Tuesday, April 26, 2016

Top Five Best Beers "Created" By Law

Beer is good.  It's an opinion based on serious research.  A lot of beer laws are not good.  They often restrict beer distribution, limits sales, and generally make it harder for us to access good beverages.  

There have been some benefits of these restrictions.  The main one, probably, is that it provided the storyline for Smokey and The Bandit: 

Big Enos (Pat McCormick) wants to drink Coors at a truck show, but in 1977 it was illegal to sell Coors east of the Mississippi River without a permit. Truck driver Bo "Bandit" Darville (Burt Reynolds) agrees to pick up the beer in Texas and drive it to Georgia within 28 hours. When Bo picks up hitchhiker Carrie (Sally Field), he attracts the attention of Sheriff Buford T. Justice (Jackie Gleason). Angry that Carrie will not marry his son, Justice embarks on a high-speed chase after Bandit.

(Note that IMDB's description -- "The Bandit is hired on to run a tractor trailer full of beer over county lines in hot pursuit by a pesky sheriff." -- seems to have confused the film with the Dukes of Hazzard.  Crossing state, not county, lines was the issue and Rosco P. Coltrane was not part of the Bandit films.  I digress.)  

In my home state of West Virginia, getting craft beer, until 2009, was hard. Beer with more than 6% ABV could not be sold in the state. All beer in the state is "non-intoxicating beer" but the definition was raised from 6% so that it now includes (and allows) all malt-based beverages between 0.5% and 12% ABV.  

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April 26, 2016 in Comparative Law, Entrepreneurship, Joshua P. Fershee, Law and Economics, Legislation, Licensing | Permalink | Comments (0)

Tuesday, April 19, 2016

Veil Piercing or Alter Ego Doctrine in a Criminal Suit? No Thanks.

A recent Illinois case uniquely applied the alter ego doctrine in the context of a criminal case.  See People v. Abrams, 47 N.E.3d 295, ¶¶ 57-61, 399 Ill. Dec. 790 (2015) ( slip op. PDF here ).  In my view, not quite right, either.

In the case, the defendant (Abrams) stole $1.87 million from the victim (Lev), which led to a restitution order for that amount and a twelve-year prison sentence for Abrams.  The conviction was for a Class 1 felony, for the the theft of property exceeding $500,000.  Id.¶ 23 (citing 720 Ill. Comp. Stat. Ann. 5/16-1(a(2) (West 2012)).  The statute provides, "Theft of property exceeding $500,000 and not exceeding $1,000,000 in value is a Class 1 non-probationable felony." 720 Ill. Comp. Stat. Ann. 5/16-1(b)(6.2). 

On appeal, the defendant argued the indictment was wrong in that it stated the money was stolen from Lev, when most of the money actually belonged to Lev's company, The Fred Lev Company (presumably a corporation, but that is not stated expressly).   Abrams claimed: 

the State did not prove he obtained “unauthorized control” of more than $500,000 of Lev’s property. Abrams recognizes the evidence presented at trial established that over $1.8 million was taken. Abrams contests the finding that the entire amount was taken from Lev and not The Fred Lev Company. 

Abrams, 47 N.E.3d 295 ¶ 57.  The court countered: "This is a distinction without a difference. Two separate doctrines of law guide our decision." Id. Although I think the court is probably right on the outcome, one of the rationales is wrongly explained.

The court's first assertion is as follows: 

First, the alter ego doctrine of corporate law was developed for and has been traditionally used by third persons injured due to their reliance on the existence of a distinct corporate entity. In re Rehabilitation of Centaur Insurance Co., 158 Ill. 2d 166, 173 (1994). “The doctrine fastens liability on the individual or entity that uses a corporation merely as an instrumentality to conduct that person’s or entity’s business.” Peetoom v. Swanson, 334 Ill. App. 3d 523, 527 (2002). In the context of “piercing the corporate veil,” an alter ego analysis starts with examining the factors which reveal how the corporation operates and the particular party’s relationship to that operation. A.G. Cullen Construction, Inc. v. Burnham Partners, LLC, 2015 IL App (1st) 122538, ¶ 43. Generally, did the corporation function simply as a facade for the dominant shareholder? Id. Here, without question, the corporate entity, The Fred Lev Company, served as the alter ego or business conduit of Lev, and Abrams’ own testimony confirmed it. 

Id.¶ 58. This is an overreach, as far as I am concerned, and I don't like the ease with which the court uses veil piercing without a detailed analysis. I believe that veil piercing, if it is to be used, should have some consistency, though I know that's now how it tends to work (i.e., without consistency).  Here, would the court have pierced the veil if this were a creditor bringing suit directly against Lev because his corporation couldn't satisfy a judgment? I think it would be wrong to do so on similar facts, so I think it is careless to apply the alter ego doctrine in this manner here.  

The court continues:

Second, the indictments sufficiently apprised Abrams of the charges against him. See People v. Collins, 214 Ill. 2d 206, 219-20 (2005) (any variance was neither material nor prejudicial to defendant). We do not believe that the defendant was in any way prejudiced by the indictments at issue. 

Id.¶ 59. I totally and completely buy this.  And, in addition, the court noted:

Even more convincing is that in opening statements to the jury, defense counsel told the jury that the checking accounts “were not used solely for [Lev’s and Abrams’] corporate work. They didn’t separate the corporation from their personal lives and personal expenses. *** They were using everything that went into that corporate account and writing checks on it for their own personal private, for their own person use. There was a commingling.” Additionally, defense counsel referred to “Fred Lev and Company” as being both Abrams and Lev. In closing argument, defense counsel argued that the company was “a small-time operation” with “one corporate book” that both Lev and Abrams used as “their own personal piggybank.” 

Id.¶ 60.  In the trial, it was determined that the statutory felony monetary amount threshold was met.  And the defendant admitted that he considered the funds to be Lev's and that he (the defendant) disregarded the entity.  I see no notice problem as to the defendant, and I have no concern that a jury couldn't understand whether the theft occurred in the amount claimed. I can see an argument, perhaps, that the prosecution should still get it right as to whom the money actually belonged, but it seems to me correct to say the crime was properly analyzed and assessed as to the criminal elements, so the claim is harmless error in this instance. Lev would have been the one to assert the claim for the Company, so it is hard to see how Abrams was harmed. 

I will maintain, though, that the veil piercing rationale is unnecessary and overstated. (I might be comfortable if they used the analogy to explain harmless error, but the way it was done is too much for me.)  Furthermore, as to the judgment for restitution to Lev, it is wrong. That money (or some portion of it) belongs to The Fred Lev Company.  Suppose there are creditors out there who have gone unpaid.  Or they are unpaid down the road.  At a minimum, the funds stolen from the company should go back through the company so it could be clear what funds were there and should have been available. Thus, as to the charges, I think the court probably got it right.  But as to respecting the entity (and protecting creditors now, and in the future), this could have been handled better. 

H/T Prof. Gary Rosin

April 19, 2016 in Business Associations, Corporations, Joshua P. Fershee, White Collar Crime | Permalink | Comments (1)

Tuesday, April 12, 2016

Business Judgment Rule Protected?

Short post today:  I spent Business Organizations today whining that Benefit Corporations dilute the business judgment rule for regular corporations.  I do this, in part, because I hate it, but I also do it because students can see (I think) how the concept of the business judgment rule works in practice. 

I left class to find that Coca-Cola is providing paid leave for new fathers, not just new mothers.  I fully support this, and think it is both wise and moral.  The report notes: 

Coke said one motivation is to help it recruit and retain millennials.

This makes total sense to me. And I think it good business.  But I still hope the reason to say this is that it is (in the Board's judgment) good business, and not because the board thinks they otherwise need to justify such a decision. 

April 12, 2016 in Corporations, Joshua P. Fershee, Law and Economics | Permalink | Comments (4)

Tuesday, April 5, 2016

Six Years and $20B Later: Revisiting BP and the Role of Government

AP reported yesterday:

NEW ORLEANS (AP) — A federal judge in New Orleans granted final approval Monday to an estimated $20 billion settlement over the 2010 BP oil spill in the Gulf of Mexico, resolving years of litigation over the worst offshore spill in the nation's history.

The settlement, first announced in July, includes $5.5 billion in civil Clean Water Act penalties and billions more to cover environmental damage and other claims by the five Gulf states and local governments. The money is to be paid out over roughly 16 years. The U.S. Justice Department has estimated that the settlement will cost the oil giant as much as $20.8 billion, the largest environmental settlement in U.S. history as well as the largest-ever civil settlement with a single entity.

The settlement with the government (private claims remain) reminds me of a post I made almost six years ago, where I argued that it was not the federal government's job to avoid the harm of such an oil spill, and it was neither advisable nor reasonable to expect that the government could handle such an event.  I explained my thinking

Just imagine what would have happened six months [before the oil spill] if the President had suggested a new agency that would be trained and funded to clean up disasters like this, granted the authority to take over an oil well at the first sign of trouble, and this agency would be funded by a large tax on oil companies. You can be sure that the response would have been that the government shouldn’t be in this business because the oil companies are better trained, better prepared, and better able to respond to such problems. I guarantee it.

Yes, perhaps the federal government could have been swifter than it has been, especially with regard to protecting the coast. However, in this situation, President Obama’s primary mistake was likely listening to BP when they said they could, and would, handle the problem. I find it curious that many of the same people who often argue that government should stay out of the way of big businesses now want to lay blame at the feet of a president who did just that.

In this political era where candidates suggest that the government should be in business of building big walls (funded, and perhaps also built, by other governments) and free college tuition, I think it's worth taking another close look at what we really should expect of government.  (For the record, of the two ideas proposed above, I hate the first idea, and I am skeptical of the second. I appreciate the sentiment behind the free college tuition idea, but highly question the wisdom or feasibility in practice, even if I would prefer that someone else pay my law school loans.) 

The reality is that, where we allow highly specialized industrial activity, we cannot ensure there will be no harm.  We can try create protections, and we can enact penalties for failures to follow the rules and remediate harm. This is not to say everything was done correctly leading up to the Deepwater Horizon spill.  There were significant regulatory failures to accompany BP's failures. But when we look for solutions, we still need to be realistic about what role the government can and should take. About one thing I am confident: it is still not a good use of government funding to put a fleet of government-funded, oil-well plugging submarines at the ready. 

April 5, 2016 in Current Affairs, Joshua P. Fershee, Legislation, Shareholders | Permalink | Comments (0)

Tuesday, March 29, 2016

Wyoming Cleans Up Veil Piercing in LLC Act

Wyoming has added two new sections to its Code Section 17-29-304, which is related to veil piercing of a Wyoming LLC.  The additions are a response of a court decision from last year, Green Hunter Energy, Inc. v. Western Ecosystems Technology, Inc., No. S-14-0036, 2014 WL 5794332 (Wyoming Nov. 7, 2014), which is summarized nicely here. The first added section provides:
(c) for purposes of imposing liability on any member or manager of a limited liability company for the debts, obligations or other liabilities of the company, a court shall consider only the following factors no one (1) of which, except fraud, is sufficient to impose liability:
 
(i)         Fraud;
(ii)        Inadequate capitalization;
(iii)       Failure to observe company formalities as required by law; and
(iv)       Intermingling of assets, business operations and finances of the company and the members to such an extent that there is no distinction between them. 
Although some might view this as a significant change to the veil piercing of a Wyoming LLC, this largely confirms and clarifies the law prior to GreenHunter.  The rule from that case was set forth as follows: 
The veil of a limited liability company may be pierced under exceptional circumstances when: (1) the limited liability company is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the limited liability company; and (2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness, or inequity.
GreenHunter Energy, Inc. v. W. Ecosystems Tech., Inc., 2014 WY 144, ¶ 27, 337 P.3d 454, 462 (Wyo. 2014).
 
The GreenHunter court provided the above rule, then stated that several factors could be considered in assessing whether both prongs of the test were met.  These factors included fraud, inadequate capitalization, and intermingling of assets.  "No single category, except fraud, alone justifies a decision to disregard the veil of limited liability; rather, there must be some combination of them, and of course an injustice or unfairness must always be proven." GreenHunter Energy, 2014 WY 144, ¶ 34, 337 P.3d at 464.  
 
This amendment, in fact, adds another factor courts can consider in LLC veil piercing: "Failure to observe company formalities as required by law." As such, this law clarifies the state LLC law, which is an improvement over the prior iteration, in my view. I do have a concern that some courts might miss that the need for "company formalities" as a potential factor for veil piercing is limited only to the formalities that are "required by law," which also means very few such formalities. "Company formalities" are not "corporate formalities," and I hope courts remember this. 
 
In addition, the Wyoming legislature added:   
(d)  In any analysis conducted under subsection (c) of this section, a court shall not consider factors intrinsic to the character and operation of a limited liability company, whether a single or multiple member limited liability company.  Factors intrinsic to the character and operation of a limited liability company include but are not limited to:
 
(i)         The ability to elect treatment as a disregarded or pass-through entity for tax purposes; 
(ii)        Flexible operation or organization including the failure to observe any particular formality relating to the exercise of the company’s powers or management of its activities;
(iii)       The exercise of ownership, influence and governance by a member or manager;
(iv)       The protection of members’ and managers’ personal assets from the obligations and acts of the limited liability company.
This section is, to me, spot on.  GreenHunter did not disabuse the notion of using tax classification as a factor in veil piercing analysis, and that was wrong.  Tax status is irrelevant to limited liability (a general partnership is a pass-through entity) and using any factors of an LLC acting like an LLC is inherently flawed. 
 
Overall, if the state is going to allow veil piercing of LLCs, then I support a more clear statute. This is an improvement over the original statute, which did not include veil piercing, but Wyoming courts allowed it anyway. Still, the better read on GreenHunter, is not really veil piercing, it would have been some version of enterprise liability, though I know some people think it has to be veil piercing when the entities in questions are vertically related, and reserve enterprise liability for horizontal relationships.  I don't agree, but that's for another post. 
 

March 29, 2016 in Joshua P. Fershee, Legislation, LLCs | Permalink | Comments (4)

Tuesday, March 22, 2016

Top Five LLC Mistakes of March

March has provided a slate of mistakes as to entity form, focusing (as it almost always does) on limited liability companies (LLCs) and various outlets calling such entities "corporations."  These are not in any particular order, but lists are neat. Enjoy! 

(1 ) Politifact Checks Trump Facts, Forgets to Check Entity Law Facts

In an article on Politifact.com, Donald Trump incorrectly says Virginia winery is the largest on East Coast, which determines that Trump's claims about the size of a winery that his son runs to be false and notes some statements are incorrect. Ironically, the article also claims: 

A legal disclaimer on the winery website says the GOP presidential candidate doesn’t own the winery. The venture is a limited liability corporation, and its owners are not a matter of public record.

Wrong. The winery site says, "Trump Winery is a registered trade name of Eric Trump Wine Manufacturing LLC, which is not owned, managed or affiliated with Donald J. Trump, The Trump Organization or any of their affiliates."  An LLC is still not a corporation. 

(2) Big Bang Theory: Big Brains Don't Know Entity Law

I don't watch the Big Bang Theory, but my colleague at Valparaiso University, Professor Rebecca J. Huss, is a reader of this blog who also cares about precise language with regard to LLCs alerted me to this one.  The story line of the March 10 show (the show can be found here) related to a the creation of a partnership agreement for some of the characters. One thing that is realistic is that the folks think it's a good idea to form an entity and draft contract language without a lawyer.  One character says he has some concerns about the partnership, and another replies with this "joke": "Are you suggesting a limited liability corporation, because I did not LLC that coming." (The offending segment is roughly 14 minutes into the show.) (This was also covered at Kentucky Business Entity Law Blog, here, which noted, "Ughhhh.   LLC ≠ limited liability corporation.  Rather, LLC = limited liability company.") 

(3) Ghost LLCs Masquerading as Corporations

The Washington Post last week ran a story, How ‘ghost corporations’ are funding the 2016 election. The article discusses how entities can be used to shield those backing political candidates. The article states: 

Advocates for stronger campaign-finance enforcement fear there will be even more pop-up limited liability corporations (LLCs) funneling money into independent groups, making it difficult to discern the identities of wealthy players seeking to influence this year’s presidential and congressional contests.

. . . .

Many corporate givers this cycle are well-established hedge funds, energy companies and real estate firms. But a significant share of the money is coming from newly formed LLCs with cryptic names that offer few clues about their backers.

That LLC definition is wrong, and LLC giving is not "corporate" giving. Perhaps political funding via opaque entities is a problem, but we should try to get our entities right.  There may be problems (and solutions) unique to one entity form or another, so this could be more than semantic.  

 

(4) Pass-Through Tax Law Isn't Really About Corporations (mostly)

The Topeka Capital-Journal Editorial Board wrote on March 20: LLC loophole needs plugging: Even some small business owners think the tax exemption should be eliminated.  The editorial is related to a 2012 Kansas law, HB 2117, which eliminated taxes on pass-though entities like LLCs, S corps, partnerships, farms, and sole proprietorships. (So, I admit, S corps are corporation, but they are essentially partnerships for federal tax purposes.)  Even though I agree with some their concerns, the board makes a couple mistakes here when they assert that the bill "was simply an unconditional gift from the state for anyone who has created an entity called a limited liability corporation (LLC)."

First, it assumes that just LLCs get the benefit, which is not true. All pass-though entities benefit.  Second, of course, the "limited liability corporation" is a corporation, not an LLC, and the corporation (other than one chosen to be an S corp) does not get the benefit of the law.  

(5) Court Gets Entity Right, Regulations Not Quite

I'm not one to leave the courts out of this.  Judge Robert M. Dow, Jr., of the United States District Court, Northern Illinois has an incredible resume.  A member of Phi Beta Kappa and a Rhodes Scholar, his credentials are impressive.  In a recent decision, though, his opinion refers to a defendant LLC correctly, but then goes on to say that Treasury Regulations are silent on treatment of "limited liability corporations." Alas, that's not accurate.  Here's the passage: 

It is undisputed that, as of the date of Anderson Bros.' withdrawal from the fund, Anderson Bros. (an Illinois corporation) was 100% owned by Anderson. Anderson therefore had a “controlling interest” in Anderson Bros. 29 U.S.C. § 1.414(c)-2(b)(2)(A). At the same time, Defendant (an Illinois limited liability company) was also solely owned by Anderson. Section 1.414(c)-2 of the Treasury Regulations does not address specifically the treatment of limited liability corporations, and the Board does not address this issue in its brief. According to the Internal Revenue Service (“IRS”), “an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes * * *, unless it files Form 8832 and affirmatively elects to be treated as a corporation.” IRS, Single Member Limited Liability Companies, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Single-Member-Limited-Liability-Companies (last visited Mar. 16, 2016).

Bd. of Trustees of the Auto. Mechanics' Local No. 701 Union & Inustry Pension Fund v. 6516 Ogden Ave., LLC, No. 14-CV-3531, 2016 WL 1043422, at *4 (N.D. Ill. Mar. 16, 2016) (emphasis added).

 

March 22, 2016 in Corporations, Joshua P. Fershee, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (1)

Tuesday, March 15, 2016

Why Not Have Freedom of Strategic Contracting in LLC Formation?

In my Energy Business: Law & Strategy course, I use Larry A. DiMatteo's article, Strategic Contracting: Contract Law as a Source of Competitive Advantage, 47 Am. Bus. L.J. 727 (2010).  I have been using the article in the class since 2012 (this is the third time I have taught it), and I think it does a great job of providing a theoretical backdrop for practical application.  I teach the article in combination with a one-sided proposed Memorandum of Understanding to help students think about the contracting process and and the long-term implications of what might seem like a small-scale negotiation. I highly recommend the piece.  

In reading the article this time around, though, I was struck by how differently the piece treats limited liability companies (LLCs) and corporations and the way concerns about opportunistic behavior are raised in the context of the latter.   In one portion of the article, DiMatteo notes: 

Corporate strategy that fails to take account of the strategic use of law is likely to waste opportunities for competitive advantages. A corporate legal strategy can be used to gain competitive advantages both internally and externally.

I wholeheartedly agree, and this is part of the reason I teach my course.  Although I don't think this is true of just "corporate" strategy, because the same applies to other entities, such as educational institutions, environmental organizations, LLCs, and even governments.  Regular readers will not be surprised that I would choose to start the sentence "entity strategy" instead of "corporate strategy, " but his point is still well taken.  

Later in the piece, Prof. DiMatteo takes the following position with regard to LLCs: 

The freedom of contract paradigm that underlies LLCs allows for broad flexibility in strategically drafting the operating agreement. I will make a distinction here between proper and improper strategic drafting, because a distinction based on legality is insufficient. That is, improper terms may be perfectly legal under some states’ LLC statutes. The argument here is that the freedom of contract construct can lead to contractual abuse, albeit a legally sanctioned abuse. For example, a combination of clauses could be inserted into the operating agreement that strips nonmanager members of all power and protections, such as removal of fiduciary duties relating to the managing member, an indemnification clause to protect the managing member from liability for malfeasance, and a clause providing that the nonmember managers have no right to withdraw or to seek dissolution. These types of provisions may be legal under some statutory schemes, but strict enforcement of these clauses by the managing member would be abusive.

I fail to see why strategic use of law in this context is more problematic than the strategic use of law in other contexts. I do understand and validate concerns about on-going expectations of fiduciary protections related to entities, and that is why, as I have suggested previously, that the lack of fiduciary duties and post-formation changes to fiduciary duties (especially loyalty) should include disclosure and perhaps other structural protections.  (I am less concerned about those forming the entity agreeing to limit or eliminate fiduciary duties because they are agreeing to the option at formation when they can object or walk away.) Still, I don't see any reason that freedom of contract in LLCs is fundamentally different from freedom of contract in any other setting, at least as along as you account for a potential knowledge gap about fiduciary duties. In contrast, I liked how Larry Ribstein framed the question of possible promoter liability for LLCs in New York, where he argued that one could make a complaint that "alleged a misrepresentation which would be actionable without implying a fiduciary duty."

I do agree with Prof. DiMatteo when he says, "In the end, contracts can be a strategic tool in obtaining a competitive advantage, or they can be a tool to support collaboration by minimizing the opportunities for advantage taking." Freedom of contract in LLC formation embraces both of these concepts, too.  I just think that those forming the entity should be the ones to determine which path they will take.  

March 15, 2016 in Corporations, Delaware, Joshua P. Fershee, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (3)

Wednesday, March 9, 2016

Five "Best" Songs About Business (Law Edition)

It has been a crazy busy couple of weeks, and one thing I rely on the keep sane (or sane-ish) is music. This morning I was listening to the most recent Public Enemy album, Man Plans God Laughs, which includes a song called "Corplantationopoly."  (The album is solid, and while it will never top Nation of Millions or Fear of a Black Planet, Chuck D is still powerful to hear.)  This got me to thinking about songs that reference business as part of their lyrics and/or theme.

With the availability of the internet, of course several such lists have already been compiled. Here is a sampling:

March 9, 2016 in Joshua P. Fershee, Law School, Lawyering, Music | Permalink | Comments (6)

Wednesday, March 2, 2016

A Modern Business Tragedy: Chesapeake Energy and Aubrey McClendon

I have long followed the trials and tribulations of Chesapeake Energy and founder Aubrey McClendon, and I had been planning to write about yesterday's indictment of McClendon for bid rigging in a couple weeks, after I gathered more information.  About an hour ago, though, reports broke that former Chesapeake CEO Aubrey McClendon died today.  According to CNBC:

Aubrey McClendon, a founder and former chief executive of Chesapeake Energy, died in a single-car crash Wednesday at age 56, a day after he was charged with conspiring to rig bids for oil and natural gas leases.

McClendon crashed into an embankment while traveling at a "high rate of speed" in Oklahoma City just after 9 a.m. Wednesday morning, said Capt. Paco Balderrama of the Oklahoma City Police Department. Flames engulfed McClendon's vehicle "immediately," and it was burnt so badly that police could not tell if he was wearing a seatbelt, he said.

Before going any further, my thoughts go out to his friends and family.  Regardless of how anything else comes together, their loss is real, and I feel badly for them.  

In years past, I have questioned how Chesapeake conducted some of their business, including their use of entities and their leasing practices in Michigan and whether loan practices McClendon used personally were at odds with his fiduciary duties to Chesapeake.  This round of bid rigging allegations were new to me (a Michigan case settled last year), and I was researching this set of allegations to see what I thought about this case.  I remain curious whether it was a case of "singling him out" unfairly, as he claimed, or were there some strong evidence of more.  

And even if he were being singled out, was it because the practice didn't occur or is it just how everyone did business?  That question remains an open one, even if the case against McClendon is now closed.  I hope to learn more in the coming weeks.   

As to the impact on his former company, CNBC notes
Chesapeake said Tuesday that it did not expect to face criminal prosecution or fines related to McClendon's charges. The company's stock, which was already substantially higher Wednesday, briefly added to gains following news of McClendon's death.
That's a cold reminder that the market (and the news coverage of the market) moves on quickly.  It's good that life continues on, of course, but sometimes reminders of that are still striking.  

March 2, 2016 in Corporations, Joshua P. Fershee, Litigation, White Collar Crime | Permalink | Comments (0)

Thursday, February 25, 2016

On Describing The Limited Liability Partnership . . . .

Our Kentucky "brother," Tom Rutledge, sent me a link to a super blog post yesterday on Mortgage Grader Inc. v. Ward & Olivo, a limited liability partnership case currently before the New Jersey Supreme Court.  Tom's focus in his post was the limited liability aspect of the case, which is fascinating--and more than a bit unsettling for those practicing in jurisdictions like New Jersey and Kentucky that require law firms organizing limited liability partnerships to maintain malpractice insurance.  The question before the court: whether, in the absence of an express provision in the partnership statute, the failure of a law firm organized as a limited liability partnership to maintain required malpractice insurance results in the loss of the partnership's limited liability status.  The trial court ruled that the lapse of malpractice insurance caused a loss of limited liability status; the appeals court reversed.

But Tom also mentions another aspect of the case in his post that I want to call out here.  Specifically, he notes references in the appellate court opinion to the conversion of a partnership to a limited liability partnership.  Here's what he says on that point:

One potentially disturbing aspect of the language used by the Court of Appeals and in the oral argument is the notion that the loss of LLP status and the treatment of the firm as a general partnership is some sort of conversion. But it isn’t. An LLP is a general partnership that has elected into a special status – it is still a general partnership but for the rule of partner limited liability. . . .

This comment reminded me of co-blogger Josh Fershee's super-helpful obsession (maybe too strong a word?) with "limited liability corporation" as an incorrect judicial (and other) descriptor of the limited liability company business form.  (See, e.g., his December 2015 post here.)  And far be it from me to disagree with either of these guys in making their respective points about these labeling inaccuracies!  

As a separate point, I want to call out the fact that this area of partnership law can be important both for bar examinations (thinking of all those folks suffering through that test this week . . .) and IRL.  In fact, I was asked a question recently about the Tennessee provision on limited liability elections by a BARBRI student.  (Little-known fact: I teach the Tennessee BARBRI segments on agency, unincorporated entities, and personal property.)  The student's question did not inappropriately refer to a conversion of a partnership into a limited liability partnership, but it did point out several differences in Tennessee law in this area that I want to mention.

Continue reading

February 25, 2016 in Business Associations, Joan Heminway, Joshua P. Fershee, Partnership, Teaching | Permalink | Comments (2)

Friday, February 19, 2016

Comin' Back Atcha, Josh, on Partnerships and the Requirement of a Contract

I love your most recent post, Josh, and have been truly enjoying the ensuing commentary/conversation. I took on the “is it a contract?” issue in the LLC context because of questions similar to those raised in your post and in the comments it generated. I admit that the partnership issue on which you posted has fascinated me for quite some time. (I first encountered it when I undertook to teach Business Associations almost 16 years ago . . . .)

I have to push back on your analysis a bit, however.  In particular, here’s the part of your post with which I have some trouble:

There must be an agreement to associate for a purpose. To me, that requires consideration and assent.  If one has associated sufficiently under the law to make one both a partner and an agent of another (and thus liable for the partner), I don’t see how there is a lack of sufficient consideration or assent to form a contract.

Why does an association for a purpose require an agreement? To "associate" is to combine, connect, or link. The concept of an association builds from that: "connection or combination" or "an organization of people with a common purpose and having a formal structure."  It is clear in the comments to the RUPA that the drafters use "associate" and "association" in these common forms. In fact, the drafters refer to various forms of association created under other statutes, including “corporations, limited partnerships, and limited liability companies.” See RUPA Section 202, cmt 2.  

It is the association--of two or more persons to carry on as co-owners a business for profit--that creates an agency relationship and third-party liability for the obligations of the firm (unless the parties separately agree to those matters--which they may do independently or coincident with the formation of a partnership).  Those parts of the relationship are attributes of a partnership--aspects of the relationship that flow from the legal conclusion that a partnership has been formed. In other words, because of the formation of a partnership, the partners are agents of the partnership and are liable for partnership obligations.

Even assuming an agreement, however, it certainly is true that not every agreement is a contract.  Offer, acceptance, and (as you note) consideration would be required at common law to form a contract.  (Mohsen adds value to that analysis as well in his comment, even if he refers to the partnership agreement as opposed to partnership formation.)  Partners may and do, in fact, contract with each other under that legal meaning.  But I am not confident that a contract is required.  

Tell me what I am missing in all this . . . .

Parenthetically, I will note that I am extending my work on LLC operating agreements as contracts (referenced favorably at the outset in your post, for which I thank you) in future work, and I will be presenting the preliminary ideas on that at KCON XI next weekend in San Antonio.  It will be interesting to share some of these ideas with folks for whom contracts is their primary area of legal inquiry.  And since my associate dean is making noises about me teaching contracts sometime soon, I'd best get myself up to speed with the experts in any case . . . .

 

February 19, 2016 in Business Associations, Joan Heminway, Joshua P. Fershee, Partnership | Permalink | Comments (10)

Tuesday, February 16, 2016

The Contrarian Contractarian: Every Partnership is Formed by Contract

My co-blogger Joan Heminway a short while back wrote a great article, The Ties That Bind: LLC Operating Agreements as Binding Commitments, 68 SMU L. Rev. 811 (2015). (symposium issue)

I often (and perhaps even usually) agree with Joan on issues of law and life, but there’s a spot in Joan’s article with which I disagree.  Joan says:

Although partnership law varies from state to state, as a general matter, partners are not expressly required to contract to form a partnership,88 and a partnership agreement is not defined in a manner that mandates adherence to the common law elements of a contract.89

  1. Under the Revised Uniform Partnership Act, a partnership exists when two or more persons associate as co-owners to carry on a business for profit. REVISED UNIFORM PARTNERSHIP ACT § 101(6), 202(a) (1997).
  2. See, e.g., Sewing v. Bowman, 371 S.W.3d 321, 332 (Tex. App.-- Houston [1st Dist.] 2012, no pet.). The Revised Uniform Partnership Act provides the following definition for a partnership agreement: “the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement.” REVISED UNIFORM PARTNERSHIP ACT § 101(7).

Joan has case law support, so at least in some jurisdictions, she’s right (as usual), but I think the opinion she relied on got it wrong.  That is, I disagree with the idea that "partners are not expressly required to contract to form a partnership” because I think the partnership definition — see footnote 88 above — satisfies (and must satisfy) the requisites for a contract. Unlike an LLC, partnerships can be formed by mere agreement of the parties, which is an agreement I think must rise to the level of a contract.

Partnership law is such that "the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”  § 202. Formation of Partnership., Unif. Partnership Act 1997 § 202. There must be an agreement to associate for a purpose. To me, that requires consideration and assent.  If one has associated sufficiently under the law to make one both a partner and an agent of another (and thus liable for the partner), I don’t see how there is a lack of sufficient consideration or assent to form a contract.  

Another Texas case, which the Sewing court decided not to apply, provided:

Clearly, an offer and its acceptance in strict compliance with the offer's terms are essential to the creation of a binding contract. American Nat'l Ins. Co. v. Warnock, 131 Tex. 457, 114 S.W.2d 1161, 1164 (1938); Smith v. Renz, 840 S.W.2d 702, 704 (Tex.App.—Corpus Christi 1992, writ denied). However, even if an offer and acceptance are not recorded on paper, dealings between parties may result in an implied contract where the facts show that the minds of the parties met on the terms of the contract without any legally expressed agreement. Smith, 840 S.W.2d at 704; City of Houston v. First City, 827 S.W.2d 462, 473 (Tex.App.—Houston [1st Dist.] 1992, writ denied). Accordingly, the parties' conduct may convey an objective assent to the terms of an agreement, and whether their conduct evidences their agreement is a question to be resolved by the finder of fact. Estate of Townes v. Townes, 867 S.W.2d 414, 419 (Tex.App.—Houston [14th Dist.] 1993, writ denied). If the finder of fact determines that one party reasonably drew the inference of a promise from the other party's conduct, then that promise will be given effect in law. E–Z Mart Stores, Inc. v. Hale, 883 S.W.2d 695, 699 (Tex.App.—Texarkana 1994, writ denied).

Ishin Speed Sport, Inc. v. Rutherford, 933 S.W.2d 343, 348 (Tex. App. 1996)

I see the formation of a partnership—the agreement to carry on a business as co-owners for profit—to be a higher level agreement than a contract (i.e., contract plus), not less than a contract.  We view partnership as a more significant connection between parties than an agency relationship, which does not require consideration. How would it be possible for me to agree with another person to carry on a business as a co-owner seeking profit, without meeting the minimal requirements contract formation? I simply can’t see it.  Once a court finds there is a partnership, the agreement that satisfied the partnership threshold carried reciprocal obligations that I must have agreed to, even if I did not knowingly agree at the time to all the obligations that then occur by operation of law because I made the agreement.  

A partnership is more than just a contract, and I might even be willing to concede that some of the obligations of a partnership under partnership law are outside or independent of contract law. But to me, if there is a partnership, somewhere, there is an underlying contract.  Thus, the question is not whether there is a contract where there is a partnership.  The question is what is the scope of the contract?

February 16, 2016 in Joshua P. Fershee, Partnership | Permalink | Comments (8)

Tuesday, February 9, 2016

Legislated Discrimination Is Terrible for Business

My home state in West Virginia is struggling.  The economy is struggling because two of the state's main industries -- coal and natural gas -- are facing falling production (coal) and low prices (gas). Severance taxes for the state account for approximately 13% of the budget, and both are down dramatically. Tax revenues for the state were down $9.8 million in January from the prior year and came up $11.5 million short of estimates.  For the year-to-date, the state collected $2.29 billion, which is $169.5 million below estimates. Oddly enough, state sales and income taxes for January both exceeded estimates, but not enough to offset other stagnation in the state.  

The state has long been known as a coal state, and that industry has dominated the legal and political landscape.  West Virginia has been criticized for having a legal system that is "anti-business," with the United States Chamber of Commerce finding stating that West Virginia is the 50th ranked state in terms of the fairness of its litigation. (See PDF here.) CNBC (with input from the National Association of Manufacturers) also ranked West Virginia last in terms of business competitiveness, so the starting point is not good.  

Now, the West Virginia legislature is considering the state's Religious Freedom Restoration Act, which many (including me) see as about legalizing specific forms of discrimination, and not promoting or supporting religion.  And some religious groups agree.  As the Catholic Committee of Appalachia’s West Virginia Chapter explains: 

We appreciate the background of 1993 federal act with the same name, and the history leading up to it, with its pertinence to protecting Native American sacred lands and religious practices from governmental infringement. With the U.S. Supreme Court’s decision that RFRA would only be applicable to federal actions, we can recognize, also, the value of an argument for versions of a law to be passed at the local level. However, the primary motivation behind West Virginia’s bill #4012, and others like it, seems not to be the protection of legitimate religious exercises, but securing the ability of religious groups to discriminate against marginalized populations on the basis of religious convictions.

Just as important for purposes of this post, many West Virginia businesses oppose the bill.  Local Embassy Suites and Marriott hotels representatives spoke out against the bill, and the Charleston (WV) Regional Chamber of Commerce and Generation West Virginia, along with several city mayors, have opposed the bill, as well.  They have good reason.  When the state of Indiana passed a similar bill, Indianapolis promptly lost as many as twelve conventions and estimates around $60 million.  Ouch. As one mayor said, West Virginia legislators need to "Get out of the way." 

Morgantown, home to my institution, was the state’s second city to pass an LGBT non-discrimination ordinance in February 2014. West Virginia University’s faculty senate also unanimously yesterday approved a resolution condemning the bill. And there was a chance to make clear the intent of the bill was not intended to be used as a way to discriminate against someone based sexual orientation through a proposed amendment making that clear. Unfortunately, the amendment was deemed “not germane.”

Beyond coal, natural gas, chemicals, and timber, tourism is one of our state's main industries. It's also a great one. From whitewater rafting to skiing to hiking, the state is a great place for outdoor activities.  Craft breweries and a few great local restaurants are helping make the state a destination.  Unfortunately, the debate about this bill, especially in the wake of the backlash in Indiana, is hurting the state's ability to make build up it's tourism industry by making many people feel unwelcome.  

It's really too bad as a local restaurant, Atomic Grill, made international news for how they responded to comments about their waitresses and has been lauded for their response to other intolerance in their restaurant.  

I don't like this bill because, to me, it's either a tautology or an attempt to discriminate through legislation.  But beyond that, it's stupid, terrible way to promote business in the state.  We spend enough time trying to get people to come visit -- and when people do, they almost always like it. It really is a great place in so many ways.  At a time when the entire state is looking at 4% budget cuts across the board -- when we need to be building bridges to broader audiences -- the state's legislature is screwing around with bills that have zero economic upside and reinforce stereotypes about the people of our state.   

Being pro-business means being pro-consumer, which really means being pro-people.  This bill is none of those.  We need to do better, and it's disappointing our time and our money are being wasted like this.  

February 9, 2016 in Current Affairs, Jobs, Joshua P. Fershee, Law and Economics, Religion | Permalink | Comments (3)

Tuesday, February 2, 2016

Embracing Freedom of Contract in the LLC: Linking the Lack of Duty of Loyalty to a Duty of Disclosure

I have been giving a lot of thought to the idea of waiving the duty of loyalty in LLCs in Delaware.  The more I think about it, the more I am okay with the concept of allowing members of an LLC to decide to do away with the duty of loyalty when they form the entity.  Delaware, of course, retains the implied covenant of good faith and fair dealing in any contract, and I think parties to a contract should be able to decide the terms of their deal.  

Still, I am sympathetic to those who are concerned about eliminating the duty of loyalty because it does seem rather awful, and yet, I am also a proponent of freedom of contract.  How to reconcile these things?  Well, I am now of the mind that perhaps we need to bring a partnership principle to LLCs to help.  In partnerships, the default rule is that changes to the partnership agreement or acts outside the ordinary course of business require a unanimous vote. See UPA § 18(h) & RUPA § 401(j).  I think changes to the duty of loyalty should have the same requirement, and perhaps that even the rule should be mandatory, not just default.  

At formation, then, those creating an LLC would be allowed to do whatever they want to set their fiduciary duties, up to and including eliminating the consequences for breaches of the duty of loyalty.  This is part of the bargain, and any member who does not agree to the terms need not become a member.  Any member who joins the LLC after formation is then on notice (perhaps even with an affirmative disclosure requirement) that the duty of loyalty has been modified or eliminated.  This is not especially concerning to me. 

What would concern me more is a change in the duty of loyalty after one becomes a member.  That is, if the majority of LLC members could later change the loyalty provision, then that seems problematic to me, as fiduciary duties are not just to protect the majority.  As such, it seems to me more proper that changes to the duty of loyalty, when a member does not have any say in that change, is what should be restricted. Like in changing a partnership agreement, if everyone agrees, then there is not a problem.  And if you accept the provision when you join, it is not a problem.  But you shouldn't have a fiduciary duty removed or modified after the fact without your consent.  

Because the duty of loyalty is a fixture that most people expect, I do see value in requiring (at least for some time) that there be clear disclosure of the applicable to duties to potential LLC members.  But at least for the moment, I am feeling the freedom of contract option on the duty of loyalty is quite reasonable.  

February 2, 2016 in Joshua P. Fershee, LLCs | Permalink | Comments (8)

Tuesday, January 26, 2016

The Stock Market and Oil: What's in a Correlation?

The Wall Street Journal yesterday reported that oil and stocks are working together closer than they have in twenty-six years.

Oil and stock markets have moved in lockstep this year, a rare coupling that highlights fears about global economic growth.

As oil prices tumbled early in 2016, global equities recorded one of their worst-ever starts for a new year. On Monday, oil and stocks were lower again. The S&P 500 index was down 0.7% in midday New York trading, and Brent crude futures, the global benchmark, were down $1.37 a barrel, or 4.3%, to $30.81. That followed a joint rebound on Friday.

The correlation between the price of Brent and the S&P 500 stock index is at levels not seen in the past 26 years. January isn’t over yet, but over the past 20 trading days—an average month—the correlation is 0.97, higher than any calendar month since 1990 . . . .

And today, stocks rebounded with the 3.4% increased in the price of oil to $31.38 a barrel. And yeah, that's still low.   

The correlation may not be a strong as reports indicate, though.  Some reports suggest that the correlation is not nearly as close as it seems. As this analysis explains, "[e]ven if correlations between assets are trending higher that doesn’t mean that the outcomes have to be even remotely similar. While stocks are down around 8% this year, oil has fallen nearly 20%." 

There is some indication that oil and stocks now tend to correlate, even though for a long time, stocks and commodities seemed to operate independently. According to this 2012 study,

The changes in commodity price correlation and volatility have profound implications for a wide range of issues, from commodity producers’ hedging strategies and speculators’ investment strategies to many countries’ energy and food policies. We expect these effects to persist so long as index investment strategies remain popular among investors. 

It's hard to predict what this correlation can mean, or whether one is driving the other.  Certainly a spike in oil supply demand could cause an increase in oil prices, and that demand would like help support the stock market.  But oil prices could stay low, and we could still see the market go up if other indicators make investors happy.  

One correlation that it seems you can always count on: low oil prices means more car and truck sales.  And by that, it usually means SUV and truck sales.  

Sales of trucks and sport utility vehicles are rapidly outpacing sales of all other vehicle types in the U.S. as consumers ditch four-door sedans and flock to a seemingly endless selection of small, midsize and gargantuan SUVs. According to 2015 sales data released by the world’s top automakers on Tuesday, trucks and SUV sales dominated last year.

We'll see how long it lasts. As they say, the cure for low prices is low prices, and the cure for high prices is high prices.  For now oil and gas are low -- the market will fix that one way or another soon enough.   

 

January 26, 2016 in Joshua P. Fershee, Law and Economics | Permalink | Comments (0)

Tuesday, January 19, 2016

The Business of Politics: Is Politics Commercial Activity or Just Plain Politics?

Section 2 of the Sherman Act provides: 

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.

The Washington Examiner, among other outlets, reports that President Obama and former Republican presidential candidate Mitt Romney are fighting a section 2 lawsuit together.  The lawsuit, filed by a group of  third-party political groups including the 2012 nominees for the Libertarian Party and the liberal Green Party, claims the Commission on Presidential Debates committed antitrust violations:

This action challenges a per se continuing illegal conspiracy or agreement between the RNC, the DNC, and the Commission, with the direction, assistance, and collusion, over the course of many years, of several co-conspirators and affiliated persons, including Fahrenkopf, McCurry, Obama, Romney, and other presidential candidates of the Republican and Democratic Parties. The conspiracy commenced prior to the formation of the Commission, and no Defendant has withdrawn or abandoned it. The overall objective was and continues to be the entrenchment market power in the presidential debates market, the presidential campaign market, and the electoral politics market of the two major political parties by exercising duopoly control over presidential and vice presidential debates in general election campaigns for the presidency. That objective was achieved in 2012 when the individual Plaintiffs were arbitrarily excluded substantially because of hostility towards their political viewpoints from presidential and vice presidential debates between the nominees of the two major parties organized and conducted by Defendants on October 3, 2012, October 11, 2012, October 16, 2012, and October 22, 2012, respectively.

Romney's brief responds:

Presidential debates are a quintessential political, non-commercial activity... .

The antitrust laws were not intended to regulate non-commercial markets like the 'marketplace of ideas' (even assuming such 'markets' exist as anything more that metaphors). Plaintiffs' claims therefore fail. . . . .

Soliciting votes is fundamentally different from selling widgets. The former implicates core constitutional values that are absent from the commercial arena. The First Amendment forbids Congress from telling political candidates where to go, what to do, what to say, or— crucially here—who they have to debate. Just as President Obama has an absolute right to refuse to debate every person who attacks his Administration, Governor Romney had an absolute right during the 2012 presidential campaign to refuse to debate Gary Johnson, Jill Stein, or any other candidate waging a long-shot bid for the presidency. The only possible sanction for that refusal is a political one.

I'm not an antitrust expert, but this case seems like a loser even if the concept of the claim is viable.  The Examiner piece quotes an expert, Geoffrey Manne, executive director of the nonpartisan think tank International Center for Law and Economics, who said the case was out of the ordinary, but not inconceivable: 

"The short answer is that it is not crazy... The commission is a private entity, not a government one, so it doesn't get immunity," he said, adding, "The question is whether the activity amounts to a restraint of trade." It was hard to tell how a court might come down on that, he said.

Manne knows his stuff, and I trust his point that the claim could have legs. I also agree a court might buy it.  Still, I think it ultimately fails in most courts. It seems to me that it is reasonable to have some limits on who participates in debates (do we all get stage time?), and because of that, plaintiffs would likely have to show that the current structure is an unreasonable restraint on trade. Then you start getting into where to draw those lines, and I think you have a problem with the marketplace. That is, not all speech is being shut out, and two people don't have to agree to share a platform with others.  

Furthermore, if people cared, CNN or FoxNews or TruTV or HBO, could have debates with the other candidates and invite all of them.  I'd argue they should.  But the fact that people don't vote with their eyeballs suggests the restraint isn't really as simple as the debate commission.  It's a lack of interest.  I'd like to see a broader discussion of ideas -- maybe a real platform of people who think government should be inclined to stay out of bedrooms and boardrooms, for example.  But I don't think the Commission on Presidential Debates is really responsible for the nation's inability to demand more information, more interaction, and more accountability.  

Maybe in 1976 or even 1986, but not in 2016. There's just too many options for the other candidates to get their word out if the people care.  People should care, but I don't think antitrust law was designed to make that happen, nor do I think it can. 

January 19, 2016 in Current Affairs, Joshua P. Fershee, Nonprofits | Permalink | Comments (0)

Thursday, January 14, 2016

Bowie Leaves Legacy of Music, Creativity in Talent and Finance

On Sunday, the world lost a musical giant in David Bowie, who died of cancer at 69.  He was the first artist who that made me a true music fan. Like buy all the records, read the biographies, hang-posters-on-the-wall type fan.  I grew up with a love for Motown music, especially Smokey Robinson, the Supremes, and the Four Tops, that I still have, but my appreciation for that music came from listening to my parent's records.

When it came time to choose my own artists, other kids were into Led Zeppelin and Pink Floyd, but Bowie emerged as my guy.  He was later followed by bands like R.E.M., the English Beat, and The Cure, among others, as I moved into more of the college radio scene, and I really liked Joan Jett, but Bowie was always The Guy.  My fandom started with an album I poached from my aunt, Heroes.  I also got ahold of David Live (1974), and then worked my way back before going forward.  The Rise and Fall of Ziggy Stardust and the Spiders from Mars, Space Oddity, The Man Who Sold the World, Aladdin Sane, Diamond Dogs, and Hunky Dory were the next to follow. I even own a copy of the Christmas record featuring David Bowie and Bing Crosby. 

Let's Dance came out in 1983.  It was a hit, and yet criticized for being too mainstream. I was twelve, and thought it was great.  I still do, though in a very different way than much of his other work.  The connected tour for the album, the Serious Moonlight Tour, featured Bowie in a bow tie.  I thought it was the coolest thing. I bought one and learned to tie it myself.  I still have the tie, and I wore it to teach my first Business Organizations class of the semester on Tuesday (and my Energy Business Law and Strategy course).  Contrary to what some want to believe now that E. Gordon Gee is the president of my institution, bowties originated with Bowie for me, not President Gee.  (And yes, it is likely that only a law professor could connect someone as cool as Bowie with bowties, and probably only this law professor.)

I write this as much for me, as anything, I suppose, but a few things about David Bowie strike me as relevant to this blog. First, he was always ahead of his time, looking for what was next. He didn't back down, he said what he thought in a strong, but usually respectful way.  He was, unfortunately, well ahead of his time in criticizing MTV for its lack of programing diversity. Not so much for calling them out -- others did that, too -- but in the way he did it, as you can see here.  

His eye for talent was remarkable, too.  David Sanborn played sax on David Live. Luther Vandross sang backup on Young Americans. Stevie Ray Vaughn played on Let's Dance, and Reeves Gabrels (now with The Cure) with Tin Machine. Adrian Belew played on Lodger.  Bowie, in turn, sang back up and played sax on Lou Reed's Transformer.  And his work with Iggy Pop, Queen, Tina Turner, Trent Reznor, and others crossed genres and time.   

Finally, he tried creative financial vehicles.  As one report explains, 

In 1997, Bowie, born David Robert Jones, securitized revenue from 25 albums (287 songs) released before 1990. At the same time, he swapped distribution rights on his back catalogue for a $30 million advance on future royalties in a deal with EMI. The 10-year “Bowie Bond” he created with banker David Pullman promised a 7.9% return and raised $55 million, along with a media frenzy. A flurry of other artists followed, but the Bowie Bonds skidded toward junk status by 2004, downgraded by Moody’s from A3 to Baa3.

The trend never really took off, though. Despite never missing a payment, the bonds did not do well, though that did not appear to hurt Bowie.  People got worried about online music sharing soon after the deal was struck.  Still, the idea of monetizing intangible assets, was rather forward looking, even if some believe that loans, and not bonds, are the better suited to assets like music. For Bowie, in music and otherwise, new things were worth trying, even if they didn't always go as planned. I still wished I'd gotten in on that deal, regardless.  I always felt like I missed out. 

I know Bowie is something of an acquired taste for some (and an unacquirable one for others), but the outpouring of support following his death shows a tremendous amount of respect and admiration.  He may even get his first U.S. number one album with his Blackstar album, which was recently released. Some believe the track Lazarus and the related video were his goodbye to the world.  It's hard to argue it's not.    

He will be missed, but I'm glad his legacy provides such a tremendous body work. I think the Sirius/XM Bowie channel should be permanent, and not just a limited-run engagement.

As I write this, I got a notice that Alan Rickman, also 69, has died of cancer. Cancer sucks.  As David Bowie noted in this short, but poignant, interview from 2002, "Life is a finite thing."  It sure is. 

January 14, 2016 in Financial Markets, Joshua P. Fershee, Music | Permalink | Comments (1)

Tuesday, January 5, 2016

U.S. Courts Called LLCs Corporations About Once a Day in 2015

Some day, I may tire of calling out courts (and others) that refer to limited liability companies (LLCs) as "limited liability corporations, but today is not that day. Looking back on 2015, I thought I'd take a quick look to see who the worst offenders were, starting with the state courts.  I figured I'd start with Delaware.

As a state that is proud of its status as a leader as a key forum of choice for corporations, and Delaware has done well for uncorporations, as well, it seemed logical.  The book Why Corporations Choose Delawarewritten by Lewis S. Black, Jr., and printed and distributed by the Delaware Department of State,  Division of Corporation, explains:

Delaware continues to be the favored state of incorporation for U.S. businesses. Delaware has been preeminent as the place for businesses to incorporate since the early 1900s, and its incorporation business, supplemented by the growth in numbers of such “alternative entities” as limited liability companies, limited partnerships and statutory trusts, continues to grow smartly.

And Delaware does have a generally well-informed and skilled judiciary.  Still, even Delaware is not above calling an LLC a "limited liability corporation." Better than many jurisdictions, Westlaw reports that the state had just three cases in 2015 making that error, and no such mistakes were noted after March 2015.  Not ideal, but not bad. 

Here are some other states I reviewed for 2015 (again, using Westlaw): 

  • Michigan: 0
  • Pennsylvania: 3
  • Ohio: 4
  • Florida: 5
  • Nevada: 6
  • California: 7
  • New York: 7
  • Texas: 8

Overall, state courts called LLCs "corporations" 105 times in 2015.  Federal courts did the same 280 times in 2015.  As such, it works out to just over once a day that some U.S. court is making this mistake.  

Big picture, given the number of cases courts see each year, it may seem that these are small numbers. Not really.  A search of federal courts for the term "limited liability company" turns up 2949 cases from 2015, which suggests that around 10% of cases (9.49%) referring to LLCs in some substantive manner made a reference to a "limited liability corporation." NOTE:  If one searches for "LLC," the number of cases exceeds 10,000 for 2015, but I decided that a court taking the time to spell out "limited liability company" suggested that the entity choice had a heightened relevance to the case.

At the state level, the numbers are a little better.  State courts referred to "limited liability companies" 1691 times in 2015. With 105 cases calling an LLC a corporation, that works out to just over 6% of the time.  Not great, but a substantial improvement.  

I admit this is not a scientific review of the data and I am making some assumptions, but the sheers number do, I think, support the notion that all our courts can do better on this issue. And give state courts credit -- although federal courts are often viewed the more prestigious courts, state courts are holding their own on this issue.  Perhaps state courts are a little more careful because entities are generally (though not always) creatures of state law.

This is not, I am sure, just the courts.  I suspect a lot of these errors come from attorneys who call LLCs corporations, then the court just take their lead.  Still not okay, but I can imagine that some courts just follow the lead of those arguing the cases before them on such issues.  

So, for 2016, I issue a challenge to all U.S. courts and the lawyers who practice in them: let's cut these numbers in half!  (I'd like them to go to zero, but one needs to be somewhat realistic, right?)  

January 5, 2016 in Corporations, Delaware, Joshua P. Fershee, Law Firms, LLCs, Unincorporated Entities | Permalink | Comments (2)

Tuesday, December 29, 2015

Year-End Edition: LLCs Are Still Not Corporations, Even if They Try to Pass a Law

A quick break from grading for my year-end report on the use of "limited liability corporation" instead if the correct "limited liability company" when referring to LLCs.  Hold on to your hats. 

Since December 31, 2014, Westlaw reports the following using the term "limited liability corporation":

The most concerning of these, though, is Proposed & Enacted Legislation View all 169.  That's not just misstating the law; it's trying to make incorrect law. 

For example, Massachusetts has the following proposed legislation from, Sen. Tarr, Bruce (R), with the following summary: " An Act relative to limited liability corporation filing fees."  2015 Massachusetts Senate Bill No. 238, Massachusetts One Hundred Eighty-Ninth General Court. Of course, the proposed change is to the state's Limited Liability Company Act, Mass. Gen. Laws Ann. ch. 156C, § 12 (West 2015).  

And one proposed change to "limited liability corporations" is not sufficient for that state this year. Rep. Arciero, James (D), similarly proposed "An Act relative to limited liability corporations dealing with children." 2015 Massachusetts House Bill No. 304, Massachusetts One Hundred Eighty-Ninth General Court. The sponsors of these bills show that the "limited liability corporation" mistake is, at least, bipartisan.  

A bipartisan effort in the U.S. Congress is underway, as well, with "[a] bill to amend the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 to modify provisions relating to grants, and for other purposes."  This proposed amendment to Superfund boasts Sen. Inhofe, James M. R-OK, as the primary sponsor, and co-sponsors include Sen. Markey, Edward J. D-MA, Sen. Rounds, Mike R-SD, Sen. Boxer, Barbara D-CA, Sen. Crapo, Mike R-ID, Sen. Booker, Cory A. D-NJ.  The bill was referred to the Committee on Environment and Public works, and included the following provisions: 
Section 104(k)(1) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. 9604(k)(1)) is amended-

. . . .

(3) by adding at the end the following:
 
'(I) an organization described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of that Code;
 
'(J) a limited liability corporation in which all managing members are organizations described in subparagraph (I) or limited liability corporations whose sole members are organizations described in subparagraph (I);
 
'(K) a limited partnership in which all general partners are organizations described in subparagraph (I) or limited liability corporations whose sole members are organizations described in subparagraph (I); or
 
'(L) a qualified community development entity (as defined in section 45D(c)(1) of the Internal Revenue Code of 1986).'.
S. 1479, 114th CONGRESS, 1st Session (emphasis added).
 
Sigh.  
 
Finally, less binding than a statute would be, but perhaps more upsetting given its source, is Senate Resolution 210 from June 23, 2015.  A resolution "[c]elebrating the 125th anniversary of the State of Wyoming" as proposed by Wyoming Senator Enzi (for himself and Senator Barrasso) has the following bit of history wrong: "Whereas in 1977, Wyoming was the first State to establish a limited liability corporation (LLC) statute . . . ."  While the Senate resolution appropriately "commends and celebrates Wyoming and the people of Wyoming on the 125th anniversary of the State of Wyoming," it is a something of a travesty that a "limited liability corporation" is part of that celebration of the state that gave us the limited liability company.  
 
Okay, just to be clear, I know that relative to real world problems like starvation, illness, and violence, this is not even a blip on the radar of relative importance. But, this should also not be that hard to fix, even with 169 proposed pieces of legislation last year using such abominable language.  
 
As we close out the year, I am hoping to see Michigan State at the top of both the men's football and basketball rankings, and I wish everyone a happy and healthy New Year that is entirely free of LLCs being called "limited liability corporations." 

December 29, 2015 in Corporations, Current Affairs, Joshua P. Fershee, Legislation, LLCs | Permalink | Comments (1)

Tuesday, December 22, 2015

Happy Holidays and a Reminder to Seek Good Wine (not Whine)

My colleague Steve Bradford noted a little while back that this is the season grading, not grade whining. (Colleague Joan Heminway followed up with some sound advice on avoiding grade whining, too.) Add to the grading season an upcoming ABA site visit, and a few other deadlines, I'm feeling more overwhelmed than usual.  And, this morning, I went for my run in wet and rainy 55-degree weather with some a stiff wind in my face (on the way out).  

The wind in my face, coupled with Steve's sound words, reminded me of a post I wrote in November 2014, Better Teaching Idea: Try to Notice When the Wind Is at Your Back.  When I got into the office, I read it again to try to help me get back to my work with a good mindset.  The close of that piece was this: 

If we want to be better teachers, better lawyers, and better people, we’d all do well to try to recognize when the wind might be (or might have been) at our backs.  At various times, because of our race, gender, sexual orientation, class, religion, familial situation, education, or other reality, we have faced challenges, feeling the wind blowing directly in our faces. But at some point, most of us had the wind at our back, at least as compared to someone else.  And certainly, some of us have had the help more than others. 

Recognizing the challenges others face does not make our challenges less real or our accomplishments less significant. It just gives us the chance to have a closer, if not full, understanding of the challenges others face.  Ideally, that can make us more fair, more accessible, and more reasonable. It is right to try, especially for those of us who have reaped the benefit of the wind at our backs more often than others. 

I still very much believe this is true, and with the holidays rapidly approaching, it's a good reminder to me to be thankful for all I have, and to appreciate how well I have it.  

I wish you all happy holidays, efficient grading, good beer and wine (not whine), and great friends and family.  

December 22, 2015 in Joshua P. Fershee, Teaching | Permalink | Comments (0)