Tuesday, November 24, 2015
Like many people, I am traveling for the holiday this week. Because of that, I'll keep this short. Since November 15, 2015, six more courts have listed an LLC as a "limited liability corporation," instead of the correct, ""limited liability company." The culprits:
1) JACK LOUMENA, Pl., v. WALTER P HAMMON, et al., Defendants. Additional Party Names: Travis I. Krepelka, 15-CV-03613-LHK, 2015 WL 7180679, at *2 (N.D. Cal. Nov. 16, 2015) ( "PAI 'is a limited liability corporation which was originally owned, at least in part, by...Timothy Tibbott.' . . . Aug. 25, 2014 Order at 5.") .
2) Ironridge Glob. IV, Ltd. v. Securities and Exch. Commn., 1:15-CV-2512-LMM, 2015 WL 7273262, at *11 (N.D. Ga. Nov. 17, 2015) ("Notwithstanding the plain text of § 1391(c), the SEC argues that (1) § 1391(c) was intended to apply to corporations, partnerships, limited liability corporations, and labor unions—not federal agencies—according to “a natural reading of the full text of the statute” and its legislative history; and (2) to read § 1391(c) otherwise would facilitate forum shopping.").
3) In the caption: Perez v. Sophia's Kalamazoo, LLC, d/b/a SOPHIA'S HOUSE OF PANCAKES, a limited liability corporation, et al., Defendants., No. 1:14-CV-772, 2015 WL 7272234 (W.D. Mich. Nov. 17, 2015).
4) In the caption: Oracle America, Inc., a Delaware Corporation, Plaintiff, v. The Oregon Health Insurance Exchange Corporation, dba Cover Oregon, an Oregon Limited Liability Corporation, and The State of Oregon, by and through The Oregon Health Authority and The Oregon Department of Human Services, Defendants, No. 3:14-CV-01279-BR, 2015 WL 7296233 (D. Or. Nov. 18, 2015).
This post concludes the Contract Is King, But Can It Govern Its Realm? Micro-symposium. The symposium was hosted as part of the AALS section on Agency, Partnership, LLCs and Unincorporated Associations in advance of the section meeting on January 7th at 1:30 where the conversation will be continued.
I summarized the conversation and provided links to all of the individual posts. Bookmark this page-- there is great commentary at your finger tips on a range of topics. Please keep reading (and commenting) on these great contributions by our insightful participants to whom we are very grateful.
Jeffrey Lipshaw kicked off the symposium conversation with his post (available here) questioning, in practice, how different LLCs are from traditional corporations. He used a great map analogy to talk about the role of formation documents and default rules as gap fillers.
“The contractual, corporate, and uncorporate models are always reductions in the bits and bytes of information from the complex reality, and that’s what makes them useful, just as a map of Cambridge, Massachusetts that was as complex as the real Cambridge would be useless.”
After asserting that LLCs differ from corporations only in matters of degrees, Jeff went on to to them illustrate how degrees of difference may still matter. He provided a good example of a situation where the ability to eliminate fiduciary duties may produce the right result—an option only available in alternative entities not corporations.
Mohsen argued that if contract is king, business revenue rules the reign in Delaware. Franchise taxes and revenues generated from being the business domicile of so many businesses, in all forms, is a source of riches, one that Mohsen argued will be protected by preserving a commitment to freedom of contract.
“Delaware’s annual tax charged to alternative entities is flat. All LLCs and LPs, no matter how large or small, whether publicly traded or closely held, pay the state only $300 annually for the privilege of being a Delaware entity. Thus, unlike the corporate context, where Delaware’s business is dependent on attracting large, publicly traded corporations, in the alternative entity context, Delaware’s business depends on volume alone.”
In his first post, Mohsen also addressed Delaware Chief Justice Strine and Vice Chancellor Laster’s provocative “Siren Song” book chapter, where the pair advocate for mandatory fiduciary duties in publicly traded LLCs and LPs. Mohsen questioned the limitation arguing that
“[M]any of critiques that Strine and Laster levy at publicly traded alternative entities– unsophisticated investors, the absence of true bargaining, and confusing contract terms that often unduly favor the managers—could be levied at many private entities as well. If so, then why should Strine & Laster’s proposal be limited to public entities?”
Sandra Miller blogged here about investor sophistication and its relationship to fiduciary duty waivers. She highlighted her scholarship in the area and provided helpful links to her papers discussing her points in greater detail.
“[T]here are asymmetries in the marketplace that make it unlikely that the marketplace will efficiently discount the effects of waivers. Given the investor profile, at a very minimum, the duty of loyalty should be non-waivable for publicly-traded entities.”
Joan Heminway questioned whether LLC operating agreements are contracts, and if not the implication for fiduciary duties, statue of frauds, capacity and public policy challenges and enforceability against third parties.
“[W]ith judicial and legislative attention on freedom of contract in the LLC, the status of the LLC as a matter of contract law may shed light on the extent to which contract law can or should be important or imported to legal issues involving LLC operating agreements...So, while contract may be king in LLC law, we may question whether a contract even exists under LLC law.”
Joan also highlighted her recent appearance at the ABA LLC Institute in a related post available here and shared the many functions of an operating agreement (whether contract or not!).
Daniel Kleinberger contributed to the conversation in four parts (appearing in three separate posts here (1), here (2) and here(3)). Daniel focused on Delaware’s implied contractual covenant of good faith and fair dealing and the covenant’s role in Delaware entity law. He carefully distinguished the covenant from the UCC implied covenant of good faith and fair dealing and from the corporate standards of good faith as articulated in Stone v. Ritter and Smith v. Van Gorkum. Thirdly he addressed waivers of good faith and fair dealing both in the governing agreement and arising from contract in Delaware and under the Uniform Limited Partnership Act.
“Perhaps ironically (or some might even say “counter-intuitively”), the Uniform Limited Liability Company Act (2006) (Last Amended 2013) permits an ULLCA operating agreement to go where a Delaware operating agreement cannot.”
In his final post, available here, Kleinberger addressed interpretation questions with implied covenants analogizing the analysis to that used with impracticability.
“For impracticability or a breach of the implied covenant to exist, the situation at issue must have been fundamentally important to the deal and yet unaddressed by the deal documents. Put another way: the notion of a “cautious enterprise” means that only a condition that is egregious or at least extreme is capable of revealing a gap to be remedied by the implied covenant.”
BLPB editor, Joshua Fershee, was inspired by the topic and contributed his own post to the micro-symposium. In his post, he declared himself a Larry Ribstein devotee and highlighted how the structural differences in the LLC form, as opposed to the corporate form, provide business benefits for LLC members.
“The flexibility of the LLC form creates opportunity for highly focused, nimble, and more specific entities that can be vehicles that facilitate creativity in investment in a way that corporations and partnerships, in my estimation, do not.”
Greg Day, another BLPB-generated contribution to the conversation, blogged about sophisticated parties’ utilization of freedom of contract in LLC, and sophisticated investors demand for the conformity of traditional corporate formation over LLCs.
“[W] hen Delaware LLCs become big, and attract big funds, a condition of investment almost always requires an LLC to convert into a Delaware corporation. It seems that the lack of predictability associated with the freedom of contract scares potential investors who prefer the comforts of fiduciary duties, among other corporate staples. …So the parties who ostensibly are best served by contractual freedoms—i.e., sophisticated parties—appear to be the ones most likely to demand the traditional corporate form. And on a related note, this helps to explain why such a paltry number of LLCs and LPs have become public companies.”
Finally, Peter Molk & Verity Winship also contributed a last-minute addition to the symposium highlighting their empirical work on LLC operating agreement dispute resolution provisions as it relates to the question of contracting rights in unincorporated entities. They reported some of their early findings and linked it to the discussion about contractual freedom and the implications of mandatory fiduciary duties.
“More than a third of the agreements in our sample selected the forum for resolving disputes, primarily through exclusive forum provisions or mandatory arbitration provisions. The agreements also modified litigation processes through terms that imposed fee-shifting, waived jury trials, and, less commonly, through other means like books and records limitations.”
Participants in the Micro-Symposium were asked to respond to a series of questions (available here) that will be further discussed at the AALS section meeting. Joan MacLeod Heminway (BLPB editor), Dan Kleinberger, Jeff Lipshaw, Mohsen Manesh, and Sandra Miller.will be panelists at the AALS meeting and joined by Lyman Johnson and Mark Loewenstein.
Thursday, November 19, 2015
Regular readers of this blog know that I am fervent that the distinction between entities matters, particularly when it comes to LLCs and corporation. I’m happy to be a part of this micro-symposium, and I have enjoyed the input from the other participants.
My comments relate primarily to the role of contract in LLCs and how that is different that corporations. Underlying my comments is my thesis that LLCs and corporations are meaningfully distinct. This view is in contrast to Jeff Lipshaw, who argued in his post:
[I]f uncorporations differ from corporations, it’s more a matter of degree than of any real difference. Both are textual artifacts. We have created or assumed obligations pursuant to the text at certain points in time, and we use the artifacts and their associated legal baggage opportunistically when we can. I am not convinced that organizing in the form or corporations or uncorporations makes much difference on that score.
I tend to be more of a Larry Ribstein disciple on this, and I wish I had the ability to articulate the issues as eloquently and intelligently as he could. Alas, you’re stuck with me. (Editor's note: As Jeff Lipshaw says in his comment below, he did not say the forms of LLCs and corporations are not distinct. He is, of course, correct, and I know very well he knows the difference between the forms. In fact, a good portion of what I understand of the practical implications of the LLC comes from him. I do believe that the choice of form matters, and at least should matter in how courts review the different entities, as I explain below. And I do think the LLC is better, or should be (if courts will allow it), because of what the form allows interested parties to do with it. The flexibility of the LLC form creates opportunity for highly focused, nimble, and more specific entities that can be vehicles that facilitate creativity in investment in a way that corporations and partnerships, in my estimation, do not.]
In his book, The Rise of the Uncorporation, Ribstein stated, “Uncorporations [his term for noncorporate entities] come in all shapes and sizes, and are increasingly encroaching on traditionally ‘corporate’ domain. The thesis is that form matters.” He goes on to explain that the differences between corporations and noncorporate entities have practical implications for those in business (and their lawyers). I think he was right.
It seems that some view the limited liability protection that comes with both an LLC and a corporation as the main, if not sole, defining function of the firm. If that were true, then it would be accurate that LLCs and corporation are functionally the same. I think the evolution and purposes of the limited partnership, the LLC, and the corporation suggest that these entities at least should (if they don’t in fact) serve different purposes and roles for those who create them.
The LLC Revolution helped facilitate formation of entities with pass-through taxation and limited liability protection. And it is true, that limited liability one chief benefit of the corporation, and the rise of the corporation can be tracked to that benefit. But, entity choice is more that just liability and taxation, too, at least where there are real entity choices that provide options.
Corporations are far more off-the-rack in nature, and they have a tremendous number of default rules. These rules facilitate start up, and help skip a number of conversations that promoters and initial investors might otherwise need to have. (Of course, they probably should have these conversations, but if they don’t, there are more significant gap fillers than for other entities.)
Ribstein observed, “Uncorporations not only explicitly permit, but also indirectly facilitate contracts. A firm’s contractual freedom should be evaluated not only in terms of the flexibility permitted by a given business association statute, but in light of the alternative available standard forms.” As such, the clearer and more distinct the terms of the various entity-form statutes are, the more significant a firm’s choice of form can be. And if the choice is an LLC, that choice should be respected.
As my countless posts lamenting the fact that courts can’t seem to get the distinction between LLCs and corporations clear, there’s evidence that Lipshaw is right as to the current state of the law, or some meaningful portion of it. But that doesn’t make it right.
Tuesday, November 17, 2015
The defense for Don Blankenship, former CEO of Massey Coal, rested today without putting on any witnesses. Blankenship is on trial because he is charged with conspiring to violate federal safety standards. Investigators believe that Blankenship's methods contributed to a mine disaster that killed 29 people at the Upper Big Branch mine in West Virginia.
One part of the trial has an interesting business law component. Prosecutors have tried to show the Blankenship's interest in making more money was a key factor in cutting corners. One West Virginia news paper reported it this way:
“The government is using his compensation package as an indication of how much production mattered to Don,” said Mike Hissam, partner at Bailey & Glasser. “They’re using his compensation to establish a motive for him lying and making false statements to investors, their theory being his compensation was so tied up with company stock he had a motive for lying to the SEC and the public to protect his own personal net worth.”
It's possible that this is accurate, but I am leery of that line of thinking. It's not that I don't think it's possible Blankenship cut corners because it cost money, but it's not clear to me that would be the main of even a significant reason, if he did. The problem with this line of thinking is that Don Blankenship has tons and tons of money. So the risk is that the jury looks at and says, "Nope -- he's already rich. Why would that motivate him so much?" Further, while Blankenship stood to make money when things went well, his net worth was tied to company stock, so bad outcomes hurt him, too. The incentive story is not as easy as it seems.
My theory for the jury on this point would be more like this: Blankenship played the game to win. He liked winning, and he was used to winning, and he would not stop. His winning made him rich. And what was it that made him a winner? More coal coming out of the ground. His coal. Coal, not money, earned points. Coal, not protecting lives, earned points. Safety measures and slow downs or shut downs lost points. And Blankenship was about scoring points. If the rules didn't help him, he tried to change the rules. And who was hurt along the way did not matter. Because hurt people don't score points. Only coal matters in Blankenship's game.
Anyway, there's a reason I'm not a prosecutor, but I put my theory forth because I am a little skeptical that the money-as-the-goal message will resonate with a jury the way prosecutors hope. (To be clear, this is not the only theory prosecutors put forth -- it's just the one I am focusing on.) My colleague Pat McGinley explained the challenges with Blankenship this way:
"There are a considerable number of people who view Mr. Blankenship in his role as the Massey CEO as arrogant and dismissive of criticism," he said. "But the jury hasn't seen that side of him. And don't forget he's embraced by many people, including many powerful people; he's not universally viewed as arrogant or in a negative light. What's important here is what assessment is the jury going to have?
Had Blankenship testified, we'd have a better sense of what the jury might think of him, because we'd at least have his testimony to assess. We'd know at least part of what the jury knows. But he didn't. No witnesses for the defense, and no insight for those watching.
It should be an interesting few days.
Friday, November 13, 2015
Just a quick report from the 2015 ABA LLC Institute, an annual event held in the fall in Washington, DC that attracts anally compulsive (and I do mean that in the most positive way possible) business lawyers (academics and practitioners) interested in limited liability companies (LLCs) and other alternative business entities. The agenda for this year's program is full of nifty stuff and great presenters (present company excepted). Co-blogger Josh Fershee would love the LLC Institute. No one here confuses the LLC with the corporation! (I will just link to one of Josh's fabulous posts on that topic as a reference point.)
For this year's institute, I chaired a panel on dissolution in the LLC and also participated in a panel that explored just what an LLC operating agreement really is. I was wowed in each case by my co-paneleists. Because the norm at this conference is to interrupt the panelists and comment on their presentations as they speak, the discourse was engaged and lively.
I will save my comments on the operating agreement panel for next week's micro-symposium. Today, I want to briefly cover highlights from the dissolution panel. Specifically, we focused a lot of attention on the evolution of dissolution events under the uniform and prototype LLC acts and various state LLC statutes since the adoption of the federal income tax "check the box" rules. There's more in and related to that topic than you might think . . . .
Tuesday, November 10, 2015
Missouri’s president recently resigned amid protests about how his institution responded to racist and other deplorable acts on his campus. A graduate student staged a hunger strike, and players from the Missouri football team threatened to sit out their next game if the president did not resign.
Some have worried that the threat sets bad precedent, in that they think now a president can be forced to resign based on the racist acts of someone beyond his or her control. I don’t buy that, but more on that later. Others are upset that it took the football team to make the protests have legs. I don’t buy this one, either, though I give this one more credence.
As someone working in an academic environment, I will say that I would be sympathetic if the resignation really happened because of things that were out of the control of the university president. That is, if he were really being held accountable for what was said by an idiot racist student, I'd be supportive of him and think it was wrong he was being forced out. Based on what I have seen, though, the criticisms were valid about the institution's response to the racists acts, and specifically the president’s response, to issues of racism on campus.
I have seen administrations respond well and respond poorly to such events, and how they respond does a lot for how people feel about their institution. My read on this is that this president did not seem to care about an institutional response, when he did respond it was dismissive, and when he came under fire, he lashed back.
One of this things that struck me was that the football coach publicly supported his players. To me, it seems that when high-level folks step out front like that, it's likely the problems were recognized deeply and across boundaries.
Beyond that, personally, I had little patience with the president, based on reports of his responses. The one that sealed the deal for me was his description of “systematic oppression,” which goes as follows: "Systematic oppression is because you don’t believe that you have the equal opportunity for success.” Um, no, that's exactly wrong.
As such, I don’t think this was an issue where the president of a university was being held accountable for the racist behavior of some students. Unfortunately, that kind of behavior unavoidable, but worth trying to avoid. How we respond the racist behavior of others, though, is within our control, and we’re accountable for how we respond.
Furthermore, I don’t think it was just the potential $1 million loss a forfeit of a football game was the sole reason this resignation happened. I do think it accelerated the process, but I also get the sense this was a problem across the campus. I think the football players astutely noted that the time was right to join the movement, and knew they had support. Notoriously conservative football coaches (and I don’t mean politically) don’t jump out in front of things like this very often, at least not if they have a question about which way the wind is blowing. This seems more to me like a case where the lack of an adequate response -- meaning mostly that the administration was not showing they cared or noticed the problems -- was recognized by a critical mass as problematic. And things moved forward quickly.
I am responding only to my perception of reports, and maybe I am getting this wrong, but I get the sense the outcome here was right. And I think it is more complex than the fact that the football players complained, so change happened. That undercuts the work of the initial protestor, who did motivate change, and it underestimates how deep the lack of support for the administration seemed to go. And, sorry, it was more than financial, even if that was part of the story.
Frankly, I worry more about the gendered aspect of this, as colleges and universities are notoriously bad in how they handle Title IX violations, and I don’t know of many (read: any) protests like this leading to successful change on that front. But maybe, just maybe, we’re on the cusp of something like that. In a proper case, I sure wouldn’t mind if a football team took the lead on that, too.
Tuesday, November 3, 2015
The Georgia Attorney General's (AG) office is trying to make the case that the Georgia Pipeline Act does not allow any entity other than a corporation to use the statute's eminent domain power. Palmetto Pipeline is seeking a certificate for authorization to use that power, provided in GA Code § 22-3-82 (2014):
(a) Subject to the provisions and restrictions of this article, pipeline companies are granted the right to acquire property or interests in property by eminent domain for the construction, reconstruction, operation, and maintenance of pipelines in this state . . . .
The state AG has argued that a pipeline company must be a corporation, and thus a limited liability company (LLC) cannot use the statutory power. The AG is right. In the Pipeline Act's definitions section, it provides, at GA Code § 22-3-81 (2014),
As used in this article:
. . . .
(2) "Pipeline company" means a corporation organized under the laws of this state or which is organized under the laws of another state and is authorized to do business in this state and which is specifically authorized by its charter or articles of incorporation to construct and operate pipelines for the transportation of petroleum and petroleum products.
Palmetto Pipeline LLC is a Delaware LLC, formed by Kinder Morgan for purposes of developing the pipeline. According to news reports:
"Kinder Morgan will also be responding to the Department’s motion to dismiss, which mistakenly asserts that a limited liability company does not have the legal rights of a corporation,” [spokeswoman Melissa Ruiz wrote in an email]. “Kinder Morgan continues to strongly believe that the Palmetto Pipeline is good for consumers in the state of Georgia and the Southeast region, and we are committed to bringing this project to market.”
Sorry, Charlie, although it may be good for consumers, the statute is clear on this one. In fact, Georgia utility law provides a good example of how to write a statue that expands the scope to other entities when desired. The public utility law relating to natural gas in the state, at GA Code § 46-4-20 (2014), provides:
As used in this article, the term "person" means any corporation, whether public or private; company; individual; firm; partnership; or association.
Further, the act states:
(a) No person shall construct or operate in intrastate commerce within this state any pipeline or distribution system, or any extension thereof, for the transportation, distribution, or sale of natural or manufactured gas without first obtaining from the commission a certificate that the public convenience and necessity require such construction or operation.
Unfortunately for Palmetto/Kinder Morgan, the eminent domain act has its own definitions and says "pipeline company" and not "person." One might try to argue that the eminent domain statute somehow improperly restricts the rights of individuals and other entities by limiting the authority to corporations, and thus invalidate the law or provision, but I don't see that getting much traction. The eminent domain law states in the legislative findings that
there are certain problems and characteristics indigenous to such pipelines which require the enactment and implementation of special procedures and restrictions on petroleum pipelines and related facilities as a condition of the grant of the power of eminent domain to petroleum pipeline companies.
GA Code § 22-3-80 (2014). Given the history of utility regulation and oversight, including approval of capital structures by utility commissions, it is likely that a court would uphold the power to limit the types of entities that can be used by a regulated entity like a pipeline company.
I don't mean to suggest here that the legislature should not allow pipeline companies to choose LLCs as their entity of choice. I leave that question for another time. But I am saying that that the Georgia legislature did not allow pipeline companies to be anything other than corporations, which means an LLC cannot be a pipeline company that can use eminent domain power in Georgia. Here's hoping the court agrees.
Hat tip and thanks to my best source for such cases and news items, Tom Rutledge at Kentucky Business Entity Law Blog.
Tuesday, October 27, 2015
So, my rants about the problem of courts (and others) conflating LLCs and corporations are not new. Unfortunately for the proper evolution of the law, but good fodder for my posts, I continue to get examples. We now have a new one that raises the bar a bit.
A recent case from the United States District Court for the Western District of Pennsylvania continues the trend. The beauty, if one can call it that, of the case is that there are failures to recognize the difference between LLCs and corporations at multiple levels.
First, though, let’s recap what LLCs are. LLCs are limited liability companies, and they are creatures of statute. See, e.g., 6 Del. C. § 18-101, et seq. As such, they are not corporations, which are creatures of other statutes. Cf., e.g., 8 Del. Code § 101, et. seq. In contrast, LLCs, like corporations and other associations, can be people. See, e.g., Dictionary Act, 1 U.S. Code § 1 (“[The wor[d] 'person' . . . include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.").
Back to our newest example, which I think of as a strikeout. The case was filed by the Pennsylvania General Energy Company, LLC, (PGE), which challenged the “constitutionality, validity and enforceability of an ordinance adopted by Grant Township that established a so-called Community Bill of Rights.” Penn. Gen. Energy Co., LLC, v. Grant Township, C.A. No. 14-209ERIE, at 1 (Oct. 14, 2015, W. Dist. Pa.), available here. As Judge Baxter explains, “The Ordinance lays out the framers' beliefs that corporations should not have more rights than the people of its community and that the people have the right to regulate all activities pursuant to a right of local self government.” Id. at 2-3.
The framers are our first group that does not appear to know that corporations are not the same as LLCs. Strike one. Here’s the ordinance (emphasis added):
Section 3 - Statements of Law -Prohibitions Necessary to Secure the Bill of Rights
(a) It shall be unlawful within Grant Township for any corporation or government to engage in the depositing of waste from oil and gas extraction.
(b) No permit, license, privilege, charter, or other authority issued by any state or federal entity which would violate the prohibitions of this Ordinance or any rights secured by this Ordinance, the Pennsylvania Constitution, the United States Constitution, or other laws, shall be deemed valid within Grant Township.
So, unless the city has some definition or the other basis to say that an LLC is a corporation (which I did not see), this Bill of Rights does not apply to LLCs, partnerships, or other unincorporated entities.
As such, the plaintiff’s first argument, I think, should have been that the statute does not cover us as an LLC at all. The complaint (here) shows only an argument that LLCs are people -- the argument that PGE was not a corporation was not made. In fact, the complaint says LLCs are corporations. "The Community Bill of Rights Ordinance purports to strip corporations, such as PGE, of their status as natural persons and declares that corporations do not possess any other legal rights, privileges, power, or protections." Complaint ¶ 99. Strike two.
Finally, Judge Baxter, in what is mostly a reasonable opinion, skips right to equating LLCs and corporations, too. She explains,
Defendant provides no precedential statute or constitutional provision authorizing its action other than its assertion that Plaintiff has no rights -- from contracting to do business in Grant Township to bringing a lawsuit to complain about an ordinance -- because it is not a person. This view is contrary to over one hundred years of Supreme Court precedent that establishes that corporations are considered "persons" under the United States Constitution.
Id. at 7-8. An arguably true statement of the law that is wholly irrelevant because plaintiff is not a corporation. Plaintiff is an LLC, and the this is not transitive. That is, just because both LLCs and corporations can be persons, it does not mean that, therefore, LLCs are corporations. Strike three.
All in all, if the Grant Township ordinance has included all entities (or limited the options only to natural persons), then most, if not all, of Judge Baxter’s opinion would be correct. As it is, it’s just wrong. Absent some other analysis, the ordinance at issue did not apply to the plaintiff at all. I, for one, hope Judge Baxter amends the opinion or the case is appealed so that the court can get it right. The language here could set a terrible precedent.
Who am I kidding? It just continues the long line of other terrible precedent. But it should still be fixed.
Tuesday, October 20, 2015
From potential employers to faculty, I hear a common mantra that students are “no longer able to write.” Thus, we need to get them practice ready in a way that apparently we, as law schools, used to do.
I, too, share frustration with poorly written materials and poor performance generally. I also worry about the practice-ready nature of some of our students. Still, I find myself compelled to say that, in my experience, the vast majority of our students are thoughtful, intelligent, and capable.
I also can say that many of our students do not push themselves to deliver the high-quality work product of which they are capable. I long for the self-motivated student, the same way I have (at times) longed for the self-motivated employee. Some people have it, and some people don’t. Like height, one can’t really teach motivation, but we can try to help students find their own motivation from within. And we can set expectations high enough that failure is, in fact, an option.
I have come in contact with quite a few students, and I don’t think we have an actual literacy problem with the students I have taught over the years (a few stark examples, perhaps, to the contrary). A lack of literacy or ability is simply not a fair assessment of virtually all students I have taught. I concede, however, that we often have far too many students who fail to demonstrate their abilities, and that is cause for alarm. Not working hard is not that same as not being able to do the work, though the result is the same.
I fully support taking measures to try to address these shortcomings, and the time to do something is now. We have a moral and ethical obligation that we try to do more. At our law school, we are taking this concern seriously, but I want to make sure we are focusing our concern in the right areas.
At our school, we have started (another) dialogue about how we can improve our students’ performance, and I think (hope/expect) that those conversations obviously include improving our collective performance as teachers, as well. The law school community needs to be one that fosters learning. Part of what everyone in the building, regardless of job, should be committed to is educating our students (on professionalism, as well as legal doctrine) because everything that happens here impacts the educational experience. What happens in law school, does not stay in law school. It impacts lives, futures, and communities, including our students, their clients, and every part of where we live, learn, and work.
One of the big keys to all of this is, I think, ensuring that we hold ourselves accountable for the learning of our students, and that means holding them accountable, not just complaining when they come up short. If we’re not willing to have tough conversations, before (but including) issuing a final grade, we’re not doing our jobs. I love my job, and I care about what I do, but I’m putting myself first on the list of people who need to better.
We have many great students, and I am truly thankful for the countless wonderful I have had the chance to teach. I have many great colleagues at my school (and at others schools) who care about law students and the world those students can and will impact. But I also think that, as a group, we as faculty can do better. It starts with holding ourselves accountable in the way many seem to wish we’d hold our students accountable. Perhaps not surprisingly, part of truly holding ourselves accountable means holding our students accountable. I think we need to start there.
Tuesday, October 13, 2015
Readers of this blog know how much I hate courts that call LLCs "corporations." (If you're a new reader, welcome. And now you know, too.) I am also one who likes to remind people that entity choices come with both rights and obligations, as do choices about whether to have an entity at all. Recent events in Illinois touch on both of these issues.
A recent news story from Chicago's NBC affiliate laments a recent court decision in Illinois that requires entities to have counsel if they are to make an appeal, even in the administrative process related to a parking ticket. The story can be found here. The short story is this: if one registers a vehicle in the name of a corporation, then the corporation must be represented by counsel to contest the ticket. The reason for this determination comes from a non-parking related decision from 2014.
In that decision, Stone Street Partners LLC v. City of Chicago Department of Administrative Hearings, the court determined that "the City’s administrative hearings, like judicial proceedings, involve the admission of evidence and examination and cross-examination of sworn witnesses–all of which clearly constitute the practice of law." 12 N.E.3d 691, at ¶ 15 (Ill. App. Ct. May 20, 2014). As such, the court held, the "representation of corporations at administrative hearings–particularly those which involve testimony from sworn witnesses, interpretation of laws and ordinances, and can result in the imposition of punitive fines–must be made by a licensed attorney at law." Id. at ¶ 16.
As the news story reports, the parking division has adopted this rationale. Thus, the owner of an entity, even a sole owner, cannot represent the entity in an administrative challenge (unless he or she is a licensed attorney). The report notes that the parking tickets were "unfair," which seems to be a fair characterization because the recipient appears to show that she had paid for the spot but was given a ticket anyway. Okay, so it stinks that the city gave an erroneous ticket, but the idea that the entity has different rules than an individual doesn't exercise me much at all.
The complaint is that a small corporation is somehow unduly burdened by this rule. They even talked to Chicago Kent law professor Harold Krent, who agrees. The report notes:
"The problem is when the rule is applied to a very small corporation -- particularly if the corporation is one person -- the rule doesn't make any sense," Krent explained. “I think that if it's asked, the court itself would carve out an exception for the simple category of traffic tickets. It doesn't make sense if the corporation is an individual. The individual should be able to represent him or herself just like they can in any other case."
I respectfully disagree. First, it makes a lot of sense if you take seriously the reciprocal nature of limited liability. That is, if the owner of a small corporation went bankrupt and the entity did not have funds to pay the parking tickets, I would adamantly defend the small business owner's individual right to avoid the ticket. The city should not be able to just disregard the entity in that instance just because the corporation is an individual. But for that to work, I think it has to work both ways.
Second, the small business owner in this instance almost certainly made this specific decision to gain the protections of the entity. I don't know Illinois car registration well, but it is my understanding that, if you lease a vehicle, the vehicle is owned by an entity, but registered (in part) in the lessee's name. In such a case, the lessee is responsible for parking tickets, and could thus contest them in their individual capacity. As such, it's likely that an individual could choose to register the car in their own name; they just chose not to. Decisions have consequences.
Now, I may agree with Prof. Krent in some ways, in that I will concede that it does seem a little silly to suggest that the procedural nature of contesting a parking ticket through the mail is something that requires a law license, and I am pretty sure it's not efficient, but it's not an unreasonable decision from the court, either. And it's a decision that can likely be fixed by the legislature (despite some strong language in Stone Street). Still, as the court notes, "If anything, our holding will protect the rights of corporations which may lose valuable rights or property because they have lost administrative hearings due to the presence of an unqualified representative working on their behalf." Id. at ¶ 19.
Lastly, I would be remiss if I did not point out a major flaw in the the Stone Street decision. The entity -- Stone Street Partners, LLC -- is a limited liability company. It is not a corporation. However, making the same type of mistake so many other courts have, throughout the decision the court called Stone Street "the corporation" and its counsel is called "corporation counsel." So, what we have here is a case that requires those who form an entity to respect the entity, but the court fails to respect the entity type. It appears it's just too much to ask to have both.
Tuesday, October 6, 2015
As a life-long Detroit Lions fan, last night's loss to the Seattle Seahawks was largely expected. How they lost was new, though the fact that the Lions lost in a creative way, was also to be expected. As actor Jeff Daniels said, being a Lions fan is more painful than being a Cubs fan.
In recent years, there is ample evidence that random and uncommon rules have shown up to hurt my already mediocre team. This got me to thinking, though, of the old adage, bad facts make bad law. For the Lions, I think that's not necessarily apt. It may be that bad football makes for better football later.
To understand how one might get there, one needs to know a little what it's like to be a Lions fan, so here's a little insight into how life as a Lions fan works:
I watched the start of the game last night with my ten-year-old son. Part of the pre-game programming is all of the announcers and studio people make their pick for the game. The ten or so predictions were unanimously for the Seahawks. I turned to my son and said, "Well, the Lions will probably make a game of it then." He asked why. I replied, "Because the Lions have a better chance to win when absolutely no one objective expects them to. I don't know why. It's just true."
He went to bed shortly after kickoff. Lest anyone think I am cruel, I am not trying too hard to make him a Lions fan. I have tried to raise him and his little sister also as Saints fans. I am not going to bandwagon an make them Pats fans or anything, but New Orleans was home for three years, so I can reasonably adopt the Saints. I have been questioned on that choice as an alternative, and this year doesn't look too hot, but in my defense, my kids' team has a Super Bowl win in their lifetimes. More than I can say for me.
As the game went on, there was lost of social media complaining between me and my fellow Lions fans. Most of it along the lines of: "Did they forgot how to throw downfield?" "This is awful." "Where's Barry Sanders?" Then I posted something witty like, "Matt Stafford just checked down to me on my couch."
Despite an awful game, the Lions had a chance. With time running out, the team seemed to learned they could throw the ball down the field more than three yards.
The Lions were losing 13-10 with 1:51 left in the game when Stafford passed to Calvin Johnson, who dove for a touchdown. Just before the goal line, Seahawks safety Kam Chancellor punched the ball out of his hands, and the ball tumbled into the end zone. Another Seahawks play clearly hit the ball out of the back of the end zone. The play was call a touchback, giving Seattle the football at their own 20 yard line. The problem is that NFL rules make batting the ball illegal, and the ball should have been awarded to the Lions at the 1 yard line.
No call, and the Lions go on to lose. And yes, there were lots of other chances the Lions had to win, and you can't hope a refs call won't go against you. But it still stunk. Again, a social media glimpse into the life of a Lions fan.
Friend 1: Could an ending be more Lions than that?
Me: If you're going to screw it up, do it with panache. And no.
Friend 2: did you see the latest on ESPN.. apparently, it looks like it shouldn't have been a touchback, but 1 and goal at the 6 inch line
Me: That would be as about as Lions as it gets.
That's a long-winded bit of rambling, but it's cheaper than therapy.
All teams run into odd rules, but mediocre teams have more ways of finding challenges. The Lions find challenges like no one else. They have a history of struggling with (i.e., losing, in part, because of) arcane rules, as this article explains: Illegal bat continues Lions' proud tradition of getting hosed by the NFL rulebook. The Illegal Bat now joins the Calvin Johnson Rule and the Jim Schwartz rule.
This mediocrity can have value, though. Finding all these weird challenges can help make the game better by helping highlight risks for future games that matter. Better officiating and better rules will not make the Lions a better football team, but the challenges they seem to goof into might make for more aware officials and better rules for playoff games, which usually feature better teams.
Of course, the Lions finally made the playoffs last year, only to lose, in part, because of an oddly changed call. Nonetheless, if the Lions can't be good, at least some good is coming from their games. Right?
You don't need to answer that.
Tuesday, September 29, 2015
The ABA has recommend amendment of 28 U.S.C. § 1332 through Resolution 103B, which
urges Congress to amend 28 U.S.C. § 1332, to provide that any unincorporated business entity shall, for diversity jurisdiction purposes, be deemed a citizen of its state of organization and the state where the entity maintains its principal places of business.
I'm on record as saying a legislative fix is how this should happen because I don't think courts should read "incorporated" in the act to include any entities other than corporations. I still believe that. However, I have come up with an argument that supports the idea in a way I had not thought of. I still disagree with the idea of a court adding entities other than corporations to 1332 absent legislative action, so I disagree with what follows, but I thought of an interesting argument that I almost find compelling , so I am putting it out there anyway.
In Hobby Lobby decision, Justice Alito stated:
No known understanding of the term "person" includes some but not all corporations. The term "person" sometimes encompasses artificial persons (as the Dictionary Act instructs), and it sometimes is limited to natural persons. But no conceivable definition of the term includes natural persons and nonprofit corporations, but not for-profit corporations.
The decision continues:
Under the Dictionary Act, "the wor[d] 'person' . . . include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals."
Section 1332 provides district courts jurisdiction over "citizens of different States," and citizens are people. Now, citizen is likely intended to mean natural persons, but 1332 says "a corporation shall be deemed to be a citizen of every State." So entities can be citizens. And citizens are people. And the Dictionary Act says LLCs are people, so one could argue that 1332's corporations clause is intended to include like entities.
I still think that's wrong, but I admit it is a better argument than some I have heard.
Tuesday, September 22, 2015
This post is related to another great post from Tom Rutledge at the Kentucky Business Entity Law Blog, Diversity Jurisdiction and Jurisdictional Discovery: The Third Circuit Holds That “Hiding The Ball” Will Not Work. Tom's post is about Lincoln Benefit Life Company v. AEI Life, LLC, No. 14-2660, 2015 WL 5131423, ___ F.2d__ (3rd Cir. Sept. 2, 2015), which is available here.
Lincoln Benefit allows a plaintiff, after a reasonable inquiry into the resources available (like court records and public documents), to allege complete diversity in good faith, if there is no reason to believe any LLC members share the same state of citizenship. Thus, the diversity claim can be made on "information and belief." Tom explains that
While it may do nothing to address the fact that diversity jurisdiction may be unavailable consequent to de minimis indirect ownership . . . it does limit the ability of a defendant to “hide the ball” as to its citizenship while objecting that the other side has not adequately pled citizenship and therefore diversity.
This concern arises out of the fact that LLCs, as unincorporated associations, are treated like partnerships for purposes of federal diversity jurisdiction, meaning that an LLC is a citizen of every state in which it has a member. Thus, if an LLC has members that are partnerships or other LLCs, then a plaintiff would need to drill down all the way until they find get to natural people or corporations to know all the states in which the LLC is a citizen. (As a reminder, under 28 U.S.C. § 1332, federal diversity jurisdiction requires that the dispute both involve more than $75,000 and that there be complete diversity between all plaintiffs and all defendants.)
For corporations, the statute provides: "a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business . . . ."
Some may argue that LLCs, with the limited liability shield for all members, are just like corporations and should be treated as such for diversity purposes. I think there is instant appeal to treating LLCs as corporations in that setting, but after further thought, I don't think it's as simple as it looks (at least, not for me). As one who continues to argue that LLCs and corporations are distinct entities, I think there is a real (and valid) difference between "incorporated" as required under § 1332 and the more general term, "formed."
I would agree that one can make a reasonable argument (though I think contrary to § 1332, and not my choice) that where limited liability applies to all unit holders (or members), then the corporation rule for diversity should apply to all entities that are formed (not just incorporated). If so, though, then that would likely include LPs and LLLPs, too, because any entity that requires filing, (i.e., all limited liability entities) could then reasonably be views as "formed" under state law. That is okay, if that's the desired policy, but it's not limited to LLCs in that case.
Still, there are those who would argue that one can interpret "incorporated" in § 1332 to mean "formed," but I think that's wrong. "Formed" has its origins in partnership law. See, e.g., Uniform Partnership Act § 202 (1997) ("Formation of partnership."). Id.§ 202(c) ("In determining whether a partnership is formed, the following rules apply . . . ."). A legislature could make such a change, but it should be a legislative change.
Despite the best efforts of thousands of courts, LLCs are formed, not "incorporated." See Uniform LLC Act § 202(d): "(1) A limited liability company is formed when the [Secretary of State] has filed the certificate of organization and the company has at least one member, unless the certificate states a delayed effective date pursuant to Section 205(c)." As such, under current law for federal diversity, "incorporated" applies to corporations only.
Beyond that, as to LLCs specifically, I think there is a difference between member-managed LLCs and manager-managed LLCs in carrying out the corporate analogy. That is, a manager-managed LLC is (usually) quite comparable to a corporation and a member-managed LLC is more easily compared to a partnership. That raises the question: should there be a control test, if that's really the question, as to how diversity applies? There is no control test for close corporations, either, I would note, and instead a bright line is applied by entity, not control or risk of liability.
Furthermore, if it's just the concept of complete limited liability, I would argue that an LP with a corporate GP (that only operates for the purposes of that LP) is functionally similar to an LLC in terms of liability, yet there seems to be less of a question how we analyze the LP for diversity purposes.
It seems to me Lincoln Benefit got the test right, under current law. Let's see how that goes before we start conflating LLCs and corporations in yet another area.
Tuesday, September 15, 2015
The New York Times reports that Facebook may add a "dislike" button. I am with the many people (probably now all or mostly over 35) who use Facebook and have thought a dislike button would be a nice option.
"Just had a car accident." "Lovely dog just passed." "Kids barfing wildly." Dislike.
But I assume Facebook has skipped this for a reason. That is, it could be used in a terrible manner.
"Proud to announce we're engaged." "Welcome to our new baby boy." "This is my new painting." Dislike.
I understand the desire for symmetry, but dislike is probably not the button for a good experience with Facebook. Maybe an "I'm sorry" or "That's too bad" button, would work better. I don't know, but when I put this blog post on Facebook, a little part of me will be happy there's no dislike button.
Not that the lack of such a button ever stopped a snarky comment or six.
Tuesday, September 8, 2015
Limited liability companies (LLCs) are often viewed as some sort of a modified corporation. This is wrong, as LLCs are unique entities (as are, for example, limited partnerships), but that has not stopped lawyers and courts, including this nation's highest court, from conflating LLCs and corporations.
About four and a half years ago, in a short Harvard Business Law Review Online article, I focused on this oddity, noting that many courts
seem to view LLCs as close cousins to corporations, and many even appear to view LLCs as subset or specialized types of corporations. A May 2011 search of Westlaw’s “ALLCASES” database provides 2,773 documents with the phrase “limited liability corporation,” yet most (if not all) such cases were actually referring to LLCs—limited liability companies. As such, it is not surprising that courts have often failed to treat LLCs as alternative entities unto themselves. It may be that some courts didn’t even appreciate that fact. (footnotes omitted).
I have been writing about this subject again recently, so I decided to revisit the question of just how many courts call LLCs “limited liability corporations” instead of “limited liability companies.” I returned to Westlaw, though this time it's WestlawNext, to do the search of cases for the term "limited liability corp!". (Exclamation point is to include corp., corporation, and corporations in my search, not to show excitement at the prospect.)
The result: 4575 cases use the phrase at least once.
That means that, since May 2011, 1802 additional cases have incorrectly identified the definition of an LLC. (I concede that some cases may have used the term to note it was wrong, but I didn't find any in a brief look.)
Even the United States Supreme Court published one case using the incorrect phrase, and it was decided around three years after my article was published. See Daimler AG v. Bauman, 134 S. Ct. 746, 752, 187 L. Ed. 2d 624 (2014) ("MBUSA, an indirect subsidiary of Daimler, is a Delaware limited liability corporation."). (Author's note: ARRRRGH!) The court also stated, "Jurisdiction over the lawsuit was predicated on the California contacts of Mercedes–Benz USA, LLC (MBUSA), a subsidiary of Daimler incorporated in Delaware with its principal place of business in New Jersey." Id. (emphasis added). (Author's Note: Really?)
This opinion was written by Justice Ginsberg, and joined by Chief Justice Roberts, and Justices Scalia, Kennedy, Thomas, Breyer, Alito, and Kagan. Justice Sotomayor filed a concurring opinion that did not, unfortunately, concur in judgment but disagree with the characterization of the LLC. The entire court at least acquiesced in the incorrect characterization of the LLC!
It appears things have to get worse before they can get better, but I will remain vigilant. I’m working on an article that builds on this, and it will hopefully help courts and practitioners keep LLCs and corporations distinct.
In the meantime, I humbly submit to Chief Justice Roberts, and the rest of the Court, that there are already some useful things in law reviews.
September 8, 2015 in Business Associations, Case Law, Corporations, Joshua P. Fershee, Law Reviews, Lawyering, LLCs, Partnership, Research/Scholarhip, Unincorporated Entities | Permalink | Comments (2)
Tuesday, September 1, 2015
A couple weeks ago, I wrote Ten Promises For New Law Students to Consider, which discussed the promises I made to myself when I went to law school. It seems to me appropriate that I should follow up with something applies to me now.
This list for law professors (or at least, this law professor) includes some of the promises I made myself when I left practice, and some that have evolved over the almost decade I have been teaching. It's hard to believe this is my tenth year as a full-time teacher.
To that end, here are my suggestions for faculty members, based on my experience. I don't always keep these promises, but (as I did with the law school promises) I try. This list is even less exhaustive than my last effort, and I welcome additions to the list in comments. I am not going to lie, this was a harder list to make, and it's a challenge to fulfill them all (especially #6).
(1) To be intentional. That is, I will choose books, assign readings and exercises, and draft paper assignments and exams with a purpose. They may not always be the best choice, but there will be a reason (supported by good intent) they were chosen.
(2) To remember, whether it's related to demeanor, effort, or analysis, that I cannot be the benchmark for all my students. They are not me, and I am not them. We all have a story, and it is (in some way) unique.
(3) To remember that, while kindness, sympathy, and empathy are essential skills to being a good teacher, colleague, and human being, they are not inconsistent with high expectations.
(4) To keep connected to practice and to people with non-academic jobs so that I can keep current and grounded in the practical realities of life as an attorney and member of a broader community.
(5) To take pride (and risks) in my work in an effort to be better at what I do and to evolve in all aspects of my work -- teaching, research, and service. (Old dogs can learn new tricks.)
(6) To recognize boundaries and to be kind and patient with my family because who I am at home impacts who I am at work (and vice versa).
(7) To do my best to get enough sleep and enough exercise.
(8) To find the fun in my work when I can, and not forget that one of the best parts of being an academic is writing about things I choose (not that my clients choose) and taking positions I think are right.
(9) To be friendly and helpful to build relationships so that the community I know is a community I want. This includes my faculty colleagues, our staff and support colleagues, and our student colleagues.
(10) To understand that I cannot be everything to everyone and that opportunity costs are real. Thus, as I seek to fulfill John Wooden's ideal -- "Don't measure yourself by what you have accomplished, but by what you should have accomplished with your ability."-- I will keep in mind that accomplishments are more than articles written and classes taught. They include those, but they also include things like laughs, hugs, bike rides, soccer games, swing sets, sunsets, beaches, and good food. Beer, wine, and cocktails, are sometimes a nice touch, too.
Tuesday, August 25, 2015
I know I am Johnny One Note on this, but while researching another project, I decided to check again if litigators (and courts) are still referring to veil piercing of LLCs as "corporate veil piercing." As I have noted before, for LLCs, it should be "piercing the LLC veil" or, more generally, "piercing the limited liability veil." Or "PLLV," as I like to call it. (Not as catchy is "PCV," but it is far more universally accurate.)
Sure enough, last week, a New York court refused to denied the defendants' motion to dismiss the plaintiff's third amended complaint, deciding that "Plaintiff has adequately pled facts sufficient to defeat the Individual Defendant's motion to dismiss Plaintiff's claim for piercing the corporate veil." Capital Inv. Funding, LLC v. Lancaster Grp. LLC, No. CIV.A. 8-4714 JLL, 2015 WL 4915464, at *7 (D.N.J. Aug. 18, 2015). But Plaintiff is seeking to piercing the veil of an LLC. As such, I think they need a fourth amended complaint.
Also last week, in an unpublished opinion, a Minnesota court upheld a decision to pierce the limited liability veil of Alpha Law Firm, LLC. The court found the court below "did not abuse its discretion by piercing Alpha's corporate veil." Guava LLC v. Merkel, No. A15-0254, 2015 WL 4877851, at *8 (Minn. Ct. App. Aug. 17, 2015). Again, though, the LLC did not have such a veil because it was not a corporation.
This should be easier to keep straight in Minnesota than most places. Minnesota has a statute the specifically allows for LLC veil piercing, and states that the corporate law concept applies to the LLC. But it also calls it "piercing the veil" in the LLC statute, which means the veil is an LLC veil, and not a corporate one. The statute:
. . . .
Subd. 2.Piercing the veil. The case law that states the conditions and circumstances under which the corporate veil of a corporation may be pierced under Minnesota law also applies to limited liability companies.
I am sympathetic (to a point). As Guava points out, when a statute brings corporate veil piercing into the LLC world, it can be awkward. Another excerpt from Guava makes that obvious:
Hansmeier next challenges the district court's decision to pierce on the merits. “In certain circumstances, it is possible to ‘pierce the corporate veil’ and hold a shareholder personally liable .” Gunderson v. Harrington, 632 N.W.2d 695, 705 (Minn.2001) (Gilbert, J., dissenting) (citing Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., 283 N.W.2d 509, 512 (Minn.1979)). Veil piercing applies to LLCs as well as corporations. Minn.Stat. § 322B.303, subd. 2 (2014). A court may pierce a corporate veil when there is fraud or when the shareholder is the “alter ego” of the corporation. Gunderson, 632 N.W.2d at 705.
Hansmeier next challenges the district court's decision to pierce on the merits. “In certain circumstances, it is possible to ‘pierce the corporate veil’ and hold a shareholder personally liable .” Gunderson v. Harrington, 632 N.W.2d 695, 705 (Minn.2001) (Gilbert, J., dissenting) (citing Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., 283 N.W.2d 509, 512 (Minn.1979)). A court may pierce a corporate veil when there is fraud or when the shareholder is the “alter ego” of the corporation. Id. at 705. Veil piercing applies to LLCs as well as corporations. Minn.Stat. § 322B.303, subd. 2 (2014). Thus, a court may pierce the veil of an LLC when there is fraud or when the member is the “alter ego” of the LLC. See Minn.Stat. § 322B.303, subd. 2 (2014); Gunderson, 632 N.W.2d at 705.
Tuesday, August 18, 2015
Over at the Kentucky Business Entity law blog, Thomas Rutledge discusses a recent decision from the United States District Court for the Southern District of Indiana, affirming a Bankruptcy Court decision that finding that when a member of an LLC with voting control personally files bankruptcy, that right to control the LLC became a vested in the trustee because the right was part of the bankruptcy estate. The case is In re Lester L. Lee, No. 4-15-cv-00009-RLY-WGH, Adv. Proc. No. 14-59011 (S.D. Ind. August 10, 2015) (PDF here).
A key issue was that the bankruptcy filer (Lester Lee) had 51% of the vote, but no shares. The court then explains:
7. . . . [t]he Operating Agreement states . . .
(D) Each member shall have the voting power and a share of the Principal and income and profits and losses of the company as follows:
Member’s Name (Share) (Votes)
Debra Jo Brown (20%) (10)
Brenda R. Lee (40%) (20)
Larry L. Lee (20%) (10)
Melinda Gabbard (20%) (10)
Lester L. Lee (0%) (51)
. . . .
8. . . . Trustee’s counsel became aware of the Debtor’s 51% voting rights as a member, and that pursuant to applicable law, “this noneconomic interest became property of the estate subject to control of the Trustee on the filing of the petition pursuant to 11 U.S.C. § 541.”
Here's Rutledge's take:
On appeal, the Court’s primary focus was upon whether the right to vote in an LLC constitutes “property of the estate,” defined by section 541(a)(1) of the Bankruptcy Code as “all legal or equitable interest of the Debtor in property as of the commencement of the case. After finding that Lee could be a “member” of the LLC notwithstanding the absence of any share in the company’s profits and losses or the distributions it should make, the Court was able to determine that Lee was a member. In a belt and suspenders analysis, the Court determined also that the voting rights themselves could constitute “economic rights in the company” affording him the opportunity to, for example, “ensure his continued employment as manager” thereof.
In a response to Rutledge's blog, Prof. Carter Bishop notes,
The court did not state the trustee could exercise those voting rights. The next step is crucial. If the operating agreement is an executory contract of a multi-member LLC, BRC 365 will normally respect LLC state law restrictions as “applicable law” and deny the trustee the right to exercise the debtor’s voting rights (similar outcome to a non-delegable personal service contract).This was a managing member of a multi-member LLC, so I assume BRC 365 blocks the trustee’s exercise.
Rutledge notes that could be the case, but it's also possible the Lee court was saying we already decided that -- voting rights are part of the estate.
I find all of this interesting and important to think about, especially given my limited bankruptcy knowledge. My main interest, though, is how might we plan around such a situation? Many LLC statutes provide some options.
For example, some states allow those forming an LLC to adopt a provision in the Operating Agreement that makes bankruptcy an event that triggers "an event of dissociation,” which would make the filer (or his or her successor in interest) no longer a member. See, e.g., Indiana Code sec. 23-18-6-5(b) ("A written operating agreement may provide for other events that result in a person ceasing to be a member of the limited liability company, including insolvency, bankruptcy, and adjudicated incompetency."). This raises the question, then, of whether the bankruptcy code trumps this LLC code such that the bankruptcy filing creates an estate that makes it so the state LLC law cannot operate to eliminate the filer as a member.
The answer is no, the state law doesn't trump the bankruptcy code, but the state provision can still have effect. A recent Washington state decision (petition for review granted), relying on Virginia law, determined that where state law dissociates a member upon a bankruptcy filing, the trustee cannot be a member, and thus the trustee cannot exercise membership rights:
[I]nstead of dissociating the debtor, Virginia law operated to dissociate the bankruptcy estate itself. The court concluded, “Consequently, unless precluded by § 365(c) or (e), his bankruptcy estate has only the rights of an assignee.
Given the similarities between Virginia's and Washington's treatment of LLC members who file for bankruptcy, we adopt the reasoning of Garrison–Ashburn [253 B.R. 700 (Bankr. E.D. Va. 2000)]. By applying Washington law, we conclude that RCW 25.15.130 dissociates a bankruptcy estate such that it retained the rights of an assignee under RCW 25.15.250(2), but not membership or management rights, despite the provisions of 11 U.S.C. § 541(c)(1).
The court then needed to decided whether § 365 allows a member to retain his or her membership. Under Washington partnership law, as applied to the bankruptcy code, the court explained:
under § 365, the other partners are not obligated to accept an assumption of the partnership agreement. Partnerships are voluntary associations, and partners are not obligated to accept a substitution for their choice of partner. The restraint on assumability also makes the deemed rejection provision of § 365 inapplicable to the partnership agreement. Therefore, § 365(e)'s invalidation of ipso facto provisions does not apply, and state partnership law is not superseded. The debtor-partner's economic interest is protected by other sections of the bankruptcy code, but he no longer is entitled to membership.
Tuesday, August 11, 2015
It is orientation time for West Virginia University College of Law, and I am sure other law schools around the country. If not, it's coming soon. I always like the buzz of the new students returning to the building, though it is a little bittersweet as the time I had for other projects is clearing nearing the end. All in all, though, I miss the students and the activity, so I'm happy the new year is getting ready to start.
The combination of excitement and trepidation (if not fear) seems to be what stands our to me the most. It makes sense. Law school is a big undertaking, and it's not easy. And it can be hard because it can be challenging both academically and socially. As my wife has noted, "Law school can be more like high school than high school." (I had a distinct advantage in skipping a lot of that because we were married when we started law school.)
To that end, here are my suggestions, based on the promises I made to myself when I left my job and went back to law school. Give it a try (and I welcome additions to the list in comments.)
(1) To read everything assigned. Really. Not like undergrad, but actually read it all. Then read it again. And again if I need to.
(2) To be honest with myself about whether I really understand what I' m reading so I know if I should read it again.
(3) To view Black's Law Dictionary as my friend and use it liberally, rather than guessing at words from context.
(4) To remember I don't know Latin very well (and see number 3 above).
(5) To go to every class -- every class -- that I am able to attend and participate in that class so that I can learn what I know or don't know, not to so show what I know (or think I know).
(6) To recognize that no one class is more important (or easier or harder) than another. I will not skip Torts or Contracts to work on my Legal Writing memo. It all needs to happen.
(7) To do my best to get enough sleep.
(8) To remember that everyone has a story and not assume I know it.
(9) To be friendly and build relationships so that the community I know is a community I want.
(10) To do my best work and know that my real competition is myself, so that when I finish an exam or paper, even though I don't know how well I did, I will know I did everything I could to do well. As John Wooden said, "Don't measure yourself by what you have accomplished, but by what you should have accomplished with your ability."
Tuesday, August 4, 2015
Readers of this blog know I am fond of writing about Henry Ford and the Dodge v. Ford case (PDF here). This summer, I am still working my way through Fordlandia, by Greg Grandin. It's a really interesting read.
Henry Ford had plans to build a town in the Amazon that would run like an ideal American town. The industry would be rubber for car tires, and he was sure he could make a town that produced rubber AND moral people. He was wrong.
The book provides more about Ford than just his Amazon city planning. It highlights all sorts of what I will call "interesting" ideas Ford had (many of the quite appalling), and it provides context for a person who was far more interesting and disruptive than many people appreciate. A good summary of the book is available from NPR here, where the author explains:
"Ford basically tried to impose mass industrial production on the diversity of the jungle," Grandin says. But the Amazon is one of the most complex ecological systems in the world — and didn't fit into Ford's plan. "Nowhere was this more obvious and more acute than when it came to rubber production," Grandin says.
Ford was so distrustful of experts that he never even consulted one about rubber trees. If he had, Grandin says, he would have learned that plantation rubber can't be grown in the Amazon. "The pests and the fungi and the blight that feed off of rubber are native to the Amazon. Basically, when you put trees close together in the Amazon, what you in effect do is create an incubator — but Ford insisted."
As Grandin explains, Ford's plans are a lasting disaster:
[T]he most profound irony is currently on display at the very site of Ford’s most ambitious attempt to realize his pastoralist vision. In the Tapajós valley, three prominent elements of Ford’s vision—lumber, which he hoped to profit from while at the same time finding ways to conserve nature; roads, which he believed would knit small towns together and create sustainable markets; and soybeans, in which he invested millions, hoping that the industrial crop would revive rural life—have become the primary agents of the Amazon’s ruin, not just of its flora and fauna but of many of its communities.