Tuesday, October 18, 2016
Last week, I explained that the "War on Coal" Is Really A Competition Issue, with cheap natural gas prices as a major reason coal production and use have declined. Beyond the impact of natural gas on coal jobs, technology is also an issue. Technology is making mining more efficient, but it is making the market harder for coal miners. Following is a chart I created from Energy Information Administration data that shows coal production and employment statistics for 2013 and 2014.
Coal Production Data
|Coal-Producing||Number of Mines||Production||Number of Mines||Production||Number of Mines||Production|
|State and Region1|
|Powder River Basin (surface)||16||418,156||16||407,567||-||2.6|
Coal-Related Employment Data
|State and Region|
|Powder River Basin||-||6,592||6,592||-||6,635||6,635||-||-0.6||-0.6|
The data show the coal-production and employment figures for 2013 and 2014. Surface mining in the Powder River Basin (the highest producing region in the country) increased coal production 2.6% and employment dropped 0.6%, while underground mining production for Appalachia increased 2.8% even though employment dropped 8.9%. For the United States, overall coal production increased 1.5% between 2013 and 2014, while the number of employees dropped 6.8%. Thus, even as coal production increased modestly, the number of employees holding those jobs declined significantly.
This doesn't deter politicians from making other claims, though. As I noted last week, the presidential race has included rhetoric claiming anti-coal regulations are what really hurt coal jobs. And it's not just at the presidential level. Coal states often feature politicians promising to bring back coal jobs. In my home state of West Virginia, for example, both candidates for governor are making such a promise.
As an aside, in the Ohio U.S. Senate race between Rob Portman and Ted Strickland, Sen. Portman has made use of this similar line of attack, claiming that former Ohio and governor and U.S. Representative Strickland "turned his back" on Ohio by not supporting coal jobs. The advertisement, available here, features workers from (at least for a West Virginian) an interesting choice of mine: Rosebud Mining. (A perceptive former student, Ken Bannon, alerted me to the ad or I would have missed it.)
People outside of West Virginia may not recall the chemical spill in January 2014 that contaminated the Elk River and left 300,000 West Virginians without drinking water. As I noted in a post back then, the company that owned the chemical site was Freedom Industries, which listed as its sole owner, Chemstream Holdings, a company owned by J. Clifford Forrest. Forrest also owns the Pennsylvania company (that also has Ohio operations) Rosebud Mining, which was located at the same address Chemstream Holdings listed for its headquarters. It appears that Portman has a solid lead in the race, and if I were part of the campaign, I'd probably not feature a mining company that had been linked (through an executive) to such a major recent environmental disaster.
Despite the data (and the economic realities), claims of a war on coal continue. Even where there is some truth to the idea -- recent regulations are not especially coal friendly -- there are simply too many hurdles to overcome for coal employment numbers to go back to prior levels. One can conceivably win a war on regulations, but technology and the marketplace are far less forgiving. It's time we embrace that reality.
Tuesday, October 11, 2016
The Trump-Pence campaign has adopted a common West Virginia criticism of U.S. energy policy under the Obama administration that is known as the "war on coal." This phrase is used to describe the current administration's support for U.S. Environmental Protection Agency (EPA) policies to reduce greenhouse gas emissions (via the proposed Clean Power Plan) and other environmental protections that relate to consumption of fossil fuels, especially coal. In the vice presidential debate Republican Mike Pence repeated the phrase several times, asserting that the EPA was killing coal jobs, especially in places like West Virginia and Kentucky. The problem is that regardless of the EPA's goals, it is not environmental regulation that is coal's main challenge. It is price.
As Charlie Patton, president of West Virginia-based Appalachian Power explained, "Forget the clean power plan. You cannot build a coal plant that meets existing regulation today that can compete with $5 gas. It just cannot happen." Cheap natural gas, made available by horizontal drilling and hydraulic fracturing in shale formations, has led to a significant increase in natural gas-fired electric power generation, most of which replaced coal as the fuel of choice. The shale gas boom, which started approximately in 2008, can account for most of this change. Here's the U.S. electricity generation data by fuel (my chart using Energy Information Administration data) for 2006 to 2015):
U.S. Electricity Generation, by fuel
|Annual Total||Coal||Natural Gas||Renewables|
Note the drop in coal begins modestly in 2008 and drops from 48.21% to 33.18% in 2015. In that time frame, coal lost 15.03% of the market, while natural gas increased 11.23%. Renewable sources (not including solar and hydropower) increased 3.61% to 6.65% overall. That means that natural gas and renewables picked up 14.84% of the market -- or 98.7% of the market lost by coal.
Coal production in my home state of West Virginia has declined from the peak of 158 million short tons in 2008 down to 95 million in 2015, with further decline expected for 2016. And the state is feeling the devastating effect of lost jobs -- West Virginia was the only state in 2015-16 to lose a statistically significant number of jobs. Tax revenues are down dramatically, and that decline, too, is expected to continue. The harm to the state of these lost jobs is real, but there is no reasonable governmental policy that could change this decline, even if we wanted it to. The reality is that natural gas is a cheaper option, it has long-term potential to work alongside renewables, and no energy proposal from any major candidate has suggested a proposal that would help coal take back marketshare from natural gas (despite promises to simply bring back coal jobs).
Living in West Virginia, a place I love to live, it is easy to want hope. We need hope, and we need a plan, but that plan has to include educating our workforce and expanding economic opportunities in other industries, not harkening back to another time that will never return. The reality is that the war on coal is not one that can be won. In the end, as a pricing problem, trying to win the war on coal is really trying to win a war on math. It just can't happen. The numbers don't add up.
Tuesday, October 4, 2016
Here we go again:
Plaintiff seeks to collect the outstanding balance owed from Defendant Healthcare Enterprises, L.L.C. d/b/a Princesse Pharmacy and Defendant Octavio RX, Enterprises, L.L.C., d/b/a Christian's Pharmacy & Medical Supplies (collectively “Corporate Defendants”) as well as Defendant Christian. (Dkt. No. 13 at 3). Plaintiff alleges that Corporate Defendants “are shell corporations or alter egos of [Defendant] Christian, owner of the different establishments known as Princesse Pharmacy, [and] Christian's Pharmacy & Medical Supplies.”
The defendants Octavio Rx Enterprises, LLC and Healthcare Enterprises, LLC are shell corporations or alter egos of Gerard Christian, owner of the different establishments known as Princesse Pharmacy, Christian’s Pharmacy & Medical Supplies.
Wednesday, September 28, 2016
On Monday, Doug Moll posted a great question about RUPA 404(e), which also got some great comments. I started to write a reply comment, but it got so long, I though it worked better as a separate post. Doug asks the following (whole post here):
Under the “cabining in” language of RUPA (1997), the action has to fit within § 404(b) to be considered a breach of the duty of loyalty. Section 404(b)(1) prevents the “appropriation of a partnership opportunity.” When a partner attempts to block the partnership from taking an opportunity to protect the partner’s own related business, can it be argued that the partner is, at least indirectly, seeking to appropriate the opportunity for himself?
Alternatively, might the partner’s vote violate the § 404(b)(3) obligation to “refrain from competing with the partnership”?
Here's where I come out it:
As I think about it, I am with Frank Snyder's comment that "a partner is entitled to pursue her own interests in voting her partnership interest, unless there's some agreement to the contrary." I also think, though, that § 404(e) sanctions self-interested votes, subject to “the obligation of good faith and fair dealing” required under § 404(d).
So, I am not that troubled by the example from the comments that Doug cites, though I see where his concern comes from. To repeat the comment:
For example, a partner who, with consent, owns a shopping center may, under subsection (e), legitimately vote against a proposal by the partnership to open a competing shopping center.
First, because it’s clear that the partner first got consent to own the shopping center, the partner is not competing with the partnership, as I see it. Actually, the partnership wants to compete with the existing center, which one partner owns with consent of the partnership. As such, because of the consent, I don’t think § 404(b)(3) is a concern here. Section 404(e) says a self-interested vote is permissible, so the question is whether such a vote is consistent with the obligation of good faith and fair dealing from § 404(d).
Given that the partnership consented to ownership of the shopping center, it seems that the rest of the partnership would reasonably expect that the partner would not be excited to create a competitive shopping center. With this knowledge on both sides, it seems to me that casting a vote against a new shopping center can occur in good faith and mean the partner dealt fairly. The rest of the partnership can still proceed with the plan if they have enough votes under the partnership agreement, and if not (e.g., unanimous vote was needed), too bad.
Even without disclosure and consent, this might be permissible. Suppose existing partnership A owns a car dealership. The dealership was a Pontiac, Oldsmobile, and Saturn, dealer, and they are done and new use for the property will be needed. Suppose that one of the partners also owns a shopping center with another group of people, as part of partnership B. Should that partner be precluded from voting against converting the dealership in partnership A to a shopping center? I don’t think so.
In addition, Gottacker v. Monnier, 697 N.W.2d 436 (Wis. 2005) provides an interesting LLC parallel to this situation. Under the Wisconsin LLC act, the court says:
We determine that the WLLCL does not preclude members with a material conflict of interest from voting their ownership interest with respect to a given matter. Rather, it prohibits members with a material conflict of interest from acting in a manner that constitutes a willful failure to deal fairly with the LLC or its other members. We interpret this requirement to mean that members with a material conflict of interest may not willfully act or fail to act in a manner that will have the effect of injuring the LLC or its other members. This inquiry contemplates both the conduct along with the end result, which we view as intertwined. The inquiry also contemplates a determination of the purpose of the LLC and the justified expectations of the parties.
Id. ¶ 31. In that case, two members effectively transferred property from one entity to another, leaving a third member out. There was no question they were conflicted in their votes, but the test was not whether they could act vote in a conflicted manner (as they did). Instead, the question was whether they dealt fairly and in good faith, which had to be decided on remand (the court said they did). In assessing whether the entity or other members are injured, then, as long at the voting was done consistent with the organizing agreement, I think the test is whether the partner in question is getting something unfairly to the detriment of the other members.
Lastly, to Doug's example, in the comments to his post, he said: “[W]hen I vote to, for example, block the partnership from raising the rent on a property that I originally leased several years ago from the partnership (and with the partnership's permission), it is hard for me to understand why that vote should not be considered a breach of duty.” It seems to me that should not be a breach of fiduciary duty unless it violates some express agreement to the contrary.
There can be good faith and fair dealing under § 404(d) in such a case, and the partnership agreed to the terms up front. The question to me is simply, what kind of vote is needed to raise the rent? Again, if it requires unanimous consent, that’s the partnership’s problem. They could have changed that when they originally agree to the deal. If it’s majority vote, the other partners can change the rent despite the conflicted partner's no vote. I see no need to protect this kind of transaction with mandatory fiduciary duties. There’s not a disclosure or fair dealing problem to me, so I would sanction it, and I think that's the specific intent of § 404(e).
I admit, I am sometimes amazed at how much of a contractarian I have become.
Tuesday, September 27, 2016
As law professor, most of my students are Millennials. What does that mean? Well, Neil Howe and William Strauss, in their book Generations: The History of America's Future, 1584 to 2069, published in 1991, defined Millennials as those born between 1982 and 2004. I'll go with that. As one who is firmly part of Generation X (the age group and not the band, though that would be cool), I'm curious. It seems that some people think so. I don't think Gen Xers think of themselves as such very often.
What made me think of this? A political ad from NextGen Climate, funded by hedge fund billionaire/environmental activist Tom Steyer, apparently seeks to generate more support for Hillary Clinton by targeting Gary Johnson. The ad is below. The ad begins: "Thinking about voting for Gary Johnson? In case you missed it, climate change will cost millennials over $8 billion if no one does anything about it."
That's just weird to me. I know it's trying to motivate that age group of voters, but I am not sure many Millennials would think of themselves as such. That is -- does it resonate at all to have this ad targeted at them in that way?
I guess age-group labels like this are thrown around a lot, and I just forgot. The ABA has a mentoring article from 2004 called Generation X and The Millennials: What You Need to Know About Mentoring the New Generations. It's for "Boomers" who have to deal with us Gen Xers and Millennials. The piece makes some pretty bold assertions (some of which certainly aren't true twelve years later). For example:
All Millennials have one thing in common: They are new to the professional workplace. Therefore, they are definitely in need of mentoring, no matter how smart and confident they are. And they'll respond well to the personal attention. Because they appreciate structure and stability, mentoring Millennials should be more formal, with set meetings and a more authoritative attitude on the mentor's part.
Perhaps most of that is right. There is some value here, even though my experience is that formal mentoring is not always well received. Then again, maybe that's my bias. After all, "members of Generation X dislike authority and rigid work requirements. An effective mentoring relationship with them must be as hands-off as possible. . . .Gen Xers work best when they're given the desired outcome and then turned loose to figure out how to achieve it." I don't know about the first part, but last two sentences are definitely me.
So, while I find the description of Millennials a little overbearing, as I think about it, it explains a lot. I think a lot of us from the Gen X world can't understand why we can't tell students what we want and have them come back with a solution. That's what WE do, not necessarily what they do (unless we make it clear that's what we want).
I don't like broad generalizations of groups, but I have to admit that the 2004 article's suggestions for working with Millennials is actually consistent with a lot of what I have been doing (and working toward). I just never thought of it as trying to reach Millennials. I thought of it as trying to reach students. Turns out, in most cases, that's the same thing.
I remain skeptical of the likely efficacy of the ad, but maybe there's more here than I originally thought. Still, I'm not sure an anti-Gary Johnson ad gets anyone very far right about now.
Tuesday, September 20, 2016
Here’s a new one on the “LLC as corporation” front. A court in the Southern District of New York says the following:
[T]his Court has subject matter jurisdiction, since the parties are diverse and the amount in controversy exceeds $75,000. Hermes and Swain are “citizens” of different states; Hermes, a French limited liability corporation, has its headquarters in New York, while Swain is a New Jersey resident.
Hermés of Paris, Inc. v. Swain, 2016 WL 4990340, at *2 (S.D.N.Y., 2016)
In most such circumstances, when a court refers to a “limited liability corporation,” it meant to say “limited liability company.” See, e.g., Avarden Investments, LLC v. Deutsche Bank Nat'l Trust Co., No. 16-CV-014-LM, 2016 WL 4926155, at *2 (D.N.H. Sept. 15, 2016) (“Avarden is a limited liability company organized under the laws of New Hampshire. New Hampshire law permits a limited liability corporation to assign management responsibility of a limited liability company to a ‘manager.’ RSA 304-C:13.”). But not this time.
Bloomberg says Hermès of Paris, Inc. operates as a subsidiary of Hermes International SA. The French version of an LLC is not an SA, it often viewed as an SARL.
So, technically, a corporation is a “limited liability corporation” because corporations come with a grant of limited liability. The source of this language in this opinion is, in seems, the petition to compel arbitration, which states in paragraph 10: “Petitioner Hermés, an entity engaged in ‘commerce’ as defined in the FAA §1, is a limited liability corporation, with its United States headquarters in New York, New York.”
Another interesting (to me) note is that that court and the pleadings don’t ever say where Hermés is incorporated. They just say where it is headquartered. I see nothing that says its state of origin. I am not as up on my civil procedure (jurisdiction) as maybe I should be, but couldn’t that matter? That is, if Hermés of Paris, Inc., is a New Jersey corporation with headquarters in New York, might that not be a problem for diversity jurisdiction? (It looks like it’s not, though. I looked. But they do have a New Jersey warehouse. Still, the state of formation seems mildly important to note.)
Anyway, although I don’t like the use of the term at all, because it creates potential for confusion (is it an LLC or a corporation?), at least this time the words are correct, even if that’s not generally how we refer to the entity type. I’d still prefer the court to have just called it a corporation, though.
Tuesday, September 13, 2016
I think, by now, most people have heard about Colin Kaepernick's protest, which he manifested by his refusal to stand for the national anthem before the 49ers' August 26 preseason game against the Green Bay Packers. Kaepernick explained his actions as follows:
I am not going to stand up to show pride in a flag for a country that oppresses black people and people of color. To me, this is bigger than football and it would be selfish on my part to look the other way. There are bodies in the street and people getting paid leave and getting away with murder.
Many were offended by his decision; others have applauded it. What is it that makes people (particularly white people) so upset about someone choosing not to stand for the national anthem? I thought the anthem and flag were supposed to stand for freedom, which includes the freedom to dissent and disagree. It fascinates me that one football player could get this much press for deciding not to do something he was under no obligation to do (as his employer made clear). But it certainly explains why he did it. If nothing else, Colin Kaepernick reminded of us both of our ability to speak freely and that there are potential costs when doing so. He got people to talk about an important issue, and he used his platform to focus on a necessary conversation.
Free speech can, though, have consequences. And in many ways, it should. The Bill of Rights just protects our right to speech and limits the government's ability to impose consequences for exercising that right. The Denver Broncos' Brandon Marshall lost a credit union sponsorship for his actions in support of Kaepernick's protest. Personally, if I did business with that sponsor, they'd lose my money because I support his Marshall's right to protest and because I think the the protest, conducted in a peaceful way, raised issues worthy of discussion. (I will note that the sponsor cut ties in what appears to be a respectful and above-board way. I just disagree with the decision). That's the free market working in a (mostly) free country. I don't have any problem with the sponsor acting as they did, either. They, too, were exercising their rights (assuming they did not breach a contract, and I have seen no evidence they did). I am not mad the credit union made the decision it did; I just disagree with the decision, and I would let them know that by walking away.
Most striking to me about this uproar is the apparently binary way so many people view protests. One can love this country and hate injustice. We can protest as we try to reach our ideals. And we can disagree about the method of protest or the ideals themselves. But let's consider the point and be respectful of one another as we try to work through our differences. Brandon Marshall stated this position especially well. He explained, "I'm not against the military. I’m not against the police or America. I’m just against social injustice.”
Businesses, like people, have the right to associate with those they choose, and consumers (in turn) have a right to respond. That is not just free speech, it is how a free market operates.
Th United States, to me, is a great, yet greatly flawed, nation. The flag (and our national anthem) can represent the best of this nation and its people. The song and flag, like almost anything related to this nation that is more than 200 years old, also has ties to some of our very worst history, including slavery. That is also a reality. We have real and significant remaining institution problems related to race and gender, even if we're better than we used to be.
No matter what, the national anthem and the flag are neither bigger than, nor more important than, the citizens they are intended to represent. Speaking freely, even when it is not popular, is honoring the best of what the flag should represent, the best of this nation’s history, and (I sincerely hope) a sign of a great future. Free speech is not a liberal or conservative issue, and exercising our right to speak should be celebrated, whether you agree with the speech or not. Free speech begets free markets.
“All we say to America is, ‘Be true to what you said on paper.’ If I lived in China or even Russia, or any totalitarian country, maybe I . . . could understand the denial of certain basic First Amendment privileges, because they hadn’t committed themselves to that over there. But somewhere I read of the freedom of assembly. Somewhere I read of the freedom of speech. Somewhere I read of the freedom of press. Somewhere I read that the greatness of America is the right to protest for right.”
— Martin Luther King, Jr., Civil Rights Leader
“We are so concerned to flatter the majority that we lose sight of how very often it is necessary, in order to preserve freedom for the minority, let alone for the individual, to face that majority down.”
— William F. Buckley Jr., founder of National Review magazine
“We cannot have a society half slave and half free; nor can we have thought half slave and half free. If we create an atmosphere in which [people] fear to think independently, inquire fearlessly, express themselves freely, we will in the end create the kind of society in which [people] no longer care to think independently or to inquire fearlessly.”
— Henry Steele Commager, U.S. historian
Tuesday, September 6, 2016
Private Ordering in the Uncorporation: Modified and Eliminated Fiduciary Duties Are Often the Same Thing
What does it mean to opt out of fiduciary duties? In follow-up to my co-blogger Joan Heminway's post, Limited Partnership Law: Should Tennessee Follow Delaware's Lead On Fiduciary Duty Private Ordering?, I will go a step further and say all states should follow Delaware's lead on private ordering for non-publicly traded unincorporated business associations.
Here's why: At formation, I think all duties between promoters of an unincorporated business association (i.e., not a corporation) are always, to some degree, defined at formation. This is different than the majority of other agency relationships where the expectations of the relationship are more ingrained and less negotiated (think employee-employer relationship).
As such, I'd make fiduciary duties a fundamental right by statute that can be dropped (expressly) by those forming the entity. I'd put an additional limit on the ability to drop fiduciary duties: the duties can only be dropped after formation if expressly stated in formation documents (or agreed unanimously later). That is, if you didn't opt out at formation, tell all those who could potentially join the entity how you can change fiduciary duties later. This helps limit some (though not all) freeze-out options, and I think it would encourage investors to check the entity documents closely (as they should).
At formation, the concerns we might have of, for example, an employee without fiduciary duties, are not the same as they are for co-venturers. Those starting an entity have long negotiated what is a breach of the duty of loyalty, for example. In contrast, I think fiduciary duties in most employer-employee (and similar) relationships reflect the majoritarian default and they facilitate the relationship existing at all. For LLCs and partnership entities, I think that's less clear. Entity formation is relatively rare compared to how often we enter other agency relationships, and they almost always involve significant negotiation (if not planning). And if they don't, the rules we expect traditionally should be the default. But where the parties talk about it, and they usually do, allowing a more robust sense of freedom of contract has value.
Even in Delaware, where one can negotiate out of fiduciary duties, there remains the duty of good faith and fair dealing. I think of that as meaning that the parties still have a right to the essence of the contract. That is, the contract has to mean something. It has to have had a purpose and potential value at formation, and no party can eliminate that. But, the parties only have a right to what was bargained for. As such, what we might traditionally consider a breach of the duty of loyalty could also breach the duty of good faith and fair dealing, but a traditional breach of the duty of loyalty might not be sufficient to find liability where there is expressly no duty of loyalty. Instead, the act must so contradict the purpose of the contract that it rises to the level of a breach the duty of good faith and fair dealing.
Part of the reason I support this option is that I think case law has already validated it, but in such an inartful manner that it confuses existing doctrine. See, e.g., McConnell v. Hunt Sports Enterprises, 132 Ohio App. 3d 657, 725 N.E.2d 1193 (Ct. App. 1999) (“An LLC, like a partnership, involves a fiduciary relationship. Normally, the presence of such a relationship would preclude direct competition between members of the company. However, here we have an operating agreement that by its very terms allows members to compete with the business of the company.”).
In closing, I will note that I am all for express provisions that require investors to pay attention at the outset. I don't believe in helping cheaters hide the ball. I just think law that encourages investors and others joining new ventures to pay attention is useful and will provide long-term value to entities. I don't think that eliminated fiduciary duties at formation raise any more of a risk than we already have with limited or modified fiduciary duties at formation. With the more limited protections described above, freedom of contract should reign.
Tuesday, August 30, 2016
Although we review claims of insufficiency de novo, United States v. Harvey, 746 F.3d 87, 89 (2d Cir. 2014), it is well recognized that “a defendant mounting such a challenge bears a heavy burden” because “in assessing whether the evidence was sufficient to sustain a conviction, we review the evidence in the light most favorable to the government, drawing all inferences in the government's favor and deferring to the jury's assessments of the witnesses' credibility.” . . .
[W]e reject Jasmin's challenge to her Hobbs Act conviction. The evidence presented at trial more than sufficiently describes the consideration received by Jasmin in exchange for her official actions as Mayor, including the $5,000 in cash from Stern, “advance” cash for their partnership, and shares in the limited liability corporation that would develop the community center.
Tuesday, August 23, 2016
I am still working my way through this new paper, Seeking an Angle of Repose in U.S. Business Organization Law: Fiduciary Duty Themes and Observations, from J. William Callison of Faegre Baker Daniels LLP. It's an interesting premise, and worth a look. Here's the abstract:
This article applies liberal, neoliberal, critical, feminist and communitarian political theories to limited liability company and partnership fiduciary duty law; discusses developments in that law over the last two decades by focusing on theory; suggests a pragmatic and balanced approach to fiduciary duty law that incorporates desirable features of different approaches; and suggests that law, as developed in uniform acts, has been moving toward a balanced approach.
The paper is available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2827771
Friday, August 19, 2016
The concept of private prisons has always seemed off to me. Prisons have a role in society, but the idea of running such institutions for profit, it seems to me, aligns incentives in an improper way. The U.S. Justice Department apparently agrees and said yesterday that it plans to end the use of private prisons. The announcement sent stocks tumbling for two private prison companies, Corrections Corp. of America (CCA) and GEO. Both dropped as much as 40% and remain down more than 30% from where they were before the announcement.
Obviously, this can't make shareholders happy, but I figured this had to be a known risk. I was right -- CCA's 10-K makes clear that such government decisions related to future contracts could lead to a reduction in their profitability. So, the disclosure seems proper from a securities regulation perspective. Still, reading the disclosure raises some serious questions for me about the proper role of government. I frankly find this kind of outsourcing chilling. For example, CCA states:
Our results of operations are dependent on revenues generated by our jails, prisons, and detention facilities, which are subject to the following risks associated with the corrections and detention industry.
We are subject to fluctuations in occupancy levels, and a decrease in occupancy levels could cause a decrease in revenues and profitability. . . . We are dependent upon the governmental agencies with which we have contracts to provide inmates for our managed facilities.
. . . .
We are dependent on government appropriations and our results of operations may be negatively affected by governmental budgetary challenges. . . . [and] our customers could reduce inmate population levels in facilities we own or manage to contain their correctional costs. . . .
The idea of "customers" in this contest simply does not sit well with me. It suggests a desire for something that is not a positive. CCA's 10-K continues:
Competition for inmates may adversely affect the profitability of our business. We compete with government entities and other private operators on the basis of bed availability, cost, quality, and range of services offered, experience in managing facilities and reputation of management and personnel. While there are barriers to entering the market for the ownership and management of correctional and detention facilities, these barriers may not be sufficient to limit additional competition. In addition, our government customers may assume the management of a facility that they own and we currently manage for them upon the termination of the corresponding management contract or, if such customers have capacity at their facilities, may take inmates currently housed in our facilities and transfer them to government-run facilities. . . .
Competition is a good thing in many (I think most), but this is not one of them. These companies are responding to the existing demand for prison services, but there can be no question the real opportunity for market growth is to increase demand for such services (e.g., increase the number of prisoners, seek longer sentences). This, too, is made clear in the disclosures:
Our growth is generally dependent upon our ability to obtain new contracts to develop and manage new correctional and detention facilities. This possible growth depends on a number of factors we cannot control, including crime rates and sentencing patterns in various jurisdictions, governmental budgetary constraints, and governmental and public acceptance of privatization. The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction or parole standards and sentencing practices or through the decriminalization of certain activities that are currently proscribed by criminal laws. For instance, any changes with respect to drugs and controlled substances or illegal immigration could affect the number of persons arrested, convicted, and sentenced, thereby potentially reducing demand for correctional facilities to house them. Immigration reform laws are currently a focus for legislators and politicians at the federal, state, and local level. Legislation has also been proposed in numerous jurisdictions that could lower minimum sentences for some non-violent crimes and make more inmates eligible for early release based on good behavior. Also, sentencing alternatives under consideration could put some offenders on probation with electronic monitoring who would otherwise be incarcerated. Similarly, reductions in crime rates or resources dedicated to prevent and enforce crime could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities.
CCA does note that their "policy prohibits [them] from engaging in lobbying or advocacy efforts that would influence enforcement efforts, parole standards, criminal laws, and sentencing policies." These disclosures, though, sure make clear what kind of policies their shareholders would want to support.
I don't have any illusion that government run prisons are much (if any) better, but I do think that government's incentives are at least supposed to be aligned with the public good when it comes to the prison system. I often think government should take a more limited role than it does when it comes to regulations. That is especially true when it comes to criminal law. But privatizing prisons is not reducing the role of government in our lives -- it is simply outsourcing one key portion of the government's role. Private prisons do not equate to smaller government. Fewer laws, or relaxed enforcement and punishment, do. If the government is paying for it, it's still a government program.
Here's hoping that the reduction in use of private prisons leads to a reduction in the use of all prisons. Let's save those for truly the dangerous folks.
Tuesday, August 16, 2016
Whether we're ready or not (we mostly are), classes start tomorrow for West Virginia University College of Law. Orientation for new students started last week, and I had the chance to teach a group of our new students. I had three sessions with the group where we discussed some cases, how to brief a case, and did some writing exercises. It's been a while since I worked with first-year students, and it was a lot of fun.
In addition to the assigned work, I answered a lot of questions, in and out of the classroom. Questions focused mostly on how to succeed as a law student. Although there's plenty of advice on the internet, and whole books dedicated to subject, and even my own blog posts. Last year, I provided my Ten Promises For New Law Students to Consider. This year, I had enough similarly themed questions, that I thought I'd add some detail to my basic advice for new law students.
1) Do the work.
Some students ask -- if I work law school like a job, is that a good idea? As with everything, it depends. I don't know how you work. If you work regular hours, every day, where you focus on the task before you, then it can work well. If you're someone who sits in front of a computer doing everything but your work until a deadline is looming, it's not so likely to work for you.
So, if you work it like a job where you are the boss, and you have no employees. And the work absolutely has to get done, then yes. There will be days when you can work a normal 8 to 5 with a lunch break and get your work done, and there will be times when 80 hours a week is insufficient. If you work until the job is done, you'll be served well.
1A) Doing the work does not mean looking at the cases.
Reading for class is not about checking the box. There may have been times when "looking" at all 40 pages that were assigned would do the trick. Maybe as an undergrad. Of course, I was a mostly terrible undergrad, so I didn't even do that often enough. But law school is about figuring out what matters. That means you need to read the cases more than once. I have seen twice as the rule of thumb, though I think three times is the right place to start. It's not just about recognizing that something happened. It's knowing what happened and what that means, in the context of the case and beyond. And that requires time and careful reading. And, by the way, class is far more interesting when you know what's being discussed. Seriously.
2) Be a good classmate and be the best possible you.
You can be competitive without being a jerk. Your competition is really with yourself. UCLA basketball coach John Wooden always reminded his players to be the best they could be -- not to try to be better than someone else. If you always use someone else as the bench mark, you may be holding yourself back, even if you do better than them. Try to remember that. There will be people who are better than you, at some point, at everything. Be the best you that you can be. Good things will follow. And if it doesn't go as well as you hoped, if you did the work the best you could, you will still be okay. (See 1 and 1A above.)
3) Most people aren't cheating, but if they are, turn them in.
Every once in a while, I hear some students who are convinced that there is rampant cheating. "Some people worked together on their memo." Maybe, but usually not. "Someone's (uncle/sister/cousin) who is a (prosecutor/M&A lawyer/judge), wrote their memo!" Probably not. Most lawyers understand the ethical problems with that. And who wants to write another law school memo after you passed the bar exam? It would take a pretty odd combination of work ethic and lack of basic morals to make that a common occurrence.
But even worse -- give us some evidence if you do know something. Or some names, and we will investigate. I hate cheating, and I want it stopped. I went to law school with my wife, and we didn't even leave out any of our legal writing materials in our home. The rules matter. And you need to practice following them from day one. That said, I don't think most of my students are or were cheaters, and they have rarely given me any reason to doubt their integrity.
More than once over the years, I have also heard students say, "well, I don't want to hurt anyone's career." First, what? If you know someone is not following the rules, they need to be turned in. Lawyers have such an obligation, though I think it is one that is not often enough fulfilled. I have heard of attorneys who had opposing counsel forge their signature, and the attorney still did not turn them in. If we allow it, it continues.
In addition, I have also heard students say, "I can't prove it, but I KNOW they are cheating." If you can't point to facts that show it it, you probably don't KNOW, anything. Your strongly suspect. And might be wrong. Don't forget, lots of people posture when they are stressed or fearful. Focus on your work, and good things are likely to follow.
4) Everything is harder.
I wonder if poor grades are sometimes the reason some students decided others are cheating. I suspect it is sometimes. The numbers suggest that most of our students are used to getting good grades, so a B can seem like something went wrong. But law school is the next step up. I often use a sports analogy -- law school is like an athlete going from college to the pros (or the olympics). The competition is better because everyone at the next level has a better skill set. If there is a curve (and there usually is, official or unofficial, in the first year), then students are being compared to one another. It's not just how well did you do -- it's how well did you do relative to others. That may seem unfair, but those are (usually) the rules. Be prepared to work hard, and know others will be, too. There is room for everyone to succeed, but not everyone can be at the top.
5) You are not your grades.
Don't let a grade define you. Your paper may be a C+. But you are not. Your A* (which was how the highest grade in the course was noted when I was in law school), doesn't make you an A*, either. Your work can be a reflection of you, but it is not you. Sometimes things don't go well. Sometimes you might not have worked hard enough. Sometimes you're sick. And, yes, sometimes the professor's view of the world is flawed. Other times, a student might have studies three things all semester. And it's the three things tested on the exam. You can only control your work and your effort. You must react and respond to the rest.
So, I know I am biased. I loved law school. It's why I do what I do. Not everyone will feel that way. But give yourself a chance. Prepare. Engage. Ask questions. Be wrong. And learn.
Have a great year! Oh, and by the way, take Business Organizations before your graduate. It's pretty much essential.
Tuesday, August 9, 2016
I am not the first to notice that law professors, and academics generally, have their own jargon and favorite buzzwords. Some websites do a nice job of highlighting (or mocking) many of the odds turns of phrase many of us use. Lawyers in the practicing bar do this, too, of course, and other professionals, especially business people (see, e.g., Dilbert) and public relations professionals.
I try not to be too jargon-y, but I have caught myself more than a few times. I am big on “incentivize,” for example. After attending a great SEALS Conference (likely more on that to come), I came away with a bunch of new ideas, a few new friends, and some hope for future collaboration. I also came away noticing that, sometimes, as a group, “we talk funny.” On that front, two words keep coming to my mind: “unpack” and “normative.”
So, when did we all “need” to start “unpacking” arguments?
This seemed like a relatively recent phenomenon to me, so I checked. A Westlaw search of “adv: unpack! /3 argument” reveals 140 uses in Secondary Sources. The first such reference appears in a 1982 law review article: Michael Moore, Moral Reality, 1982 Wis. L. Rev. 1061 (1982). The phrase doesn’t appear again until 1988, in this article: Jeffrey N. Gordon, Ties That Bond: Dual Class Common Stock and the Problem of Shareholder Choice, 76 Cal. L. Rev. 1 (1988). Of the 140 citations, 113 (or 80%) of those have appeared since January 1, 2000 (69, or nearly 50%, have appeared since 2010). Relatively modest numbers, frankly, compared to how often I think I heard it said, but maybe we're just getting ramped up.
And when did things become “normative?”
It also seemed to me that it’s relatively recent that the things we expect to happen (or people to do) became “normative” in legal academic circles. Before that, I think we called things the standard or the norm, but it was far less common that legal academics discussed “normative” behavior in the way we do now.
A Westlaw search bears this out, too. A search of all secondary sources on Westlaw before January 1, 2000, revealed that the term had been used in 2,668 pieces. Since that date, normative has shown up in 7,270. The term has obviously been around for a long time, and has value in many contexts, but saying “normative” is the new normal.
To be clear, I don’t think the use of all jargon is bad, and I appreciate that as law professors do more interdisciplinary work, we will expand our jargon into other fields. Sometimes specific words help us communicate more precisely in a way that increases usefulness and understanding. I like terms of art and specificity. (See, e.g., any of my rants about LLCs.) I’m just observing what seems like a shift in how we talk. That’s not necessarily a bad thing. Maybe it’s just a thing.
I welcome any comments on these terms, or even better, a list of other words or phrases I missed. I know there's a lot more out there.
Tuesday, August 2, 2016
I am traveling to the SEALS Annual Meeting today, which means my summer is over. We start orientation next week at WVU College of Law, and I have absolutely no idea where the time went.
I will be keeping myself busy at the conference, where I am participating in a number of events, including a discussion group on Sustainability & Sustainable Business and one on White Collar Crime. Today, I thought I'd write a little bit about the first subject, and engage in a bit of shameless self-promotion, as well.
The intersection of sustainability and business is a significant part of my work. My areas of focus are business law and energy law, and I have spent much of my research time looking at how companies respond to regulation, including the effects of environmental regulations. (I also teach courses in Energy Law and Business Organizations, as well as a course called Energy Business: Law and Strategy, which merges the two subjects.)
I was recently asked to submit a response to Prof. Felix Mormann's paper, Clean Energy Federalism, which appeared in the Florida Law Review. His paper, which I think is well done, offers "two case studies, a novel model for policy integration, and theoretical insights to elucidate the relationship between environmental federalism and clean energy federalism." His article argues that renewable portfolio standards (mandates that require a certain percentage of electricity generated come from renewable energy sources) and feed-in tariffs (guaranteed payments for renewable energy that are independent of the market price) can be used together to find a "better, more efficient allocation of investor and regulatory risk."
The recent influx of cheap natural gas from shale formations (using hydraulic fracturing and horizontal drilling) has lead some to believe that renewable energy goals like the ones Prof. Mormann proposes will be ineffective, or at least much weaker. Although cheap natural gas does change way the electricity market was expected to evolve, my response argues that the change does not necessarily make renewable energy goals unattainable or even less attainable. My response, Natural Gas is Changing the Clean Energy Game, But the Game is Not Over, appears in the Florida Law Review Forum. Here's the abstract (and the paper is available here):
In his article, Clean Energy Federalism, Professor Felix Mormann analyzes the keys facets of how energy law and environmental law intersect, as he considers how to implement a program to “decarbonize America’s energy economy.” In this forward-thinking piece, Professor Mormann considers the potential role of renewable portfolio (RPSs) and feed-in tariffs (FITs) and how concurrent implementation at the federal and state level could support a lower-carbon energy future. His conclusion—“that one clean energy policy (RPS) be implemented at the federal and another (FIT) at the state level”—is likely correct from a policy-optimization perspective. Still, as Professor Mormann acknowledges, such policies can face enormous political hurdles.
This Response acknowledges the enormous role fossil fuels still play in our electricity generation sector and notes that renewables still account for less than 15% of the overall U.S. generation market. The energy sector, though, can be expected to continue its diversification, in part because diversification is valuable for utility reliability and resilience, as well as for financial management purposes. With lower natural gas prices, fuel switching has continued at pace, with the bulk of the new natural gas generation replacing coal-fired generation. This is a positive development for those looking to displace coal, but the change to natural gas also delays at least some of the shifting to renewables.
This response argues that all is not lost because of that delay. The coal-fired generation that is displaced by natural gas could create at least some opportunity for a parallel increase in renewable electricity generation. Although some may believe that low natural gas prices undercut the option of bringing new renewable energy online, that does not need to be the case. Professor Mormann’s option is still a reality, and the likelihood of success is more a question of priority than opportunity.
Tuesday, July 26, 2016
Anyone who reads this blog knows that I have issues with how people mess up the distinction between LLCs (limited liability companies) and corporations. In some instances, it is a subtle, likely careless, mistake. Other cases seem to be trolling me. Today, I present you such a case: Sky Cable, LLC v. Coley, 2016 WL 3926492 (W.D.Va., July 18, 2016). H/T: Jay D. Adkisson. The case describes the proceedings as follows:
DIRECTV asks the court to reverse-pierce the corporate veil and declare that Randy Coley is the alter ego of his three limited liability companies, such that the assets held by those LLCs are subject to the judgment in this case.
Okay, so claiming to pierce the "corporate veil" of an LLC is wrong (it doesn't have a "corporate" anything), but it's also exceedingly common for lawyers and courts to make such an assertion. This case takes the improper designation to the next level.
First, the court describes the LLCs in questios as "the Corporate Entities." It then goes on to discuss "Coley's limited liability companies." Ugh. The court further relates, "DIRECTV stated that in a forthcoming motion, it would ask the court to reverse-pierce the corporate veil given Coley's abuse of the corporate form." No such form, but perhaps we can now blame DIRECTV's counsel, in part, for this hot mess.
Here's the court's Legal Framework:
Generally, corporations are recognized as entities that are separate and distinct from their officers and stockholders. [Author's note: THERE ARE NO SHAREHOLDERS IN LLCS!] "But this concept of separate entity is merely a legal theory, 'introduced for purposes of convenience and to subserve the ends of justice,' and the courts 'decline to recognize [it] whenever recognition of the corporate form would extend the principle of incorporation "beyond its legitimate purposes and [would] produce injustices or inequitable consequences.' "" DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 683 (4th Cir. 1976) (citations omitted). When appropriate, and " 'in furtherance of the ends of justice,' " a court may pierce the corporate veil and treat the corporation and its shareholders as one, id. (quoting 18 Am. Jur. 2d at 559), if it finds a corporation and its shareholders have misused or disregarded the corporate form, United States v. Kolon Indus., Inc., 926 F. Supp. 2d 794, 815 (E.D. Va. 2013). This is often referred to as an "alter ego theory."
The court continues: "Delaware courts take the corporate form and corporate formalities very seriously.... " Case Fin., Inc. v. Alden, No. CIV. A. 1184-VCP, 2009 WL 2581873, at *4 (Del. Ch. Aug. 21, 2009)." The opinion then states that veil piercing concepts"apply equally to limited liability companies which, like corporations, have a legal existence separate and distinct from its members." The concept may, but LLCs do not have to follow the same formalities as corporations to maintain separate existence. Even if veil piercing were appropriate here, the entire case continues to misstate the law of veil piercing LLCs. Note: Delaware courts do hold some blame here: Westmeyer v. Flynn, 382 Ill. App. 3d 952, 960, 889 N.E.2d 671, 678 (2008) ("[U]nder Delaware law, just as with a corporation, the corporate veil of an LLC may be pierced, where appropriate.").
Based on the opinion, it does seems as though the defendant here was being shady, at best, and perhaps outright fraudulent. I don't suggest that, based on the facts presented, the defendant shouldn't be held accountable for his debts. Still, in addition to the misstatements of the law, I am not sure veil piercing was necessary. As the court notes, "veil piercing is an equitable remedy and an extraordinary one, exercised only in exceptional circumstances "when 'necessary to promote justice.'" It seems to me, then, the court (and the plaintiff) should discuss other remedies first, relying only on veil piercing where "necessary."
As such, I'd like to see a discussion of fraudulent or improper transfer before veil piercing -- did the defendant improperly move assets that should have been available to the plaintiff into an entity? Before veil piercing three entities, it seems to me the court should determine what should have been available to the plaintiff -- if the answer is "nothing" then no amount of shady behavior should support veil piercing. If there should be assets, then the question should still be "which ones?" If the answer is all of the assets in all of then entities, then okay. But if the court is veil piercing three entities merely to ensure adequate recovery, that's an overreach, it seems to me. In addition, how about reviewing if there was actual fraud in how the defendant acted? That, too, could support recovery without the extraordinary veil piercing remedy.
Ultimately, it's possible the court got the outcome right here. But it clearly got the law wrong. A lot.
Tuesday, July 19, 2016
Today I will pose a simple question: Is Entity Type Material?
Of course, context matters, so here's where this is coming from: On July 1, 2016, Canterbury Park Holding Corporation filed an 8-K making the following announcement:
SHAKOPEE, Minnesota (July 1, 2016) - Canterbury Park Holding Corporation, a Minnesota corporation (Nasdaq Global Market: CPHC) (the “Company”), today announced that it has completed its previously announced reorganization of the Company’s business into a holding company structure (the “Reorganization”), pursuant to which a recently-formed Minnesota corporation with the same name, Canterbury Park Holding Company (“New Canterbury”), has replaced the Company as the publicly held corporation owned by the Company’s shareholders. At the market open today, July 1, 2016, the shares of common stock of New Canterbury will commence trading on the Nasdaq Global Market under the ticker symbol “CPHC,” the same ticker symbol previously used by the Company.
As a result of the Reorganization, the Company has been merged into a limited liability company subsidiary, Canterbury Park Entertainment LLC. In addition, the Company’s shareholders have automatically become shareholders of New Canterbury on a one-for-one basis, holding the same number of New Canterbury shares and the same ownership percentage after the Reorganization as they held immediately prior to the Reorganization. The business operations, directors and executive officers of the company will not change as a result of the Reorganization.
The exhibits list, though, provides:
Exhibit No. Description 2.1 Agreement and Plan of Merger, dated March 1, 2016, among Canterbury Park Holding Corporation, a Minnesota corporation, New Canterbury Park Holding Corporation, a Minnesota corporation, Canterbury Park Entertainment LLC, a Minnesota limited liability corporation. (Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 (File No. 333-210877) filed with the SEC on April 22, 2016.)
A what? You probably guessed it: a "Minnesota limited liability corporation." No, it's a limited liability company, as properly noted in the press release.
Okay, so I suspect it's not really material to the SEC or most other investors in the sense that this is a mistake, as long as the filing and exhibit are otherwise accurate. I looked at the May 27, 2016, DEF 14A, which did list the LLC correctly. However, in searching that document I found this was part of the 14A:
GGCP Holdings is a Delaware limited liability corporation having its principal business office at 140 Greenwich Avenue, Greenwich, CT 06830.
Sigh. Well, it may not matter to the SEC, but it's material to me.
Wednesday, July 13, 2016
This is just me musing a bit, but in following up my post on how LLCs can choose to “be corporations” for federal tax purposes, meaning they get C corp tax treatment, I was thinking that maybe the IRS could just stop using state-law designations at all. That is, stop having “corporate” tax treatment at all.
My proposal is not abolishing corporate tax – that’s a much longer post and one I am not sure I’d agree with. Instead, the proposal is to have entities choose from options that are linked the Internal Revenue Code, and not to a particular entity. Thus, we would have (1) entity taxation, called C Tax, where an entity chooses to pay tax at the entity level, which would be typical C Corp taxation; (2) pass-through taxation, called K Tax, which is what we usually think of as partnership tax; and (3) we get rid of S corps, which can now be LLCs, anyway, which would allow an entity to choose S Tax.
This post deals with the tax code, which means I am in over my head, and because this is tax related, it means the solution is a lot more complicated than this proposal. But now that the code provisions are not really linked to the state law entity, I think we should try refer to state entities as state entities, and federal tax status with regard to federal tax status. Under such a code, it would be a little easier for people to understand the concept behind state entity status, and it would make more sense to people that a “C Corp” does mean “publicly traded corporation” (a far-too common misunderstanding). Thus, we could have C Tax corporations, S Tax LLCs, K Tax LLCs, for example. We'd know tax status and state-entity status quite simply and we'd separate the concepts.
A guy can dream, right?
Tuesday, July 5, 2016
So, readers of this blog know that I despise the misuse of the term "limited liability corporation" when the writer or speaker means "limited liability company," which is the correct term for an LLC. There is a time, though, when an LLC can be a corporation, and that is for federal tax purposes if the entity makes such a choice.
Entity choice is a state law decision, but and LLC can elect to be treated as a corporation under the Internal Revenue Code. The Internal Revenue Service recently issued Publication 3402, which explains:
Classification of an LLC Default classification.
An LLC with at least two members is classified as a partnership for federal income tax purposes. An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes). Also, an LLC's federal tax classification can subsequently change under certain default rules discussed later.
An LLC can elect to be classified as an association taxable as a corporation or as an S corporation. After an LLC has determined its federal tax classification, it can later elect to change that classification. For details, see Subsequent Elections, later. LLCs Classified as Partnerships If an LLC has at least two members and is classified as a partnership, it generally must file Form 1065, U.S. Return of Partnership Income. Generally, an LLC classified as a partnership is subject to the same filing and reporting requirements as partnerships. See the Instructions for Form 1065 for rep
Still, this should really be called an LLC that has elected federal tax status as a corporation or an "LLC FCorp." Or something like that. But at least in this situation, an LLC is something of a corporation.
Tuesday, June 28, 2016
SEC Chair Mary Jo White yesterday presented the keynote address, for the International Corporate Governance Network Annual Conference, "Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability." The full speech is available here.
In reading the speech, I found that I was talking to myself at various spots (I do that from time to time), so I thought I'd turn those thoughts into an annotated version of the speech. In the excerpt below, I have added my comments in brackets and italics. These are my initial thoughts to the speech, and I will continue to think these ideas through to see if my impression evolves. Overall, as is often the case with financial and other regulation, I found myself agreeing with many of the goals, but questioning whether the proposed methods were the right way to achieve the goals. Here's my initial take:
June 28, 2016 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Securities Regulation, Shareholders, Social Enterprise | Permalink | Comments (1)
Tuesday, June 21, 2016
Last week, a federal court determined that an insurance disclosure that asked about an "applicant's" criminal history did not apply to an LLC member's individual criminal past. In Jeb Stuart Auction Servs., LLC v. W. Am. Ins. Co., No. 4:14-CV-00047, 2016 WL 3365495, at *1 (W.D. Va. June 16, 2016), the court explained:
“Question Eight” on the [insurance] application asked, “DURING THE LAST FIVE YEARS (TEN IN RI), HAS ANY APPLICANT BEEN INDICTED FOR OR CONVICTED OF ANY DEGREE OF THE CRIME OF FRAUD, BRIBERY, ARSON OR ANY OTHER ARSON-RELATED CRIME IN CONNECTION WITH THIS OR ANY OTHER PROPERTY?” Hiatt, on behalf of Jeb Stuart (who [sic] was the sole [LLC] applicant for the insurance policy), answered, “No.” Hiatt signed the application and left.
As you might imagine, Hiatt had been convicted of "hiring individuals to wreck cars so that he could receive the proceeds from the applicable insurance policies," and, yep, about a month later, the building burned down. Id. at *2.
The insurance company cancelled the policy because it claimed Hiatt had lied on the application, and Hiatt sued for the improper cancellation of the policy because he did not lie (he prevailed) and for attorneys fees claiming “the insurer, not acting in good faith, has either denied coverage or failed or refused to make payment to the insured under the policy.” Id. at *3. Judge Kiser determined that not attorneys' fees were warranted:
Neither party was able to rely on a case on point regarding the issue of whether questions on an LLC's insurance application asking about criminal history applied to the members of the LLC, to the corporate entity, or to both. Although I believe the answer to that question is clear, I am not aware of any other court being called upon to answer it. Therefore, although it was unsuccessful in asserting its defense to Jeb Stuart's claim, West American's position did present a novel legal question. As such, the final Norman factor weighs in favor of a finding of good faith.