Federal Court Finds that Minimum Contacts Were Satisfied by Informal Partnership

Federal Court Finds that Minimum Contacts Were Satisfied by Informal Partnership

A Kentucky Federal District Court recently considered the question of whether certain minimal contacts with Kentucky connected with the formation and operation of an informal partnership were sufficient to vest in that court jurisdiction over the California resident partner. The court found that the contacts were sufficient to give rise to personal jurisdiction.  Clark v. Wenger, Civ. Act. No. 1:14-CV-00002-TBR, 2014 WL 4742989 (W.D. Ky. Sept. 22, 2014).

 

Clark, based in Kentucky, and Wenger, based in California, entered into a partnership for the breeding and sale of Bernese Mountain Dog puppies.  That partnership relationship was never reduced to a written “partnership agreement.”  Still, over time Clark identified certain conduct of Wenger which she asserted violated express terms to which they had agreed  For example, it was asserted that Wenger had bred two of the partnership’s dogs in her possession and sold for her own account the puppies, and had let the male out for stud, again keeping the fees earned for herself.  Based upon these violations of the partnership agreement, Clark sued Wenger in Kentucky.

 

After the suit was removed to federal court (there was as well a dispute as to the timeliness of the removal, but that I will leave to those interested in the rules of federal removal), Wenger sought to have the suit dismissed on the grounds she did not have “minimum contacts” with Kentucky sufficient to permit her to be sued in Kentucky. 

 

The Court found what Wenger’s dealings with Clark were sufficient to confer jurisdictions. Specifically, from California, Wenger had several phone conversations with Clark as to the partnership which bred the puppies in Kentucky, and certain sale proceeds of partnership property (i.e., puppies) had been sent to Clark in Kentucky.  From there the Court concluded:

 

Wenger’s conduct pursuant to her business agreement with Clark facilitated the transaction of business in the Commonwealth of Kentucky.  Such affirmative conduct constitutes purposeful availment.

 

 

Hence Wenger could be sued in Kentucky.

 

The suit was ultimately remanded to the Kentucky state court on the basis that the amount in controversy was less than the federal jurisdictional threshold of more than $75,000 for cases in diversity. 

More on Minority Shareholder Oppression

More on Minority Shareholder Oppression

 

Peter Mahler, in his blog New York Business Divorce, has been kind enough to review my recent article Minority Shareholder Oppression? – The Problem is Not with the Answer But Rather with the Question and to place it in the context of New York Law. 

HERE IS A LINK to his posting.

            I’m grateful for his kind words.

Minority Shareholder Oppression? – The Problem is Not with the Answer but Rather with the Question

Minority Shareholder Oppression? – The Problem is Not with the Answer but Rather with the Question

 

In a recent issue of the Journal of Passthrough Entities, I published Minority Shareholder Oppression? – The Problem is Not with the Answer but Rather with the Question.

 

            In this article, I submit that the classic formula under which the “oppression” of minority shareholders (and members of LLCs) is framed is an instance of a failure to critically consider the question before proceeding to ascertain the answer.  Rather, these cases are often simply an effort to, ex ante, rewrite the corporate agreement that is embodied in the statute and the organizational documents for the benefit of someone who failed to negotiate particularized protection for themselves at the inception of the venture?

 

            Ultimately, I suggest that claims of “oppression” should typically be rejected applying relatively straight forward principals of contract law.

 

            This article can be accessed through HERE IS A LINK TO THE ARTICLE.

North Carolina Business Court Applies the Apex Doctrine

 

North Carolina Business Court Applies the Apex Doctrine

 

In a recent decision, the North Carolina business court applied the “Apex Doctrine” in a discovery dispute.  Joseph Lee Gay v. Peoples Bank, 13 CVS 383, Superior Div., Court of Justice, Lincoln Cty (N.C.), Order dated September 17, 2014,

 

Typically in a lawsuit against a corporation or other business entity, it will designate a representative to, in the course of a deposition, speak on the corporation’s behalf.  The person so designated must have personal knowledge of the matters in dispute in the lawsuit.  It is not at all uncommon for the plaintiff, in addition to taking the deposition of the designated representative, to seek to depose high ranking corporate officials such as the chief executive officer and chief financial officer.  Often these depositions are viewed, at least by the defense, as being abusive as either fishing expeditions, efforts to simply inconvenience the officials and thereby perhaps increase settlement value or as grandstanding by the plaintiff’s counsel who will then crow about forcing the corporate defendant to have produced its CEO and CFO.

 

Under the Apex Doctrine, depositions of senior executives are not permitted absent the plaintiff demonstrating that the individuals in question have or may have particularized knowledge of the dispute.  Hence there will typically be disputes as to whether or not that senior executive is likely to uniquely have that particularized information.

 

In this case over alleged excess overdraft fees charged by the bank, the plaintiffs had already deposed five officers.  The plaintiff sought to depose the current COO, the former president/CEO (now retired), the current CFO and the current chief administrative officer (“CAO”).  The opinion does not recite what proffer the plaintiffs made as to what any of these persons might know that had not already been explored in the prior depositions.  In response to the effort to take these new depositions, the defendant bank argued that:

It will be very disruptive and unduly burdensome in light of the repetitive testimony to be generated to require the three top-level executive who currently work at the bank … to submit to depositions.

The Court gave the plaintiff’s a partial win.  As Wolfe was retired, it could not be argued that his deposition would interrupt the bank’s operations, and the plaintiffs were permitted to take his deposition.  They were as well permitted to take the deposition of the current chief operating officer.  At the same time they were denied permission to at this time take the depositions of the CFO and CAO.

Allocating Voting and Economic Rights in LLCs: An Invitation to Confusion

Allocating Voting and Economic Rights in LLCs:  An Invitation to Confusion

I recently published in the Journal of Passthrough Entities, I published a two part article entitled Allocating Voting and Economic Rights in LLCs: An Invitation to Confusion. 

This article explores a number of ways in which allocation of voting and economic rights in LLCs can create confusion and ambiguity, especially when contrasted with the rules required under the Internal Revenue Code for the maintenance of capital accounts.  This article as well highlights problems that can arise when the allocation of economic and voting rights is linked to capital accounts.  Considered as well as problems that arise under the LLC Acts when voting and economic rights are linked to contributed capital and the person whose rights are in question is an assignee who has never madea capital contribution to the LLC.

The article can be accessed through HERE IS THE LINK TO PART ONE and HERE IS THELINK TO PART TWO.

The Corporation of Itself Owes No Fiduciary Duties

The Corporation of Itself Owes No Fiduciary Duties

 

      In a recent decision rendered by the Delaware Chancery Court (Vice-Chancellor Glasscock), there was rejected the suggestion that the corporation itself owes fiduciary obligations to the shareholders. Buttonwood Tree Value Partners, L.P. v. R. L. Holcomb & Co., Inc., Civil Action No. 9250-VCG, 2014 WL 3954987 (Del. Ch. Aug. 7, 2014).

 

      This case arose out of a self-tender by Polk & Co. for the small minority of shares that were not held by the Polk family stockholders. Ultimately, the plaintiff shareholders would sell their shares for approximately $810 each. About six-months after that redemption there was declared a special cash dividend of $240per share, and just over 2 years later the company was sold at a price of $10,675 per share. Suit was brought, it being alleged that the plaintiffs were misled as to the value of the company when they sold their shares at $810 each. As well, the plaintiffs alleged that R. L. Polk & Co., the corporation itself, reached a fiduciary duty to the shareholders.

 

      It was this claim was dismissed by the Chancery Court. Specifically, as described by the Chancery Court:

 

The Plaintiffs allege that Polk, a Delaware corporation, “failed to meet its disclosure obligations under Delaware law as set forth in Eisenberg v. Chicago Milwaukee Corp. ... and Joseph v. Shell Oil Company ... by depriving Plaintiffs and other members of the Class of all material facts needed to determine how to respond to the Self–Tender, and specifically of the true value of their Polk stock.”

 

….  Although the Plaintiffs have not elaborated on what law set forth in these two cases supports their disclosure claims against Polk, neither of these cases demonstrates that Delaware corporations owe a fiduciary duty of disclosure to their stockholders in connection with a tender offer.

 

In fact, under settled Delaware law, “[f]iduciary duties are owed by the directors and officers to the corporation and its stockholders.” In other words, a corporation does not owe fiduciary duties to its stockholders. Thus, to the extent the Plaintiffs allege that Polk as a corporate entity breached its fiduciary duties in connection with its purported failure to meet its disclosure obligations, Count II must fail.   2014 WL 3954987, *4.

 

      In that no fiduciary duty was owed, there could not be a breach thereof.

Bankruptcy Court Holds Trustee May Not Put the Cart Before the Horse and Strikes Down Effort to Pierce the Veil as a Cause Of Action

Bankruptcy Court Holds Trustee May Not Put the Cart Before the Horse

and Strikes Down Effort to Pierce the Veil as a Cause Of Action

      In a recent bankruptcy court decision, the Court rejected the effort by a bankruptcy trustee to utilize the concepts of “piercing the veil” in order to, ab initio, bring a third-party defendant into the action.  Rather, the Court held that piercing is a remedy, not a cause of action. Spradlin v. Beads and Steeds Inns, LLC (In re Howland), Case No. 12-51251, Adv. No. 14-5019, 2014 WL 4199637, __ B.R. __ (Aug. 22, 2014).

      The facts of this case are recited in the opinion as follows:

The following facts alleged in the Trustee’s Complaint are taken as true for the purpose of this decision.  On or about June 19, 2007, the Debtors formed Meadow Lake Horse Park, LLC (“Meadow Lake”).  On July 20, 2007, Meadow Lake purchased 133 acres of real estate in Garrard County known as 9863 Lexington Road, Lancaster, Kentucky (“Farm”) for $1,600,000 with the proceeds of a mortgage loan from United Bank & Trust Company (“United Bank”).  In late November 2010, the Debtors made a $760,000.00 payment on the mortgage loan to United Bank out of their personal income tax returns.  The Trustee asserts this payment was without consideration. 

On December 28, 2010, Meadow Lake sold the Farm for $800,000 to the Defendant Beads and Steeds Inns, LLC, which is wholly owned by Robert and Susan Hale (“2010 Transfer”).  The Defendant was formed shortly before the 2010 Transfer for the sole purpose of purchasing the Farm.  Defendant financed the full purchase price with a Mortgage Loan from United Bank in the amount of $800,000.

Subsequent to the sale of the Farm, Meadow Lake leased the Farm to the Defendant for $1,000 per month.  Meadow Lake also agreed to pay all insurance and real property taxes.  The Debtors operating the Farm as a horse boarding and training facility and a bed & breakfast and event facility both before and after the 2010 Transfer.

The Debtors filed Chapter 7 Bankruptcy on May 8, 2012.  The Debtors scheduled their interest in Meadow Lake on Schedule B and listed the value as $0.  Phaedra Spradlin was appointed Chapter 7 Trustee.

On May 6, 2014, the Trustee filed the underlying adversary proceeding seeking to avoid the 2010 Transfer as a fraudulent conveyance pursuant to § 548(a)(i)(B).  The Trustee also seeks to avoid the 2010 Transfer pursuant to KRS § 378.020 through § 544(b).  The Trustee further requests that the Bankruptcy Court disallow any claims by the Defendant pursuant to § 502(d).

      Essentially, while the bankruptcy filing was on behalf of the Matthew and Megan Howland, the Bankruptcy Trustee sought to allege that their LLC, Meadow Lake, had engaged in a fraudulent transfer which should be undone, it being posited that they (the Howlands and their LLC) should be treated as one and the same and the LLC “reverse pierced.”

      Although not cited by the Court, a member of an LLC has no ownership interest in the LLC’s property.  See KRS § 275.240(1); id. § 275.250.

      Reverse piercing is a twist on the traditional concept of piercing the “corporate” veil.  In traditional piercing, the plaintiff holding a judgment against a corporation that cannot be satisfied out of corporate assets seeks to “pierce” the corporation and hold the shareholders liable for the corporation’s debt.  In a reverse pierce, a claimant against the individual shareholders (in this case the members of the LLC) aims to access the assets held by the business entity and treat them as if owned directly by the shareholder/member.  Reverse piercing is in turn divided into two categories.  “Outsider” reverse piercing involves a claimant against the shareholder/member.  “Insider” reverse piercing involves the shareholder of the corporation or member of the LLC seeking to claim, for personal benefit, the assets of the LLC.

     After noting, consequent to the unique position of a Trustee, that this effort could be characterized as either outsider or insider reverse piercing, the court determined that categorization to not be necessary in that neither effort would be permitted to proceed.  Initially, relying on Turner v. Andrew (that decision is reviewed HERE) and Williams v. Oates (that decision is reviewed HERE), the Bankruptcy Court acknowledged that it is unclear whether a Kentucky court would accept the validity of reverse veil piercing.  That controversy did not, however, need to be addressed by the Bankruptcy Court in that it held that piercing could not be used in the affirmative approach sought by the Bankruptcy Trustee.  Rather, the court focused upon the fact that, under Kentucky’s piercing law, whatever it might be, piercing is a remedy and not itself a cause of action.  In that the Trustee sought to use reverse piercing as a theory for imposing the initial liability, rather than as a remedy by which to seek collection on primary liability, the effort was dismissed.  Specifically:

The Trustee argues that disregard of the corporate form of Meadow Lake [it was actually an LLC] would mean the 2010 Transfer is treated as if it were made by the Debtors directly.  Under this theory, it does not matter whether the Debtors or Meadow Lake committed the alleged wrongdoing.  The assets and liabilities of both parties are treated as merged both prospectively and retroactively.  This logic is not consistent with veil piercing as a remedy in Kentucky. 

Still, Beads and Steeds Inns, LLC is not off the hook.  The Bankruptcy Court afforded the Trustee the opportunity to file an amended complaint setting forth a traditional substantive consolidation claim.