Will No One Rid Me of This Turbulent Priest?

Will No One Rid Me of This Turbulent Priest?

            Today marks the anniversary of the murder in 1170 of Saint Thomas Becket.  This murder has always been the most serious stain upon the reign of King Henry II

            Of Norman descent (the movie Becket inaccurately has Henry referring to Becket as a Saxon), Becket rose to be appointed Lord Chancellor of England.  While Chancellor Henry nominated Becket (who at this time was not a priest) to the position of Archbishop of Canterbury, clearly hoping that Becket would use his power as primate of England to mold ecclesiastical policy in favor of royal interests.  Becket failed to do so, rather becoming an ascetic and placing the interests of the Church over those of the crown.  Eventually he was forced to resign as Lord Chancellor.

            The contest of wills between Henry and Becket over the Constitutions of Clarendon, they seeking to increase the power of the civil state over the Church and its constituents, led to a final break in the relationship, with Becket even fleeing England for France.  Eventually he would return to Canterbury.

            While in France and likely well into his cups, Henry made a statement (exactly what was said is lost to history – there are conflicting accounts) that was interpreted by four knights as a direction to kill Becket.  They crossed the Channel and challenged Becket in Canterbury Cathedral, there killing him.  Becket was canonized barely three years later, and the four assassins were excommunicated and ordered to go on pilgrimage to the Holy Land (at least one of them thereafter became a Templar).  Henry would later do public penance at Becket’s shrine in Canterbury Cathedral.

            There is a passing reference to Becket in The Lion in Winter.

Court Incorrectly Treats Assets of Dissolved LLC as the Assets of the LLC's Members

Court Incorrectly Treats Assets of Dissolved LLC as the Assets of the LLC's Members

      The procedure followed in Ceres Protein, LLC v Thompson Mechanical & Design, Civ. Act. No. 3:14-CV-00491-TBR-LLK, 2016 WL 6090966 (W.D. Ky. Oct. 18, 2016) upon the administration of dissolution of an LLC was simply incorrect.

      Therein, Ceres Protein, LLC, a plaintiff in the action along with Shannon, one of its members, was administratively dissolved. Thereafter the defendants moved to substitute Tarullo, the other of Ceres Protein, LLC's members, for the LLC. When, ultimately, the LLC was reinstated, it was substituted back in for Tarullo, in effect returning the parties to the place they were at the initiation of the lawsuit.

      The issue is that the LLC need never have been removed as a party to the suit. The dissolution of an LLC does not limit its capacity to participate in litigation. See KRS § 275.300(4)(a). Furthermore, dissolution does not vest in the members the property, including the legal rights, of the LLC. See KRS § 275.300(3)(a). But that is what the substitution of Tarullo purported to do.

      The error of treating the members of Ceres Protein LLC as the owners, upon dissolution, of the LLC’s assets was ultimately corrected, but it should not have needed to be remedied in the first place.

The Assassination of Cicero

The Assassination of Cicero

            Today marks the anniversary of Cicero in 43 B.C.  A lawyer, politician, writer and orator, his letters serve as both a source for the goings-on in a tumultuous period in Rome and as guidance for the art of letter writing.

Thinking Marc Antony to be little more than a thug, Cicero took the additional step of detailing his views in a series of speeches, hoping to reduce Antony’s influence for the benefit of Octavian, Caesar’s heir.  When, however, Octavian and Antony joined forces in the Second Triumvirate, Cicero’s days were numbered, and he was “proscribed” (i.e., ordered executed and his property seized).  While the depiction of his execution as portrayed in the HBO series Rome was true to his character, it in fact took place on a road with Cicero riding in a litter; he did not resist.

Allegations of Diversity Substantively Lacking Even as Question of Citizenship of Statutory Trust is Raised

Allegations of Diversity Substantively Lacking

Even as Question of Citizenship of Statutory Trust is Raised

 

In a recent decision from New York, a plaintiff bank’s complaint was dismissed for failure to adequately respond to repeated admonitions from the court as to the requirements for setting forth the basis of diversity jurisdiction. As the plaintiff, it was the obligation of US Bank to detail the citizenship of the various parties to the dispute.  It failed to do so both as to itself and as to Rome Savings Bank, the holder of a subordinate lien on the property for which foreclosure was sought.  In addition, the court raised the question of whether the bank, as the trustee, was the correct party in interest or, weather, statutory trust for which it served as the trustee should be treated as the real party in interest. U.S. Bank Trust, N.A., As Trustee for LSF Master Participation Trust v. Dupre, No. 6:15-CV-0558 (LEK/TWD), 2016 WL 5107123 (N.D.N.Y. Sept. 20, 2016).

 

      As to Rome Savings Bank, US Bank was called to task for not pleading its jurisdiction of organization or its form of organization.  As to the last point, it plead that “Rome Savings Bank is a corporation or other business entity.”, a statement characterized as saying “effectively nothing about how its citizenship is properly determined.”

      Even more surprising was that US Bank was apparently unable to correctly plead its own citizenship.  A statute applicable to national banks such as US Bank provides that they are citizens of the state in which is located the main office as set forth  in the articles of association filed with the Comptroller of the Currency.  US Bank plead the location of its “principal executive offices” and “principal place of business.”  

      Here, US Bank failed to provide its articles of association, and failed to state anywhere in its memorandum that Delaware is the state listed as the location of its main office in the articles of association.  Because US Bank failed to provide its articles of association or other comparable evidence of the bank’s main office, as it  was directed to do in the Court’s July Order, the Court finds that US Bank has not sufficiently established its citizenship for purposes of diversity jurisdiction. 2016 WL 5107123, *3.

   

   Even beyond U.S. Bank’s failure to properly establish its own citizenship, it has also failed to show that its citizenship alone may be counted when bringing suit on behalf of the LSF8 Master Participation Trust. In Americold Realty Trust v. Conagra Foods, Inc., 136 S. Ct. 1012 (2016), the Supreme Court addressed the diversity citizenship of a real estate investment trust (“REIT”) created under Maryland law. Noting that states “have applied the ‘trust’ label to a variety of unincorporated entities that have little in common with” traditional, gift-based trusts, the Court found that for business trusts that are separate legal entities and can sue or be sued in their own right, the citizenship of all the trust’s shareholders or beneficiaries is dispositive. Id. at 1016–17.

     The court raised the question of whether US Bank, on behalf of the LSF8 Master Participation Trust, could proceed in its own name, in which instance only its citizenship would have been at issue, or whether the citizenship of all of the participants in that trust would as well be at issue. Applying the Americold decision, even as it criticized counsel for not well addressing the jurisdictional question, the court wrote:

U.S. Bank responds to Americold by noting that, unlike the REIT at issue in that case, here U.S. Bank brought suit in its own name as trustee and was “authorized to act on behalf of” the trust under the trust instrument. Indeed, the Court in Americold left intact the rule that “when a trustee files a lawsuit in her name, her jurisdictional citizenship is the State to which she belongs—as is true of any natural person.” 136 S. Ct. at 1016 (citing Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 465 (1980)). This rule, however, only applies when the trustees are the real parties in interest to the controversy, meaning, among other things, that they are “active trustees whose control over the assets held in their names is real and substantial.” Navarro, 446 U.S. at 462–66.

While the Court asked U.S. Bank to provide evidence on this point (namely, the trust instrument), it has utterly failed to do so. The trust agreement attached to the Second Memorandum was almost completely redacted, and the only visible portion remaining—cited by U.S. Bank as apparently showing its active control over the trust—states that U.S. Bank “shall have only such rights, powers and duties as are specifically and expressly required by this Agreement.” If anything, this provision seems to expressly reject the idea that U.S. Bank is an active trustee with real and substantial control over the trust’s assets (and thus that U.S. Bank is the real party in interest under Navarro). If the rest of the trust agreement shows differently, U.S. Bank has rendered this impossible to determine by filing an otherwise completely redacted version of this document.

Despite U.S. Bank’s argument, this Delaware statutory trust seems precisely like the type considered by the Supreme Court in Americold, and U.S. Bank has failed to demonstrate that it is a real party to the controversy that can proceed in its own right and without reference to the citizenship of the trust’s beneficiaries, cf. Del. Code Ann. tit. 12, § 3804(a) (“A statutory trust may sue or be sued [in its own name] ....”). For all of these reasons, this action must be dismissed for lack of subject matter jurisdiction.  2016 WL 5107123, *4.

      Clearly the Americold decision must be addressed anytime a party to the case brought under federal diversity jurisdiction involves a “trust.”

No Implied “Disinterested” Limitation in Approving Transfers of LLC Interest

No Implied “Disinterested” Limitation in Approving Transfers of LLC Interest

      Peter Mahler, in his blog New York Business Divorce, has provided an excellent review of the decision recently handed down in Huang v. Northern Star Mgmt. LLC, 2016 N.Y. Slip Op. 32194(u) (Oct. 24, 2016). HERE IS A LINK to that review. I write as well to emphasize the question of whether a vote of the members must be disinterested and the application of the rule of independent legal significance.

      Tai Huang was a member in Northern Star Management LLC, a New York LLC, holding a 13.5% interest therein. Ling Lian Huang held another 13.5% interest, while Jian Chai Qu held a 6% interest; those three comprised the “Minority Members.” The balance of the 67% interest in Northern Star (“NSM”) was held by four unnamed and otherwise undifferentiated members (the “Majority Members”).

      After the settlement of litigation between the Minority Member and the Majority Members regarding the financing of NSM property, the Majority Members effected a cash-out merger of the Minority Members. This was accomplished by (i) the Majority Member casing to be created NewCo; (ii) the Majority Members transferring to NewCo their respective interests in NSM, receiving in return interests in NewCo; (iii) NewCo approving, as the Majority Member of NSM, a merger of NewCo with and into NSM pursuant to which all other members of NSM (i.e., the Minority Members) would be cashed-out.

     The Minority Members sought to set aside the merger on the basis that NewCo was not a member of NSM because the Majority Members’ transfers of LLC interests to its violated § 9.3 of the NSM operating agreement. Section 9.3 of the NSM Operating Agreement provided that:

[a] Member may freely transfer his interest in [NSM] to another person or entity…, only with the prior majority consent of other Members either in writing or at a meeting called for such purpose. If majority Members do not approve of the transfer, the transferee shall have no right to participate in the management of the business and affairs of [NSM] or become a Operating Member.

      The Minority Members would assert that § 9.3 required the approval of a disinterested majority of the members in order to effect a transfer of interests in NSM to NewCo. The court refused to read into the operating agreement a limitation to the “disinterested” membership. Rather:

Despite the Huangs’s contentions, Section 9.3 of the NSM Operating is completely devoid of the term “disinterested,” which is the crux of the Huangs’s application. The plain language of the provision the Huangs cite to clearly permits a member to transfer their membership interest upon approval by a simple majority of members. It does not state that a majority of the disinterested members is required, as the Huangs assert (emphasis added by court).

            From there the court concluded:

NSM and NewCo clearly established that for each of the four Majority Members each obtained majority consent from the other three Majority Members for their respective transfers. In each instance, the three non-transferring Majority Members held over 33% of the NSM membership interests, which was the collective NSM membership interest of the Minority Members. Consequently, the Minority Members never held enough membership interest  in NSM to prevent or challenge the transfers.

            The first takeaway is that absent the operating agreement requiring a disinterested vote, one will not be implied. Nothing too surprising there, although it should be recognized that where “unanimous” consent is required, courts have inserted a disinterested requirement to avoid absurd results. See, e.g., Young v. Ellis, 172 Wash. App. 1014 (Wash. Ct. App. Div. 2, Dec. 4, 2012) (where managing member of LLC was named in the operating agreement, and amendment of operating agreement required unanimous consent of the members, court rejected as “absurd” suggestion that managing member could be removed only with his consent. Rather, the operating agreement’s general rule of majority consent of the members would apply to removal of managing member.).

            Perhaps of greater import, the court did not aggregate the Majority Members in assessing the transfer of the LLC interests in NSM to NewCo. Rather, each members’ assignment was approved, inter alia, by the other members within the Majority Members; it was as if there were four distinct transfers, each approved by the other of the Majority Members. Had there been aggregation, none of the Majority Members could have voted to admit NewCo as a substitute member, and only the Minority Members, they not participating in the capitalization of NewCo, could have done so. Assuming disaggregation of members who are acting in concert is the correct rule, it presents questions as to how an operating agreement should provide for disinterested votes. Consideration needs to be given to whether and when aggregate treatment will be provided for, being aware that on certain facts aggregation may have the effect of vesting control in a minority.

The default rule under the Kentucky LLC Act is that the admission of an assignee requires the approval of a “majority-in-interest” of the members. See KRS § 275.265(1).  The Act is express that the member seeking to assign a limited liability company interest may not (unless there is a contrary provision in the operating agreement) vote with respect to the admission of the assignee as a member.  Id.  It is, however, silent as to collective action by several members, and is likewise silent as to an assignee’s inability to vote with respect to admission as a member vis-à-vis an additional traunch of interests.

 

Assume there is an LLC with 8 equal (12.5%) members.  Five of those members want to transfer their interests to Laura (not already a member).  In series, each of the five could transfer their interests to Laura as follows:

 

Assignor	Laura’s Cumulative Interest Pre-Assignment	Assignment & Admission of Laura as a Member Approved By:	Laura’s Cumulative Interest Post-Assignment
Member 1	0%	Members 2, 3, 4 & 5 (57.14% of all interests other than those held by Member 1)	12.5%
Member 2	12.5%	Laura and Members 3, 4 & 5	25%
Member 3	25%	Laura and Members 4 and 5	37.5%
Member 4	37.5%	Laura and Member 5	50%
Member 5	50%	Laura	62.5%

 

Applying the rule of independent legal significance (see KRS § 275.003(5)), members 6, 7 and 8 have had no voice with respect to Laura’s admission as a member. If, however, that result is not desired, then the operating agreement will need to: (i) waive the application of the rule of independent legal significance; (ii) adopt a test for aggregation; and (iii) provide that the participants in an aggregated transaction may not vote with respect to the admission of the assignee as a member.

                                                                                                                                                           

 

More on the Mortgage Grader Decision

More on the Mortgage Grader Decision

Previously I wrote on the decisions of the New Jersey trial and Appellate Division courts regarding the Mortgage Grader dispute and the question of whether a dissolving LLP must continue to maintain malpractice insurance in order for the firm’s partners to enjoy limited liability.  Here are links to the discussions of the decision of the decision of the Appellate Division  and how the case was presented to the New Jersey Supreme Court.

Earlier this year the New Jersey Supreme Court issued its decision in the case, reversing the decision of the Appellate Division and holding that malpractice insurance need not be maintained during the winding-up phase.

The Journal of Passthrough Entities has just published my review of that decision; HERE IS A LINK to that article.

 

Indiana Court Of Appeals Applies Venerable Rule Of "No Backsies" To Withdrawal From LLC

Indiana Court Of Appeals Applies Venerable Rule Of "No Backsies" To Withdrawal From LLC

      In a decision rendered last week by the Indiana Court of Appeals, it applied the general venerable rule of “No Backsies” with respect to a former member's effort to bring challenges to his removal from an LLC. Stocker v Sundholm, No. 02A-03-1603-PL-615, 2016 WL 568-5422 (Ind. App. Nov. 7, 2016).

      Stocker had been a member, as well as an “employee,” of an Indiana LLC named Attero Tech LLC. On the basis that Attero’s business model had changed and Stocker's services as an employee were no longer needed, on June 23, 2011 he was provided with a notice of termination of employment, effective immediately. Thereafter, on September 1, a special meeting of the members of Attero was noticed for the purpose of discussing a buyout of Stocker's interest in the LLC. Stocker did not attend that meeting. However, thereafter, Stocker was presented with a withdrawal and redemption agreement pursuant to which his interest in the company would be redeemed. That agreement was accepted by Stocker, signed and delivered. The company has been performing on its redemption obligations. It contained a comprehensive release of claims against Attero and various of its representatives. Specifically, the release provided:

Departing Member [Stocker] hereby releases and forever discharges [Attero] respective directors, officers, employees, agents, shareholders, subsidiaries, affiliates, successors and assigns from any and all claims, demands, proceedings, causes of action, orders, obligations, contracts, agreements, debts and liabilities whatsoever, whether known or unknown, suspected or unsuspected, both at law and in equity, which [Stocker] now has or has ever had against [Attero] arising prior to the Effective Date; provided, however, that nothing contained herein shall operate to release obligations of [Attero] arising under this Agreement.

      Nearly 4 ½ years after he signed the agreement, Stocker filed an action alleging a variety of claims including breach of contract, breach of fiduciary duty and fraud in the inducement. All of these claims were dismissed on summary judgment, and that was affirmed by the Court of Appeals.

       The court found that the allegations that Stocker had been forced out of the company in breach of the operating agreement were barred by the release he had already given. Specifically, if he thought there had been a breach of the operating agreement, he would have known about that at the time he entered into the release. “Thus, by signing the Release, Stocker chose to forgo any breach of contract claims against the Defendants, including the one asserted herein.” 2016 WL 6585422, *3.

      Likewise, with respect to the claim for breach of fiduciary duty, Stocker had knowledge of the facts underlying that claim prior to the time he executed the release. Having executed the release, that claim is barred.

      With respect to the claims for fraudulent inducement, the court found that “‘Stocker had a duty to conduct due diligence to review any representations made by Attero and the Defendants in the Release’ before signing the Release” id.

      The court, in conclusion, wrote:

In short, the undisputed evidence shows that Stocker was presented with the Release, which provided for redemption of his units in Attero and included mutual release provisions covering the Defendants.  Stocker voluntarily signed the Release and thereafter accepted payments made by Attero in accordance therewith without objections.  Having duly executed the Release, Stocker is barred from bringing his claims of breach of contract and breach of fiduciary duty.  Stocker’s claim for fraud in the inducement also fails because the alleged misstatements concern matters that would have been known or should have been known by Stocker at the time he signed the Release, and yet he voluntarily signed the Release.  The trial court did not err in granting summary judgment in favor of the Defendants.

      No backsies.