An Interesting Decision on Diversity Jurisdiction and “Who is a Member?”

An Interesting Decision on Diversity Jurisdiction and “Who is a Member?”

The troubles and travails demonstrating either the absence or the presence of diversity jurisdiction in cases involving LLCs is well known. A decision from last week out of Illinois addresses the interesting question of the evidentiary basis for determining that a person is or is not a member. Cumulus Radio Corp. v. Olson, Case No. 15-CV-1067, 2015 WL 1110592 (C. D. Ill.. March 10, 2015).

The question presented was whether a particular individual, South, was a member of Alpha Media Holdings, LLC, the parent LLC; if she was a member there was not diversity jurisdiction.

South had been awarded a “profit interest” in the LLC and was identified as a member in the table to the operating agreement. She had as well received a Form K-1. However, the operating agreement also required “as a condition to receiving a grant of a Profits Unit” that the recipient execute a counterpart thereof, going on to provide that the issuance of a profits interest “shall be effective only after the new Member has executed and delivered to the Company a subscription and assumption determined by the Company.” The award agreement cross-referenced this joinder provision of the operating agreement. As described by the Court:

 

Therefore, the agreement conditions receiving profits units on the fact that a holder will become a Member once she executed a counterpart of the LLC’s Operating Agreement. Id. at * 3 (emphasis in original).

      The counterpart signed by South could not be found, and the LLC admitted it likely did not exist. While the company sought to rely upon extrinsic evidence of its treatment of South as a member, including the Forms K-1, the Court restricted its analysis to the four corners of the operating agreement:

Where the Operating Agreement is unambiguous, however, and provides clear contractual terms that replace the Delaware Act’s default rules, the contract governs and the Court is limited to its four corners.

From there, the Court held:

In this case, the Operating Agreement requires that members admitted pursuant to the issuance of Profits Units sign a counterpart to the Operating Agreement as a condition of membership, and the Court has not been presented with evidence that South has signed such a counterpart. For that reason, the Court concludes for the purpose of subject-matter jurisdiction that South is not a member of Alpha Media Holdings LLC. Therefore, Defendants have not shown that there is not complete diversity between the parties. Id. at * 5.

Federal District Court Enforce Exclusive Remedy Terms of Thoroughbred Horse Sale Agreement, Applies Economic Loss Doctrine to Preclude Fraud Claim

Federal District Court Enforce Exclusive Remedy Terms of Thoroughbred Horse Sale Agreement, Applies Economic Loss Doctrine to Preclude Fraud Claim

 

In a recent decision from the Federal District Court, it held that the specific terms of the conditions of sale utilized by Keeneland would be enforced to the effect that a horse purchaser could not seek redress on a sale as he waited too long to bring a complaint.  Further, the Court found that allegations of fraud are barred by the economic loss doctrine.  Biszantz v. Stevens Thoroughbreds, LLC, No. 5:13-CV-348-REW, 2015 WL 574594 (E.D. Ky. Feb. 11, 2015).

 

      Gary Biszantz, when first reading this decision, must have known it was not going to go well for him when the first paragraph recited:

 

The case presents no genuine dispute of any material fact, and each of Plaintiff’s claims fails as a matter of law. Mr. Biszantz, an experienced horseman who voluntarily entered an arms’ length transaction covered by the highly predictable and demanding Keeneland Conditions of Sale, seeks to evade the effect of those conditions over just satisfaction with the results of the bargain; this he cannot do, on this record, under Kentucky contract (or tort) principles.

 

 

            While the factual record recited in the decision is long, suffice it to say that Stephens, in connection with efforts to sell the thoroughbred Salina, deposited certain records with Keeneland.  There was a question as to whether everything that should have been deposited actually was, and it is clear that certain records were missing.  Still, Biszantz purchased Salina and began training the horse; that training proceeded well for at least several months.  When medical issues arose Biszantz sought to set aside the transaction.

 

            Notwithstanding failures in disclosure as to Salina, the Court reviewed and applied the Keeneland Conditions of Sale (the “COS”).  They afforded Biszantz certain rights available within certain time limitations; the COS went on to provide that the remedies afforded under the COS are exclusive.  Finding that Biszantz had not acted within the time limitations of the COS, the Court determined he had no right to have the sale set aside.

 

            Biszantz also brought a claim for fraud.  This claim was rejected based on the Economic Loss Doctrine.  Essentially, where the parties have by contract, in this case the COS, comprehensively allocated the risks and rewards of the transaction, including remedies for breach, they are restricted to an action in contract and cannot morph the complaint into one arising in tort. 

 

The Worst Decision of Marcus Aurelius Comes Home to Roost

The Worst Decision of Marcus Aurelius Comes Home to Roost

      Today marks the anniversary of the death in 180 of the great Roman Emperor Marcus Aurelius.  It is as well the date upon which his worst decision was inflicted upon the world.

      There is no question that Marcus was a great emperor.  In fact he is the only emperor to have written a book, namely the Meditations, that to this day remains in print (while Caesar's Gaelic Wars remain a staple of classes in both Latin and military history, Caesar was never emperor).  And he was a member of a string of excellent emperors.  After the tragedy that was Nero and the tumult of the Flavians (Vespasian, Titus and Domitian), the emperors of the Nervan-Antonian dynasty had consistently been effective leaders.  This had been largely achieved by the sitting emperor adopting his heir.  This path avoided the deficiency's of restricting passage of control to only natural heirs, necessarily limiting the pool of possible successors; the Flavians had been lucky in this regard, but they were only two generations – the father Vespasian to his son Domitian and then upon Domitian’s death the throne went to his brother Titus.  Hadrian was only a cousin to his predecessor Trajan. While Hadrian would in turn adopt Antoninus Pius, it does not appear they were related to one another.  It is reported that a condition imposed by Hadrian on Antoninius adoption was that he in turn adopt Marcus Aurelius.

      Marcus broke with this approach, appointing his natural son Commodus as his heir (Commodus was appointed co-emperor some three years before Marcus' death). He was a disaster.  A man of apparently no character, he is described by Aelius Lampridius as “even from his earliest years he was base and dishonorable. and cruel and lewd, defiled of mouth, moreover, and debauched.”   A megalomanic, he took to fighting in the gladiatorial games.  Of course he always won; who is going to try to kill the emperor in front of thousands of witnesses.  Of course it did not hurt that he secretly directed that his opponents be given dulled weapons.  Meantime he ignored the operation of the Empire, leaving decisions to his chamberlain and other officials.  He did, however, both order a devaluing of the currency and imposed excessive taxes.  Gibbons, in his monumental The History of the Decline and Fall of the Roman Empire, dated the decline of the Roman Empire from Commodus.

      Finally he was assassinated.  There was, however, no natural heir to the position of Emperor, and his death would be followed by the “Year of Five Emperors.” 

      Had Marcus Aurelius followed the path of the other Nervan-Antonian emperors and adopted as his heir a proven leader, the path of the Roman Empire would well have been substantially different.  But he did not. Such decisions are the stuff of history.

      In closing, contra the movie “Gladiator,” Marcus was not killed by Commodus.  Rather, he died of natural causes (it has been suggested that an unidentified plague was involved), possibly in what is now Vienna.  Commodus was not killed in the gladiatorial games, but rather was assassinated  in 192 by being strangled.

 

Beware the Ides of March

Beware the Ides of March

 

Et tu, Brute?

 

 

        The above was not said by Julius Caesar.

 

        Today, the Ides of March, marks the anniversary of the assassination of Julius Caesar in 44 B.C. Caesar was famously assassinated at a meeting of the Roman Senate after having (almost certainly apocryphally) been warned to “Beware the Ides of March.” He was presented with a written warning of the conspiracy against him as he was taken to the Senate meeting, but seems to have never read the warning. Although stabbed twenty-three times by the various conspirators, only one wound was fatal.

 

        Caesar’s death unleashed upon the tottering Roman Republic the Second Civil War of Caesar’s heir Octavian (later to be Caesar Augustus) and his compatriot Marc Antony (Lepidus, the third member of the Second Triumvirate, was a place holder) against the assassins and their various supporters. Assassins Brutus and Cassius (Gaius Cassius Longinus) would each commit suicide after losing a phase of the Battle of Philippi (notwithstanding the presentation in the HBO series "Rome," they actually died on different days), and Cicero (who was not himself part of the conspiracy) would be assassinated as part of the proscriptions after the victory of the Second Triumvirate. Still later Octavian and Antony would turn on one another, Antony’s forces being routed at Actium.

 

But back to Caesar’s dying words. “Et tu Brute” is not recorded by any classical historian – it is a quote from Shakespeare. Plutarch, who was born exactly 100 years after the assassination, reports that Caesar said nothing after the attack began in earnest. Suetonius wrote that others reported his last words to be “καὶ σύ, τέκνον” (Greek still being the lingua franca of the Romans), transliterated as “Kai su, teknon” or “You also child,” addressed to Brutus (that is Marcus Junius Brutus the Younger, not to be confused with Decimus Junius Brutus, another party to the assignation). There were rumors, later reported by Plutarch (Suetonius is silent on the topic) that Caesar was in fact Brutus’ father – it was known that Brutus’ mother Servilia was Caesar’s mistress.  Still that would appear to be something of a stretch; Caesar was 16 at the time of Brutus' conception; Servilla was at that time 28. 

 

For anyone watching the "Spartacus" series, while the sources do not exclude Caesar's participation in the war against Spartacus (i.e., the "Third Servile War"), they provide no details of that participation.  Ergo, the details of Caesar's actions as recounted are pure fiction.

Derivative Actions in Kentucky LLCs

Derivative Actions in Kentucky LLCs

 

In its current form, the Kentucky LLC Act is silent as to derivative actions.  That silence does not equate, however, to a determination that there are not derivative actions in Kentucky organized LLCs. Rather, as derivative actions are a question of equitable standing, they exist independent of an enabling statute. See also Carter G. Bishop and Daniel S. Kleinberger, Bishop & Kleinberger on Limited Liability Companies ¶ 10.07[2] (2012 and 2014-2 cum. supp.)  (“Many LLC statutes expressly authorize derivative actions, but some do not. This distinction should make little difference. Derivative litigation began in the corporate context over 150 years ago without the benefit of statutes, and remains essentially equitable in nature.”)

           

Numerous courts, with respect to LLCs organized in Kentucky, have entertained actions that are either expressly characterized as derivative or in which the rules applicable to derivative actions, including the direct versus derivative distinction, have been applied.   For example:

 

·         Pixler v. Huff, Civ. Act. No. 3:11-CF-000207-JHM, 2012 WL 3109492 (W.D. Ky. July 31, 2012) (in the context of an LLC, applied the test traditionally applied in corporations as to the direct versus derivative distinction and determined whether certain claims brought by a member could be brought only on a derivative basis);

 

·         id., 2012 WL 3109492, *3 (“Therefore, Plaintiff may maintain her claims against the Defendants only where she has suffered an injury that is separate and distinct from that which would be suffered by other members or the LLC as an entity.”);

 

·         R.C. Tway Co. v. High Tech Performance Trailers, LLC, No. 3:2012-CV-00122, 2013 WL 842577, *3 (W.D. Ky. Mar. 5, 2013) (“Each of the claims identified above clearly alleges that High Tech or Hanusosky violated some duty it owed directly to [Performance Trailers], thus causing [Performance Trailers] injury.  As [Performance Trailers] is the allegedly injured party for each of these claims, it is the one that is entitled to enforce the rights granted by substantive law.  Accordingly, [Performance Trailers] is not a nominal party, but instead is a real party in interest as to those claims.”);

 

·         Chou v. Chilton, __ S.W.3d ___, Nos. 2009-CA-002198-MR, 2009-CA-002284-MR, 2014 WL 2154087 Ky. App. May 23, 2014) (“[The LLC] and not Chou himself would benefit from any recovery for breach of the operating agreement, fraud, misappropriation, breach of fiduciary duty or gains taken by the defendants.  While Chou may or may not receive funds from [the LLC] on dissolution of that company, any wrongs for breach of the operating agreement, fraud, misappropriate, breach of fiduciary duty or gains taken by the defendants perpetrated by any of the [defendants] or possibly [a separate LLC controlled by the defendants] would be wrongs against [the LLC] and not Chou individually.”); and

 

·         Turner v. Andrews, 413 S.W.3d 272 (Ky. 2013) (rejecting effort by the sole member of an LLC to bring on his own behalf (rather than on behalf of the LLC), a claim for lost profits.).

 

It bears noting that the Kentucky LLC act is atypical in not expressly addressing derivative actions in LLCs. The vast majority of the states, including Delaware, have an express derivative action statute. See Del. Code Ann. tit. 6, §§ 18-1001 through 18-1004.  See also Revised Prototype LLC Act, 67 Bus. Law. 117, 194-198 (Nov. 2011) (providing for LLC derivative actions at §§ 901-908); 1 Ribstein & Keatinge on Limited Liability Companies, appendix 10-2 (listing derivative action and related provisions of the various LLC Acts).

 

Delaware Proposes New Fee-Shifting and Forum Selection Legislation

Delaware Proposes New Fee-Shifting and Forum Selection Legislation

 

HERE ISA  LINK to a piece on recently proposed amendment to the DGCL which would (i) limit the ability to through the bylaws impose fee shifting obligations on the shareholders and (ii) confirm the ability to provide mandatory forum for resolution of inter-company disputes.

Delaware Court Of Chancery Issues Guidance On Step Transaction Doctrine, Good Faith And Fair Dealing

Delaware Court Of Chancery Issues Guidance On Step Transaction Doctrine, Good Faith And Fair Dealing

 

In a December 30 decision, the Delaware Court of Appeals issued useful guidance with respect to both the step transaction doctrine and the application of the implied covenant of good faith and fair dealing. Ellis v. OTLP GP, LLC, C.A. No. 10495-VCN, 2015 WL 535866 (Del. Ch. January 30, 2015).

 

Marquard & Bahls AG (“M & P”) owned all of OTLP GP, LLC (“GP”). GP was in turn the sole general partner in Oiltanking Partners, L. P. (“Oiltanking”). In addition to controlling the general partner, M & B owned 65% of the limited partnership interests in Oiltanking. The balance of the limited partnership interests were held by other parties.

 

Enterprise Products Partners LP (“Enterprise”) inquired of M&B about acquiring the entirety of Oiltanking, including the interest held by the unaffiliated limited partners. M&B  responded to Enterprise that it was willing to discuss selling its interest to Enterprise, but it was not interested in any deal contingent upon the participation of those unaffiliated parties.

 

The Oiltanking limited partnership agreement provided, through November, 2014, that a merger would require the approval of a majority of the unaffiliated partnership interests. After that date, a merger could be approved by a majority of the limited partner units, they all voting as a single class. Essentially, after November 2014, the 65% limited partnership interest held by M&B in Oiltanking could approve a merger.

 

As of October 1, 2014, before the expiration of the period during which the unaffiliated limited partners could block a merger by a class vote, Enterprise acquired both GP and M&B’s limited partnership units in Oiltanking. Prior to the closing, Enterprise gave notice of its intention to acquire all of Oiltanking by means of a merger. Its proposed merger price was referred to a conflicts committee, which was able to negotiate an increase in the tender price. The price remained, however, less than the price that Enterprise was paying M&B for its limited partnership units.

 

In opposition, the unaffected limited partners asserted that they continue to be entitled to a class vote on the basis that Enterprise and M&B “design[ed] the transaction in a conscious effort to defeat their entitlement a class vote.” Slip op. at 6. They theorized that, as the merger was announced during the period when they had rights to a class vote, that right must govern the subsequent vote as to the merger irrespective that the class voting period had otherwise expired. In that the subject limited partnership agreement did not expressly address this point, it was asserted that there was a violation of the implied covenant of good faith and fair dealing in determining that no class vote is required, and that the transaction was structured in such a way that, viewed as a whole, that right should be retained.

 

As to the suggestion that the right to class voting accrued at the time of the announcement of the transaction, rather than being determined as of the time of the vote, that assertion was rejected by the Court of Chancery.  Rather:

 

If the drafters of the LP Agreement had wanted to subject announcement of the merger, as contrasted with a vote on a merger, to certain requirements, presumably they could have done so. They did not do so.  Slip op. at 9.

 

With respect to the step transaction doctrine, the Chancery Court would hold that it is inapplicable.  Reciting the three alternatives under Delaware law for the application of the doctrine (see footnote 9 at slip op. 12), the Court determined that none of them were applicable. Essentially, Enterprise acquired all of the interest of M&B in Oiltanking and then proposed to acquire all of the interest held by the unaffiliated limited partners; the former was not contingent upon the latter.  Furthermore, M&B did not engineer the two step transactions; Enterprise did.

 

With respect to the obligation of good faith and fair dealing, citing In re El Paso Pipeline Partners, L.P. Derivative Litigation, 2014 WL 2768782,*16 (Del. Ch. June 12, 2014), it was reiterated that:

 

The implied covenant is not a free-floating duty that requires good faith conduct in subjectively appropriate ends... [But] rather, the doctrine by which Delaware law cautiously supplies the implied terms to fill gaps in the express provisions of an agreement. Slip op. at 9 (balance of citation omitted).