Tuesday, April 17, 2018

LLCs Are Not Corporations & You Can't Have A Parent-Subsidiary Relationship When There is Only One Entity

Oh boy. A 2010 case just came through on my "limited liability corporation" WESTLAW alert (that I get every day).  This one is a mess. Recall that LLCs are limited liability companies, which are a separate entity from partnership and corporations, despite often having some similar characteristics to each of those. 

CBOE, along with the six other exchanges, has an interest in OPRA but OPRA was not incorporated as a separate legal entity until January 1, 2010, when it incorporated as a limited liability corporation. Id. (describing the restructuring of OPRA following its incorporation). At the time this lawsuit was filed, however, there remains a question as to whether there were any formalities in place to separate OPRA from CBOE operations. In short, the parties dispute whether, at the time the suit was filed, OPRA operated independently or was operated jointly with CBOE.
*2 To this end, Realtime asserts that the lack of any corporate governance at OPRA [an LLC], such as Articles of Association or a partnership agreement, renders OPRA “simply a label with no formal business structure.” RESPONSE at 2, 4 (citing SEC RELEASE at 2) (“OPRA was not organized as an association pursuant to Articles of Association or as any other form of organization. Instead, OPRA simply served as the name used to describe a committee of registered national securities exchanges.”).
REALTIME DATA, LLC d/b/a/ IXO, Plaintiff, v. CME GROUP INC., ET AL., Defendants. Additional Party Names: Chicago Bd. Options Exch., Inc., No. 6:09-CV-327-LED-JDL, 2010 WL 11601868, at *1–2 (E.D. Tex. Aug. 27, 2010) (emphasis added).
 
Okay, so first, we should get the LLC name right. That's old news. Important, but old news. An LLC is still not a corporation.  Second, LLCs, as non-corporate entities, do not engage in corporate governance and have significantly fewer formal entity obligations. Third, LLCs do not have "partnership agreements," they generally have operating agreements. 
 
In addition, partnerships don't need formal "partnership agreements," either, though to be a partnership there is always the agreement of two or more people to operate a business as co-owners seeking profit.  The court explains that "CBOE, along with the six other exchanges, has an interest in OPRA but OPRA was not incorporated as a separate legal entity until January 1, 2010, when it incorporated as a limited liability corporation," and states that OPRA had been in operation since 1975, when it was established by "directive from the Securities and Exchange Commission (“SEC”) designating OPRA to facilitate the distribution of options pricing information." Id. This suggests that perhaps OPRA is a partnership formed by the CBOE and the other six exchanges.  That would make CBOE (and the other six exchanges) potentially liable for the actions of OPRA and any resulting damages.  No one seemed to make that claim. 
 
Instead, CBOE was pursued under some version of an alter ego or business enterprise claim, seeking to merge OPRA into CBOE.  The court explains further: 
CBOE fails to identify grounds for institutional independence from OPRA at the time this suit was filed, and Realtime presents sufficient evidence to impute OPRA's contacts [for obtaining personal jurisdiction] to CBOE.
*5 In applying the Texas long arm statute, courts in this Circuit have followed the rule established by the Supreme Court in 1925 that “so long as a parent and subsidiary maintain separate and distinct corporate entities, the presence of one in a forum state may not be attributed to the other.” Hargrave v. Fibreboard Corp., 710 F.2d 1154, 1159 (5th Cir. 1983) (citing Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333 (1925)). In this case, however, at the time the lawsuit was filed there were no clear legal boundaries to affirmatively identify a parent-subsidiary or sister-sister corporate relationship. . . .  It is undisputed that prior to January 1, 2010, OPRA did not seek the protections of incorporation, RESPONSE, EXH. 13, OPRA LLC AGREEMENT (Doc. No. 238-14), and based on the current record, Realtime has put on more than a minimal showing that OPRA was under the managerial and day-to-day control of CBOE. See, e.g., Oncology Therapeutics Network v. Virginia Hematology Oncology PLLC, No. C 05-3033-WDB, 2006 WL 334532 (Feb. 10, 2006 N.D. Cal.) (noting, in the context assessing whether two related entities formed a single enterprise, that “At this juncture, plaintiff merely has to allege a colorable claim. Plaintiff does not have to prove the claim.”). Therefore, the strict separateness required under Cannon need not be applied here because OPRA did not seek protections to formally divide its dealings from that of its counterpart CBOE.
Id. at *4–5  (emphasis added). Rather than working to find entity status here, I would think the better claim would the existence of a partnership, as noted above, or even a principal-agent relationship, where CBOE is the agent of OPRA or vice versa.  The court goes on: 
Instead, these facts make it appropriate to apply the single business enterprise doctrine. The single business enterprise doctrine applies when two or more business entities act as one. Nichols, 151 F. Supp.2d at 781–82 (citing Beneficial Personnel Serv. of Texas v. Rey, 927 S.W.2d 157, 165 (Tex. App.- El Paso 1996, pet. granted, judgm't vacated w.r.m., 938 S.W.2d 717 (Tex. 1997)). Under the doctrine, when corporations are not operated as separate entities, but integrate their resources to achieve a common business purpose, “each corporation may be held liable for debts incurred during the pursuit of the common business purpose.”Western Oil & Gas J.V., Inc., v. Griffiths, No. 300-cv-2770N, 2002 WL 32319043, at *5 (N.D. Tex. Oct. 28, 2002) (internal citations omitted). Being a part of a single business enterprise imposes partnership-style liability. Id. The facts presented here demonstrate that OPRA and CBOE operate as a single business entity, at least for the threshold inquiry of establishing jurisdiction.
Id. (footnotes omitted) (emphasis added). How does this doctrine apply when, at the time of filing, the court has already acknowledged that there were not even tow entities? If there is one entity, then CBOE is directly connected.  If OPRA is clearly some form of entity, the court should figure out which one it is (hint: it's likely a partnership).  If, as the court says, they are a single entity, then CBOE (as a clearly defined entity) is the only entity. The court acknowledges this reality but does not concern itself with it.   
Traditionally, courts have applied this doctrine when two corporations are acting as one. However, despite OPRA not having a defined corporate status at the time this suit was filed, there is demonstrable proof that CBOE was controlling OPRA's “business operations and affairs,” permitting the two entities to be fused for jurisdictional purposes.
Id. (emphasis added). This description suggests that CBOE might be the principal and OPRA might be the agent or that OPRA is simply part of CBOE. The facts seem to suggest a separateness that makes the latter a more difficult claim (at least the court is acting that way). An agency relationship, in at least some circumstances, can support indirect personal jurisdiction. See EBG Holdings LLC v. Vredezicht's Gravenhage 109 B.V., No. CIV.A. 3184-VCP, 2008 WL 4057745, at *10 (Del. Ch. Sept. 2, 2008) (stating that there are two "indirect bases under which a parent entity may be subject to jurisdiction through a subsidiary . . . the agency theory and the alter ego theory); but see Daimler AG v. Bauman, 571 U.S. 117, 139, 134 S. Ct. 746, 762, 187 L. Ed. 2d 624 (2014) (stating that due process did not permit the exercise of general jurisdiction over an international parent corporation in California).  
 
It seems to me that using an agency relationship to establish personal jurisdiction in the CBOE case should be somewhat easier than a parent-subsidiary case given the lack of a parent-subsidiary relationship and OPRA's lack of entity status. Instead, establishing the agency relationship should be sufficient. As a reminder, an agency relationship must

include: (1) the agent having the power to act on behalf of the principal with respect to third parties; (2) the agent doing something at the behest of the principal and for his benefit; and (3) the principal having the right to control the conduct of the agent). 

Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160, 169 n.130 (Del. Ch. 2003) (citing J.E. Rhoads & Sons, Inc. v. Ammeraal, Inc., 1988 WL 32012, at *4 (Del. Super. Mar. 30, 1988)). 

Anyway, it appears the court may have been right to assert personal jurisdiction over CBOE, but I don't think the analysis was proper.  And that should matter, too. One day, the same analysis will lead to an incorrect outcome.  
 

http://lawprofessors.typepad.com/business_law/2018/04/llcs-are-not-corporations-you-cant-have-a-parent-subsidary-relationship-when-there-is-only-one-entit-1.html

Corporate Governance, Corporations, Joshua P. Fershee, LLCs, Partnership | Permalink

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