 2020, pursuant to amendments to Rule 501 of Regulation D approved by the Securities and Exchange Commission on August 26, 2020 and effective late October, 2020, limited liability companies with at least $5 million in assets fall within the definition of an “accredited investor.” See SEC Modernizes the Accredited Investor Definition, Release 2020-191 (August 26, 2020); HERE IS A LINK to that Release. There is also Release No. 33-10824, SEC Amending the “Accredited Investor” Definition; HERE IS A LINK to that document.
And So Is Set in Motion the Cousins War
Today marks the anniversary of the death, in 1422, of King Henry V of England. His death would set in motion the events that would eventually play out as what was then referred to as the Cousins War and is today referred to as the War of the Roses.
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. A recent review of his life is Matthew Lewis, Richard, Duke of York: King By Right (2016). Meanwhile nothing to bring stability to Henry VI’s position flowed from his eventual 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 short period) through the balance of the War of the Roses.
But then after his death the throne would pass to Richard III, it in turn being taken from him at the Battle of Bosworth Field by Henry Tudor, known now to history as Henry VII.
If only Henry V had lived longer, a more stable monarchy might have been passed to Henry VI, one that could withstand the travails of his mental condition. Were that the case, England could have been spared the bloodbath that was the Cousins War. But he did not.
Friday, August 28, 2020
Obligation to Arbitrate Disputes Upheld
In a recent decision from the Kentucky Court of Appeals, there was upheld the obligation to arbitrate certain disputes with respect to allegations of negligence in a patient’s care and treatment. Specifically, there were rejected assertions that the agreement to arbitrate was procedurally and substantively unconscionable. Estate of Green Through Moore-Stuart v. LP Louisville South, LLC, No. 2018-CA-000738-MR, 2020 WL 3401188 (Ky. App. June 19, 2020).
The patient, Alona, originally brought this action through her mother/guardian Kathleen Moore-Stewart. Alona herself passed away during the pendency of the appeal, whereupon her estate was substituted through its administratrix.
At the time Alona was admitted to Signature Healthcare of South Louisville, an assumed name of LP Louisville South, LLC, her mother, Kathleen, signed an arbitration agreement. Eventually a complaint was filed against Signature alleging negligence in Alona’s care and treatment. Signature, in response, sought to have the matter arbitrated. That effort was opposed on the basis that the arbitration agreement was procedurally and substantively unconscionable, and as well that it could not be performed in that the identified arbitration provider, National Arbitration Forum (“NAF”), no longer existed. The trial court denied the motion to compel arbitration, and Signature appealed. In a prior decision, LP Louisville South, LLC v. Green, 2016 WL 1069034 (Ky. App. March 18, 2016), Court of Appeals held that the decision of the trial court was insufficient as to findings of fact and conclusions of law, and remanded the matter to the trial court for reconsideration. On that reconsideration, arbitration was ordered. An appeal thereof was denied on the basis that an order compelling arbitration is interlockutory in nature. Alona Green, through Her Mother and Legal Guardian Kathleen Moore-Stuart v. Signature Healthcare, LLC, No. 2016-CA-001206-MR (Ky. App. Feb. 16, 2017). Ultimately the arbitration did take place (although not before NAF) and the arbitrator found in favor of Signature. This appeal followed.
With respect to the arguments that the agreement to arbitrate was procedurally unconscionable, allegations were made that Kathleen was misled as to its terms and implications and never provided a copy of the document for review by an attorney. The agreement to arbitrate contained a provision permitting it to be voided during the 30 days after it was executed. In her deposition, Kathleen admitted that she did not read the agreement to arbitrate before signing it. Ultimately the trial court’s findings of fact with respect to the process by which the arbitration agreement was entered into was upheld. It was ultimately found that there was no procedural unconscionability on the basis of unequal bargaining position in that entering into an agreement to arbitrate was not a condition to admission and that Alona “would have received the same quality of care and treatment irrespective of whether her mother signed [the agreement to arbitrate].” Further, as the agreement contained, a statement that entering into the agreement would waive the right to a jury, there could be no argument that its effect was concealed.
Turning to substantive unconscionability and impossibility of performance, efforts were made to set aside the agreement on the basis that NAF no longer provides arbitration of disputes of this nature. It was also asserted that arbitration would be prohibitively expensive. Specifically:
Alona argues that because the agreement incorporates the NAF Code that can only be administered by the NAF, the arbitration agreement effectively requires the NAF as arbitrator. Because the NAF is unavailable to arbitrate the dispute, argues Alona, the agreement is impossible to perform. 2020 WL 3401188, *5.
This assertion was rejected on the basis that the agreement, in addition to referencing NAF, contained qualifiers such as “but if that is not possible” and “if possible.” Further, it provided “if the NAF process is no longer in existence at the time of the dispute, or the NAF is unwilling or unable to conduct the arbitration, then the arbitration shall be administered by another alternative dispute resolution association, pursuant to NAF rules if possible.” Id., *5-6. Hence, the agreement contemplated that the arbitration could take place other than through the NAF.
As for the allegation that arbitration is “prohibitively expensive,” no evidence was submitted in support thereof, so the court set aside that argument.
Thursday, August 27, 2020
The Citizenship, For Purposes of Diversity Jurisdiction, of a Securitization Trust
In a recent decision from Texas, it was held that, where the plaintiff brought suit against Deutsche Bank in its capacity as trustee for a securitization trust and specifically a series thereof, it would be the citizenship of the trustee, and not of all of the trust’s participants/beneficial owners, that would control for purposes of diversity jurisdiction. Dorman v. PHH Mortgage Corporation and Deutsche Bank National Trust Company, as Trustee for Securitized Asset Backed Receivables LLC Trust 2007-NC1, Mortgage Pass-Through Certificates, Series 2007-NC1 and Deutsche Bank Securities Inc., 2020 WL 4904266 (N.D. Tex., 2020).
Dorman brought her suit in state court alleging a variety of claims relating, it may be inferred, to a foreclosure on her house. PHH Mortgage Corporation, the loan servicer, removed the action to federal court. This decision came in response to Dorman’s efforts to remand the case back to state court, the basis for the remand to be the failure to demonstrate diversity of citizenship. Essentially, Dorman wanted to argue that the citizenship of every participant in the securitization trust should be considered, she making that argument on the basis of Americold Realty Trust v. ConAgra Foods, Inc., 136 S. Ct. 1012 (2016). HERE IS A LINK TO MY REVIEW of that decision. In contrast, Deutsche Bank would argue that this case be decided under the principles of Navarro Savings Association v. Lee, 446, U.S. 458 (1980). In the Americold Realty decision, the US Supreme Court held that, for purposes of diversity jurisdiction, a business/statutory trust, sued as the trust, would be deemed to have the citizenship of every one of its beneficial owners. The Navarro Savings decision, in contrast, held that when the trustees of the trust are sued as the trustees, it is the citizenship of the trustees, and not the beneficiaries of the trust, that is relevant for purposes of assessing whether or not diversity jurisdiction is present.
In this decision, in that Deutsche Bank had been sued in its capacity as the trustee, and suit had not been brought directly against the trust, the rule of Navarro Savings would apply, and only the citizenship of the trust’s trustees would be relevant.
As there was diversity between the plaintiff and the trustees, and the citizenship of the other defendants was likewise diverse from that of the plaintiff, the suit has been allowed to proceed in federal court.
Wednesday, August 26, 2020
Words, Especially the Words in a Written Contract, Matter
A recent decision of the Kentucky Court of Appeals may be cited for the proposition that words matter, especially when those words are set forth in a written agreement. In this instance, the defendant sought to avoid the application of those words by citing alleged actions and conduct outside the terms of the agreement. Those arguments were unavailing. Stathis v. Lexington Selected Yearling Sales Co., LLC, No. 2019-CA-000275-MR and 2019-CA-000370-MR, 2020 WL 3401184 (Ky. App. June 19, 2020).
Stathis and Celebrity Farms (LLC) [why the parentheses around “LLC” will be reviewed below] purchased three standardbred horses, Mettle, Fool to Believe, and Italian Style, at an auction sponsored by Lexington Selected Yearling’s Sales Co., LLC (“LSYSC”). In connection therewith, Stathis executed a number of standard agreements, which were signed “Sam Stathis Celebrity Farm.” Notably, Stathis did not complete and submit to LSYSC an “Authorized Agent Form” indicating he was acting as an agent on behalf of a principal. The purchase prices of the horses were $180,000 (Mettle), $30,000 (Fool to Believe) and $45,000 (Italian Style).
Stathis would assert that, prior to the auction, he entered into a partnership with Ernie Martinez and Al Crawford to acquire Mettle and that “LSYSC was aware of this partnership at the time he purchased Mettle on behalf of the partnership.” For reasons alleged to be based upon a dispute as to who would name the trainer for Mettle, the alleged partnership ruptured. While the purchase price for Fool to Believe and Italian Style were paid by Stathis to LSYSC, the $180,000 owed on behalf of Mettle was never tendered. However, Stathis did have possession of all three horses. Several months after the sale, LSYSC filed suit against Stathis and Celebrity Farms, and they filed a variety of counterclaims. Eventually, Stathis and Celebrity Farms were allowed to file a third-party complaint against Martinez and Crawford. Eventually LSYSC delivered registration certificates for Fool to Believe and Italian Style to Stathis and Celebrity Farms, subject to a reservation of rights; the registration certificate for Mettle was not similarly delivered.
While Crawford would move to dismiss the third-party complaint, LSYSC moved for summary judgment against Stathis and Celebrity Farms. That summary judgment was granted on the basis that there were no material facts in dispute concerning LSYSC’s breach of contract claims against Stathis and Celebrity Farms, and LSYSC was ultimately awarded a judgment in the amount of $204,300 “plus interest thereon at the agreed rate of 1.50% per month from August 16, 2018 until paid,” plus attorney fees and costs expended. In a subsequent ruling, the trial court held that LSYSC was justified in its delay in delivering the registration certificates for Fool to Believe and Italian Style under the terms of the sales agreement. This appeal followed.
After determining that sufficient discovery had taken place in order for summary judgment to be considered, the Court of Appeals would affirm the actions of the trial court. Specifically, while Stathis asserted he needed to undertake additional discovery from Martinez and Crawford, it was held that would be irrelevant to the contract between Stathis/Celebrity Farms and LSYSC in connection with the sale of Mettle. First, the court reviewed the merger clause of the sales agreement (which by reference incorporated several distinct documents) and the language that LSYSC “shall not be bound by any oral or written agreement or alleged agreement varying from these Conditions of Sale [.]” 2020 WL 3401184 *3. That shut the door on Stathis’ argument that the agreements were modified by LSYSC’s alleged knowledge of the partnership.
As for Stathis’ suggestion that he was acting in a representative capacity on behalf of Celebrity Farm, LLC, and not on his own benefit, the court noted that there was no “LLC” indicated on the sales agreement, and that he never submitted an Authorized Agent Form to advise LSYSC that he was acting on a representative capacity. Rather, the court relied upon the language in the agreement itself which “directly above Stathis’s signature” provided:
The individual signing this agreement, regardless of the form of the signature or his signing capacity agrees to be personally liable, jointly and severally with the purchaser, for the full price if the purchaser does not make settlement within 30 minutes or have approved credit or if Lexington Selected Yearling has not been provided with a signed buyer’s authorized agent form granting purchase authority during this sale to the individual signing this agreement. Id. (italics added by Court of Appeals).
Ergo, Stathis was personally liable for the purchase price. The language of this agreement is consistent with general principles of agency law, which hold generally that an agent on behalf of an undisclosed principal is a party to and personally responsible for performance under the agreement.
After citing a number of cases that generally stand for the proposition that people will be bound by the agreements into which they enter, the court found:
Here, the terms of the contract were clear and unambiguous. Under the sales ticket and conditions of sale, Stathis and Celebrity Farms owed LSYSC $180,000 in exchange for Mettle. Their failure to pay this amount when due further obligated them to pay interest, as well as cost and attorneys’ fees and expenses incurred to recover under the contract. The trial court correctly found no genuine issue of material fact regarding this sale and correctly interpreted the contract. Thus, the trial court did not err in granting summary judgment in favor of LSYSC as a matter of law. Id., *4.
Rejecting suggestions by Stathis and Celebrity Farms that there existed material facts as to whether rescission was available under a variety of rules, the court found that “in the case herein, LSYSC performed its obligations under the contract when it delivered Mettle to Stathis. By contrast, Stathis and Celebrity Farms failed to perform under the contract by refusing to pay for the horse. Because LSYSC did not breach the parties’ contract, Stathis and Celebrity Farms are not entitled to rescission as a matter of law.” Id. Likewise, the court rejected the suggestion of reformation of the contract on the basis of mutual mistake, finding that while “Stathis and Celebrity Farms believed the cost of Mettle would be borne equally among the partners, based on an unwritten partnership agreement,”, the existence of this partnership was not disclosed in the sales agreement with LSYSC. Rather, the signed sales agreements indicated that the purchasers were Stathis and Celebrity Farms. In consequence, there was no mutual mistake, and for that reason reformation is unavailable. Further, the suggestion that LSYSC orally agreed that the purchase would be by the alleged partnership was rejected on the basis that the written documents expressly rejected any oral modification.
Based upon the language in the agreement as to personal responsibility of the signatory and the absence of an Authorized Agent Form tendered to LSYSC, the court affirmed the determination that Stathis, individually, was bound on the obligation. “It is undisputed that Stathis signed his name to the sales ticket and provided no authorized agent form to LSYSC. Contrary to assertions by Stathis and Celebrity Farms, this provision is not ambiguous; there is no doubt Stathis could be held individually liable.” Id., *5.
With respect to a counterclaim made by Stathis against LSYSC based upon the delay in the delivery of the registration certificates for Fool to Believe and Italian Style, the grant of summary judgment was affirmed. The executed sales agreements provided, in part that LSYSC “shall hold the registration certificates for all horses purchased by any Buyer until the Buyer’s account, including late charges and any other fees, have been paid in full.” The court found that LSYSC’s conduct was not commercially unreasonable nor inconsistent with the written agreement. Id.
Tuesday, August 25, 2020
Soliciting Murder is a Breach of Fiduciary Duty: Who Could Have Guessed?
David Tingstad, blogging on the Beresford Booth website, has reviewed the decision of the Washington Court of Appeals in King and Mockovak Eye Center, Inc., P.S. v. Mockovak, No. 79290-3-I, 2020 WL 1952509 (Wn. App. April 13, 2020). HERE IS A LINK to that review.
Cutting to the chase, one shareholder in a professional service corporation (hereinafter the “Bad Guy”) solicited the murder of the other (hereinafter the “Good Guy”) in order to collect on the life insurance policy on the Good Guy and thereby recover on the losses suffered by the jointly owned lasik eye surgery clinics. Well, as often seems to be the case, the Bad Guy was talking not to a “Russian mobster” but rather to an FBI informant.
In an earlier decision, King and Mockovak Eye Center, Inc. v. Mockovak, No. 74544–1–I, 2017 WL 4898237 (Wn. App. Oct. 30, 2017), there was affirmed the trial court’s determination that soliciting the murder of your co-owner is a breach of fiduciary duty. Someday I need to delve into the arguments made that it was not. As David noted, curiously there was no award of damages from this breach of duty.
This most recent opinion addressed the valuation of the Bad Guy’s interest in the LLC, the trial court accepting and the Court of Appeals affirming a determination of negative value to the effect that nothing would be paid to the Bad Guy.
Again, I commend David’s more detailed review to you.
Monday, August 24, 2020
Piercing Is a Remedy, And Always Has Been
In recent years there have been a number of decisions in Kentucky and around the country confirming that piercing the veil is a remedy and not of itself a cause of action. Recent decisions on the point include:
- In re CC Operations, LLC, No. 17-33389-THF, 2020 WL 1970509, *6 (Bankr. W.D. Ky. Apr. 23, 2020) (“veil-piercing is a remedy for enforcement of a judgment and not an independent cause of action in and of itself, a distinction Trustee does not dispute. Kentucky does not permit veil-piercing as a means of consolidating entities to try and create assets for the debtor company.”);
- In re Bullitt Utilities, Inc., 614 B.R. 676, 684 (Bankr. W.D. Ky. 2020) (“[Piercing] is an equitable remedy, not a separate cause of action.”); and
- Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 212 (Ky. App. 2009) (“Given the above legal reasoning, we find that the action before us involves an equitable remedy and is not one at law or one for damages.”).
While recently going through some older decisions I stumbled upon Louisville & N.R. Co. v. Nield, 186 Ky. 17, 216 S.W. 62 (1919). While the context is somewhat different in that the law governing a corporation’s voluntary dissolution has changed, the point made by the Court as to the ability to require a shareholder to pay the corporation’s unresolved debt through piercing is valid today as it was then. The Kentucky Court of Appeals, then the highest Kentucky court, wrote:
The question upon this appeal is whether, in any event, a suit may be maintained in equity against a stockholder for a debt of the corporation before a judgment has been obtained at law against the corporation and a return of “no property,” and without the corporation being made a party defendant. That ordinarily and as a general rule the secondary and equitable liability of a stockholder for the corporation debt cannot be enforced until the primary and the legal liability of the corporation has been determined and legal remedies exhausted by obtaining a judgment and a return of “no property” thereon …. Id. at 63.
Ergo, as long ago as 1919, piercing presupposed a judgment against the corporation and a determination that it had insufficient assets from which to satisfy the judgment.
Sunday, August 23, 2020
The Last Ptolemy
Today marks the anniversary of the death well, execution, of Caesarion, the last member of the Ptolemiac Dynasty.
Ptolemy XV Philopator Philometor Caesar was the son of Cleopatra VII and (possibly/probably Julius Caesar. As one of the final acts of the civil war fought between Octavian (ultimately Caesar Augustus) and Mark Antony, Octavian’s forces captured Alexandria and with it Egypt. Thereafter, Mark Antony and Cleopatra each committed suicide. When subsequently captured by Octavian's forces, Caesarion was executed, thereby bringing to an end the Ptolemaic Dynasty.
Ptolemy had been a companion to and a general for Alexander the Great. When Alexander died in 323 BC, Ptolemy and the other generals fought for control of portions of Alexander’s empire. In 305 BC, Ptolemy declared himself the new Pharaoh of Egypt. His family would rule until the death of Caesarion in 30 BC.
So ended the Ptolemiac Dynasty in Egypt.
The Death of William Wallace
Today marks the anniversary of the death (execution), in 1305, of William Wallace.
Most people in this age, to the extent they know anything about William Wallace, learned it from the movie Braveheart in which Mel Gibson played the role of William Wallace. The movie is entirely correct that William Wallace lived and fought for an independent Scotland in the First Scottish War for Independence. The movie is correct in that the he was opposed by King Edward I, who was known by the nickname “long shanks” (he was quite tall for the age). It is true, as depicted in the movie, that William Wallace was executed by being drawn and quartered, that being the accepted method of execution for traitors.
Almost everything else in the movie is incorrect. For example:
► Wallace was from a minor noble family; Wallace was not a peasant farmer.
► Wallace’s father was not executed by the English and may well have been alive when Wallace was appointed Protector of Scotland.
► Piers Galveston, the “friend” of Edward II, was never thrown from a window by Edward I. Rather, Galveston lived well into the reign of Edward II, although he was ultimately killed as a component of a revolt of the nobles upset about their relationship and Piers’ access to royal largess.
► In all likelihood, William Wallace and Robert the Bruce (the 7th) never met.
► Isabella of France did not marry Edward II until 1308, well after the death of William Wallace.
► The depiction of the Battle of Sterling Bridge omitted the namesake bridge.
► Isabella of France never negotiated with William Wallace for the treatment of York or anything else; she was born in 1295 and in consequence would have been less than 10 years old at the time of Wallace’s death.
► Edward I died in July, 1307. While the movie suggests he was on his deathbed at the time Wallace was executed, in fact he outlived Wallace by almost two years.
► It is suggested that Isabella of France was secretly “involved" with Wallace and carried his baby at the time of Wallace’s execution. Edward III born November 13, 1312. Wallace could have been his father only if Isabella was able to pull off a pregnancy of more than seven years.
► The moniker “Braveheart” was attributed not to Wallace, but rather to Robert the Bruce. In fact, after his death, his heart was cut out and carried in a chest by Scottish forces going into battle.
Saturday, August 22, 2020
A Horse, a Horse, My Kingdom for a Horse
Today is the anniversary of the Battle of Bosworth (1485), the final major battle of that English civil war titled The War of the Roses (this conflict was at the time sometimes referred to as the Cousin’s War). It was at this battle that King Richard III, variously identified as the last King from the House of Plantagenet or the House of York, was killed. He was the last English King to die in battle. Henry Tudor, the victor at Bosworth, then became King Henry VII.
Henry’s victory in battle was if anything surprising. Richard’s forces outnumbered those of Henry. Meanwhile, William Stanley held back his own force; if combined with that of Henry, that of Richard would have been out-numbered. Conversely, if Stanley joined with Richard, the weight of the forces arrayed against Henry would have been overwhelming. Richard held William Stanley’s nephew George (Lord Strange) as a hostage. That nephew’s father, Lord Thomas Stanley, was married to Henry Tudor’s mother Margaret Beaufort. As battle was about to commence, Richard sent word to Thomas Stanley that if the Stanley forces did not join with his, he would execute Lord Strange (Henry Tudor’s step-brother). Stanley replied, “I have other sons.”
To provide but a taste as to why this conflict was referred to as the Cousins War, consider that Thomas Stanley was the brother of William Stanley, husband of Margaret Beaufort, she being the mother of Henry Tudor. Ergo, William Stanley was the brother-in-law to Henry’s mother. Thomas Stanley had previously been married to Eleanor Neville, sister to Warwick the Kingmaker and aunt to Richard III’s recently deceased wife Anne Neville. Anne Neville was a daughter of Warwick.
Richard’s attack upon Henry’s position nearly succeeded; Henry’s standard-bearer William Brandon was killed at Henry’s side. Polydore Virgil, a contemporary historian/chronicler, recorded that Richard fought well. However, Richard’s fate was sealed when the William Stanley and his troops, having until then not committed to either side, rode against Richard’s infantry as his cavalry was separately moving against Henry. Thomas Stanley would place the coronet (crown) of Richard III on Henry Tudor’s head.
William Brandon’s son Charles, ultimately Duke of Suffolk, would become the best friend of Henry VIII.
In 2012, Richard’s remains were located in the course of excavations under a parking lot that now covers part of what was the Blackfriars (Dominican) Church in Leicester, England; early 2013 saw the announcement that testing had confirmed the remains were those of Richard. In sad testimony to the modern age, litigation ensued as to whether Richard should be re-buried in Leicester Cathedral, apparently consistent with the terms of the agreement by which the archaeological work was performed and other British law, or in York where certain claimed descendants of Richard assert he would want to have been buried. That question was resolved in favor of Leicester, and in 2016 Richard III was laid to rest in Leicester Cathedral.
Notwithstanding Polydore Virgil’s positive comments as to Richard III (many of which are now disputed by historians), in proof of the adage that the winners write the history, his reputation was besmirched by various Tudor affiliates such as St. Thomas More and William Shakespeare. The quote above, “A horse, a horse, my kingdom for a horse,” is from Shakespeare’s play Richard III, Act V, Scene IV. He is currently being reassessed by historians who are not so indebted to supporting the legitimacy of the House of Tudor. The “standard” biographies of Richard III are those of Paul Murray Kendall and Charles Ross, each titled Richard III.
Friday, August 21, 2020
Attorney-Client Privilege Does Not Shift In An Asset Sale
In a recent decision from Delaware, the court was called upon to consider who, after an asset sale, could assert the attorney-client privilege. On the facts of this case, it was held that the attorney-client relationship remained with the seller and had not shifted to the buyer. Re: DLO Enterprises, Inc. v. Innovative Chem. Prod. Grp., LLC, No. CV 2019-0276-MTZ, 2020 WL 2844497 (Del. Ch. June 1, 2020).
In a merger, absent a contrary provision in the merger agreement, the attorney-client privilege with respect to pre-merger activities passes to the corporation/entity that survives the merger. See, e.g., Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, ADA3d 155 (Del. Ch. 2013). In this instance there was not a merger, but rather a sale of only a distinct list of assets. It goes without saying that the attorney-client relationship between the seller and its attorneys was not identified as an asset being conveyed. Hence, the attorney-client relationship remained with the seller.
Adding a wrinkle of complexity, the transferred assets included computers that contained pre-transaction privileged communications between the seller and its attorneys. The court held that this disclosure did not constitute a waiver of the attorney-client privilege, and set up mechanisms by which to police the use of those communications by the purchaser. Other companies in similar situations may not be so lucky. Hence, as a practice pointer, if computers are being transferred in an asset transaction, it is advisable to carefully and comprehensively scrub them of attorney-client communications.
Thursday, August 20, 2020
You Cannot “Fail” Until You Try
Peter Mahler, in his blog New York Business Divorce, has reviewed a resent New York decision addressing judicial dissolution for failure by the shareholders to elect directors. In this case, Gupta v. E.J.'s Bucket Buddies, Inc., No. 650952/2019, 2020 WL 4258756 (N.Y. Sup. Ct. July 24, 2020), because there had actually been no meetings convened for the purposes of electing directors, there had been no failure to elect directors. Hence, that basis for seeking judicial dissolution of the corporation was unavailable.
Peter's review of this decision was posted on August 10 in an article titled Dissolve For Failure to Elect a Board? Better Demand an Election First. HERE IS A LINK to that posting.
This decision is as well of interest to Kentucky attorneys as the Kentucky Business Corporation Act contains an almost verbatim (as compared to the New York statute reviewed in this decision) provision.
Paycheck Protection Program Loan Forgiveness
Recently, there have been a number of new developments in the Paycheck Protection Program (“PPP”), not surprisingly unresolved questions remain. A crucial one is whether and how a borrower may submit a loan forgiveness application before the end of the new twenty-four-week period in which loan funds may be disbursed.
The PPP continues to challenge and sometimes befuddle borrowers who now seek forgiveness of their loans. While we may lament the complexity of the forgiveness process, it is what it is, and it is necessary for borrowers to carefully consider and apply the applicable rules. In an article posted on SKO Insider, I consider and (hopefully) explain a number of the limitations imposed upon loan forgiveness, particularly limitations imposed by changes in the borrower’s total number of employees as compared to the pre-loan period, or changes in employee compensation since that same period. This article also explains a number of regulatory safe harbors that have been created with respect to those limitations.
The article is titled How to Seek Paycheck Protection Program Loan Forgiveness; HERE IS A LINK to the article.
Wednesday, August 19, 2020
Peter Mahler’s Summer Shorts
Peter Mahler, in his blog New York Business Divorce, has presented his annual “Summer Shorts” posting. Therein he provides summaries of no less than five cases, namely:
· a decision upholding the termination for cause of an LLC member based on a felony conviction that preceded his membership;
· a decision denying a motion to dismiss a statutory counterclaim for deadlock dissolution which the plaintiff unsuccessfully argued was foreclosed because of the plaintiff’s own request for dissolution;
· a decision refusing to limit the plaintiff limited partners’ access to books and records under the normal rules governing discovery in plenary actions based on provisions in the partnership agreement giving the general partner discretion to withhold certain information;
· a decision denying defense motions to dismiss a statutory dissolution action on procedural grounds and based on issue or claim preclusion;
· and finally, an unusual decision by the Mississippi Supreme Court in an oppression case brought by a 49% shareholder against the other 51% shareholder, affirming the trial judge’s remedial order for the transfer of a 1% interest thereby equalizing the two shareholders at 50/50, in lieu of dissolution.
That posting, dated August 17, is titled Summer Shorts: For-Cause Termination of LLC Member and Other Decisions of Interest; HERE IS A LINK to this article.
Tuesday, August 18, 2020
South Dakota Amends the Limited Liability Provision of Its LLC Act
In 2020 the South Dakota legislature amended its LLC act to entirely replace the provision addressing limited liability. The prior law (S.D. Code § 47-34A-303) provided:
(a) Except as otherwise provided in subsection (c), the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.
(b) The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company.
(c) All or specified members of a limited liability company are liable in their capacity as members for all or specified debts, obligations, or liabilities of the company if:
(1) A provision to that effect is contained in the articles of organization; and
(2) A member so liable has consented in writing to the adoption of the provision or to be bound by the provision.
In SDIF Limited Partnership 2 v. Tentexkota, LLC, 1:17-cv-01002-CBK, 2018 WL 6493160 (D. S.D. Dec. 10, 2018), the South Dakota Supreme Court was asked whether a personal guarantee by a member of a company debt was enforceable where are the guarantee had not been authorized in the LLC’s articles of organization. Previously I reviewed this case in a posting titled I’m Not Understanding Why This is a Question (March 18, 2019), HERE IS A LINK to that posting. https://kentuckybusinessentitylaw.blogspot.com/2019/03/im-not-understanding-why-this-is.html. Ultimately, no decision was rendered as the case was otherwise settled. See SDIF Ltd. Partnership II v. Tentexkota, LLC, Order Rendering Certification Moot, South Dakota Supreme Court, File No. 1:17-CV 1002-CVK, # 28825 (Aug. 27, 2019). However, responding to the suggestion that the statute rendered void a member’s guarantee of an LLC obligation absent an enabling provision in the articles of organization, the statute was amended.
As amended in 2020, the South Dakota LLC Act, section 303, now provides:
(a) A debt, obligation, or other liability of a limited liability company is solely the debt, obligation, or other liability of the company. A member or manager is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager. This subsection applies regardless of the dissolution of the company.
(b) The failure of a limited liability company to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground for imposing liability on a member or manager for a debt, obligation, or other liability of the company.
S.D. Code 47-34A-303 as amended by SL 2020, ch 199, § 1.
Battle of Thermophylae
Today, by one reckoning, is the anniversary of the commencement of the Battle of Thermopylae in 480 B.C. The record is not clear – the battle may be dated to August 7-9, August 18-20 or September 8-10.
Darius, King of the Persians, had invaded Greece in 490 B.C. Meeting an almost exclusively Athenian force at Marathon, his army was decimated while the Athenian force suffered relatively few casualties. A runner (so it is said) took off to announce the victory to the population of Athens. Just over 26 miles later he entered the city, announced “Nikomen” (victory) and dropped dead from exhaustion. Meanwhile, part of the Persian fleet had broken off to attack Athens. The force at Marathon marched back to the city, manning its walls as the fleet approached.
The Persian fleet and army withdrew from Greece.
A decade later Xerces had succeeded Darius as the Persian King, and he resolved to subdue the Greeks. Gathering a huge army (said to be over a million but likely not larger than 100,000), he invaded Greece. Those overwhelming numbers were, however, the basis of Dienekes’ boast, as reported by Herodotus, in response to the assertion that the Persian arrows will block out the sun, “Good, then we will fight in the shade.” Herodotus, The Histories, Book 7, 226. A force led by 300 Spartan hoplites (heavy infantry) and several thousand others Greek troops, all under the command of King Leonidas, resolved to block the Persians at Thermopylae.
For two days the Greek forces, taking advantage of the small front, it minimizing the advantage in numbers of the Persian forces, fought them to a standstill while suffering minimal casualties. Ultimately, the Persians were shown how to outflank the Greek forces. Knowing that they were to be outflanked, most of the Greek forces withdrew while the Spartan forces, along with certain others, stayed as a rear guard to hold off the Persians as long as possible. In the last day of fighting the Spartans were annihilated; some of the other Greek troops surrendered. Still, knowing that they were to that day fall in battle, they gave better than they got: "The Hellenes knew that they were about to face death as the hands of the men who had come around the mountain and so they exerted their utmost strength against the barbarians, with reckless desperation and no regard for their own lives. By this time most of their spears had broken, so they were slaying he Persians with their swords." Herodotus, The Histories, Book 7, 223-24. Two of Xerces brothers and two of his sons were killed on that final day.
Notwithstanding the movie “The 300,” Leonidas did not fight in the final segment of the battle – he had already been killed. Herodotus, The Histories, Book 7, 224.
Monday, August 17, 2020
A “Permitted Transferee” Is Not By That Reason A Member
In a recent decision interpreting the Illinois LLC Act, the successor to one of the initial members alleged it was a successor member in the LLC. Interpreting this operating agreement, it was held that the assignee to whom the member had transferred his interest in the initial LLC was a mere assignee and did not succeed to status as a member. Grand-Waukegan, LLC v. GMAK Investments, LLC, 2020 Il. App (2d) 190432-U, 2020 WL 1922408 (Il. App. April 20, 2020).
George X. Machris (“Machris”) was an initial member in Grand-Waukegan LLC (the “Company”), holding a 50% membership therein. The balance of the interest in the Company were held equally by John, Michael and Paul Svigos (the “Brothers”). In anticipation of his death, Machris transferred his interest in the Company to a new LLC, GMAK Investments, LLC. At issue in this appeal was a determination by the trial court that GMAK held only an economic interest in the Company and was not a member.
Particularly relevant to this discussion was a provision of the operating agreement that defined a “permitted transferee” as “a Member’s spouse, his or her parent(s) or child(ren), grandchild(ren), great-grandchild(ren), or their spouses, his or her sibling(s), or a trust established for their benefit or to a self-declaration of trust established for the benefit of the Member, or any entity of which the Member and one or more Permitted Transferees owns the entire present interest.” Also relevant is a provision to the effect that while no member has the right to transfer any portion of his interest in the LLC without the vote of the other members, “[a] any Member may, without the consent of the other Members, transfer part or all of his, her[,] or its Interest to a Permitted Transferee.” After Machris died, a dispute arose between his widow, Vivian, and the Brothers, summarized by the court as:
Vivian claimed that GMAK, a “permitted transferee” under [the Company's] operating agreement, was a member of [the Company] with full rights to participate in and manage the company’s affairs. Vivian demanded, as a member of Grand-Waukegan, access to the company’s books and records. The [Brothers] disagreed, asserting that, while GMAK held a distributional interest, did not acquire membership rights. 2020 WL 1922408, *2.
The trial court would hold, the Court of Appeals would affirm, that the “operating agreement’s plain and unambiguous language permitting a member to transfer, without approval, an ownership interest to a permitted transferee does not include assignment of membership status.” Id, *4. Parsing the language of the subject operating agreement, the court focused upon a number of points including the distinction between “membership rights” as contrasted with an “interest,” and as well the definition of an “interest Holder,” which may include and “unadmitted Assignee of a member.” Id. Giving effect to the status of a “permitted transferee” was section VI of the operating agreement, which provides:
Except as otherwise expressly provided in the Agreement, no Member may transfer all or any portion of his, her[,] or its Interest without the affirmative vote of the Members holding at least a sixty six (66%) percent Interest. Any transfer or attempted transfer by any Member in violation of this Section 6 shall be null and void and of no effect whatever. Any Member may, without the consent of the other Members, transfer, part or all of his, her or its Interest to a permitted transferee. Id., *5.
One of the judges on the panel issued a dissenting opinion.
Friday, August 14, 2020
The Interrelationship of Exculpation and Aiding and Abetting Liability
In a recent decision from Delaware has highlighted the distinctions between exculpation and aiding and abetting liability, in this instance in the context of a Delaware business corporation. Essentially, while consequent to a 102(b)(7) provision in the certificate of incorporation the directors were protected from personal liability in approving a flawed transaction, a financial advisor, J. P. Morgan, could still be held liable for aiding and abetting the breach of fiduciary duty, in this instance because what it failed to be forthcoming with respect to its conflicts of interest. The decision is Morrison v. Berry, C.A. No. 12808-VCG, 2020 WL 2843515 (Del. Ch. June 1, 2020).
The Morris James firm in Delaware has on its blog reviewed this decision in a posting titled Court of Chancery's Sustained Aiding-and-Abetting Breach of Fiduciary Duty Claim Against Financial Advisor Based On Its Conflicts Of Interest In Going-Private Transaction, HERE IS A LINK to that posting.
Thursday, August 13, 2020
Piercing the Veil of a Louisiana LLC? Yes
In a recent decision from the Federal District Court in Louisiana, in the absence of a contrary ruling from the Louisiana Supreme Court, it was held that corporate principles of piercing the veil would be applied equally to limited liability companies. In re Carino, 615 B.R. 449 (Bankr. W.D. La. 2020).
Wednesday, August 12, 2020
Diversity Jurisdiction: You Have to Try
In a recent decision from Nebraska, persons seeking to bring a suit in federal court based upon diversity jurisdiction, where the suit involves LLCs, are reminded of the efforts that must be undertaken in order to show, at least initially, that diversity is present. Ag Navigator, LLC v. Top Gun Ag LLC, 2020 WL 3316106 (D. Neb. June 18, 2020).
Navigator filed suit against Top Gun in state court, and Top Gun removed the action to federal court, asserting that diversity jurisdiction (28 U.S.C. § 1332) existed. After removal, Top Gun sought to dismiss the lawsuit on the basis that the court lacked personal jurisdiction over the defendants. In response, Navigator asserted that the initial removal was improper and that diversity jurisdiction was not present:
Defendants’ notice [of removal] was defective, as it failed to allege the citizenship of each member of each party-LLC. Without that information, Plaintiff's argue, the court cannot determine from the notice whether there is complete diversity, and Defendants have therefore failed to carry their burden of proof.
The magistrate judge would ultimately agree with that determination.
After reciting the settled law that the citizenship of an LLC is determined by that of its members, the court noted that:
That said, this case highlights a quandary faced by state court defendants sued by plaintiff LLCs: It is often difficult to determine whether the case can be removed to federal court based on diversity jurisdiction. Here, and in most complaints filed by LLCs, there are no allegations in the complaint related to the identity (much less the citizenship) of each plaintiff LLCs’ members. This puts defendants in a tough spot. The membership of LLCs and other unincorporated entities are often not publicly accessible. And the deadline to remove a case to federal court is typically 30 days after service – undoubtedly limiting the amount of investigation and discovery a defendant can do prior to filing a notice of removal. Thus, defendants are placed in the precarious position of having to include in their notices of removal allegations regarding the members of entities despite having little or no initial access to the entities’ membership documents. 2020 WL 3316106, *2.
From there, the court noted the various approaches taken by courts as to the availability of jurisdictional discovery in order to confirm (or not) the existence of diversity jurisdiction but having provided that review, the decision continues that is not necessary to select amongst the various test in that Top Gun, who would remove the case to federal court, had “not even attempted” to demonstrate that diversity jurisdiction existed. Having recited the jurisdictional portion of the notice of removal, it was observed:
Defendants’ notice does not indicate that they performed any due diligence regarding member-citizenship. In their brief in opposition to remand, Defendants claim they did not have access to important documents that would reveal the membership of the plaintiff-entities. As noted above, the court is sympathetic to that plight. The Defendants did not alert the court to those issues in their notice. Or plead that they believed that the evidence would bear out that all members were citizens of different states. In fact, Defendants’ notice does not indicate that they understood that LLC citizenship would have any effect on the jurisdictional question. This is highlighted by the fact that they did not include in their notice of membership of the defendant LLC - Top Gun Ag, LLC - whose membership they clearly knew. Id., *3.
The court would go on to review some of the limited information, finding that it indicated that diversity jurisdiction did not, factually, exist.
The court went on to find that the notice of removal was not objectively reasonable, and set forth the procedures by which attorneys’ fees could be awarded to Navigator for having to successfully challenge the removal.
Tuesday, August 11, 2020
Mere Qualification to Transact Business Does Not Give Rise to General Jurisdiction
In the decision rendered last week started by a Federal District Court in Louisiana, it was held that the fact that a foreign LLC had qualified to do business in Louisiana was not sufficient to give rise to general jurisdiction. Gamboa v. Great Lakes Dredge & Dock Company, LLC of Louisiana, 2020 WL 4373111 (M.D. La. July 30, 2020).
Gamboa, who qualified as a seaman under the Jones Act, alleged he was injured while working and brought this suit alleging negligence in the operation and maintenance of the vessel upon which he was injured. The LLC moved to dismiss on the basis that it was not subject to jurisdiction in the courts of Louisiana. The court, applying general jurisdiction (the plaintiff made no claims of specific jurisdiction) principles, reviewed whether the LLC was subject to the jurisdiction of the court sitting in Mississippi. Ultimately, it was determined that jurisdiction did not exist, and the complaint was dismissed.
In response to Gamboa’s assertion that having qualified to do business in Mississippi was sufficient to give rise to general jurisdiction, the court observed that “these activities are insufficient to establish general jurisdiction.”
Monday, August 10, 2020
Personal Jurisdiction Over Managers of Delaware LLC Extends to
Tort Claims of Third-Parties
Delaware’s LLC Act, at § 18-109, provides that every manager of a Delaware LLC is subject to the jurisdiction of Delaware’s courts. This provision has been traditionally understood to relate to claims the LLC might bring, directly or on a derivative basis, against the manager in connection with his or her conduct as a manager. In a recent decision it was held that the statutes scope is broader, and that it encompasses third-party tort claims. CLP Toxicology, Inc. v. Casla Bio Holdings LLC, No. CV 2018-0783-PRW, 2020 WL 3564622 (Del. Ch. June 29, 2020).
The Delaware LLC Act, at § 18-109(a) provides in part
A manager’s or a liquidating trustee’s serving as such constitutes such person’s consent to the appointment of the registered agent of the limited liability company (or, if there is none, the Secretary of State) as such person’s agent upon whom service of process may be made as provided in this section. Such service as a manager or a liquidating trustee shall signify the consent of such manager or liquidating trustee that any process when so served shall be of the same legal force and validity as if served upon such manager or liquidating trustee within the State of Delaware and such appointment of the registered agent (or, if there is none, the Secretary of State) shall be irrevocable. As used in this subsection (a) and in subsections (b), (c) and (d) of this section, the term “manager” refers (i) to a person who is a manager as defined in § 18-101 of this title and (ii) to a person, whether or not a member of a limited liability company, who, although not a “manager” as defined in § 18-101 of this title, participates materially in the management of the limited liability company; provided however, that the power to elect or otherwise select or to participate in the election or selection of a person to be a “manager” as defined in § 18-101 of this title shall not, by itself, constitute participation in the management of the limited liability company.
In application, for example, it has been held that this statute gave the Delaware courts jurisdiction over an LLC’s manager who was resident in Singapore. See PT China LLC v. PT Korea LLC, No. CIV.A. 4456-VCN, 2010 WL 761145 (Del. Ch. Feb. 26, 2010). Who is a “manager” (i.e., participates materially in the LLC’s management without the “manager” title) has been considered in a number of decisions including Metro Storage International LLC v. Harron, No. CV 2018-0937-JTL, 2019 WL 3282613 (Del. Ch. July 19, 2019).
The Delaware General Corporation Law, Del. Code tit. 10, § 3114, contains an equivalent jurisdiction statute. In Hazout v. Tsang Mun Ting, 134 A.3d 274 (Del. 2016), it was held that this statute applied to situations outside of only a claim by the corporation; personal jurisdiction is proper “over a non-resident officer or director of a Delaware corporation in any civil action in which the corporation is a party.”
CLP Toxicology alleged that it was defrauded in the purchase of a biomedical company and brought suit against not only the seller but also certain of its constituent managers and members. They defended on grounds including that they were not subject to personal jurisdiction in the Delaware courts. In response to the assertion that the managers had consented to jurisdiction by reason of having served as a manager, see Del. LLC Act § 18-109(a) quoted above, they claimed that it should be restricted to claims involving the management of the LLC and not extend to third-party claims. Relying upon Hazout, it was held that the section 109(a) consent to jurisdiction included these third-party tort claims, and that the managers were subject to the Delaware court’s jurisdiction.
Other defendants, not managers, were dismissed from the action on the basis that classic Article III jurisdiction was not present.
Friday, August 7, 2020
Members of an LLC Have Limited Liability From Its Debts and Obligations,
Except When They Do Not
A decision handed down last week in Louisiana is but another reminder that while all else being equal an LLC’s members are not liable for the LLC’s debts, sometimes things are not equal. Korrapati v. Augustino Bros. Constr., LLC, --- So.3d ----, 2020 WL 4381850 (La. App. 5 Cir. July 31, 2020).
Christopher Perdomo was the sole member of Augustino Brothers Construction, LLC (the “Company”). Perdomo, on behalf of the Company, signed a contract to do construction work on the house of Kanaka Korrapati. The contract included a provision that the Company would get the necessary building permit. Under Louisiana law (La. Rev. Stat. § 37:2160), it is illegal to operate a contracting business without a license. The Company failed to complete the contracted for work in a timely manner, and Korrapati cancelled the contract; to that point she had already paid the Company $79,050. She thereafter brought suit seeking recovery of the funds paid and the additional amounts required to complete the project, which included dismantling some work done that was not effected properly (e.g., affixing an addition not to the house’s frame but rather to its brick veneer). After a jury verdict in her favor of $108,190.43, this appeal followed.
One defense made by the Company and Perdomo was that the reference to the company was an inadvertent typo, that the properly licensed Augustino Brothers, Inc. was intended, and that the agreement should have been so reformed. This position was rejected as the remodeling contract itself was not the sole reference to the Company rather than the similarly named corporation:
Appellants assert that there was a clerical error and that Ms. Korrapati’s contract should have been with Augustino Brothers, Inc., which was and is a licensed contractor. However, the only evidence to support that there was a clerical error is Mr. Perdomo’s testimony. Both the “Insurance Scope & Contract Specifications” and the April 27, 2017 letter signed by the parties refer to Augustino Brothers Construction, LLC. Ms. Korrapati made out some checks to Augustino Brothers Construction, LLC, and when deposited, the checks were stamped with Augustino Brothers Construction, LLC.
The trial court, faced with the testimony of Mr. Perdomo, as well as the entirety of the evidence, clearly did not believe that formation of the construction contract with Augustino Brothers Construction, LLC was a paperwork error. Upon review, we cannot find manifest error in the trial court’s declaration of the construction contract as null. 2020 WL 4381850, *4.
The court then turned to the determination that Perdomo was liable personally on the judgment. “Appellants allege that the trial court erred in finding that Mr. Perdomo and Augustino intentionally and purposely misled Ms. Korrapati by failing to obtain a building permit and that Mr. Perdomo acted in his individual capacity and was personally liable for acts of fraud and intentional misrepresentation.” Id., *5. Finding the imposition of personal responsibility to be proper, the court parsed the limited liability provision of the Louisiana LLC Act (La. Rev. Stat. § 12:1320) and the qualifier as to personal liability for wrongful acts, namely:
Nothing in this Chapter shall be construed as being in derogation of any rights which any person may by law have against a member, manager, employee, or agent of a limited liability company because of any fraud practiced upon him, because of any breach of professional duty or other negligent or wrongful act by such person, or in derogation of any right which the limited liability company may have against any such person because of any fraud practiced upon it by him. La. Rev. Stat. § 12:1320(D).
Upholding the factual determinations of the trial court, it was found that Perdomo knew he did not have a building permit and represented the contrary to Korrapati, which constituted an intentional misrepresentation of a material fact. 2020 WL 4381850, *6. “Thus, we find no error in the trial court’s judgment holding Mr. Perdomo jointly, severally, and solidarily liable with Augustino Brothers Construction, LLC for any and all damages.” Id.