Application for Judicial Dissolution of LLC By A Non-Member Dismissed

Application for Judicial Dissolution of LLC By a Non-Member Dismissed

      The Delaware Limited Liability Company Act, and specifically section 18-802 thereof, provides that an LLC may be judicially dissolved “[o]n application by or for a member or manager.” In a recent decision, an application for judicial dissolution brought by neither a member nor a manager was dismissed. SolarReserve CSP Holdings v. Tonopah Solar Energy, LLC, C.A. No. 2019-0791-J RS, 2020 WL 1291638 (Del. Ch. March 18, 2020).

      Tonopah Solar Energy, LLC was originally organized as a single member LLC in which SolarReserve CSP Holdings, LLC was the sole member. Over time and in connection with a variety of financings, SolarReserve conveyed its interests in Tonapah to several other holding companies and as well borrowed money from the US Department of Energy. In turn, SolarReserve also entered into a joint venture agreement with Cobra Thermosolar Plants, Inc. to build a solar power facility. Ultimately, after a default in the Department of Energy borrowing, SolarReserves was removed from its position of ultimate control over Tonopah. In connection with this suit, SolarReserve alleges that Tonopah was insolvent and being unable to build its plats, it was no longer practicable for Tonopah to carry on its business. On that basis, it was requested that the court dissolve Tonopah. Tonopah resisted, which led to this decision.

      Parsing the current ownership and control structure of Tonopah, the court determined that SolarReserve was not a member, but rather an indirect investor. Further, turning to the argument it should order dissolution on equitable principles, the court deferred, concluding that doing so would create rights in SolarReserve that it did not already have. Rather, to the extent in SolarReserve continue to hold any interest in Tonopah, there was an intervening holding company from which all of the membership interests in Tonopah had been pledged to secure the now defaulted Department of Energy loan.

Delaware Chancery Court Applies Implied Covenant of Good Faith and Fair Dealing, Finds Plaintiff Failed To Prove What Would Have Been Agreed Upon

Delaware Chancery Court Applies Implied Covenant of Good Faith and Fair Dealing, Finds Plaintiff Failed To Prove What Would Have Been Agreed Upon

      The implied contractual covenant of good faith and fair dealing, as applied by the Delaware courts, will in one of its aspects look to and enforce what the parties would have agreed to had they thought to actually negotiate on the point. Resolution of that question will involve a factual analysis of matters including how the parties have otherwise allocated risk in the transaction. In a recent decision, the court found that the plaintiff failed to demonstrate that the defendant would have agreed to what it said it would have been the negotiated rule. RoundPoint Mortgage Servicing Corp. v. Freedom Mortgage Corp., C.A. No. 2020-0161-SG, 2020 WL 4199957 (Del. Ch. July 22, 2020).

      RoundPoint Mortgage Servicing acquired, by means of a merger, Freedom Mortgage. The merger agreement, in addition to the usual restrictions on transactions outside the ordinary course between signing and closing, specifically addressed that RoundPoint might, in that period of time, face margin calls on a credit facility that was secured by certain of its assets. In order to make funds available to satisfy those obligations, the merger agreement allowed RoundPoint to borrow money from its controlling shareholder (the “Shareholder Loan”). That same merger agreement required as a closing condition that Round Point “shall have repaid, all amounts outstanding under the [Shareholder Loan].” Pursuant to that authorization, between the signing of the merger agreement and its ultimate close, that controlling shareholder loaned to RoundPoint some $123 million. However, except with respect to $1 million thereof, prior to closing the controlling shareholder forgave the Shareholder Loan without requiring any repayment; this worked to the controlling shareholder’s interest because the purchase price was net asset value plus a 7.5% premium. Had the Shareholder Loan been repaid, the net asset value would have been reduced. But as characterized by the Chancery Court, the controlling shareholder appreciated that with this that each dollar of the loan forgiven “benefits (almost) 7.5 cents per dollar of debt it forgives.” and that “each such dollar [forgiven by the controlling shareholder] requires [Freedom Mortgage] to come up with an additional dollar (plus premium) in cash at closing.” 

      RoundPoint Mortgage sought to avoid its obligation to close on the transaction unless the seller actually repaid, rather than forgave, the Shareholder Loan.

      After first determining that the merger agreement did not expressly prohibit the controlling shareholder from forgiving the Shareholder Loans (and thereby effecting a net increase in the purchase price), it recognized that, in support of its claim under the implied covenant, the buyer would want to prohibit forgiveness of the loan that it first sanctioned. The court, however, was not willing to imply into the agreement a no forgiveness limitation because Freedom Mortgage, the buyer, failed in its burden of demonstrating that, had the parties negotiated the terms, they would have negotiated in a no forgiveness condition. Rather, while it is not conclusive that the parties would have negotiated a no forgiveness limitation, is entirely possible that they would have negotiated something else.  Failing to satisfy that burden, Freedom Mortgage's implied covenant claim failed.

No Breach of Fiduciary Duty or of Good Faith and Fair Dealing in (Apparently) Zeroing Out Another Member

No Breach of Fiduciary Duty or of Good Faith and Fair Dealing in (Apparently) Zeroing Out Another Member

      In a recent decision from New York, while at best sparse on the underlying facts, does affirm a determination that the exercise of an express power set forth in an operating agreement will not give rise to a claim of breach of fiduciary duty or the implied contractual covenant of good faith and fair dealing. Seeking Valhalla Trust v. Deane, --- N.Y.S.3d ----, 182 A.D.3d 457, 2020 WL 1812730 (App. Div. 1^st April 9, 2020).

       Again, the available facts are sparse; this entire opinion runs to only two pages. Still, it would appear that the Seeking Valhalla Trust was a member in an otherwise unnamed LLC. Deane, apparently the LLC’s manager, exercised an express right under the operating agreement to adjust the sharing ratios amongst the members, even down to zero, at any time. It appears that this was done, and the Seeking Valhalla Trust brought suit alleging that Deane, in making these adjustments, violated either or both of fiduciary duty or the implied contractual covenant of good faith and fair dealing.

       In dismissing the claim for the alleged violation of the obligation of good faith and fair dealing (the court would as well summarily dismiss the claim for breach of fiduciary duty), the opinion recites:

Nevertheless, the complaint was properly dismissed for failure to state a cause of action. As the court found, Deane did not breach the operating agreement or the covenant of good faith and fair dealing by exercising her express sole discretion to reallocate sharing ratios, even down to zero, at any time. The language of the provision is unambiguous. Considered otherwise, Deane merely exercised the very power given her by the operating agreement. 2020 WL 1812730, *1 (citations omitted).

LLCs As “Accredited Investors”

LLCs As “Accredited Investors”

      Last week the Securities and Exchange Commission approved amendments to Rule 501 of Regulation D to expand the definition of who is an “accredited investor.”

      Effective late October, 2020, pursuant to amendments to Rule 501 of Regulation D approved by the Securities and Exchange Commission on August 26, 2020 and effective late October, 2020, limited liability companies with at least $5 million in assets fall within the definition of an “accredited investor.” See SEC Modernizes the Accredited Investor Definition, Release 2020-191 (August 26, 2020); HERE IS A LINK to that Release.  There is also Release No. 33-10824, SEC Amending the “Accredited Investor” Definition; HERE IS A LINK to that document.

And So Is Set in Motion the Cousins War

 And So Is Set in Motion the Cousins War

      Today marks the anniversary of the death, in 1422, of King Henry V of England. His death would set in motion the events that would eventually play out as what was then referred to as the Cousins War and is today referred to as the War of the Roses.

      Henry V, the victor of Agincourt, died young. His only child, also named Henry, was nine months old at the time of his father’s death. Upon his father’s death, and subject of course to a Regency, young Henry, now Henry VI, was elevated to the English throne. Henry VI’s mother was Catherine of Valois, a French princess who after Agincourt married Henry V; under the Treaty of Troyes, Henry V was to inherit the French throne. Of course, that did not come to pass as the civil war aspect of the Hundred Years War was ultimately resolved (the enemy of my enemy is my friend). So now sitting on the throne was Henry VI, whose mother was a member of the house in Valois. That particular house was troubled with some sort (today it cannot be entirely diagnosed) of mental instability. At various times in his life this instability would manifest in Henry VI. In some of the later experiences he would be effectively catatonic while at other times he would appear to have no appreciation of where he was or what he was doing. Regardless of the degree of expression from time to time, these were not characteristics of an effective medieval king. In addition, Henry VI would go on to marry Margaret of Anjou. Being French, she brought no natural allies to Henry’s household and, for herself, was generally disliked.

      And so the stage was set; following the highly effective and well liked war hero Henry V, the country was plunged into a minority kingship with a regency and all of the instability that flows therefrom. The Duke of York, who had aspirations to the throne, served as a regent. A recent review of his life is Matthew Lewis, Richard, Duke of York: King By Right (2016).  Meanwhile nothing to bring stability to Henry VI’s position flowed from his eventual marriage to Margaret of Anjou.

    

Ultimately, the Cousins War would erupt. York would, in one of its earlier battles, be killed (Wakefield in 1460), but ultimately his son, Edward IV, would prevail in that conflict (Towton, 1461), taking the throne and then protecting it (except when he lost it for a short period) through the balance of the War of the Roses.

    

But then after his death the throne would pass to Richard III, it in turn being taken from him at the Battle of Bosworth Field by Henry Tudor, known now to history as Henry VII.

     

If only Henry V had lived longer, a more stable monarchy might have been passed to Henry VI, one that could withstand the travails of his mental condition. Were that the case, England could have been spared the bloodbath that was the Cousins War. But he did not.

Obligation to Arbitrate Disputes Upheld

Obligation to Arbitrate Disputes Upheld

      In a recent decision from the Kentucky Court of Appeals, there was upheld the obligation to arbitrate certain disputes with respect to allegations of negligence in a patient’s care and treatment. Specifically, there were rejected assertions that the agreement to arbitrate was procedurally and substantively unconscionable. Estate of Green Through Moore-Stuart v. LP Louisville South, LLC, No. 2018-CA-000738-MR, 2020 WL 3401188 (Ky. App. June 19, 2020).

      The patient, Alona, originally brought this action through her mother/guardian Kathleen Moore-Stewart. Alona herself passed away during the pendency of the appeal, whereupon her estate was substituted through its administratrix.

      At the time Alona was admitted to Signature Healthcare of South Louisville, an assumed name of LP Louisville South, LLC, her mother, Kathleen, signed an arbitration agreement. Eventually a complaint was filed against Signature alleging negligence in Alona’s care and treatment. Signature, in response, sought to have the matter arbitrated. That effort was opposed on the basis that the arbitration agreement was procedurally and substantively unconscionable, and as well that it could not be performed in that the identified arbitration provider, National Arbitration Forum (“NAF”), no longer existed. The trial court denied the motion to compel arbitration, and Signature appealed. In a prior decision, LP Louisville South, LLC v. Green, 2016 WL 1069034 (Ky. App. March 18, 2016), Court of Appeals held that the decision of the trial court was insufficient as to findings of fact and conclusions of law, and remanded the matter to the trial court for reconsideration. On that reconsideration, arbitration was ordered. An appeal thereof was denied on the basis that an order compelling arbitration is interlockutory in nature. Alona Green, through Her Mother and Legal Guardian Kathleen Moore-Stuart v. Signature Healthcare, LLC, No. 2016-CA-001206-MR (Ky. App. Feb. 16, 2017). Ultimately the arbitration did take place (although not before NAF) and the arbitrator found in favor of Signature. This appeal followed.

      With respect to the arguments that the agreement to arbitrate was procedurally unconscionable, allegations were made that Kathleen was misled as to its terms and implications and never provided a copy of the document for review by an attorney. The agreement to arbitrate contained a provision permitting it to be voided during the 30 days after it was executed. In her deposition, Kathleen admitted that she did not read the agreement to arbitrate before signing it. Ultimately the trial court’s findings of fact with respect to the process by which the arbitration agreement was entered into was upheld. It was ultimately found that there was no procedural unconscionability on the basis of unequal bargaining position in that entering into an agreement to arbitrate was not a condition to admission and that Alona “would have received the same quality of care and treatment irrespective of whether her mother signed [the agreement to arbitrate].” Further, as the agreement contained, a statement that entering into the agreement would waive the right to a jury, there could be no argument that its effect was concealed.

      Turning to substantive unconscionability and impossibility of performance, efforts were made to set aside the agreement on the basis that NAF no longer provides arbitration of disputes of this nature. It was also asserted that arbitration would be prohibitively expensive. Specifically:

Alona argues that because the agreement incorporates the NAF Code that can only be administered by the NAF, the arbitration agreement effectively requires the NAF as arbitrator. Because the NAF is unavailable to arbitrate the dispute, argues Alona, the agreement is impossible to perform. 2020 WL 3401188, *5.

This assertion was rejected on the basis that the agreement, in addition to referencing NAF, contained qualifiers such as “but if that is not possible” and “if possible.” Further, it provided “if the NAF process is no longer in existence at the time of the dispute, or the NAF is unwilling or unable to conduct the arbitration, then the arbitration shall be administered by another alternative dispute resolution association, pursuant to NAF rules if possible.” Id., *5-6. Hence, the agreement contemplated that the arbitration could take place other than through the NAF.

      As for the allegation that arbitration is “prohibitively expensive,” no evidence was submitted in support thereof, so the court set aside that argument.

The Citizenship, For Purposes of Diversity Jurisdiction, of a Securitization Trust

The Citizenship, For Purposes of Diversity Jurisdiction, of a Securitization Trust

       In a recent decision from Texas, it was held that, where the plaintiff brought suit against Deutsche Bank in its capacity as trustee for a securitization trust and specifically a series thereof, it would be the citizenship of the trustee, and not of all of the trust’s participants/beneficial owners, that would control for purposes of diversity jurisdiction.  Dorman v. PHH Mortgage Corporation and Deutsche Bank National Trust Company, as Trustee for Securitized Asset Backed Receivables LLC Trust 2007-NC1, Mortgage Pass-Through Certificates, Series 2007-NC1 and Deutsche Bank Securities Inc., 2020 WL 4904266 (N.D. Tex., 2020).

      Dorman brought her suit in state court alleging a variety of claims relating, it may be inferred, to a foreclosure on her house. PHH Mortgage Corporation, the loan servicer, removed the action to federal court. This decision came in response to Dorman’s efforts to remand the case back to state court, the basis for the remand to be the failure to demonstrate diversity of citizenship. Essentially, Dorman wanted to argue that the citizenship of every participant in the securitization trust should be considered, she making that argument on the basis of Americold Realty Trust v. ConAgra Foods, Inc., 136 S. Ct. 1012 (2016). HERE IS A LINK TO MY REVIEW of that decision. In contrast, Deutsche Bank would argue that this case be decided under the principles of Navarro Savings Association v. Lee, 446, U.S. 458 (1980). In the Americold Realty decision, the US Supreme Court held that, for purposes of diversity jurisdiction, a business/statutory trust, sued as the trust, would be deemed to have the citizenship of every one of its beneficial owners. The Navarro Savings decision, in contrast, held that when the trustees of the trust are sued as the trustees, it is the citizenship of the trustees, and not the beneficiaries of the trust, that is relevant for purposes of assessing whether or not diversity jurisdiction is present.

      In this decision, in that Deutsche Bank had been sued in its capacity as the trustee, and suit had not been brought directly against the trust, the rule of Navarro Savings would apply, and only the citizenship of the trust’s trustees would be relevant.

      As there was diversity between the plaintiff and the trustees, and the citizenship of the other defendants was likewise diverse from that of the plaintiff, the suit has been allowed to proceed in federal court.