The 2021 Business Law Associations Institute
With CJ Donald of SKO’s Lexington office, this morning I presented at the UK CLE/KBA Section of Business Law seminar, the 2021 Business Associations Law Institute. We addressed topics including the Business Court Docket of the Jefferson County Circuit Court, the federal Corporate Transparency Act and a variety of recent decisions from across the country including decisions from Delaware and here in Kentucky.
Charging Orders and Foreign LLCs
A recurring issue in LLC law is whether a court has the capacity to issue a charging order as to the LLC interests of the judgment-debtor when the LLC that issued those interests is not of itself subject to the jurisdiction of the court. Consider a court sitting in Jefferson County, Kentucky. The judgment debtor, domiciled in Kentucky, holds a membership interest in an LLC that is organized in Colorado; the LLC is not a party to the lawsuit. Can the Jefferson Circuit Court issue a charging order as to the judgment-debtor’s interest in the Colorado LLC? The courts disagree as illustrated by a pair of recent decisions.
In Oberg v. Lowe, 2021 WL 495043 (D. Kan. Jan. 4, 2021), the court cited Professor Carter Bishop (Id., note 7, citing Carter G. Bishop, LLC Charging Orders: A Jurisdictional & Governing Law Quagmire, 12 No. 3 Bus. Ent. 14, 21 (May/June 2010)) for the proposition that there are “three ways a court can have jurisdiction to enter an LLC charging order: (1) Personal jurisdiction over the member, (2) In rem jurisdiction over the LLC membership interest to be charged, or (3) Personal jurisdiction over the LLC itself.” On that basis it was recommended that the court had jurisdiction to issue the requested charging orders in that “Defendant is a citizen of Kansas. If Defendant were not a citizen of Kansas, the Court would have in rem jurisdiction over his interests in the various limited liability company interests, all of which were formed in Kansas.” 2021 WL 495043, *2 (footnotes omitted).
In contrast is the decision rendered in Steamfitters Union, Local 420 Welfare Fund v. Direct Air, LLC, 2020 WL 6131163 (E.D. Pa. Oct. 10, 2020), wherein the court sitting in Pennsylvania determined it did not have jurisdiction to enter a charging order as to the judgment-debtors interests in a New Jersey LLC. See also id. at note 18 (suggesting that the judgment-creditors could domesticate the judgment in New Jersey and from a court in that state request the charging order). The judgment-creditors argued the Pennsylvania court had that capacity:
The question is whether a Pennsylvania court can charge a transferable interest in a New Jersey limited liability company. The plaintiffs contend that jurisdiction over a foreign limited liability company is not required to enter a charging order against its members’ transferable interests. They argue that because we have personal jurisdiction over SCST’s members, our jurisdiction over them extends to their personal property, wherever it is located. They rationalize that because a judgment creditor, as transferee, obtains only limited rights of a member, the charging order will affect only the member’s transferable rights and will not affect SCST itself.
See id.
at *3. Notwithstanding this
invitation the court found that
the New Jersey LLC did not have minimum contacts with Pennsylvania sufficient
to assert jurisdiction, and on the basis the requested charging order was
denied. Id. at *6 (“Because we
lack authority under the PULLCA to charge the defendants’ transferable
interests in the New Jersey limited liability company over which we have no
jurisdiction, we shall deny the plaintiffs’ motion for entry of a charging
order.”).
The Death of Pope Formosus
Yesterday marked the anniversary of the death, in 896, of Pope Formosus. All else being equal, this relatively obscure pope would be known only to scholars of the Carolingian age. He would, however, subsequent to his death, become rather well-known consequent to the Cadaver Synod.
Formosus was a diplomat on behalf of the Papacy. When a dispute arose as to who should be appointed Holy Roman Emperor (Charles the Bald or Louis the German), Pope John VIII sided with Charles; apparently Formosus was a partisan of Louis. This disagreement led to Formosus self-exiling himself from Rome. When told to return he did not, at which point he was stripped of his priestly office and excommunicated. The excommunication was lifted by Pope Marinus I, successor you John VIII.
Formosus would be elected to the Holy See in 891. His papacy was embroiled in disputes as to who should be the Patriarch of Constantinople and challenges to the then sitting Holy Roman Emperor Guy of Spoleto.
Formosus was succeeded by Boniface VI (Pope for some fifteen days in April of 896), who was in turn succeeded by Stephen VI. And that is where things got weird. Stephen’s election to the Papacy was supported by Guy of Spoleto, who of course Formosus was against. Convening the “Cadaver Synod,” Formosus was ordered exhumed from his grave and his corpse was clothed in papal vestments. Through a deacon appointed to defend him, the deceased Formosus was called upon to defend himself against a variety of charges involving ecclesiastical authority. When found guilty the papal vestments were torn from his body, three fingers of his right hand were amputated, his papal actions declared void ab initio, and the corpse thrown into the Tiber. Eventually the corpse would be located and re-interred in (old) St. Peter’s Basilica.
The public reaction was extreme; Pope Stephen VI was first imprisoned
and then strangled to death. By December
of 897 a new Pope, Theodore II, annulled the Cadaver Synod. As well the trial of a corpse was forbidden.
The Sine Qua Non of the Charging Order is Asset Segregation, Not “Pick Your Partner”
It is not uncommon for courts to focus upon the in personam delectus (a/k/a “pick your partner”) principle as the basis for the charging order, and to the discount the charging order in the single-member LLC context. See, e.g., AOK Property Investments, LLC v. Boudreaux, 308 So.3d 1214, 1216 (La. Ct. App. 5th Cir. Dec. 9, 2020) (“The trial court found that the charging order statute is not relevant in a single-member LLC. The court reasoned that there are no other members to protect in a single-member LLC when a creditor attempts to seize the entire membership interest, and a single-member judgment-debtor’s membership interest should not be shielded from seizure by a judgment creditor.”). This focus is improper. Charging orders exist not to protect in personam delectus, but rather the treatment of an LLC, even a single member LLC, as a legal entity separate and apart from its member(s).
The beginning point of the analysis is that an LLC is a legal entity distinct and apart from its member(s). The LLC owns its property for itself (not on behalf of the members as a nominee) and has its own debts and obligations (i.e., asset segregation). The second point is that an assignee of a membership interest does not succeed to management of the LLC. If a creditor of a member were able to seize the debtor’s membership interest that creditor would not succeed to a voice in the LLC’s management. Rather, that control would continue to be vested in the members. Different LLC acts have different treatments of the debtor-member in that situation, but none afford that involuntary assignee management rights in the LLC.
A straight-forward (well, as straight-forward as anything can be when discussing charging orders) application of the LLC act demonstrates the fallacy of this reliance. Assume a single member LLC in which the
judgment-debtor is that sole member.
Assume as well that the sole asset of the LLC is $1 million in cash, and
amount which happens to be the amount of the judgment. However, the LLC has trade debts of
$500,000. Even if the judgment-creditor
can gain control of the LLC, he or she cannot apply the LLC’s $1 million to
satisfaction of the judgment. Rather,
that $1 million is an asset of the LLC, and its assets must be applied first to
the satisfaction of its debts and obligations.
Nothing about the charging order allows the LLC to make distributions
that will impair the claims of its creditors.
Further, the judgment-creditor’s charging order lien on distributions
made to the judgment-debtor is not a lien on the LLC’s assets or give rise to
the capacity to compel that those assets be distributed in satisfaction of the
judgment even as the creditors do have the ability to compel the LLC to satisfy
their claims from that same pool of assets.
The Unfortunate Mixing of the Obligation to Qualify to Transact Business and the Obligation to File an Assumed Name
In a December, 2020, decision, the Court of Appeals treated as inter-changeable the assumed name statute and the obligation of a foreign entity to qualify to transact business. Barber v. Topgolf USA Louisville, LLC, No. 2019-CA- 1112-MR, 2020 WL 7919028 (Ky. App. Dec. 18, 2020). They are however, distinct statutes that address different issues.
On February 19, 2018, Topgolf applied for the necessary permits to open a facility in the Oxmoor mall. The initial application was filed in the name of “Topgolf USA Louisville, LLC.” There was not, however, as of the filing of the application on LLC of that name. Some nine months later that name was filed as an assumed name of Topgolf USA Ky1, LLC, a Delaware LLC that had qualified to transact business in Kentucky in 2017. In the course of hearings over the land use applications Topgolf representative would identify the misnaming as a “result of a miscommunication,” although the mistake continued after it was first identified.
Regardless, Topgolf’s application was confirmed and then upheld by the trial court. In this appeal the opponents to the project would claim Topgolf was “not legally in existence and, thus, could not participate in the litigation.” (2020 WL 7419028, *6) and that Topgolf’s “application was illegal ab initio became applicants Topgolf and GGP, Inc., had not registered with the Kentucky Secretary of State. See KRS 14A.9-010(1).” Id
And it was here that the wheels came off. KRS 14A.9-010 addresses the obligation of a foreign entity that is “transacting business” in Kentucky to qualify to do so with the Secretary of State. What the opinion never does is assess whether filing a land use application is of itself “transacting business”; hence its ab initio application to Topgolf remains an open question. But the confusion within the four corners of the opinion arose immediately after the reference to KRS 14A.9-010, where it recited:
We disagree with the residents that the circuit court acted erroneously. “[T]he purpose of the assumed name statute is to inform members of the public, including appellants, of the identity of persons doing business under an assumed name. It could not be disputed that for lawful use, including litigation, the statute imposes a duty to provide such information.” Munday v. Mayfair Diagnostic Laboratory, 831 S.W.2d 912, 915 (Ky. 1992). In Munday, however, the Court held that “appellees’ failure to file the certificate denied appellants information which was essential to the commencement of litigation.” Id. (emphasis added). That is not the argument here, and, even if it were, the residents fell short in their burden of proving that Topgolf and GGP, Inc., actively concealed their true identities to cause the residents to file their appeals out of time. Cf., Emberton v. GMRI, Inc., 299 S.W.3d 565, 575 (Ky. 2009). In fact, the residents were unaware of the lack of compliance with KRS 14A.9-010(1) and did not argue this issue before the administrative bodies. Accordingly, the circuit court held that the residents forfeited this argument on appeal to the circuit court because it was not a preserved issue. See City of Louisville v. Kavanaugh, 495 S.W.2d 502, 505 (Ky. 1973). Topgolf has since cured its defect. GGP, Inc., is now known as Brookfield Property REIT, Inc. It, too, had complied with the statute prior to the circuit court hearing.
The court treats the qualification to transact business under the Business Entity Filing Act as being synonymous with the filing of an assumed name. But they are not. They are distinct statutes that are applicable in different situations. The requirement of qualify to transact business (KRS § 14A.9-010) is triggered when a non-Kentucky organized entity is transacting business in Kentucky. In contrast, the assumed name statute (KRS § 365.015) is triggered when a natural person, a domestic business entity or a foreign entity is doing business other than under its “real name.”
There is no basis for challenging to the
decision to grant the necessary permits based upon either the failure to
qualify to transact business before filing the application or the failure to
have an assumed name of record. As to
the former, the statute defines the consequences of a failure to qualify,
namely the inability to “maintain” a legal action, and a failure to raise the
issue creates a waiver. As for a
failure to register an assumed name, the Munday decision sets to
consequence, namely an extension of the statute of limitations for claims
against that organization. See Munday v. Mayfair Diagnostic Lab, 891
S.W.2d 912 (Ky. 1992); see also Thompson v. Otis Elevator Co., No. 3:10-CV-139-DW,
2012 BL 172602 (W.D. Ky. July 12, 2012). Note also that with a single narrow
exception a foreign entity is not required to qualify to transact business as a
pre-condition to filing an assumed name. See also Margaret Walton and
Thomas Rutledge, The Kentucky Assumed Name Statute, Bench & Bar Hot Topics at 3 (Sept.
27, 2017). Simply put the two statutes address different issues; unfortunately,
the Topgolf decision treated them as being inter-changeable.
The Beginning of the End for the Middle Ages
Some scholars date the end of the
Middle Ages to May 29, 1453, and the fall of Constantinople to the Ottoman
forces of Mehmed II. Obviously, this is
an arbitrary date. But still, accepting
its validity, today marks the anniversary of the beginning of the end. On this day in 1453 Mehmed’s forces began the
siege of the city.
The Passing of Eleanor of Aquitaine
Today marks the anniversary of the death, in 1204, of Eleanor of Aquitaine. By any measure employed, she led an incredible life.
Heir to more of what we today think of as France than was the then king of France, she would both marry and then divorce Louis VII, King of France. In between the marriage and divorce she would go on a crusade to the Holy Land. Louis, who had originally been trained for a career in the church and became heir to the French throne only upon his brother Phillip’s death, was not tolerant of what we would today refer to as her high-spirited ways. Allegations that, while in the Holy Land, she had an affair with her uncle have never been substantiated.
After divorcing Louis on grounds of consanguinity, she married Henry of Anjou, the heir (consequent to the settlement of the Anarchy in which King Stephen agreed that the son of Empress Matilda would inherit) to the English throne (he was as well Duke of Normandy). Upon his ascension to the English throne there was created, by personal union, the Angevin Empire. Had she predeceased Henry, Eleanor’s lands would have been claimed by him. History, however, enjoys a good twist, and Eleanor significantly outlived Henry.
Eleanor was the mother of three English kings, the first Henry III, Richard (the Lionheart) I and John. Admittedly, one can quibble as to whether this Henry III was ever king. He was crowned during his father Henry II’s lifetime in an effort to secure the succession. He would never, however, sit upon the throne as a sole monarch as he predeceased his father. Richard, in his own right, was king of England. Sadly, so was John, to this day identified by the moniker “Bad King John.”
But back to Henry III. Having been crowned king of England, but deprived of significant lands, income or authority, he bristled at being a showpiece. In concert with his brothers, the then King of France and the King of Scotland, he led a revolt against his father. It was ultimately put down, whereafter Henry II kept Henry III on a short leash. Still, he did not merely keep Eleanor on a leash. Rather, for 16 years, he kept her prisoner including in the castle at Old Sarum.
The Angevin Empire would substantially fall under Bad King John; he simply did not have the wherewithal to hold together its far flung properties.
Aside from these historic notes, Eleanor’s influence continues to this day. At her court in Aquitaine they played the relatively recently imported game of chess, it having arrived from the Middle East. Eleanor, however, took umbrage at one of the rules and had it changed. Prior to Eleanor’s intervention, the rules of chess provided that the king was the most powerful character while the queen had a circumscribed range. Eleanor decreed, it is said, that those roles be reversed. Her rule continues to this day.
While Amy Kelly’s Eleanor of Aquitaine and the Four Kings
and Marion Meade’s Eleanor of Aquitaine continue to be authoritative
biographies, Ralph Turner’s Eleanor of Aquitaine: Queen of Franc, Queen of
England is the more modern review of her life.
