Plaintiffs Fail in Effort to Substantively Consolidate Archdiocese With Various Parishes and Other Organizations

Plaintiffs Fail in Effort to Substantively Consolidate Archdiocese With Various Parishes and Other Organizations

      In a decision rendered yesterday by the United States Bankruptcy Court for Minnesota, it denied an effort by those representing alleged victims of clerical sexual abuse to substantively consolidate the Archdiocese of St. Paul and Minneapolis with over 200 other Catholic, nonprofit (and not debtors in bankruptcy) entities. In Re: The Archdiocese of St. Paul and Minneapolis, Case No. 15-30125 (Bankr. D. Minn. July 28, 2016).

      In connection with allegations of clerical sexual abuse, on July 16, 2015, the Archdiocese of St. Paul and Minneapolis filed for Chapter 11 bankruptcy. On May 23, 2016, the unsecured creditors committee filed a petition to substantively consolidate with the Archdiocese in excess of 200 Catholic entities, none of themselves parties to the bankruptcy. Those entities included individual parishes, a foundation, various cemeteries and various high schools. Numerous of those entities filed objections to the consolidation. Ultimately, the effort to achieve substantive consolidation would be rejected.

      After determining that the unsecured creditors committee did have standing to bring the substantive consolidation motion, the bankruptcy court first found that it lacks the capacity to effect the substantive consolidation of these numerous nonprofit corporations. The bankruptcy Code at § 303(a) bars the involuntary bankruptcy of “a corporation that is not a moneyed business, or commercial corporation.” In connection therewith, the Court cited the legislative history, it stating that “Eleemosynary institutions, such as churches, schools, and charitable organizations and foundations, likewise are exempt from the involuntary bankruptcy.” Finding that all of the other entities that would be swept into the substantive consolidation are religious, nonprofit organizations exempt from involuntary bankruptcy consequent to § 303(a), the court wrote that “I conclude that I lack authority to substantively consolidate the debtor with the targeted entities.”

      The court continued its analysis from the legal bar to a granting substantive consolidation to a factual basis, namely that the plaintiffs had failed to allege facts sufficient to justify consolidation. Rather, notwithstanding generalized allegations of interrelationship, “The committee failed to sufficiently establish that the interrelationship warrants consolidation.” The court went on to observe:

Those allegations concerning generic actors are insufficient because they failed to identify and show how each non-debtor’s characteristics or actions make them individually subject to substantive consolidation. It is also unreasonable to infer all the non-debtors are liable for the actions or characteristics of a few named non-debtors because the plausibility standard generally does not allow holding hundreds of non-debtors liable for the conduct of one. Facts demonstrating grounds for substantive consolidation should have been alleged as to each and every non-debtor individually, but the committee did not do so here.

      From there the court would expand on its determination that there been no showing that the finances of the various debtors and non-debtors had been inextricably intertwined, and as well found that the committee had failed to demonstrate the benefits of consolidation would outweigh the harm to creditors of the to be consolidated entities.

Plaintiff Allowed Jurisdictional Discovery with Respect to Partnership and LLC Defendants

Plaintiff Allowed Jurisdictional Discovery with Respect to Partnership and LLC Defendants

 

      In an action brought in federal court on the basis of diversity, the party asserting diversity jurisdiction bears the burden of showing that it exist, i.e., that no defendant is a citizen of the same state as is any plaintiff. This can be an especially daunting task when one of the defendants is a partnership or LLC. A partnership or an LLC is deemed to have the citizenship of each of its members, but who are those partnerships or members is not a matter of public record. On the recent decision from Pennsylvania, the court allowed the plaintiff to undertake discovery as to the membership of the defendant partnership and LLC in order to determine whether or not diversity actually existed. Bissell v. Graverley Brothers Roofing Corp., Civ. Act. No. 15-04677, 2016 WL 3405455 (E.D. Penn. June 21, 2016).

      Bissell brought suit against the various defendants after a house she owned was bulldozed by the defendants. In response to that complaint, the defendants filed a motion to dismiss on the basis that Bissell had not identified in the complaint who are all the partners of Graverley Family Partnership, one of the defendants, or the members of Gerard Commons, LLC, also a defendant. In response, the court first noted that those defendants had not advised the court of who are those partners/members, from which the court could have made a factual determination. Second, based upon Lincoln Benefit Life Co. v. AEI Life, LLC, 800 F.3d 99, 105 (3^rd Cir. 2015), “affirmative allegations of citizenship for unincorporated associations are not required when a party can allege in good faith that it is diverse from each member.” 2016 WL 3405455,*7. The court then recounted the efforts made by Bissell to investigate the partners and members of the LLC, and found that she had undertaken sufficient efforts of reasonable investigation.

      From there, the court ordered that there will be jurisdictional discovery as to who are the partners of the partnership and who are the members of the LLC.

Because members of the unincorporated associations are not within Plaintiff’s reach, jurisdictional discovery is appropriate with regard to the citizenship of the two disputed Defendants. Therefore, plaintiff shall be afforded an opportunity to conduct discovery to establish the existence of diversity jurisdiction with regard to the unincorporated associations. This, however, is not an invitation to Plaintiff to embark on a fishing expedition - discovery shall be narrowly tailored to address the limited issues set forth herein. 2016 WL 3405455,*7.

Kentucky Supreme Court Clarifies Responsibility of Landowner Towards Party Crasher

Kentucky Supreme Court Clarifies Responsibility of

Landowner Towards Party Crasher

 

      In a recent case, the Court of Appeals held that a party crasher is to be treated as an “licensee,” and for that reason the landlord was not responsible when she fell off the landing of a fire escape, sustaining significant injuries. Phillips v. Touchstone Properties, LLC, No. 2014-CA-001851-MR (Ky. App. July 1, 2016).

      Touchstone Properties, LLC leased an apartment to Jason Orr and Gabriel Dent. The apartment was comprised of the second and third floors of the house.  Orr thereat held a party with Dent’s knowledge. Madison Phillips was not invited to the party, but was rather invited by someone who had been; in effect she crashed the party.

      A fire escape ran up to the third floor of the building. At some point in the course of the party, the window through which the fire escape could be accessed (the window itself had been painted closed at some point in the past) was broken. Phillips followed a friend of hers out onto the fire escape so that the friend could smoke a cigarette. Phillips, while holding both her cell phone and a can of beer, stepped backwards and fell through the ladder opening of the fire escape. Ultimately Phillips and her parents would file a suit against Touchstone, Orr and Dent alleging negligence in the failure to keep the premises in a reasonably safe condition.

      Under the law of real property, a person is upon real property either as an invitee, a licensee or a trespasser. Different obligations are owed to the different classes, with the highest obligations being owed to an invitee with minimal obligations owed to a trespasser. Touchstone, Orr and Dent defended on the basis that Phillips was either a licensee or a trespasser to whom no duty with respect to the fire escape was owed. Phillips maintained that she was an invitee and that, if instead she was classified as a licensee, still a duty of care to her was breached. Summary judgment was granted to Touchstone, Orr and Dent, to the effect that Phillips’ lawsuit was dismissed. This appeal followed:

Phillips contends that the Circuit Court committed error by rendering summary judgment dismissing her premises liability action against Touchstone, Orr, and Dent. Phillips maintains that she was an invitee and that under Shelton v. Kentucky Easter Seals Society, Inc., 413 S.W.3d 901 (Ky. 2013), granting defendant’s summary judgment was improper. Alternatively, Phillips argues that even if she is classified as a licensee, the precepts of Shelton, 413 S.W.3d 901, nevertheless are still applicable and preclude the granting of summary judgment. Accordingly, whether being an invitee or as a licensee, Phillips argues that Touchstone, Orr, and Dent owed Phillips a duty of reasonable care to prevent foreseeable harm in the premises liability action based upon Shelton, 413 S.W.3d 901. Shelton, Phillips maintained that any issue of foreseeability are to be left to [sic] fact-finder for resolution and that summary judgment was thus improper. Slip op. at 4.

      The Court of Appeals rejected that reading of Shelton and the suggestion that there is no distinction between the obligations owed invitees versus licensees. Rather, those distinctions continue to exist, so it was necessary for the court to determine whether Phillips was an invitee, licensee or trespasser.

      In reliance upon authorities including Shipp v. Johnson, 452 S.W.2d 828 (Ky. 1969), a social guest is a licensee (and not an invitee). Notwithstanding the fact that Phillips had not been directly invited to the party, but rather was invited to it by someone who had been invited, “viewing the facts most favorable to Phillips, she was invited as a social guest to the party on the evening of December 28, 2011, and thus, qualifies as a licensee.” Slip op. at 5.

      From there, the court would determine that none of the defendants were aware that anybody was using the fire escape on the night of the party. Likewise, none of them failed to warn Phillips of an unreasonably dangerous condition known to them. While Phillips stepped backwards and fell through the ladder opening in the fire escape, her fall was not caused by any unreasonably dangerous “hidden peril” known to Touchstone, Orr, or Dent and not to Phillips. Slip op. at 6.

 

Federal District Court in Virginia Reverse Pierces Delaware LLC

Federal District Court in Virginia Reverse Pierces Delaware LLC

 

Based if nothing else upon the outrageous facts of the case, a recent decision from the Federal District Court in Virginia is worth rending. Substantively, reverse pierced three Delaware LLCs in order to access their respective assets to satisfy a judgment debt of the sole member. Sky Cable, LLC v. Coley, Civ. Act. No. 5:11cv00048, 2016 U.S. Dist. LEXIS 93537 (W.D. Va. July 18, 2016).

A judgment had been entered in favor of DirectTV, LLC against Coley and East Coast Cable Vision in the amount of $2,393,000. In post-judgment collection actions, in language detailed by the court, Coley engaged in a pattern of recalcitrance including failing to produce documents by set deadlines, the apparent submission of fraudulent documents, and giving inconsistent answers with respect to a number of matters, including whether he is the sole member, or in contrast is a member with his wife, of three Delaware LLCs, they being Its Thundertime, LLC, East Coast Sales, LLC and South Raleigh Air, LLC. There was in addition comingling of funds between Coley and these three LLCs. In depositions, he was either unable or unwilling to explain how the money moved between these three companies and his personal account. Also, his personal residences were held by one of these LLCs, even as Coley and his family lived in them rent-free. DirectTV, in order to collect on a judgment, petitioned the court to reverse pierce the three LLCs.

Finding that Delaware law is controlling as to whether these three LLCs may be pierced, it collected and reviewed the laws with respect to whether or not outsider reverse piercing would be permissible under Delaware law. Ultimately concluding that outsider reverse piercing would be permissible, that determination being based upon hints in certain Delaware decisions as well as the long list of other states that have allowed outsider reverse piercing on appropriate facts, reverse piercing was ordered. In addition, the court pointed a receiver for each of the LLCs, finding this to be a “extraordinary case.” Specifically:

Randy Coley’s deception and efforts to evade judgment have plagued this litigation. Based on this history, there is a probability that Coley’s deceitful tactics will continue in an effort to frustrate DirectTV’s valid claim as a judgment creditor in this case, and that the corporate assets are in imminent danger of being “concealed, lost, or diminished in value.

For that reason, the receiver was justified.

If Your Thing is the Organization of the Insurance Companies, This is a Really Interesting Opinion

If Your Thing is the Organization of the Insurance Companies, This is a Really Interesting Opinion

     In a recent decision, the Kentucky Court of Appeals in the course of determining whether an exemption from garnishment was available, undertook a detailed review of the various manners in which an insurance company may be organized. Choate  v. Bank of Cadiz & Trust Co., No. 2015-CA-000435-MR, 2016 WL 3453326 (Ky. App. June 17, 2016).

      The primary issue in this case was whether certain proceeds from an insurance policy are exempt from garnishment. Specifically, KRS § 427.110 exempts the proceeds of fire insurance policies from garnishment if those policy proceeds constituted “money or other benefit to be paid or rendered by any assessment or cooperative life or casualty insurance company.” Whether the proceeds of a policy would go to the policyholder or, alternatively, to the Bank of Cadiz pursuant to a garnishment to satisfy a deficiency judgment on a real property mortgage was the question facing the court.

      The decision reviews the various means and mechanisms by which insurance companies are organized. Thereafter, the Court of Appeals determined that State Farm, the insurer at issue, did not fall within the class of an “assessment or cooperative life or casualty insurance company.” On that basis, the proceeds of the policy were not exempt from garnishment.

Tennessee Adopts New Standard for the Direct Versus Derivative Distinction

Tennessee Adopts New Standard for the Direct Versus Derivative Distinction

      On July 11, the Tennessee Supreme Court adopted a new test, it based on Delaware law, for when a lawsuit is direct versus derivative.  Keller v. Estate of Edward Stephen McRedmond, No. M2013-02582-SC-R11-CV (Tenn. July 11, 2016). 

      Professor Joan Heminway has already done a review of this decision.  HERE IS A LINK to that discussion.

Alter Ego Applied to “Reverse Pierce,” But We Don’t Know on What Grounds

Alter Ego Applied to “Reverse Pierce,” But We Don’t Know on What Grounds

      A July 15, 2016 decision of the Court of Appeals upheld the treatment of an LLC as being the alter ego of its sole member, in effect reverse piercing the LLC to make its assets available to satisfy a debt of the sole member.  Unfortunately, the decision does not detail the basis for the alter ego determination.  Lee v. Lee, No. 2014-CA-000387-MR, 2016 WL 3886884 (Ky. App. July 15, 2016).

      This dispute had its inception in the Lee’s divorce.  John Lee was held liable for Jill’s attorney fees to the sum of $70,000.  In December, 2011, John’s company, Lee Development Group d/b/a Acceleris, was found to be jointly and severally liable on that $70,000 judgment.  The opinion is silent as to the basis on which that determination was made.  In May, 2012, the Acceleris bank account was garnished.  In May, 2012, John formed a new company, Acceleris LLC.  Learning of it, the Plaintiffs sought to garnish its accounts on the basis that it was John’s alter ego.  That order of garnishment was entered.

      The substance of the decision was upon whether the trial court properly complied with the garnishment statute, KRS § 425.501, and not upon the finding of alter ego. Rather:

On appeal, the Appellants do not challenge any of the court’s factual findings regarding “alter ego” liability; rather, they contend the garnishment order was void ab initio because Appellees did not have a final judgment against Acceleris, LLC, before obtaining the order of garnishment. Slip op. at 3 (footnote omitted).

      Upholding the garnishment against Acceleris, LLC on the basis it was John Lee’s alter ego, the Court of Appeals quoted the trial court’s findings of fact.

Mr. Lee testified that he was the sole member of Acceleris, LLC, and that he alone made all the managerial decisions.

Mr. Lee acknowledged that he used money from Acceleris, LLC, to pay personal debt.  Introduced as an Exhibit is a copy of a check on an Acceleris, LLC, account made payable to the Internal Revenue Service, which he acknowledged was used to pay his personal back taxes.  Mr. Lee also testified that he used Acceleris, LLC, funds to fund his son’s baseball team.  Mr. Lee contended that Acceleris, LLC, funds that were used to pay personal debt was salary.  He further acknowledged that funds from Acceleris, LL, were used to pay his personal providers.

Mr. Lee acknowledged that he opened a checking account with a bank located in Indiana.  When questioned as to whether he opened the account to avoid garnishment, he stated that he did business with his business associates.  As to the Acceleris, LLC, bank account, Mr. Lee testified that he used his personal social security number to identify the account even though Acceleris, LLC, has its own Federal ID number.

      It would be comforting to have more details as to why the finding of alter ego was justified.  For example, being a single member LLC is by statute not a basis for piercing the veil.  See KRS § 275.150(1).  As for paying personal expenses out of the LLC, were the examples given typical or atypical versus all company activities?  Is any use of company funds to pay personal expenses sufficient to support a finding of alter ego, or must there be some higher threshold?  That point was not addressed.  Yes, I know the alter-ego finding was not appealed, but if not appealed why this quotation as to why alter-ego treatment was appropriate?

      This decision is one of only a few that have addressed reverse piercing in Kentucky.  I submit it deserved a more detailed analysis, especially as it is designated “to be published.”