Burford Abstention

Burford Abstention

      Peter Mahler, in his blog New York Business Divorce, has reviewed a recent New York decision on Buford Abstention in the context of the dissolution of a non-profit corporation.

      Under Burford Abstention, federal courts, although they would have the jurisdictional capability to do so, will defer to state courts with respect to matters particular to the organization of business organizations. The intent is to avoid creating conflicting law between state and federal courts. In this instance, where the common law dissolution of a non-profit membership corporation was sought, the federal court decided that it would be best for a state court to consider that question. This holding is consistent with prior New York law, reviewed by Peter, with respect to actions for a statutory judicial hearing.

      The title of the posting is Another Door Closes to Federal Court in Judicial Dissolution Cases; HERE IS A LINK to it.

      This decision stands in opposition to a 2019 decision of Judge Van Tatenhove of the Federal District Court for the Eastern District of Kentucky, wherein he held, on reconsideration, that Burford Abstention did not preclude him from ruling on a suit seeking judicial dissolution of a business corporation. That case was Henley Mining, Inc. v. Parton, Civ. No. 6:17-CV-00092-GFVT, 2019 WL 1048839 (E.D. Ky. March 5, 2019).  HERE IS A LINK to my review of it. It, in turn, includes a link to the decision rendered prior to Judge Van Tatenhove’s reconsideration of the matter and reversal of his prior decision.

Thinking Through All of the Implications of the Gig Economy

Thinking Through All of the Implications of the Gig Economy

      In the so-called “gig economy,” workers are self-employed and work as independent contractors of any number of companies including Uber, Lift and DoorDash. Of course, the gig economy extends well beyond these transportation companies to include freelancing graphics design, artists, participants in the computer industry and even contract attorneys. For each person so engaged, they need to carefully consider what it means to be self-employed. 

      According to a recent newspaper story, a woman working for Grubhub learned the hard way that she had not fully considered those implications. While working on a delivery, she was, at her fault, involved in a significant automobile accident. After the driver of the other car was made whole by his insurance company, that insurance company came against her, exercising its subrogation rights. She turned that claim over to her automobile insurance provider, and there is where the problem arose. She had an ordinary, and not a commercial/business, insurance policy. On the basis that she was engaged in business (i.e., delivering for GrubHub) at the time of the accident, the insurer denied that she was entitled to coverage, a denial that extended as well to the damage to her own vehicle. She is now facing the possibility of filing bankruptcy. 

      As reported in the newspaper article, she believes that at least part of the fault lies with GrubHub. She presented a copy of her personal insurance policy, and they did not tell her that she needed to have a commercial policy. Whether that was really GrubHub's obligation is subject to debate. Regardless, at the time of this accident she did not have insurance that would protect her from the consequences of an accident taking place while working as an independent contractor of GrubHub.

      HERE IS A LINK to that news story.

      Persons involved in the gig economy need to carefully consider all of the implications of working as a self-employed independent contractor including as to the full range of appropriate insurance.

An Unsuccessful Effort to Steal a House

An Unsuccessful Effort to Steal a House

      In a verdict widely reported of in the news, including in the New York Times, a man in Bartow, Florida has been sentenced to prison following his efforts to steal a house. 

      In connection with a residential closing, Stanley Livingston asked to defer signing the mortgage documents, even as he was somehow able to convince the other participants to go ahead and sign the deed made out to him. He grabbed that document and ran out of the closing. Two days later he filed that deed with the county land records, and then asserted he was the owner of the property free and clear.

      He was convicted of grand theft for filing a false document against real property.  At some point in the proceeding, that deed was declared void by the court. Now, rather than living in that house, he will spend the next 3 ½ years in prison.

The Importance of Carefully Defining What is Being Valued

The Importance of Carefully Defining What is Being Valued

      I am currently working on updating a publication of the American Bar Association addressing buy-sale agreements. In the course of that work I stumbled upon a 2018 bankruptcy decision that stands for an important rule, namely that it is crucial to define what is being appraised in determining a buyout value. In re Stebnitz (Dubis v. Daniel J. Stebnitz and Gary C. Stebnitz), 586 B.R. 289 (Bankr. E.D. Wis. 2018). 

      Daniel J. Stebnitz, the debtor in bankruptcy, was a one-third member in an LLC along with his two brothers David and Gary. That LLC, Spirit Valley Camp, LLC, was governed by a written operating agreement signed by each of Daniel, David and Gary. The opinion suggests, but does not state explicitly, that the property held by the LLC was a vacation home. As such it did not generate income. The operating agreement provided for per stirpes descent of the membership interests amongst the three family groups and is well addressed voluntary withdrawal from the LLC (¶ 20.B), providing: 

If a Membership Group wishes to withdraw from the LLC, it shall give the remaining Membership Groups written notice. The remaining Membership Groups shall purchase said departing Membership Group interest within 120 days of receipt of such notice. The purchase price shall be one-third (1/3) [of] a formal appraisal, obtained and paid for by the departing Membership Group. If the remaining Membership Groups object to said appraisal, they have the option of requiring a second appraisal, at the departing Membership Group’s cost. If an agreement cannot be reached, the Membership Groups shall obtain a third appraisal, at the cost of the departing Membership Group and the purchase price shall be the average of the three. If the departing Membership Group fails to obtain and/or pay for the appraisal, that Membership Group shall be considered in default. 586 B.R. at 293.

The opinion noted that the agreement did not define the term “appraisal.” Id. 

      After an adversary proceeding in which the trustee recovered to the estate Daniel’s interest in the LLC after he had transferred it pre-bankruptcy filing, the trustee gave notice of his intent to withdraw from the LLC, requiring the redemption of Daniel’s interest for $80,000. That notice included an appraisal valuing the LLC’s property at $240,000. Well within the 120 day period for closing on the put option, David and Gary’s attorney returned to the trustee a valuation of a one-third interest in the LLC. After utilizing a 15% discount for lack of control and a 20% discount for lack of marketability, valued Daniel’s interest in the LLC at $40,800. That amount was further reduced for a variety of expenses, yielding a final offer price of $25,000. 586 B.R. at 293-94. It does not appear that the third appraisal provided for in ¶ 20.B. of the operating agreement was ever sought. Rather, the trustee brought this adversary proceeding and requested summary judgment, arguing that “the [operating] Agreement’s plain language requires a formal appraisal of the Property, not a valuation of the LLC.” As the court would further note, “The problem with Paragraph 20.B is that it requires a ‘formal appraisal’ but does not specify what is to be appraised.” 

      The court would accept the trustee’s argument that the appraisal should be of the LLC’s property in part because the LLC, beyond holding the property, did not have a “business purpose” evidenced by, for example, renting the property or regularly buying and selling other parcels of property for profit. Ergo, the court would conclude that the “appraisal” provided for in ¶ 20.B of the operating agreement should be of the underlying asset, that being the real property. As such, the court granted the trustee summary judgment on its claim that the judgment debtor’s interest in the LLC should be redeemed by the other members for $80,000. 

      For myself, I find this decision entirely unsatisfactory. The court ignored the fact that the debtor did not have any ownership interest in the property. Rather, he held a one-third interest in the LLC. Ownership of an LLC does not convey to the member any ownership interest in the LLC’s property. This point was not, however, even in passing, acknowledged in the decision.

Further, in justifying its decision, the court wrote: 

The defendants do not offer a reasonable interpretation of the contract provision to counter the Trustee’s reading. As noted above, the Agreement shows an intent to keep the LLC (and the Property) in the family, with interests equally apportioned between the families of the defendants and the debtor. The Agreement describes this as an intent “to provide for the transition to future generations [of the initial members] without diluting their respective ownership percentages” and instructs that the Agreement “shall be interpreted with this goal in mind.” This goal is apparent in the transfer of a member’s interest to only tow other categories of individuals: (1) the member’s designated beneficiaries; and (2) the other membership groups.

Given this stated intention, it is unreasonable to read the buy-out price of “one-third (1/3) a formal appraisal” to mean instead a valuation of an individual one-third share in the LLC that factors in deductions or discounts for “lack of control” or “lack of marketability,” as the defendants propose. The purpose of the buy-out provision in Paragraph 20.B is to allow the remaining membership groups to retain their investment positions in the family-owned property, and to allow the existing member to recapture his investment, in shares proportionate to the value of the LLC’s assets-currently, the Property. Applying any kind of discount for lack of control or similar considerations is inconsistent with the Agreement’s stated purposes, and would allow the remaining membership groups to purchase one-third of the LLC’s assets for less than one-third their appraised value, reaping a windfall at the expense of the existing family member. A discount for lack of marketability is likewise inappropriate when the Agreement obligates the remaining membership groups to purchase the existing member’s interest. In sum, the defendants’ reading of the contract is unreasonable, and therefore does not render the contractual provision ambiguous. 586 B.R. at 296-97 (citations to record and footnote omitted).

      Except that happens all the time. Again, the debtor held only a minority interest in the LLC itself. He had no control over the LLC’s property; as recited in the opinion, ordinary course transactions require the approval of two-thirds of the members, with extraordinary transactions requiring unanimous approval. Rather, the application of discounts for lack of control and marketability are common in the valuation methodologies employed in operating agreements and are to be expected in the event of a voluntary withdrawal from a venture. A point made by the court, namely that minority and lack of control discounts are not permitted in corporate dissenter rights actions may be true, but is also irrelevant. The facts of this case were a voluntary withdrawal from the LLC, not a compulsory of redemption as is the case in a dissenter rights action.

      Again, the only thing the debtor in bankruptcy could sell was an interest in the LLC, and the agreement should have specified that the appraisal would be of that intangible. The operating agreement’s failure to be specific as to that point allowed this decision to turn out as it did.

LLCs Do Not Have Families

LLCs Do Not Have Families

      In a recent decision by a trial court in New York, it was determined that an LLC does not have a family. Bellstell 7 Park Avenue LLC v. Seven Park Avenue Corp., 2019 N.Y. Slip Op. 29402, 2019 WL 7421760 (Sup. Ct. New York County Dec. 23, 2019). 

      This dispute arose out of the characterization of certain unsold shares in a housing cooperative. The owner of “unsold shares” may sublet the property or assign the lease without the requirement of the approval of the cooperative’s Board of Directors or other shareholders. Rather, only the building’s managing agent’s approval is required. This case involved the question of whether the shares related to a particular unit would be characterized as unsold. 

      Bellstell, holding all of the unsold shares of in the cooperative, is a New York limited liability company for which the sole member is a New York corporation. That New York corporation is in turn owned by an Italian corporation named Edilverde e Beni Internazionali S.p.A. In November 2015, with the approval of the building’s managing agent, Bellstell sublet one of its apartments to Ciro Campagnoli. Campagnoli holds a 50% contingent remainder interest in Edilverde.

      Under the lease agreement, unsold shares remain in that category until “the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment.” 2019 WL 7421760, *2. Bellstell would assert, in effect, that the “member of his family” language could never apply to it as it is only applicable when applied to natural persons. On the other side of that coin, an LLC or other business entity does not have family members, and therefore the proviso is inapplicable when it is the holder of the unsold shares. Conversely, 7 Park Avenue would assert that because Campagnoli is a principal of Bellstell’s ultimate owner and a member of the family that ultimately controls it, he should be treated as a member of Bellstell’s family.

      Rejecting the argument of Seven Park Avenue, the court wrote: 

Put simply, this court sees no principled or practical means of defining when an individual’s ties to an LLC would suffice to make them a “family member” of the LLC for purposes of determining when the individual’s occupancy of an apartment strips the apartment’s shares of unsold-share status under the lease at issue here. The court therefore concludes that as a matter of law, the only reasonable reading of “member of his family” in ¶ 38(b) of the lease is that this language does not encompass individuals connected to LLCs or corporations that hold unsold shares. Id., *4 (footnote omitted).

The Die is Cast

The Die is Cast

      Today, January 10, is the anniversary of Caesar’s crossing of the Rubicon in 49 b.c., thereby precipitating the Roman Civil War and his ultimate appointment to the office of dictator for life.  The Rubicon constituted the border between Cisalpine Gaul and Italy proper. No general was permitted to bring an army into our Italy; doing so was considered an attack on both the Senate and the people of Rome.

      It is said that, when Caesar crossed, he observed “the die is cast.“ There is not, however, a contemporaneous report to that effect, including in Caesar’s own writings.

      Apparently not realizing that Caesar had only a single legion with him, most of the leaders of the opposition, including Pompey Magnus, fled the city.

      Exactly where was the river Rubicon has been lost to history.

Pleading the Factual Basis for Diversity Jurisdiction

Pleading the Factual Basis for Diversity Jurisdiction

      A pair of recent decisions stand for the proposition that facts are necessary in order to plead diversity jurisdiction or, from the other perspective, speculation is not sufficient. Those decisions are Platinum-Montaur Life Sciences, LLC v. Navidea Biopharmaceuticals, Inc., Docket No. 18-3535-CV, 2019 WL 6258632 (2^nd Cir. Nov. 25, 2019) and Alanazi v. Avco Corporation, Case No. 6:19-CV-2230-ORL-28 LRH, 2019 WL 6324007 (M.D. Fl. Nov. 26, 2019).

      The Platinum-Montaur case arose out of an alleged breach of contract. After the plaintiff filed suit in Florida, the defendant removed the action to the Federal District Court for the Southern District of New York. While the parties engaged in “limited informal jurisdictional discovery,” Platinum-Montaur’s citizenship was never conclusively determined. The District Court, however, proceeded on the merits on the basis that “it had no ‘good faith basis to believe there is not complete diversity.’” That basis would be reversed by the Second Circuit Court of Appeals

      It was noted that one of Platinum-Montaur’s members (the other two being natural persons) was an investment fund organized as a limited partnership based in the Cayman Islands. As such, the citizenship of each of the partners, limited and general, in that limited partnership would be attributed to Platinum-Montaur in determining its citizenship. One of the limited partners in that partnership was in turn another limited partnership with some 220 limited partners, most if not all of whom would be in the United States. It was not possible, however, to determine the citizenship of each of those persons.   

      Noting that the diversity jurisdiction of the federal courts is limited and that questions as to removability of suit are to be resolved against removal, the Second Circuit wrote that: 

A District Court may not assume subject-matter jurisdiction when the record does not contain the necessary prerequisites for its existence. Here, the District Court erred by exercising diversity jurisdiction on the basis that it did not have a “good faith basis to believe” that the parties before it were not completely diverse.

* * *

At this stage, the District Court had two options. First, it could have remanded the case to state court because Navidea had failed to allege complete diversity of citizenship or to establish diversity through discovery. Second, the District Court could have exercised its discretion to order further discovery to determine whether there was complete diversity of citizenship. ….

Here, none of the underlying state-court pleadings, the notice of removal, or the record as a whole reflected that the parties were completely diverse. Thus, the District Court erred in proceeding on the merits of this case. We therefore re-manned so that the District Court can exercise its discretion to conduct further proceedings, if any, as it deems appropriate. 2019 WL 6258632, *4 (citations omitted).

      In the Alanazi decision, the plaintiff, an individual, filed an action in state court against the nine defendants, of whom three were LLCs. The defendants then removed to federal court on the basis of diversity jurisdiction. The court would remand the case because the removing defendant had failed to specify the citizenship of the plaintiff. In addition, the pleading of the citizenship of the various LLC defendants was deficient. It asserted that none of the members of those LLCs was a citizen of Florida, that being the presumptive citizenship of the plaintiff. That was rejected on the basis that “pleading that none of the members as a citizen of Florida is not sufficient to establish diversity; affirmative pleading of citizenship is required.” The court went on to write that “The citizenship of each member of each LLC must be alleged.”

      In the course of its decision, the court cited an earlier opinion rendered in Wilkins v. Stapleton, 2017 WL 11219132 (M.D. Fla. Aug. 1, 2017) for the following admonition (the emphasis being in the original): 

DO not allege jurisdictional facts “on information and belief.”