South Carolina Supreme Court Invalidates LLC Operating Agreement's Repurchase Right After Charging Order Foreclosure

 South Carolina Supreme Court Invalidates LLC Operating Agreement's Repurchase Right After Charging Order Foreclosure

Doug Batey has reported on a recent South Carolina decision addressing:

Many LLC operating agreements contain transfer restrictions on LLC member interests. Those restrictions sometimes include the LLC’s right to repurchase the interest if a member makes a transfer in violation of the operating agreement. What’s the result if such a repurchase right applies to a transfer resulting from the foreclosure of a charging order by a member’s judgment creditor? The South Carolina Supreme Court earlier this month ruled that a foreclosure sale was valid and trumped the operating agreement’s repurchase right, and that the repurchase right could not be enforced.

His posting can be found HERE.

Court Holds There to Be No Breach of Duty of Loyalty Between Partners With Respect to Post-Term Activities

Court Holds There to Be No Breach of Duty of Loyalty Between Partners

With Respect to Post-Term Activities

 

      In Cass JV, LLC v. Host International, Inc., Cass and Host jointly bid on and were awarded the right to operate concessions at an airport for a franchise period of ten years.  During that period the relationship between Cass and Host deteriorated.  Prior to the time that solicitations were made for the concession franchise for the next ten-year period, Host advised Cass that it would not be bidding with Cass for the next period.  Host, with a new partner, was awarded the franchise for the next period, and Cass brought suit alleging breach of fiduciary duty.  Cass JV, LLC v. Host International, Inc., No. 312-CV-00359-CRS-DW, 2014 WL 3955366 (W.D. Ky. Aug 13, 2014).

      The District Court found there to be no breach of duty.  Initially, the purpose of the partnership was defined as exploitation of the concession franchise, that being defined as that for a specific ten-year period.  Second, Host had advised Cass that they would not be together bidding to receive the franchise for the next period.  On that basis there was no concealment of intentions.

 

      On this decision is consistent with a long string of court cases which have held, inter alia, that when the purpose of a partnership is defined as exploiting an opportunity for a particular term or undertaking, there is no breach of duty when one of the participants in the venture exploits those same assets and on a subsequent term or in a different undertaking see, e.g., Whalen v. Connelly, 545 N.W.2d 284 (Iowa 1996) (purpose of particular venture described as exploitation of a particular business opportunity with only the possibility, but no commitment, of expansion into other areas).

Bankruptcy Court Holds That, Even If USACafes Applies, No Actionable Breach of Duty Was Alleged

Bankruptcy Court Holds That, Even If  USACafes Applies, No Actionable

Breach of Duty Was Alleged

      In a recent decision by the Bankruptcy Court for the Eastern District of Kentucky, it considered and rejected an allegation that there was a breach of fiduciary duty by the corporate parent of an LLC when that LLC was itself insolvent.  The Liquidating Trustee of the Appalachian Fuels Liquidating Trust v. Energy Coal Resources (In re Appalachian Fuels), CIV. ACT.  No. 13-157-HRW, 2014 WL 4230877 (Bankr. E. D. Ky. Aug. 20, 2014).

      Appalachian Fuels, LLC, was an indirect wholly-owned subsidiary of Energy Coal Resources, Inc. (“ECR”). One of ECR’s directors served as the manager of Appalachian Fuels. After Appalachian Fuel’s failure, the plaintiff (the liquidating trustee) alleged that certain transactions damaged Appalachian Fuels and benefited ECR and its related companies at a time when Appalachian Fuels was insolvent. The allegations went on to assert that the approval of these transactions violated fiduciary duties owed by certain directors of ECR to Appalachian Fuels.

      The dispute would turn on whether the directors of ECR owed a fiduciary duty to Appalachian Fuels, the indirectly wholly-owned subsidiary.  In connection therewith, there was reviewed the line of Delaware cases beginning with In re USACafes, L. P. Litigation, 608 A.2d 43 (Del. Ch. 1991), which, as described in this opinion:

would hold that the human controller of an entity that manages another entity owes a fiduciary duty of loyalty to the managed entity, but that the fiduciary duty of loyalty in this context is limited to the duty not to engage in personal self-dealing.

As the second amended complaint did not allege personal self-dealing but only a violation duty of care, the directors had been dismissed. In responding to an objection to that finding, it was held that:

·         there is no contrary Kentucky common law of fiduciary duties from which a different rule could be drawn; and

·         Kentucky courts typically looked to the laws of Delaware when it comes to matters of Kentucky law on which there is not Kentucky law.

      Ultimately:

Plaintiffs claiming that the directors of a fiduciary parent company breached their fiduciary duty toward an insolvent subsidiary must therefore plead that the directors advanced themselves at the subsidiary’s expense. Here, negligence is the only thing alleged in the breach of fiduciary duty claim against the Independent Directors.

Arizona Court of Appeals Considers Direct Versus Derivative Distinction in LLCs and the Demand Requirement

Arizona Court of Appeals Considers Direct Versus Derivative Distinction

in LLCs and the Demand Requirement

      In a recent decision, the Arizona Court of Appeals parsed a complaint filed by a member of an LLC as to whether particular allegations were direct or derivative in nature and, as to the derivative claims, whether there had been demand made before the derivative action was brought.  The court has well addressed the capacity of a dissolved LLC to prosecute suit for collecting assets as part of its winding up.  Rose Goodyear Properties, LLC, v. NBA Enterprises Limited Partnership, No. 1 CA-CV 12-0484, 2014 WL 443 (Ariz. App. Aug. 5, 2014).

      Able Commercial Ventures was formed as an LLC by Rose Goodyear Properties, NBA Enterprises and Hohokam Acres for the purpose of developing certain real estate.  The manager was Civica Development, LLC (the opinion is unclear as to the relationship of Civica to any of the members).  Able borrowed $2 million dollars secured by its property, and loaned those funds to Hohokam and NBA.  Able then defaulted on that loan.  The property was sold for just over $1 million dollars, and Able was sued for the deficiency exceeding a million dollars.

      Consequent to certain disputes whose nature is not identified in the opinion, NBA and Hohokam caused Civica to be removed as the manager.  In turn, they formed a new LLC, Hamba, and appointed it as the LLC’s manager.  Thereafter, Rose filed its complaint alleging a variety of claims against NBA, Hohokam and Hamba.  

      At some unidentified point in the dispute, Rose underwent an administrative dissolution. Although it was apparently reinstated, the opinion focused upon its capacity to act notwithstanding reinstatement. Responding to the allegation that Rose did not have the capacity to bring either direct or derivative claims because of its dissolution, the Arizona Court of Appeals interpreted the LLC Act and specifically the provision allowing a dissolved LLC to do “all other acts required to liquidate its business and affairs” as being sufficiently broad to allow a dissolved entity to bring suit by which it may collect its assets.

• This guidance is useful in Kentucky which, at KRS § 275.300(2)(e), authorizes a dissolved LLC to do “every other act necessary to wind up and liquidate its business and affairs.”  That said, likely this guidance is not necessary in Kentucky as KRS § 275.300(4)(a) provides that dissolution of an LLC shall not “Prevent commencement of a proceeding by or against a limited liability company in its name.”

      Turning to the derivative claims, the primary issue was whether there is been sufficient demand made upon the manager of Able prior to the bringing of the derivative action.  Note that the Arizona LLC Act contains an express provision on derivative actions, including a requirement that before bringing a derivative action a demand be made. Ariz. Stat. § 29-831(2).  In this instance, the letter upon which Rose relied nowhere demanded that Hamba cause the LLC to bring suit. Rather, the relied upon letter was merely a recitation of Rose's position as to certain matters.  Another letter meeting the demand requirements that was submitted after the complaint was filed was found to be insufficient, the statute requiring that the demand letter be tendered prior to the time the derivative action is brought. On that basis, the dismissal of the derivative aspects of the complaint was affirmed.

      The Court of Appeals did reverse the trial court as to certain counts brought in the complaint on the basis that these were direct, and not derivative, claims. Specifically, allegations based upon breach of fiduciary duty by NBA and Hohokam, the refusal to arbitrate a claim for breach of contract and for violation of the implied covenant of good faith and fair dealing (the implied covenant claim being cast as well as a tort) were found to constitute direct, not derivative, claims that should not have been dismissed for failure to satisfy the demand requirement for bringing a derivative action.

Kentucky Court of Appeals Orders Arbitration; Arbitrator to Determine Timeliness of Demand for Arbitration

Kentucky Court of Appeals Orders Arbitration;

Arbitrator to Determine Timeliness of Demand for Arbitration

 

            In a recent decision, the Kentucky Court of Appeals reversed a trial court determination to not refer a dispute to arbitration.  While the trial court had ordered discovery as to whether the demand for arbitration was timely, the Court of Appeals directed that determination is to be made by the arbitrator.  Roberts v. Molyneaux, No. 2013-CA-000044, 2014 WL 4177443 (Ky. App. Aug 22, 2014).

 

            Roberts bought a house from Talbott; Molyneaux was the realtor.  Both Talbott and Molyneaux told Roberts that the property could be easily converted into a duplex.  After closing on the property Roberts proceeded with the work to convert the property.  He received a cease and desist order as to those efforts, and was denied a conditional use permit.  In accordance with the Residential Sales Contract, Roberts sought mediation and arbitration.  The mediation took place, but no agreement was reached. When Roberts sought arbitration, Talbott and Molyneaux brought a declaratory judgment action seeking to avoid arbitration on the basis that Roberts did not seek arbitration within a year of when he should have known of the zoning restrictions on the property.  They then sought discovery as to Robert’s knowledge, which he in part refused to answer on the basis that it is the arbitrator who should rule on whether the petition for arbitration was timely.  The trial court denied the application for arbitration, and this appeal followed.

 

            Relying upon Beyt, Rish, Robbins Group v. Appalachian Reg’l Healthcare, Inc., 854 S.W.22 784 (Ky. App. 1993), the Court of Appeals affirmed that “the timeliness of tn arbitration demand is to be decided by the arbitrator.”  From there, after referencing Louisville Peterbilt, Inc. v. Cox, 132 S.W.3d 850 (Ky. 2004), the Court wrote:

 

Because Kentucky courts favor upholding arbitration agreements, we believe the present dispute is best addressed by an arbitrator, as the parties intended at the time they signed the agreement. The trial court’s order denying Roberts’s motion to compel arbitration was in error, and on remand, the trial court is instructed to compel arbitration.

Pro Se Defendant Prevails in Challenge to Service of Complaint

Pro Se Defendant Prevails in Challenge to Service of Complaint

 

Snider v. McIntosh, No. 2012-CA-001634-MR (Ky. App. Sept. 5, 2014).

 

Donald Snider brought suit against Terry McIntosh, a resident of Louisiana.  A Louisiana sheriff delivered the complaint not to Terry but to his wife.   Later, although on exactly what date was not recorded, Terry received another copy of the complaint and summons by certified mail.  When Terry did not file an answer to the complaint within 20 days of the date it was delivered to his wife Snider moved for a default judgment.  Even though an answer was filed the day the motion for default was filed, the trial court granted a default judgment in Snider’s favor.

 

            On appeal, Snider argued that the delivery of the complaint to his wife, and not to him, was not sufficient to start the clock for the 20 day deadline to file an answer.  Relying upon R.F. Burton & Burton Tower Co. v. Dowell Division of Dow Chemical Co., 471 S.W.2d 708 (Ky. 1971), which in turn cites decisions going back to 1858, the Court of Appeals easily determined that delivery of the complaint to the spouse was not sufficient to effect valid service.

 

            The Court ordered a reversal of the default judgment and further proceedings, presumably was to when service by certified mail was made.  A concurring opinion by Judge VanMeter would direct that the remand direct the matter to proceed on the merits as an answer has been filed.

District Court Confirms that Partner is Not an
“Employee” Afforded Protection Under Title VII

      In a recent decision, the Western District of Kentucky denied the Plaintiff additional opportunity for discovery and held that a partner in a partnership is not an “employee” afforded protections by Title VII.  Bowers v. Ophthalmology Group, LLP, Civ. Act. No. 5:12-CV-00034-JHM, 2014 WL 4259430 (W.D. Ky. Aug. 27, 2014).

      This dispute involves allegations by Bowers, formerly a partner in Ophthalmology Group, alleging various claims including violation of Title VII, she asserting that she was mistreated consequent to her sex.  In prior decisions the courts had considered and ultimately granted a Motion to Disqualify the law firm originally hired by the Ophthalmology Group on the basis of an asserted conflict.  Having new counsel, Ophthalmology Group brought this Motion to Dismiss.

      Notwithstanding Bowers’ objections that there had been no further discovery and that the prior discovery was “tainted” by the now removed firm’s conflict, the District Court found that the Title VII claim must fail:

At the end of the day, the undisputed evidence shows that Dr. Bowers was, in fact, a partner of Ophthalmology Group, not an “employee” afforded protection under Title VII.  Dr. Bowers enjoyed partnership status through the partnership agreement, engaged in decision-making with her partners, and was compensated according to a partnership formula.  This evidence is undisputed and is not tainted.  No amount of additional discovery will change these facts. 

      Having dismissed the only federal claim, the District Court declined to exercise supplemental jurisdiction, leaving those matters to be resolved in state court.