Saturday, April 24, 2021

Beware Greeks Bearing Gifts

 

Beware Greeks Bearing Gifts

      Today marks the anniversary of the traditional Fall of Troy in 1184 B.C., thereby bringing to its culmination the Trojan War.

      The Fall of Troy is not recounted in Homer’s Iliad, the iconic epic, it rather covering only a period of ten days to two weeks within the supposed ten-year span of the war.  The Fall of Troy through the subterfuge of the Trojan Horse is briefly mentioned in the Odyssey and is referenced in several other Greek sources.  The story would not find, however, its full development until Virgil’s Aeneid.

      Some modern historians have attempted to explain the story as an analogy, suggesting that an earthquake – Poseidon, whose portfolio included horses, was as well the god of earthquakes – was the reason for the fall of Troy’s walls.  I, for one, would rather retain the literal interpretation.

      Regardless it is a great story, especially the fall of Achilles to Paris after the former killed Hector.  Speaking of which, the movie Troy misstated the story, likely because they wanted to keep Brad Pitt on the screen.  Achilles was killed before the fall of Troy; he never entered the city.

            Some might consider the Trojan War to be ancient history.  It’s all matter of perspective.  At the time of the Fall of Troy the Egyptian civilization had been flourishing already for 2000 years.

Wednesday, April 21, 2021

Kentucky’s COVID-19 Anti-Liability Law

 

Kentucky’s COVID-19 Anti-Liability Law

Kentucky’s Senate Bill 5, passed by both chambers of the General Assembly and effective notwithstanding the absence of a signature from the Governor, provides broad protection to businesses against allegations that employees and customers contracted the COVID-19 virus thereat.

My law partners Harry Dadds and Benjamin Fiechter have published a review of this new statute; HERE IS A LINK to that review.

Monday, April 19, 2021

The Corporate Transparency Act

 

The Corporate Transparency Act

Previously on the SKO website I published an introduction to the Corporate Transparency Act (the "CTA") and its requirements that most small businesses report to a new federal database information on “beneficial owners.”  HERE IS A LINK to that introduction.

Last Friday a significantly longer and more detailed review to the CTA and its challenges was published by Business Law Today, a publication of the Section of Business Law of the American Bar Association.  That article, authored by Scott Ludwig, Laurie Smiley, Bob Downes and myself, is titled The Corporate Transparency Act – Preparing for the Federal Database of Beneficial Ownership Information; HERE IS A LINK to that article.

Wednesday, April 14, 2021

Remembering “Big” Lew Kaster

 

Remembering “Big” Lew Kaster

         In November, 2015, we lost “Big” Lew Kaster.  He was a giant of the bar, and a great friend and mentor. Today would have been his 89th birthday.  HERE IS A LINK to what was posted shortly after his untimely passing.

Friday, April 9, 2021

A Collection of Important Guidance on LLC Law: CC Operations

A Collection of Important Guidance on LLC Law:  CC Operations

      In a decision from the U.S. Bankruptcy Court for the Western District of Kentucky, the court was called upon to determine whether certain members of an LLC, it being in bankruptcy, owed to the LLC fiduciary duties. Applying KRS § 275.170(4) which provides, inter alia, that in a manager-managed LLC the members, as members, do not owe fiduciary duties, and the section generally, which allows fiduciary duties to be modified or eliminated in a written operating agreement, it was held that the defendants in the action, the LLC’s members, owed no fiduciary duties. In addition, the court applied the express terms of the operating agreement waiving any liability for breach of a fiduciary or other duty. In re: CC Operations, LLC (Wheatley v. McCarty), Case No. 17-33389-THF, Adv. No. 19-03034-THF, 2020 WL 1970509 (Bankr.  W.D. Ky. April 23, 2020).

      CC Operations, LLC, the debtor in bankruptcy, was a Kentucky limited liability company that, in its articles of organization, elected to the “manager-managed.” Throughout the LLCs existence, while from time to time there had been other members, Chris McCarty and Lewis Pomerance were members, but not managers, of the company. After the company suffered a variety of setbacks, it filed for bankruptcy protection. In this suit, the trustee sought to hold McCarty and Pomerance liable for a variety of claims including breach of fiduciary duty, a variety of theories of fraudulent transfer and piercing the veil.

KRS § 275.170 Says What It Means and Means What It Says

      As “Defendants were only members of the LLC, and in Kentucky, a member of a manager-managed LLC does not owe fiduciary duties to the LLC or its members”, citing KRS § 275.170(4);

Because Debtor’s Amended and Restated Operating Agreement provided that CC Operations was a manager-managed LLC managed by someone other than Defendants, this Court finds further statutory grounds to reject the contention that Defendants, as members, owed any fiduciary duty to CC Operations at any point in time. 

The Operating Agreement Waived Liability

      Addressing liability for the alleged fiduciary duty violations, the Court found that the operating agreements at issue (there were an original and an amended agreement, although the trustee contested whether the amended agreement was properly adopted) waived any fiduciary duties. Specifically, Section 10.2 of the operating agreement provided:

Members of the Company will not be liable to the Company or the other Members for monetary damages for conduct as Members except to the extent the [LLC Act] ... prohibits elimination or limitation of member liability. (bracketed language and ellipses in original).

       In furtherance of KRS § 275.180(1), which as described by the Court provides that “‘A written operating agreement may … [e]liminate or limit the personal liability of a member or manager for breach of any duty provided for in KRS § 275.170.”’, the Court held this language sufficient to have waived any fiduciary duties that might have otherwise been owed the LLC. The Court did clarify, later in its opinion, that this waiver was technically of liability for breach of duties, rather than waiver of the duties themselves.

Adverse Domination Does Not Apply in LLCs

      Turning to the various allegedly improper transfers, with the exception of one tax distribution, the court found that all of the other alleged fraudulent transfers, if indeed fraudulent, had taken place outside the applicable statute of limitations, either two years under the Bankruptcy Code or five years under Kentucky fraudulent conveyance law. Where the trustee had sought to toll the statutes by virtue of the doctrine of adverse domination, the court found that it is applicable to LLCs nor applied outside the discovery rule context.

Adverse domination, a doctrine that tolls the statute of limitation when tortfeasors dominate and control a corporation so as to prevent the corporation from bringing a timely claim against them, is “merely a corollary of the discovery rule, applied in the corporate context.” Notably, the present case deals with an LLC rather than a corporation; this Court is unaware of any Kentucky decision applying the theory of adverse domination to LLCs, and other courts have expressly held that the theory is inapplicable in the LLC context.

      As to the assertion that adverse domination should toll the statute of limitations with respect to any claim for breach of fiduciary duty (and necessarily setting aside the court’s determination that no duties were owed by the individual defendants), the Court wrote:

The Court notes that adverse domination would also not toll the limitations period for any untimely breach of fiduciary duty claims. Under Kentucky law, the doctrine of “adverse domination” does not toll the statute of limitations for breach of fiduciary duty claims, because the “discovery rule” does not apply to claims for breach of fiduciary duty. 

Piercing is a Remedy and Not a Cause of Action

      The trustee’s complaint against McCarty and Pomerance set forth a count for “piercing the veil” to, in effect, hold them individually liable for certain claims against CC Operations and other business entities. This count was rejected on two bases. First, it was noted that “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, which is what Trustee apparently seeks to do.” In addition, the Court found that the necessary precedents of a piercing claim, namely “both an ‘egregious failure to follow corporate formalities,’ and ‘a high degree of control over the corporation’s day to day operations and decisions,’” were absent.  Rather:

Trustee fails to establish any such level of control or egregious action by either Defendant; on the contrary, Trustee’s complaint acknowledges that CC Operations had an operating agreement in place, filed separate tax returns, maintained a separate bank account, prepared separate financial statements, and produced regular annual reports, suggesting corporate formalities were indeed followed.

Trustee at no point alleges that either McCarty or Pomerance possessed a controlling membership interest in CC Operations, managed or supervised the LLC or its employees, or was in any way responsible for or involved in its daily operations. Assuming all allegations in the complaint to be true, the evidence of either and “egregious failure to follow corporate formalities” or “a high degree of control over the corporation’s day to day operations and decisions” by either Defendant remains tenuous and inadequately set forth. 

As a point of disclosure, this writer and Stoll Keenon Ogden represented Chris McCarty in this litigation. 

Wednesday, April 7, 2021

Business Law Associations Institute

The 2021 Business Law Associations Institute

 

       With CJ Donald of SKO’s Lexington office, this morning I presented at the UK CLE/KBA Section of Business Law seminar, the 2021 Business Associations Law Institute. We addressed topics including the Business Court Docket of the Jefferson County Circuit Court, the federal Corporate Transparency Act and a variety of recent decisions from across the country including decisions from Delaware and here in Kentucky.

Tuesday, April 6, 2021

Charging Orders and Foreign LLCs

 

Charging Orders and Foreign LLCs

A recurring issue in LLC law is whether a court has the capacity to issue a charging order as to the LLC interests of the judgment-debtor when the LLC that issued those interests is not of itself subject to the jurisdiction of the court.  Consider a court sitting in Jefferson County, Kentucky. The judgment debtor, domiciled in Kentucky, holds a membership interest in an LLC that is organized in Colorado; the LLC is not a party to the lawsuit.  Can the Jefferson Circuit Court issue a charging order as to the judgment-debtor’s interest in the Colorado LLC?  The courts disagree as illustrated by a pair of recent decisions.

   In Oberg v. Lowe, 2021 WL 495043 (D. Kan. Jan. 4, 2021), the court cited Professor Carter Bishop (Id., note 7, citing Carter G. Bishop, LLC Charging Orders: A Jurisdictional & Governing Law Quagmire, 12 No. 3 Bus. Ent. 14, 21 (May/June 2010)) for the proposition that there are “three ways a court can have jurisdiction to enter an LLC charging order: (1) Personal jurisdiction over the member, (2) In rem jurisdiction over the LLC membership interest to be charged, or (3) Personal jurisdiction over the LLC itself.”  On that basis it was recommended that the court had jurisdiction to issue the requested charging orders in that “Defendant is a citizen of Kansas. If Defendant were not a citizen of Kansas, the Court would have in rem jurisdiction over his interests in the various limited liability company interests, all of which were formed in Kansas.” 2021 WL 495043, *2 (footnotes omitted).

In contrast is the decision rendered in Steamfitters Union, Local 420 Welfare Fund v. Direct Air, LLC, 2020 WL 6131163 (E.D. Pa. Oct. 10, 2020),  wherein the court sitting in Pennsylvania determined it did not have jurisdiction to enter a charging order as to the judgment-debtors interests in a New Jersey LLC. See also id. at note 18 (suggesting that the judgment-creditors could domesticate the judgment in New Jersey and from a court in that state request the charging order). The judgment-creditors argued the Pennsylvania court had that capacity:

 The question is whether a Pennsylvania court can charge a transferable interest in a New Jersey limited liability company. The plaintiffs contend that jurisdiction over a foreign limited liability company is not required to enter a charging order against its members’ transferable interests. They argue that because we have personal jurisdiction over SCST’s members, our jurisdiction over them extends to their personal property, wherever it is located. They rationalize that because a judgment creditor, as transferee, obtains only limited rights of a member, the charging order will affect only the member’s transferable rights and will not affect SCST itself.

See id. at *3.  Notwithstanding this invitation the court found that the New Jersey LLC did not have minimum contacts with Pennsylvania sufficient to assert jurisdiction, and on the basis the requested charging order was denied.  Id. at *6 (“Because we lack authority under the PULLCA to charge the defendants’ transferable interests in the New Jersey limited liability company over which we have no jurisdiction, we shall deny the plaintiffs’ motion for entry of a charging order.”).

 

 

Monday, April 5, 2021

The Death of Pope Formosus

 

The Death of Pope Formosus

Yesterday marked the anniversary of the death, in 896, of Pope Formosus. All else being equal, this relatively obscure pope would be known only to scholars of the Carolingian age. He would, however, subsequent to his death, become rather well-known consequent to the Cadaver Synod.

Formosus was a diplomat on behalf of the Papacy. When a dispute arose as to who should be appointed Holy Roman Emperor (Charles the Bald or Louis the German), Pope John VIII sided with Charles; apparently Formosus was a partisan of Louis. This disagreement led to Formosus self-exiling himself from Rome. When told to return he did not, at which point he was stripped of his priestly office and excommunicated. The excommunication was lifted by Pope Marinus I, successor you John VIII.

Formosus would be elected to the Holy See in 891. His papacy was embroiled in disputes as to who should be the Patriarch of Constantinople and challenges to the then sitting Holy Roman Emperor Guy of Spoleto.

Formosus was succeeded by Boniface VI (Pope for some fifteen days in April of 896), who was in turn succeeded by Stephen VI. And that is where things got weird.  Stephen’s election to the Papacy was supported by Guy of Spoleto, who of course Formosus was against.  Convening the “Cadaver Synod,” Formosus was ordered exhumed from his grave and his corpse was clothed in papal vestments.  Through a deacon appointed to defend him, the deceased Formosus was called upon to defend himself against a variety of charges involving ecclesiastical authority.  When found guilty the papal vestments were torn from his body, three fingers of his right hand were amputated, his papal actions declared void ab initio, and the corpse thrown into the Tiber.  Eventually the corpse would be located and re-interred in (old) St. Peter’s Basilica. 

The public reaction was extreme; Pope Stephen VI was first imprisoned and then strangled to death.  By December of 897 a new Pope, Theodore II, annulled the Cadaver Synod.  As well the trial of a corpse was forbidden.

 

 

The Sine Qui Non of the Charging Order is Asset Segregation, Not “Pick Your Partner”

 

The Sine Qua Non of the Charging Order is Asset Segregation, Not “Pick Your Partner”

It is not uncommon for courts to focus upon the in personam delectus (a/k/a “pick your partner”) principle as the basis for the charging order, and to the discount the charging order in the single-member LLC context.  See, e.g., AOK Property Investments, LLC v. Boudreaux, 308 So.3d 1214, 1216 (La. Ct. App. 5th Cir. Dec. 9, 2020) (“The trial court found that the charging order statute is not relevant in a single-member LLC. The court reasoned that there are no other members to protect in a single-member LLC when a creditor attempts to seize the entire membership interest, and a single-member judgment-debtor’s membership interest should not be shielded from seizure by a judgment creditor.”).  This focus is improper.  Charging orders exist not to protect in personam delectus, but rather the treatment of an LLC, even a single member LLC, as a legal entity separate and apart from its member(s).

The beginning point of the analysis is that an LLC is a legal entity distinct and apart from its member(s).  The LLC owns its property for itself (not on behalf of the members as a nominee) and has its own debts and obligations (i.e., asset segregation).  The second point is that an assignee of a membership interest does not succeed to management of the LLC.  If a creditor of a member were able to seize the debtor’s membership interest that creditor would not succeed to a voice in the LLC’s management.  Rather, that control would continue to be vested in the members. Different LLC acts have different treatments of the debtor-member in that situation, but none afford that involuntary assignee management rights in the LLC. 

 A straight-forward (well, as straight-forward as anything can be when discussing charging orders) application of the LLC act demonstrates the fallacy of this reliance.  Assume a single member LLC in which the judgment-debtor is that sole member.  Assume as well that the sole asset of the LLC is $1 million in cash, and amount which happens to be the amount of the judgment.  However, the LLC has trade debts of $500,000.  Even if the judgment-creditor can gain control of the LLC, he or she cannot apply the LLC’s $1 million to satisfaction of the judgment.  Rather, that $1 million is an asset of the LLC, and its assets must be applied first to the satisfaction of its debts and obligations.  Nothing about the charging order allows the LLC to make distributions that will impair the claims of its creditors.  Further, the judgment-creditor’s charging order lien on distributions made to the judgment-debtor is not a lien on the LLC’s assets or give rise to the capacity to compel that those assets be distributed in satisfaction of the judgment even as the creditors do have the ability to compel the LLC to satisfy their claims from that same pool of assets.

Friday, April 2, 2021

The Unfortunate Mixing of the Obligation to Qualify to Transact Business and the Obligation to File an Assumed Name

 

The Unfortunate Mixing of the Obligation to Qualify to Transact Business and the Obligation to File an Assumed Name

            In a December, 2020, decision, the Court of Appeals treated as inter-changeable the assumed name statute and the obligation of a foreign entity to qualify to transact business. Barber v. Topgolf USA Louisville, LLC, No. 2019-CA- 1112-MR, 2020 WL 7919028 (Ky. App. Dec. 18, 2020).  They are however, distinct statutes that address different issues.

            On February 19, 2018, Topgolf applied for the necessary permits to open a facility in the Oxmoor mall. The initial application was filed in the name of “Topgolf USA Louisville, LLC.” There was not, however, as of the filing of the application on LLC of that name. Some nine months later that name was filed as an assumed name of Topgolf USA Ky1, LLC, a Delaware LLC that had qualified to transact business in Kentucky in 2017. In the course of hearings over the land use applications Topgolf representative would identify the misnaming as a “result of a miscommunication,” although the mistake continued after it was first identified.

            Regardless, Topgolf’s application was confirmed and then upheld by the trial court. In this appeal the opponents to the project would claim Topgolf was “not legally in existence and, thus, could not participate in the litigation.” (2020 WL 7419028, *6) and that Topgolf’s “application was illegal ab initio became applicants Topgolf and GGP, Inc., had not registered with the Kentucky Secretary of State. See KRS 14A.9-010(1).” Id

And it was here that the wheels came off.  KRS 14A.9-010 addresses the obligation of a foreign entity that is “transacting business” in Kentucky to qualify to do so with the Secretary of State.  What the opinion never does is assess whether filing a land use application is of itself “transacting business”; hence its ab initio application to Topgolf remains an open question. But the confusion within the four corners of the opinion arose immediately after the reference to KRS 14A.9-010, where it recited:

We disagree with the residents that the circuit court acted erroneously. “[T]he purpose of the assumed name statute is to inform members of the public, including appellants, of the identity of persons doing business under an assumed name. It could not be disputed that for lawful use, including litigation, the statute imposes a duty to provide such information.”  Munday v. Mayfair Diagnostic Laboratory, 831 S.W.2d 912, 915 (Ky. 1992). In Munday, however, the Court held that “appellees’ failure to file the certificate denied appellants information which was essential to the commencement of litigation.” Id. (emphasis added). That is not the argument here, and, even if it were, the residents fell short in their burden of proving that Topgolf and GGP, Inc., actively concealed their true identities to cause the residents to file their appeals out of time. Cf., Emberton v. GMRI, Inc., 299 S.W.3d 565, 575 (Ky. 2009). In fact, the residents were unaware of the lack of compliance with KRS 14A.9-010(1) and did not argue this issue before the administrative bodies. Accordingly, the circuit court held that the residents forfeited this argument on appeal to the circuit court because it was not a preserved issue. See City of Louisville v. Kavanaugh, 495 S.W.2d 502, 505 (Ky. 1973). Topgolf has since cured its defect. GGP, Inc., is now known as Brookfield Property REIT, Inc. It, too, had complied with the statute prior to the circuit court hearing.

The court treats the qualification to transact business under the Business Entity Filing Act as being synonymous with the filing of an assumed name. But they are not. They are distinct statutes that are applicable in different situations. The requirement of qualify to transact business (KRS § 14A.9-010) is triggered when a non-Kentucky organized entity is transacting business in Kentucky. In contrast, the assumed name statute (KRS § 365.015) is triggered when a natural person, a domestic business entity or a foreign entity is doing business other than under its “real name.” 

There is no basis for challenging to the decision to grant the necessary permits based upon either the failure to qualify to transact business before filing the application or the failure to have an assumed name of record.  As to the former, the statute defines the consequences of a failure to qualify, namely the inability to “maintain” a legal action, and a failure to raise the issue creates a waiver.   As for a failure to register an assumed name, the Munday decision sets to consequence, namely an extension of the statute of limitations for claims against that organization. See Munday v. Mayfair Diagnostic Lab, 891 S.W.2d 912 (Ky. 1992); see also Thompson v. Otis Elevator Co., No. 3:10-CV-139-DW, 2012 BL 172602 (W.D. Ky. July 12, 2012).  Note also that with a single narrow exception a foreign entity is not required to qualify to transact business as a pre-condition to filing an assumed name. See also Margaret Walton and Thomas Rutledge, The Kentucky Assumed Name Statute, Bench & Bar Hot Topics at 3 (Sept. 27, 2017). Simply put the two statutes address different issues; unfortunately, the Topgolf decision treated them as being inter-changeable.

 

The Beginning of the End for the Middle Ages

 

The Beginning of the End for the Middle Ages

            Some scholars date the end of the Middle Ages to May 29, 1453, and the fall of Constantinople to the Ottoman forces of Mehmed II.  Obviously, this is an arbitrary date.  But still, accepting its validity, today marks the anniversary of the beginning of the end.  On this day in 1453 Mehmed’s forces began the siege of the city.

Thursday, April 1, 2021

The Passing of Eleanor of Aquitaine


The Passing of Eleanor of Aquitaine

      Today marks the anniversary of the death, in 1204, of Eleanor of Aquitaine.  By any measure employed, she led an incredible life.

      Heir to more of what we today think of as France than was the then king of France, she would both marry and then divorce Louis VII, King of France. In between the marriage and divorce she would go on a crusade to the Holy Land.  Louis, who had originally been trained for a career in the church and became heir to the French throne only upon his brother Phillip’s death, was not tolerant of what we would today refer to as her high-spirited ways.  Allegations that, while in the Holy Land, she had an affair with her uncle have never been substantiated.

      After divorcing Louis on grounds of consanguinity, she married Henry of Anjou, the heir (consequent to the settlement of the Anarchy in which King Stephen agreed that the son of Empress Matilda would inherit) to the English throne (he was as well Duke of Normandy). Upon his ascension to the English throne there was created, by personal union, the Angevin Empire.  Had she predeceased Henry, Eleanor’s lands would have been claimed by him.  History, however, enjoys a good twist, and Eleanor significantly outlived Henry.

      Eleanor was the mother of three English kings, the first Henry III, Richard (the Lionheart) I and John. Admittedly, one can quibble as to whether this Henry III was ever king. He was crowned during his father Henry II’s lifetime in an effort to secure the succession. He would never, however, sit upon the throne as a sole monarch as he predeceased his father. Richard, in his own right, was king of England. Sadly, so was John, to this day identified by the moniker “Bad King John.”

      But back to Henry III.  Having been crowned king of England, but deprived of significant lands, income or authority, he bristled at being a showpiece. In concert with his brothers, the then King of France and the King of Scotland, he led a revolt against his father. It was ultimately put down, whereafter Henry II kept Henry III on a short leash. Still, he did not merely keep Eleanor on a leash. Rather, for 16 years, he kept her prisoner including in the castle at Old Sarum.

      The Angevin Empire would substantially fall under Bad King John; he simply did not have the wherewithal to hold together its far flung properties.

      Aside from these historic notes, Eleanor’s influence continues to this day. At her court in Aquitaine they played the relatively recently imported game of chess, it having arrived from the Middle East. Eleanor, however, took umbrage at one of the rules and had it changed. Prior to Eleanor’s intervention, the rules of chess provided that the king was the most powerful character while the queen had a circumscribed range. Eleanor decreed, it is said, that those roles be reversed. Her rule continues to this day.

While Amy Kelly’s Eleanor of Aquitaine and the Four Kings and Marion Meade’s Eleanor of Aquitaine continue to be authoritative biographies, Ralph Turner’s Eleanor of Aquitaine: Queen of Franc, Queen of England is the more modern review of her life.