LLC’s Dissolution Did Not Transfer LLC’s Assets to the Member

LLC’s Dissolution Did Not Transfer LLC’s Assets to the Member

 

A June decision from a Connecticut court has (again) confirmed the rule that an LLC’s dissolution does not of itself transfer the LLC’s property to the LLC’s members. Mukon v. Gollnick, 151 Conn. App. 126, 92 A.3d 1052 (Conn. App. 2014).

 

Mukon was the managing member of Sea Pearly Marine, LLC.  In February, 2007, the LLC purchased a ship hull in Maine and paid sales tax to the State of Connecticut.  It began refurbishing the hull into a ship; sales tax was not paid on the additional items purchased pursuant to a resale certificate.

 

In 2009 Mukon asked Gollnick, a CPA, about how to avoid Connecticut’s $250 per year LLC filing fee.  Gollnich told Mukon that the fee could be avoided if the LLC were dissolved, and dissolution paperwork was then filed with the state.

 

Eventually Mukon registered the vessel in his own name.  Upon an audit he was required to pay $11,665.41 to the state.  Mukon then brought an accounting malpractice action against Gollnick.  While Mukon would prevail at trial, on appeal  Gollnick was vindicated.

 

 

The Court of Appeals wrote:

 

The thrust of the plaintiff’s argument before the trial court was that the dissolution of the company triggered an automatic transfer of the vessel from the company to the plaintiff, and that this automatic transfer triggered the tax liability.

 

Those conclusions were ultimately embodied in the trial court’s decision.

 

The Court of Appeals examined the Connecticut LLC Act as to the effect of dissolution, and found that in fact it did not provide that an LLC’s dissolution effects a transfer of its property.  On that basis the conclusion relied upon by the trial court was negated.

 

The Court of Appeals also considered the statutes governing the application of an LLC’s assets upon dissolution and the requirement that its outstanding liabilities be satisfied.  Ultimately the Court found that Mukon’s obligations arose consequent to his failure to satisfy those statutory requirements.

 

This question should never arise in Kentucky as the LLC Act provides that dissolution will “not…transfer title to the [LLC’s] property.”  KRS § 275.300(3)(a).

Caesar, Vercingetorix and the Battle of Alesia

 

Caesar, Vercingetorix and the Battle of Alesia

      Today marks the anniversary of the surrender in 52 b.c. of Vercingetorix to Julius Caesar, bringing to a close the Battle of Alesia.

      The story of the battle was well documented by Caesar in The Gallic Wars.   Caesar and the legions trapped the Gaul army in Alesia.  In order to enforce the blockade they built a wall around nearly the entire town (some geography kept the walls from being complete).  Fearing the arrival of a relieving army, the Romans then built another wall around their siege lines (again nearly complete except where limited by geography).     Hence the Romans were intentionally in the space between the two walls. 

      A relieving army did arrive, and the Romans had to fight both the army on the outside of the fence as well as the forces in Alesia that were trying to break out from the inner wall.  The battles were bloody, and the outcome was a Roman victory.  Vercingetorix was brought back to Rome to be paraded at a Triumph held for Caesar.  He was then killed (likely strangled).

Reflections on the Hobby Lobby Decision

Reflections on the Hobby Lobby Decision

 

      Last June, on the last day of the Supreme Court term, it issued sits decision in Burwell v. Hobby Lobby, holding, inter alia, that a business corporation could deprive its employees of certain contraceptive benefits mandated by the Affordable Care Act based upon the religious objections thereto held by the corporation’s shareholders.  For reasons I detailed in an article published in the William and Mary Business Law Review, A Corporation Has No Soul – The Business Entity Law Response to Challenges to the PPACA Contraceptive Mandate, I entirely disagree with the Court’s reasoning in this decision. CLICK HERE TO LINK TO THAT ARTICLE.

 

One especially unsatisfactory aspect of the decision was the assertion by the majority that in fact it is a very narrow decision and would not have broad application.  This possibility  of broad application was highlighted by Justice Ginsburg in her dissent, and was the point raised in my article that was cited to the US Supreme Court in an amicus brief filed by a group of business law professors.   Essentially, if a corporation can deprive its employees of otherwise statutorily mandated contraceptive coverage, there exists no analytic basis by which the company owned by the observant Jehovah's Witness cannot require exclusion from the employee’s insurance plan of blood transfusions, that the corporation owned by a devout Muslim should not be able to refuse to cover the transplant of a pig valve into an employee’s heart or the Scientologist owned company should not be permitted to exclude from its insurance plan coverage for psychiatric care.

 

In a recent article by Jeffrey Toobin published in the New Yorker magazine, he suggest that, based upon recent reliance upon the Hobby Lobby decision by various individuals asserting they should not have to comply with an otherwise existing legal obligation because of their religious belief’s, Justice Ginsburg was right.

 

Click here to link to that article.

The Fall of Jerusalem

The Fall of Jerusalem

      October 2 marks the anniversary of the fall of Jerusalem in 1187.  Jerusalem had been captured by the Crusader forces in 1099 at the culmination of the First Crusade.

     

      For those of you who saw the movie Kingdom of Heaven, well, lets just saw the script writers did not feel themselves bound by the historic record. The movie failed to acknowledge Balian’s wife and children.  Also ignored was the fact that Balian not only fought at the Battle of Hattin but was as well captured; the movie has him staying behind in Jerusalem, coming to the battle field only after the Crusader army had been destroyed.  At least that part is true; the Crusader army was destroyed, and the Templars were especially hit; all the captive Templers were executed.  Also, the city wall fell not at a gate and not from trebuchet bombardment, but rather from being undermined.  As near as I can tell Balian never visited France.  And he should have been in his mid to late 40’s at the time of the fall of Jerusalem. 

 

Planned Distribution of Assets to Satisfy Obligations Guaranteed by Management and to Leave Other Creditors Hanging Enjoined

Planned Distribution of Assets to Satisfy Obligations Guaranteed by Management and to Leave Other Creditors Hanging Enjoined

 

            It is not uncommon that when a corporation or other business entity is dissolved that the available assets will not be sufficient to satisfy all of the corporation’s debts.  Recently a North Carolina court was called in to asses a circumstance in which the corporation’s assets were to be used to satisfy only the debts personally guaranteed by members of management, leaving the claim of the other creditors unsatisfied.  The Court issued  a restraining order to preclude that from happening.  Americana Development, Inc. v. Ebius Trading & Distributing Company, No. 13-CVS-7849 (Gen. Ct. of Justice, Sup. Div., County of Wake, N.C  Aug. 28, 2014).

 

            Ebius had suffered an apparent long string of financial set-backs, losing money in each of the recent years.  Recently it had borrowed $200,000 from Wells Fargo; that line of credit was personally guaranteed by Byers and Corley, members of management.  The corporation otherwise owed $2.4 million in trade debt.

            In connection with Edius winding up, Byers and Corley sought to saell certain Ebius intellectual property and to apply the proceeds to the satisfaction of the Wells Fargo obligation, in so doing eliminating Byers’ and Corley’s obligations under the personal guarantees.

            Under North Carolina law it is clear that the directors of an insolvent and dissolving corporation owe a fiduciary obligation to the corporation, which duty is breached if they use their control of the entity for their own benefit at the expense of other creditors. 

            The Court entered a restraining order to the effect that corporation debts could be satisfied only “on a pro rata basis.”

Court Rejects Notion that Contract with Nonexistent Corporation is Void Ab Initio

Court Rejects Notion that Contract with Nonexistent Corporation is Void Ab Initio

 

In a recent decision, the court rejected an effort to declare a contract void on the basis that the alleged counter-party did not exist as a legal entity at the time the contract was entered into.  Pharmacogemetics Diagnostic Laboratory, Inc. v. Essential Molecular Testing Corp, LLC – PGXL Partners, LLC, Civ. Act. No. 3:13-CV-867-H, 2014 WL 4163859 (W.D. Ky. Aug. 20, 2014).

 

Pharmacogenetics entered into a sales representative agreement with an entity identified as “Essential Molecular Testing Corporation”; Scott Goodman signed the agreement as president and CEO. The only problem was that there was no such corporation, and no such corporation has subsequently come into existence. Rather, some time after the agreement was entered into, Goodman caused a pre-existing LLC to adopt that assumed name.

 

Ultimately, EMTC was quite successful in marketing Pharmacogenetics’ product, giving rise to substantial commission obligations. Pharmacogenetics filed suit requesting that the sales representative agreement be declared void ab initio on the basis that EMTC did not exist. As set forth by Judge Heyburn:

 

The threshold question is whether the Agreement is valid and, therefore, enforceable. This question is separate and distinct from who may enforce it and against whom.

 

He would conclude that the fact that EMTC did not exist at the time the contract was entered into did not of itself automatically render the agreement void ab initio.  Further, he found that KRS § 275.095 addresses only a liability for executing an agreement on behalf of a nonexistent entity, and does not provide that “contracts entered into in the name of the nonexistent entity are null and void.”

Let’s Stop Describing LLC’s as “Hybrids”

Let’s Stop Describing LLC’s as “Hybrids”

      Recently I published in the Journal of Passthrough Entities Let’s Stop Describing LLC’s as “Hybrids”. 

      In this article I challenge the often made suggestion that LLC’s are a hybrid of corporate and partnership law, a statement which is then typically followed by an effort to pigeonhole the particular question into the answer that would result from either partnership or corporate law. I suggest that the LLC needs to be considered as a unique organizational form not derived from either partnership or corporate law.  

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