Diversity Jurisdiction and Donative Trusts; Look to the Citizenship of the Trustee

Diversity Jurisdiction and Donative Trusts; Look to the Citizenship of the Trustee

      In a relatively recent decision of the Second Circuit Court of Appeals, it considered and affirmed the traditional rule with respect to determining the citizenship, for purposes of diversity jurisdiction, of a traditional, donative (as contrasted with a business or statutory) trust. Raymond Loubier Irrevocable Trust v. Loubier, 858 F.3d 719 (2^nd Cir. 2017).

      The federal statute governing diversity jurisdiction requires both that the amount in controversy exceeds $75,000 and, inter alia, that none of the defendants have the same citizenship as any of the plaintiffs. Rather involved and sometimes byzantine rules exist with respect to determining what is the citizenship of various organizations such as corporations and LLCs. Those rules can be particularly complicated in the context of a trust in that trust may be either donative or business; different rules may apply depending upon that characterization. In this instance, the question turned on the citizenship of a traditional donative trust. In that the trust did not have certain characteristics now seen in business trusts, such as the capacity to sue and be sued in its own name, it was a traditional donative type trust.

While the fiduciary relationship established by the plaintiff trusts allow vested beneficiaries to demand accountings from and even to sue the trustees, the trusts themselves are not entities that can be sued except through their trustees. 858 F.3d at 730.

      From there, applying Navarro Savings Association v. Lee, 446 U.S. 458 (1980), the citizenship of the trust parties to this litigation would be determined exclusively with respect to the citizenship of the trustees thereof.

       Ultimately, this case was remanded until such time as a clear determination as to the trustees’ citizenship could be made.

Delaware Chancery Court Rejects Naked Assertion That Minority Member Owes Fiduciary Duties

Delaware Chancery Court Rejects Naked Assertion That Minority Member
 Owes Fiduciary Duties

      In a decision rendered last month by the Delaware Court of Chancery (Glasscock, V.C.), there was rejected the naked assertion that the minority member of the Delaware LLC is bound by fiduciary obligations. Re: Beach To Bay Real Estate Center LLC v. Beach To Bay Realtors Inc., Civ. Act. No. 10007-VCG, 2017 WL 2928033 (Del. Ch. July 10, 2017).

      The facts of this case are rather involved, if only because it involves a number of related companies with nearly indistinguishable names. Still, ultimately, this came down to a dispute with respect to the winding up and termination, with related settling of accounts, a failed real estate venture to which only one of the parties had made significant capital contributions beyond the original. Also complicating the case was the fact that there was no integrated written operating agreement, but rather a series of alleged oral agreements and one writing, it conflicting, in part with the alleged oral contract.

      In this decision, the court ruled on motions to dismiss that were filed in 2014. At that time, the parties requested that the court hold off on consideration as they were pursuing settlement discussions. Finally, in 2017, at the courts own motion, consideration was given to those arguments. Vice Chancellor Glasscock’s description of this case’s history is worth reading, namely:

In Yoknapatawpha County, Faulkner tells us, the “past is never dead. It’s not even past.” It must be so in Sussex, if this case is any indication. This matter involves a Sussex-centered real estate sales venture, ultimately unsuccessful and, according to the Plaintiffs, giving rise to a dog’s breakfast of claims and accountings, mostly concerning acts taking place during the time of the administration of the second President Bush. The Defendants moved to dismiss three of the counts. Three years ago. The matter was fully briefed in 2014, and oral argument had been schedule. I continued the argument, at the parties’ request, because they were “exploring” settlement. Outside the litigation, the world continued to turn. Births and deaths occurred, heartaches were endured, aspirations were pursed, wars were fought. Inside the litigation, in the micro-world of Beach to Bay v. Beach to Bay, time stood still. Apart from rousing themselves to answer, in desultory fashion, occasional proddings from this Court (themselves, I admit, less than energetic), the parties were content in a world slowed to the pace of matter chilled to near-absolute zero. Eventually, following a mandatory appearance of counsel at a call of the calendar, sufficient thaw set in to revive consideration of this partial motion to dismiss. The parties consented – that is, impliedly consented by failing to respond to a letter from the Court – to consideration of the briefs without amendment or update, and sans oral argument. Therefore, I have addressed the issues as fixed in the briefs from 2014 like flies in amber.

      But back to the merits. The plaintiff, in its complaint, alleged that the defendant owed a fiduciary duty to the plaintiff and failed to appropriately discharge that obligation by means of certain self-dealing transactions. The defendant sought dismissal of this claim on the basis that the plaintiff had not demonstrated that a fiduciary duty existed to begin with. The parties were in agreement that a manager/managing member of a Delaware LLC does owe fiduciary duties, but that did not extend to minority members. Rather, the Chancery Court found:

On the face of the Complaint, minority membership is the sole allegation that purports to create a fiduciary duty. That is insufficient as a matter of law. Thus, the pleading that [the minority member] owed fiduciary duties to [the majority member] falls short.

Courts Disagree as to the Standard for Issuing a Charging Order; Is the Judgment-Debtor a Member?

Courts Disagree as to the Standard for Issuing a Charging Order;
Is the Judgment-Debtor a Member?

      As a vehicle for collecting on a judgment, a charging order may be issued against a judgment-debtor’s interest in a partnership, limited partnership or LLC, functioning essentially as a garnishment of whatever distributions that company would otherwise make to the judgment-debtor. Pursuant to the charging order, those amounts are paid to the judgment-creditor. In a pair of recent decisions, courts disagreed as to what level of showing must be made that the judgment-debtor is indeed a member/partner in the LLC/partnership that would be subject to the charging order.

      In the first of these decisions, the court held, in effect, that there is a very low threshold for the issuance of a charging order.  Seufret v. Temple Management, LLC, 2017 WL 2622347 (Conn. Sup. Ct. May 25, 2017). In this instance, the judgment-creditor asserted that the judgment-debtor, Bergman, was a member in 660 Sherman, LLC, and that his interest therein should be subject to a charging order. An objection thereto was filed on the basis that the plaintiff had not made a showing that of the judgment-debtor held an interest therein. The court overruled that objection, writing:

If 660 Sherman, LLC is served with the charging order and owes no debt to the defendant, 660 Sherman, LLC is under no jeopardy. If a dispute arises about whether Bergman is owed a debt by 660 Sherman, LLC, that dispute can be presented to this court for resolution at a future date with notice to all relevant parties.

      In contrast, in a decision out of Missouri, the judgment-creditor seeking a charging order was held to a much higher standard. St. Louis Bank First v. Kohn, 517 S.W.3d 666 (Mo. Ct. App. 2017). Therein, the court of appeals reversed a lower decision granting charging orders with respect to the judgment-debtor’s alleged interest in certain partnerships and LLCs. On the basis that there had not been a sufficient showing that in fact the judgment-debtor was a member/partner in those ventures, the award of the charging orders was reversed.

      IMHO, the Seufret decision is the better of the two. Vis-a-vie the LLC, the charging order is a passive obligation to direct to the judgment-creditor what would otherwise be paid to the judgment-debtor. For that reason, little proof of the judgment-debtor’s interest in the LLC need be shown. Rather, even as the statute is silent as to the point, the judgment-creditor should be awarded a charging order on “information and belief” that the judgment-debtor is a member/assignee. If in fact the judgment-debtor is not in fact a member/assignee of the LLC, it is not obligated to do anything as there are no payments to divert to the judgment-creditor.

Bamberger and SKO Have Merged

Bamberger and SKO Have Merged

 

      Effective today August 1, 2017, the merger of Bamberger, Foreman, Oswald and Kahn and Stoll Keenon Ogden is complete.  The Bamberger firm was one of the oldest and most respected firms in Evansville, Indiana and it has long maintained a successful, full service office in Indianapolis.  The attorneys resident in Evansville have already moved and are working from the SKO’s Evansville offices.

      As of today, Stoll Keenon Ogden serves its clients from full service offices in Lexington, Louisville, Frankfort, Pittsburgh, Evansville and Indianapolis.  

Agreement to Arbitrate Disputes Did Not Survive Contract Termination

Agreement to Arbitrate Disputes Did Not Survive Contract Termination

      In a recent decision by the Sixth Circuit Court of Appeals, it was held that an agreement to arbitrate disputes did not survive the termination of the agreement that contained that provision. On that basis, there being no agreement to arbitrate disputes, an arbitration decision was essentially vacated with, presumably, the parties now left to litigate their dispute in court. Gridsmart Technologies, Inc. v. Marlin Controls, Inc., Case No. 17-5121, 2017 WL 3084419 (6^th Cir. July 20, 2017).

      Under the subject contract, Marlin Controls, Inc. had the exclusive right to distribute certain traffic-signal equipment manufactured by Gridsmart Technologies, Inc. On June 30, 2015, Gridsmart terminated that distribution agreement effective July 31, 2015. Thereafter, they attempted to reconcile how certain outstanding orders, delivered to Marlin on September 30, 2015, would be addressed. They were unable to come to agreement as to that point:

According to Marlin, it’s construction contracts did not pan out, so it sent the equipment for those projects back to Gridsmart. Gridsmart then demanded full payment for the returned equipment. Gridsmart argued that the returned equipment had been specifically made for Marlin and was obsolete by the time Marlin returned it.

      Ultimately, Gridsmart would file a claim with the American Arbitration Association. Marlin refused to participate in that arbitration. Ultimately, the arbitrator granted summary judgment to Gridsmart. Gridsmart then sought to enforce that arbitration judgment in court. After removing the case to federal court, Marlin moved that the district court vacate the arbitration award, which it ultimately did. Gridsmart then appealed to the Sixth Circuit Court of Appeals. It would determine that, under both the language of the agreement itself and the Tennessee Uniform Commercial Code, there was no agreement to arbitrate post-termination disputes.

     Section 6.2 of the subject Distribution Agreement provided (italics added by the court):

Effect of Termination on Unfulfilled Orders.  If at the time this Agreement is terminated for any reason by either Party, all orders for Products made by Distributor or the Company, that have not been fulfilled and/or shipped (whether partial or full) by the company to Distributor shall be fulfilled by mutual agreement between the Parties; provided, however, should Distributor terminate this Agreement for any reason within sixty (60) days of placing an order for Products, Distributor shall remain liable for payment of such order to the extent fulfilled by the Company unless the Company provides written notice that the order is deemed canceled.

      Applying this language, the court found:

Since the orders at issue were pending at the time the Distribution Agreement was terminated, those orders were subject to a different mutual agreement than the Distribution Agreement. Under the plain language of the contract, absent a second contract or new mutual agreement, the parties ceased to have any rights or obligations concerning the orders at issue.

      Also, applying the Tennessee UCC and specifically Tenn. Code Ann. § 47-2-106(3), which provides “all obligations which are still executory on both sides are discharged [upon termination of a contract] but any right based on prior breach or performance survives.”, the court held:

The Tennessee UCC instructs that once the Distribution Agreement was terminated, the parties’ rights and obligations, including the obligation to arbitrate disputes, as to those orders were also terminated.

      In response to suggestions that the agreement to arbitrate should survive termination, the court noted that in other instances particular provisions of the contract were identified as surviving termination. As the arbitration clause was not so identified as surviving termination, there was further support for the court’s to decision.

      The guidance of this case is rather clear. If there is an agreement to arbitrate disputes during the pendency of the contract, and it is desired that that right/obligation survive the contract termination, the agreement needs to so provide.

An Amendment Too Far

An Amendment Too Far

      The Florida State University Business Review has released the volume containing An Amendment Too Far?: Limits on the Ability of Less Than All Members to Amend the Operating Agreement, co-authored by myself and Katharine Sagan, also of Stoll Keenon Ogden. This article focuses upon the question of what limits exist when a partnership or operating agreement allows it to be amended by less than unanimous consent. Put another way, if less than unanimity is required, what are the outer limits of the modification of the deal that the permitted threshold for amendment may impose upon those who vote against the amendment? After reviewing the case law and the clear trends of no limitations, we consider a number of principles including fiduciary duties and the implied covenant of good faith and fair dealing to see if they impose any limits. We conclude they do not.

      We hope you find this piece of interesting. It can be accessed on the SKO website;  HERE IS A LINK to the article.

Sixth Circuit Court of Appeals Considers Ohio Standard for Piercing the Veil and Finds the Claims Lacking

Sixth Circuit Court of Appeals Considers Ohio Standard for Piercing the Veil

and Finds the Claims Lacking

 

      In a recent decision, the Sixth Circuit Court of Appeals considered an effort to pierce the veil of a corporation in an effort to hold its officers liable on its breach of a contract with respect to a point-of-sale system. The Sixth Circuit would reject that effort. Rutherlan Enterprises, Inc. v. Zettler Hardware, No. 16-4147, 2017 WL 2684109 (Sixth Cir. June 21, 2017).

      This appeal was in response to the District Court's grant of summary judgment dismissing the complaint in its entirety. After affirming the dismissal of certain counts alleging fraudulent misrepresentations on the basis of the statute of limitations, it turned to the argument that there was a breach of contract for which the various individual defendants could be hold personally liable under a theory of piercing the veil. Applying Taylor Steele, Inc. v. Keeton, 417 F.3d 598, 605 (Sixth Cir. 2005), the court found that the elements of piercing were not adequately demonstrated on the record.

      With respect to the failure to observe corporate formalities and hold meetings, the court rejected a suggestion that the mere failure to produce records of the meetings gives rise to an inference that they did not take place.

      With respect to a suggestion that the corporation was insolvent at the time it incurred its obligation, the court reviewed financial documents and tax returns which demonstrated that in fact the company had never been insolvent.

      With respect to an argument of inadequate capitalization, the court found that the mere fact that it began with minimal capitalization did not compel the conclusion that it was inadequately capitalized.

      Ultimately:

Giving the facts in the light most favorable to Rutherlan, like the District Court, we find no evidence in the record that supports an assertion of fraud, bad faith, or illegality. While it is true that ordinarily factual disputes should be decided by a jury rather than dismissed on summary judgment, that supposes that there is some factual evidence for a jury to consider in the first place. Ruthrtlan pointed to no factual evidence to prove fraud, bad faith, or even legality and its opposition to summary judgment and, likewise, fails to point to any such factual evidence on appeal. (citation omitted)