Tuesday, July 15, 2014
The Hobby Lobby decision states:
No known understanding of the term "person" includes some but not all corporations. The term "person" sometimes encompasses artificial persons (as the Dictionary Act instructs), and it sometimes is limited to natural persons. But no conceivable definition of the term includes natural persons and nonprofit corporations, but not for-profit corporations. 20 Cf. Clark v. Martinez, 543 U. S. 371 , 378 (2005) ("To give th[e] same words a different meaning for each category would be to invent a statute rather than interpret one").
The decision continues:
Under the Dictionary Act, "the wor[d] 'person' . . . include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals." Ibid .; see FCC v. AT&T Inc., 562 U.S. ___, ___ (2011) (slip op., at 6) ("We have no doubt that 'person,' in a legal setting, often refers to artificial entities. The Dictionary Act makes that clear"). Thus, unless there is something about the RFRA context that "indicates otherwise," the Dictionary Act provides a quick, clear, and affirmative answer to the question whether the companies involved in these cases may be heard.
Thus, unless otherwise stated, any place a person can recover claims, so can “corporations, companies, associations, firms, partnerships, societies, and joint stock companies.” There are opinions that have distinguished the “fictional person” from the “natural person.” See, e.g., All Comp Const. Co., LLC v. Ford, 999 P.2d 1122, 1123 (Okla. App. Div. 1 2000) (stating that an LLC was a "fictional 'person' for legal purposes and thus any damages due to the LLCs would be "due to it as a fictional person," and thus certain damages were not recoverable because LLCs are not "capable of experiencing emotions such as mental stress and anguish"). RFRA, per Hobby Lobby, though, does not make such a distinction.
As such, it seems to me there are places where federal law uses the term person that might now extend potential recovery to entities for things like pain and suffering or mental anguish. Maybe I am missing something here. Any ideas come to mind? Maybe civil rights laws?
The ripples, it seems, are just beginning.
Thursday, June 12, 2014
Tuesday, June 3, 2014
The Louisiana Supreme Court recently denied the state's attempt to collect sales tax on the sale of an RV to a Montana LLC. Thomas v. Bridges, No. 2013-C-1855 (La. 2014). The LLC was formed for the sole purpose of avoiding RV sales tax (saving the buyer as much as $47,000). The state argued that the LLC veil should be pierced and the tax should be assessed to the LLC's sole member claiming fraud. The court disagreed, explaining that "taking actions to avoid sales tax does not constitute fraud. Although tax evasion is illegal, tax avoidance is not."
There were problems with the state's attempt from the outset. First, the sale occurred in Louisiana, but the RV was housed in Mississippi. Even if the LLC were to be disregarded, Mississippi, it seems to me, would be the state that should be asserting the claim. Second, the state attempted to collect from the LLC's member before ever trying to collect from the LLC. Thus, the veil-piercing claim was being used as a post hoc justification for the attempt to recover from the LLC's member and was not properly raised below.
This "legal loophole" (which is redundant because if it's a loophole, it's legal and if not, it's fraud), can be fixed by legislation, as Justice Guidry concurred,
While I concur in the majority analysis and result, I write additionally to encourage the legislature to revisit this area of the law on foreign limited liability corporations formed solely for the purpose of sales tax avoidance on purchases made in Louisiana. As the facts of this case suggest, the law may be susceptible to abuse.
Justice Clark's concurrence goes a step further:
Because I see no actual violation of the letter of the law in this matter, I concur with the result reached by the majority. However, I am concerned that the spirit of the law is not being protected. The potential for abuse in allowing the creation of sham entities to avoid the payment of taxes has policy implications that are worthy of the legislature’s attention.
I agree with Justice Guidry, but I think Justice Clark goes too far. I just don't see this as a sham entity. It does seem a bit shady, I admit, but shady does not equal a sham. The entity here is a tax avoidance vehicle, but the entity is real, and the entity was apparently properly formed. There was no allegation that the entity was not real, not disclosed, or otherwise used to perpetrate fraud. There are other ways to try to ensure taxes are paid in a state where the RV is housed. (As a side note, though, one should always be sure to make it very clear that one is signing for the entity and not in one's individual capacity.)
And like the competition for entity formation, states often compete for business in a variety of ways. Maine, for example, has long-term leasing for trailers, including 8-, 12-, 20- and 25-year terms, that latter of which requires registration of at least 30,000 trailers.
Other states choose to charge annual personal property taxes on vehicles like my home state of West Virginia. Similarly, the State of Virginia assesses personal property tax on vehicles kept by non-residents in the state, as long as the tax is paid somewhere:
Any person domiciled in another state, whose motor vehicle is principally garaged or parked in this Commonwealth during the tax year, shall not be subject to a personal property tax on such vehicle upon a showing of sufficient evidence that such person has paid a personal property tax on the vehicle in the state in which he is domiciled.
It seems Montana is using entity law to make a few dollars on state LLC formations, but that the benefit will likely be short lived. I would expect many states will respond to reduce the effectiveness of this behavior. The more interesting response, though, would be if Montana were to pass an annual RV property tax on entities (not individuals) that own such vehicles. Montana natural persons, of course, don't need entities to avoid RV sales tax, so the tax would only (or mostly) impact out-of-state individuals who would have to pay taxes for their Montana entity. Because these nonresidents can't vote in the state, it would be hard for these folks to raise too much of a ruckus.
Whether it is Montana or the location the RV is stored, the loopholes may start to close quickly. That, though, is a cost of doing business, even if the only business the entity tries to conduct is tax avoidance.
Tuesday, May 13, 2014
The Supreme Court of Appeals of West Virginia recently had the opportunity to address the role (if any) of veil piercing in West Virginia LLCs. The state statute is silent on the subject, but the court determined veil piercing was there, anyway. It was close, though, as the West Virginia Circuit Court took on the following question with the corresponding answer:
Does West Virginia's version of the Uniform Limited Liability Company Act, codified at W. Va. Code § 31B el seq., afford complete protection to members of a limited liability company against a plaintiff seeking to pierce the corporate veil?
Kubican v. The Tavern, LLC, 2012 WL 8523515 (W.Va.Cir.Ct.)
Under West Virginia LLC law:
[T]he debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, are solely the debts, obligations and liabilities of the company. A member or manager is not personally liable for a debt, obligation or liability of the company solely by reason of being or acting as a member or manager. . . . The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company.
W. Va. Code § 31B-3-303 .
The Supreme Court of Appeals of West Virginia recently took the certified question and disagreed, determining that veil piercing is permitted in LLCs in the state. Kubican v. The Tavern, LLC, 752 S.E.2d 299, 313 (W. Va. 2013) (pdf here). There are legitimate arguments on both sides of this issue, so it was proper for the court to answer the question. The reasoning behind the court’s decision, though, is not very satisfiying.
The Supreme Court explained, in the syllabus, the law on veil piercing for corporations, as follows:
[T]o ‘pierce the corporate veil’ in order to hold the shareholder(s) actively participating in the operation of the business personally liable ..., there is normally a two-prong test: (1) there must be such unity of interest and ownership that the separate personalities of the corporation and of the individual shareholder(s) no longer exist (a disregard of formalities requirement) and (2) an inequitable result would occur if the acts are treated as those of the corporation alone (a fairness requirement).” Syllabus point 3, in part, Laya v. Erin Homes, Inc., 177 W.Va. 343, 352 S.E.2d 93 (1986).
For LLCs, the court eliminates the “disregard of formalities requirement” in part one, but kept the rest of the corporate veil-piercing test the same. The court provided:
To pierce the veil of a limited liability company in order to impose personal liability on its member(s) or manager(s), it must be established that (1) there exists such unity of interest and ownership that the separate personalities of the business and of the individual member(s) or managers(s) no longer exist and (2) fraud, injustice, or an inequitable result would occur if the veil is not pierced.
The problem, of course, is that part one of the LLC test is the same as that of the corporate veil piercing test, minus the explanation that part one is “the disregard of formalities requirement.” The court is comfortable saying that the veil piercing test:
is a fact driven analysis that must be applied on a case-by-case basis, and, pursuant to W.Va. Code § 31B–3–303(b) (1996) (Repl. Vol. 2009), the failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business may not be a ground for imposing personal liability on the member(s) or manager(s) of the company.
However, now that the “unity of interest and ownership” test no longer looks at corporate formalities and looks simply to other factors to make the determination. The court notes the nineteen factors that can be used in corporate veil-piercing cases, like undercapitalization, commingling of funds, etc., and explains that similar considerations may apply for LLCs. The court is right to point out that other states have made the same determination on similar statutes, but that doesn’t clearly make those decisions correct. See, e.g., Bainbridge, Abolishing LLC Veil Piercing (pdf here). In addition, West Virginia’s veil-piercing test under Laya stated more clearly than other states have that corporate formalities are the main issue for the unity of interest test.
Courts continue to look to veil piercing to rectify harms such as commingling of funds or using entity funds for personal endeavors. This does not inherently warrant veil piercing. Instead, courts can find such uses of funds fraudulent transfers or improper uses of entity funds that the member needs to pay back. That is not veil piercing; that is simply requiring the member to put back in the entity that which was wrongfully withdrawn.
Further, there are other arguments that can be made to hold LLC members liable for the entity’s debts. If the members pay directly the bills for the entity, it may be that the members have become guarantors for the entity. In the Kubican case, the allegation was that the members used the entity credit cards for things like visits to the chiropractor, dinners, and even a trip to Myrtle Beach. Again, though, if true, all of those funds should be returned to the entity to pay any claims the plaintiff is awarded from the LLC, but it does not need to be that the limited liability veil must be disregarded in full.
It is at least an open question whether the West Virginia legislature intended to preserve veil piercing for LLCs. The often cited Flahive case in Wyoming determined it was a mere oversight of that state’s legislature to provide veil piercing in the LLC context expressly. Since then, though, states have shown they know how to include LLC veil piercing by statute (see, e.g., Minnesota: Minn. Stat. § 322B.303(2) (2003) & North Dakota: N.D. Cent. Code § 10-32-29(3)). If the legislature determines that veil piercing is proper in LLCs, then so be it. Until then, though, courts should ensure entity funds are available for entity debts, but they should also be far more willing to follow the statute as written and respect the unique nature of LLCs.
Thursday, April 10, 2014
Continuing with the theme, I want to highlight a new hybrid resource, JURIFY, which is a mostly-free, online transactional law resource.
“Jurify provides instant access to high-credibility, high-relevance legal content, including forms and precedent in Microsoft Word® format written by the world’s best lawyers, white papers and webinars from top-tier law firms, articles in prestigious law journals, reliable blog posts and current versions of statutory, regulatory and case law, all organized by legal issue.”
Here are the stats: Jurify, launched in 2012, covers 5 broad transactional areas: General Corporate, Governance, Mergers & Acquisitions, Securities and Startup Companies. The 11,000+ sources that the website currently contains have been verified by transactional attorneys and generated from free on-line platforms or submitted by private attorneys who are voluntarily sharing their work. Documents are organized according to 586 tags. Three transactional attorneys started this website (husband/wife duo and their former law-firm colleague); none take compensation from editors, publishers or law firms.
Jurify is a unique transactional law resource for the following reasons:
- FREE (mostly). Website contents including primary law, secondary sources and template agreements and forms. All content is searchable; most is free; some templates/forms, available in Microsoft word version, require either a fee or a paid membership. In the future, Jurify founders hope to generate revenue by providing performance metrics and career services components.
- Emphasis on Primary Sources—collecting the most current and complete versions of governing statutes, and here is the important part—putting relevant sources together. Want to find out registration obligations? A search on Jurify will pull from several different sources to give you a comprehensive look at the governing law.
- Organization. The website resources are organized in a consumer-friendly, vertically integrated platform (like the searching functions on YouTube). If you search for one term of art, (the example used was break-up fees), the search results pull all related terms of art (i.e., termination fees, reverse break-up fees, etc.). The data base has been encoded with 1600 corporate law synonyms in the platform to facilitate more robust natural language searches.
- Multiple search modes (i.e., accessible for the novice). Non-experts can search for information using tags and drop down boxes to sort information by source type (news articles, videos, journals, statutes and regs, etc.). The site also includes a glossary of terms, and those terms serve as searchable categories that have documents associated with them.
- Narrowing the field. You don’t need every document- you just need the right document. Researchers can narrow search results through subcategories, which include definitions on all of the subcategories to assist the non-expert (i.e., students, generalist attorneys like some in-house teams). Within general categories, researchers can also conduct granular searches within a topic and can narrow by specific fields (i.e., M&A).
- Sorting the results. Search results are displayed in order of relevance. Relevance, in Jurify, is determined by the tags assigned by Jurify attorneys reviewing and labeling each document in the database. While a document may have 15 tags, 2 or 3 tags will be the primary tag, and the document will be flagged as “noteworthy” for that particular topic. The idea is that you review the most relevant documents first not just any document that contains any reference to your search fields.
- Networking Component. Some of the documents are voluntarily provided by practicing attorneys and their names remain associated with the document(s). If an attorney wants to establish herself as an expert in an area, she may do so in part, by contributing high-quality documents on that topic. Top contributors are highlighted on the website, using in part, a Credibility Score. In the future, a ranking/review feature will be added so that users can provide feedback on the quality/relevance of a document as well.
Erik Lopez, co-founder of Jurify, contacted the BLPB editors earlier this spring. As a result, I test drove the site with Erik a few weeks ago, which formed the basis of my comments above. Thanks Erik! (Note: Neither BLPB nor I, individually, received any compensation as a result of this post. I am passing it along because I genuinely am intrigued by the platform, business model, and potential for the website to be a valuable transactional resource.)
If anyone currently uses Jurify, or test drives the site after reading this post, please share your experience in the comments.
Tuesday, March 25, 2014
(1) As I explained here, entities should be able to take on a racial, religious, or gender identity in discrimination claims. I would add that I feel similarly about sexual orientation, but (though I think it should be) that is still not generally federally protected. To the extent the law otherwise provides a remedy, I’d extend it to the entity.
(2) It is reasonable to inquire, why is discrimination different than religious practice? For me, I just don’t think religious exercise by an entity is the same as extending discrimination protection to an entity. There is something about the affirmative exercise of religion that I don’t think extends well to an entity. That is, discrimination happens to a person or an entity. Religious practice is an affirmative act that is different. Basically, reification of the entity to the point of religious practice crosses a line that I think is unnecessary and improper because discrimination protection should be sufficient.
As a follow up to that, I also think it's a reasonable question to ask: Why is religion different than speech? To me it is different because entities must speak, but entities don’t have to practice religion. The entity needs speech to conduct business. A public entity speaks in its public filings. Speech is not just something an entity could do. It is something it must do. Religion, at the entity level is not necessary.
(3) Reverse piercing is not as good a solution as it might appear. Professor Bainbridge suggests that reverse veil piercing is one way in which the religion of the shareholders could be used to justify extending a religious identity to the Hobby Lobby entity, thus allowing the entity to object to certain provisions of the federal healthcare mandate. His argument is, as usual, reasonable and plausible. Still, as explained above, I don't think this is necessary.
More important, though, I don’t like expanding the use of any form of veil piercing. Veil piercing is supposed to be used (at least in my view) solely as a heightened level of fraud protection. It is already used too often and too haphazardly, and further degradation of the line between the entity and others is a dangerous proposition, regardless of the purpose. That is, as people (and courts) get more comfortable with disregarding the entity, they are more likely to disregard the entity. As a general proposition, I think that’s a bad outcome. That alone is reason enough for me to hope the Court will pass on reverse veil piercing as a potential remedy.
Sunday, March 23, 2014
I'm trying out a new weekly blog post theme, "The Weekly BLT," wherein I highlight a few interesting business law tweets that I've come across in the past week that have not yet made it to the BLPB.
"The problem ... is that ... Kiobel ... ignore[s] the robust corporate identity [recognized in Citizens United]" http://t.co/RI0BefWUUr— Stefan Padfield (@ProfPadfield) March 18, 2014
"Only ... 10 percent of S&P 500 companies reported the number of environmental fines paid." http://t.co/rthzXPwy2w— Stefan Padfield (@ProfPadfield) March 17, 2014
John Cunningham: "one of the best discussions I’ve ever seen about the application of veil-piercing doctrine to LLCs" http://t.co/xJae7nGqQm— Stefan Padfield (@ProfPadfield) March 17, 2014
"traditional theory about shareholder voting..does not reflect recent fundamental changes as to who shareholders are" http://t.co/e9LsR4YUtp— Stefan Padfield (@ProfPadfield) March 17, 2014
Tuesday, March 18, 2014
Ed Whelan at National Review Online (h/t: Prof. Bainbridge) asks, in light of a recent Fourth Circuit opinion, “Will those who (wrongly) think that for-profit corporations are incapable of exercising religion for purposes of RFRA object as vigorously to the concept that for-profit corporations can have a racial identity for purposes of Title VI? If not, why not?”
I have been following the Hobby Lobby case with interest, though I am just delving into its depths now. After starting through the various amicus briefs, my initial reaction is that the law has not evolved to where it needs to be with respect to protecting those engaging in the widespread use of entities. I, as is often the case, my intitial reaction is that the answer to Mr. Whelan’s question is somewhere in the middle: I think for-profit corporations are capable of exercising religion under RFRA, but in this case I don’t see the necessary substantial burden, at least when balanced with an individual’s right to make such decisions, to carry the day. (Reasonable minds can disagree on this, but that’s my take).
Taking a broader look, though, view entities should be able to take on the race, gender, or religion of its primary shareholders (or members) in proper circumstances to protect against discrimination. The Fourth Circuit opinion states: “We hold that a corporation can acquire a racial identity and establish standing to seek a remedy for alleged race discrimination under Title VI.” Seven other circuit courts “have concluded that corporations have standing to assert race discrimination claims.” This seems proper, because a minority-owned company might be denied a contract or be treated differently in the execution of a contract because of the race of the primary shareholders. It would be improper to deny protections for the shareholders/members just because they chose to avail themselves of entity protections to conduct their business.
The same should be true in cases of religion and gender. Suppose, for example, an all-female construction company were denied a bid because the city seeking the project thinks construction is “man’s work to be done by men.” Similarly, protections should be available if a Catholic-owned company were to lose a bid because the county seeking the bid was run by people who didn’t “trust Catholics to finish anything on time.” (Disclosure: I was raised Catholic, and while I most certainly don’t speak for any other Catholics, my comfort level leads me to use Catholics in such examples.)
Thus, an entity should be able to take on the race, gender, or religion of the shareholders/members to fight cases where the same discrimination against an individual would stand. Obviously, then, having a member of a certain race, gender, or religion as a shareholder, member, director, or employee would not be sufficient to make the claim. The entity would also have to demonstrate: (1) that the alleged discrimination was predicated on race, gender, or religion, and (2) the entity (and not just certain individuals) was identified with the group against whom the discrimination was targeted.
In the Hobby Lobby case, then, under this rubric I think the claim would fail because the entity would not be able to demonstrate they have satisfied the first test. Regardless of what one thinks of the healthcare law, the law was not designed to discriminate against certain religions (or race or gender). The law also does not mandate any individual course of action, but merely requires that access be provided to certain healthcare options. (That is, it mandates access, not use.)
This is not the current state of the law, of course. Still, it seems to me that the proper way forward is to recognize that entities can often take on identities of those running them, but that protections should only be available where the entity’s identity was targeted for harm because of that identity, and not an arguable result of another non-identity-based decision.
Monday, March 3, 2014
Business law has a broad overlap with tax, accounting, and finance. Just how much belongs in a law school course is often a challenge to determine. We all have different comfort levels and views on the issue, but incorporating some level of financial literacy is essential. Fortunately, a more detailed discussion of what to include and how to include it is forthcoming. Here's the call:
Call For Papers
AALS Section on Agency, Partnerships LLCs, and Unincorporated Associations
Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax
2015 AALS Annual Meeting Washington, DC
Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law. Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play. In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation. Yet many law professors still struggle with the reality that their students (and sometimes the professors themselves) are not “numerate” enough to make these important connections. While recognizing the importance of numeracy, the basic course cannot in itself be devoted wholly to primers in accounting, tax, and finance.
The Executive Committee will devote the 2015 annual Section meeting in Washington to the critically important, but much-neglected, topic of effectively incorporating accounting, tax, and finance into courses in the law of business associations. In addition to featuring several invited speakers, we seek speakers (and papers) to address this subject. Within the broad topic, we seek papers dealing with any aspect of incorporating accounting, tax, and finance into the pedagogy of basic or advanced business law courses.
Any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1 or 2-page proposal by May 1, 2014 (preferably by April 15, 2014). The Executive Committee will review all submissions and select two papers by May 15, 2014. A very polished draft must be submitted by November 1, 2014. The Executive Committee is exploring publication possibilities, but no commitment on that has been made. All submissions and inquiries should be directed to Jeff Lipshaw, Chair.
Jeffrey M. Lipshaw
Suffolk University Law School
Click here for contact info
Thursday, February 13, 2014
Last night I attended a forum organized by the Ladies Empowerment and Action Program (LEAP). The panel featured female entrepreneurs from the culinary industry. Some were chefs, some owned restarurnts, some sold products, and others blogged and educated the public, but their stories were remarkably similar. They told the audience of business students and budding entrepreneurs that they generally didn’t like partners, were wary of investors because they tended to exert too much control over their vision, and that they wished that they had better financial advisors who cared about them and understood their business.
One panelist, who had received $500,000 in capital from an investor, indicated that she was glad that she had been advised to enter into her contract as though she may end up in litigation. As a former litigator who now teaches both civil procedure and business associations, I both agree and disagree with that advice. As a naïve newbie litigator in a large New York firm, I used to joke with the corporate associates that the only reason I needed to understand how their deals were done was so that I could understand how to defend them went they fell apart and the litigation ensued. Now that I am older and wiser I try to focus my students on considering an exit strategy of course, but also on how to ask the right questions so that the parties never have to consider litigation.
Many of my students will likely advise small and midsized businesses as well as large corporations and that’s part of the reason that I stress the importance of a baseline level of understanding of finance and accounting. But how will we prepare them to counsel entrepreneurs who may not see the value in partners or understand how startup capital works? Perhaps that’s not the job of a lawyer but if the issue comes up, will our graduates know how to provide balanced arguments for their clients? How will we prepare our students to add value so that accountants don’t provide the (potentially wrong) legal advice to these entrepreneurs or so that their clients don’t just turn to LegalZoom, which reportedly sets up 20% of the LLCs in California? In essence, how do we teach our students to think like business people and lawyers?
Although clinics where students advise entrepreneurs or small businesses are expensive, and skills-based transactions courses aren’t as plentiful as they should be in law schools, these are good starts. I currently try to integrate drafting, negotiation and role-play into my classes when appropriate, but would welcome additional ideas that work.
Wednesday, February 12, 2014
The Grand Forks City Council Service/Safety Committee recommended Tuesday that the city deny a liquor license transfer for Rumors bar in Grand Forks.
The committee originally recommended the full council deny the license earlier this month because of the previous felony charges against Blake Bond, Jamestown, N.D., one of the partners in Sin City LLC, the applicant of the license.
The council then sent the issue back to the committee, but when representatives from Sin City failed to show up at Tuesday’s meeting, the committee voted to recommend denying the license again. . . . .
A quick note for the reporter, who wouldn't necessarily know this: LLCs don't have partners. They have members. So, the more accurate statement would be that Mr. Bond "is one of the members of Sin City, LLC." The North Dakota Limited Liability Company Act definitions provision explains that:
"Member" means a person, with or without voting rights, reflected in the required
records of a limited liability company as the owner of a membership interest in the
limited liability company.
As for the LLC members, here's a hint: it's probably best not to name your LLC "Sin City, LLC" when you want approval from the council's Safety Committee and need approval of the full council to get the liquor license you need for your bar. This is likely to be even less of a good idea when one of your LLC members apparently has prior felony convictions. It's also probably best to show up for the council meeting to make your case, too, if the council is willing to listen.
In this circumstance, it is entirely possible that Sin City, LLC, was formed (about a month ago) without the services of an attorney. I rather hope so. Although as lawyers we are not necessarily required to opine on entity names or other business decisions, sometimes being a good counselor requires suggesting to one's client the potential implications of such decisions. Here, for example, good counsel might have suggested that other naming options might be preferable.
Clients won't always listen, of course, but it's worth a shot (no pun intended).
Tuesday, February 4, 2014
I understand that I may be one of the few people who seems to actually care about such a thing, but it seems to me courts really should be careful about their descriptions of limited liability entities. I have written about this before (here, here, and here), but it continues to frustrate me.
One of the things that got me thinking about this again (but let's be honest, it seems I am always thinking about this) is a post over at The Conglomerate. There, Christine Hurt (who, to be clear, is a lot smarter and more knowledgeable than I) discusses the Illinois governor's interest in generating more jobs by shifting to "the $39 limited liability company." In her post, she makes a couple references to incorporation in the context of LLC formation. But, in fairness, that's a blog post, and I can't claim that I have always been as precise as I should be in my blog writing, either.
Courts, however, should be more careful. The U.S. Court of Appeals for the Ninth Circuit, for example, loves to call limited liability companies "limited liability corporations" in their cases. Take, for example, CarePartners, LLC v. Lashway, 545 F.3d 867 (9th Cir. 2008), the caption of which is: "CAREPARTNERS LLC, limited liability corporation under the Laws of the State of Washington doing business as Alderwood Assisted Living . . . ." That is wrong. Washington LLC law provides that an LLC is a limited liability company. Even more significant, Washington LLC law provides specifically that an LLC's name "[m]ust not contain any of the words or phrases: . . . 'corporation,' 'incorporated,' or the abbreviations 'corp.,' 'ltd.," or 'inc.,' . . . ." Wash. Stat. 25.15.010(d) (2014).
Tuesday, January 28, 2014
Last week, after a post here, I received a call from a Charleston (WV) reporter seeking some background on veil piercing as it relates to the company (Freedom Industries) linked to a chemical spill that left 300,000 people without clean drinking water. That conversation led to a rather long article, as newspapers go, on the concepts of veil piercing in West Virginia. The article did a rather good job of relaying the basics (with a few nits), and I hope it at least informs people a little bit about the process to follow on that front.
The article does reflect a little confusion over what I was trying to communicate about personal liability for the president of Freedom Industries. West Virginia law provides: (b)“Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.” W. Va. Code, § 31D-6-622 (emphasis added). I was trying (and I take responsibility for any lack of clarity) to reflect my view that it was conceptually possible that the company president could be found personally liable for the harm if there were activities undertaken in his personal (and not corporate) capacity, but that based on the facts currently available, that seemed unlikely to me.
West Virginia courts have long reinforced the separate nature of the corporation and the shareholder. Consistent with prevailing views, the state recognizes each corporation as a distinct, individual entity that is separate and distinct from other corporations and from their respective shareholders. “The law presumes that two separately incorporated businesses are separate entities and that corporations are separate from their shareholders.” S. Elec. Supply Co. v. Raleigh County Nat. Bank., 173 W. Va. 780, 788, 320 S.E.2d 515, 523 (1984). In a proper case, courts will disregard the entity form—pierce the limited liability veil—where necessary to prevent injustice; however, courts take seriously this separate nature of corporations and shareholders, and “the corporate form will never be disregarded lightly.” Laya v. Erin Homes, Inc., 177 W. Va. 343, 347, 352 S.E.2d 93, 97 (1986) (quoting S. States Coop., Inc. v. Dailey, 167 W.Va. 920, 930, 280 S.E.2d 821, 827 (1981)); see also S. Elec. Supply Co. v. Raleigh County Nat. Bank., 173 W. Va. 780, 787, 320 S.E.2d 515, 522 (1984) (“The [veil piercing] doctrine is complicated, and it is applied gingerly.”). Thus, while veil piercing is not impossible, it is a significant hurdle.
I mentioned in a prior post that I thought enterprise liability (essentially collapsing various limited liability entities into one) was a more likely possible remedy for unpaid losses, though again it is by no means a given. Much more information about how the various entities involved in the whole situation operated and interacted with one another will need to be discovered before the real likelihood of such an outcome can be reasonably predicted.
Regardless of how that turns out, though, there is another issue worth noting, and that is the lack of government oversight. The classic case on veil piercing and enterprise liability, Walkovszky v. Carlton, explained that complaints about the inadequacy of corporate insurance and others assets are not a problem for the courts to solve. That court explained:
if the insurance coverage required by statute “is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature.” It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N. Y. Const., art. X, §1) and it may not be fairly implied, from any statute, that the Legislature intended, without the slightest discussion or debate, to require of . . . [such] corporations that they carry . . . liability insurance over and above that mandated by [law].” Walkovszky v. Carlton, 18 N.Y.2d 414, 419-420(N.Y. 1966) (citations omitted).
I don’t know if a court will pierce the veil or apply an enterprise liability theory to expand the available assets for victims of the chemical spill. There is a lot to be determined before we’ll see an outcome. Still, it needs to be clear that where a company acts within the parameters of its grant of limited liability, seeking additional compensation from others after the fact is improper. (Again, whether the companies involved acted appropriately is an open question.)
If we’re uncomfortable with the cap on recovery for harms such as this, then randomly, haphazardly, and retroactively eliminating a state grant of limited liability protection is not the proper response. There are other ways to help protect the public, such as proper permitting, oversight and enforcement at chemical storage sites, and increased insurance and/or bonding requirements. State and federal legislatures should be discussing such options right now, and at least some discussions are occuring. It is, though, disheartening to read that even while discussing stronger standards for chemical storage tank operators, the West Virginia Senate Natural Resources Committee also voted to reduce water quality standards for aluminum in state water.
Saturday, January 25, 2014
Pearce & Hopkins on “Regulation of L3Cs for Social Entrepreneurship: A Prerequisite to Increased Utilization”
John A. Pearce II & Jamie Patrick Hopkins have posted “Regulation of L3Cs for Social Entrepreneurship: A Prerequisite to Increased Utilization” on SSRN. Here is the abstract:
One new business model is the low-profit, limited liability company (L3C). The L3C was first introduced in Vermont in 2008 and has since been adopted by several other states. The L3C is designed to serve the for-profit and nonprofit needs of social enterprise within one organization. As such, it has been referred to as a "[f]or-profit with [a] nonprofit soul."
In an effort to efficiently introduce the L3C business model, states have designed L3C laws under existing LLC regulations. The flexibility provided by LLC laws allows an L3C to claim a primary social mission and avail itself of unique financing tools such as tranche investing. Specifically, the L3C statutes are devised to attract the program related investments (PRIs) of charitable foundations. Despite these successes, adoption of the L3C form has been slower than proponents expected.
A similar business initiative has found great success in the United Kingdom (U.K.), where numerous proponents supported legislation designed to create hybrid business models that would promote social entrepreneurship. As a result, the U.K. created the Community Interest Company (CIC) in 2006, allowing more than 4,500 companies to register as CICs that offer a double bottom line (or dual benefit) to investors.
While CICs and L3Cs were created with the same double bottom line in mind, CICs face strict government regulations that provide investors with additional protections. These regulations have indirectly contributed to the success of many CICs by increasing investor confidence in the success of these businesses. In the United States, the flexibility of LLC statutes may provide L3Cs with unique funding options, but the lack of government regulation leaves investor outcomes uncertain and inhibits L3Cs from being a better-utilized business model for social entrepreneurship.
Tuesday, January 21, 2014
Freedom Industries -- the company apparently responsible for contaminating the Elk River (and, along with it, 300,000 West Virginia residents’ drinking water) – has filed for Chapter 11 bankruptcy. The company wasted little time filing for reorganization, and the process already has some people on edge.
From a public relations perspective, this kind of cases does not serve the concepts of Business Organizations especially well. The use of limited liability vehicles is sanctioned by law, and such use has been credited with creating all kinds of opportunities for growth through pooled resources that would not otherwise occur without the grant of limited liability. I happen to think that’s true. (See, e.g., Corporate Moral Agency and the Role of the Corporation in Society, p. 176, By David Ronnegard)
Still, one of the issues is that figuring out who owned Freedom Industries took some sleuthing (reporter's findings here). It appears the structure is as follows:
Freedom Industries’ Chapter 11 documents list its sole owner as Chemstream Holdings, which is owned by J. Clifford Forrest. Forrest also owned the Pennsylvania company, Rosebud Mining, which is located at the same address Chemstream Holdings lists for its headquarters. The
Reports note that the chapter 11 filing also states that two entities have offered to lend up to $5 million to fund Freedom Industries’ reorganization. The two entities are VF Funding and Mountaineer Funding, the latter of which is a West Virginia LLC formed by its sole owner: J. Clifford Forrest.
The idea that the owner of the company that owns the company that owned the chemicals that harmed the water in West Virginia is now seeking to create a new company to loan money to the company that owned the chemicals is note sitting very well with many of those harmed by the chemical leak.
Some of those harmed by the chemical spill are objecting to the proposed reorganization structure. As reported here, West Virginia American Water (WVAW), the utility providing the tainted water (and the subject of it own lawsuits because of it), claims the water company will be “the largest creditor by far in this bankruptcy case.” As such, WVAW has asked (PDF here) the bankruptcy judge to slow down the reorganization so that the utility and other creditors an opportunity get a better sense of the ownership structure and how the creditors (and possible creditors) will be treated.
This case probably looks even worse because it keeps coming back to a single person, and not a group of investors. Again, one company – Chemstream Holdings, Inc. is owned by one person -- J. Clifford Forrest, who then is the sole owner of a company seeking to loan money to the embattled company.
Keeping with that theme, after a little sleuthing of my own, I found that although the initial reports were of VF Funding and Mounatineer Funding LLC offering to loan $5 million to Freedom Industries, it seems to have gotten even more convoluted. There is yet another company in the mix – WV Funding LLC (pdf), which was formed on January 17, 2014, and on the same date the entity filed to be the Debtor in Possession of Freedom Industries (pdf). WV Funding LLC was organized by same Wheeling attorney who formed Mountaineer Funding LLC for Forrest. The sole listed member of WV Funding LLC? Mountaineer Funding LLC (pdf). Related documents here.
All of this, at least at this point, seems permissible. Still, at some point, it really does start to look like someone is trying to pull a fast one. And even a staunch defender of the corporation and uncorporation has a hard time arguing otherwise. At a minimum, and even though there are good counterarguments (like Steve Bainbridge makes here in a different context), such behavior starts to make an expansive view of enterprise liability a lot more attractive.
Wednesday, January 15, 2014
Francis G.X. Pileggi and Kevin F. Brady at Delaware Corporate & Commercial Litigation Blog closely track Chancery and Supreme Court cases out of Delaware. Their annual Delaware round up, is always a top-notch, quick and dirty summary of the year. If you haven't kept up with the major cases, or want a quick reference when thinking about what developments to include in your classes this spring or next fall--then this list is for you.
Here are 2 additional cases that I have found noteworthy for some combination of scholarship, teaching and practice reasons:
1. Chevron forum selection clause enforceability
Chancellor Strine’s opinion in Boilermakers Local 154 Retirement Fund v. Chevron Corp.,et al, upheld the enforceability of a Delaware forum selection clause unilaterally adopted by corporate boards of directors of Defendants. Plaintiffs dismissed their appeal, and moved to dismiss their remaining claims in Chancery Court leaving intact Chancellor Strine strong support of forum selection clauses. Chevron was preceded Chevron was preceded by National Industries Group (Holding) v. Carlyle Investment Managements LLC and TC Group LLC, a 2013 Delaware Supreme Court opinion, which addressed the contractual enforceability of forum selection clauses.
2. Huatacu Upholding waiver of dissolution rights when not “reasonably practicable” to carry on the business of the LCC.
VC Glasscock reaffirmed Delaware’s commitment to contractual freedom in LLCs by upholding an express waiver of statutory dissolution rights for LLC members. The case enforced an LLC operating agreement that “rejected all default provisions, and expressly limited members’ rights to those provided in the LLC Agreement.” The Chancery Court found that dissolution rights, were waivable by LLC members, but that the members remained subject to the non-waivable duty of good faith and fair dealing. The Chancery Court also left open the possibility that members of an LLC may not divest the Court of all of its equitable authority to order dissolution, but where the parties presented no unusual facts giving rise to such equities, the waiver is enforceable.
Saturday, January 4, 2014
I am writing this while on a break at the AALS Annual Meeting, having just attended the panel discussion organized by the AALS Section on Agency, Partnership, LLCs, and Unincorporated Associations: Effective Methods for Teaching LLCs and Unincorporated Business Arrangements. The presentations were excellent, including one by BLPB co-blogger Anne Tucker. Here are a couple of items I took from Robert Rhee’s presentation that I thought might be of interest to our readers:
1. Robert J. Rhee, Case Study of the Bank of America and Merrill Lynch Merger
This is a case study of the Bank of America and Merrill Lynch merger. It is based on the article, Fiduciary Exemption for Public Necessity: Shareholder Profit, Public Good, and the Hobson’s Choice during a National Crisis, 17 Geo. Mason L. Rev. 661 (2010). The case study analyzes the controversial events occurring between the merger signing and closing. It reviews in depth the circumstances under the federal government threatened to fire the board and management of Bank of America unless it consummated the Merrill Lynch acquisition. Among other issues, this case study raises the questions: (1) what is the role of a private firm during a public crisis? (2) what are the responsibilities of the board? (3) what is the role of government and how should it treat private firms? This case study can be used in corporate ethics classes in business schools, or business associations classes in law schools.
2. Todd D. Rakoff, Martha Minow, A Case for Another Case Method, 60 Vand. L. Rev. 597, 602-03 (2007).
[W]hen we think of what students most need that they do not now get, we think: “legal imagination.” What they most crucially lack, in other words, is the ability to generate the multiple characterizations, multiple versions, multiple pathways, and multiple solutions, to which they could apply their very well honed analytic skills. And unless they acquire legal imagination somewhere other than in our appellate-case-method classrooms, they will be poorer lawyers than they should be.As a pedagogical matter, it seems to us that the place to start in creating these additional skills is the time frame by which materials are assigned. Appellate cases present the world as already structured in almost all dimensions, so that the few open issues can be decided crisply. Insofar as professors try to alter those frames, they must retrace steps that have already been taken. We need to start instead with a much more open-ended presentation of the world, and walk onward. We need (if the language of the VCR is not already hopelessly out-of-date) to shift from “rewind” to “play.” (Indeed, since we want to start with raw data, we might even say we are advocating using a “facts-forward” mode.)
Wednesday, December 11, 2013
With winter break nearly upon us this means grading, writing projects, and possibly some conference travel with the upcoming AALS annual meeting. I plan on putting together my AALS talk (on incorporating experiential exercises in teaching LLCs) next week, and have drawn inspiration from the following image:
The Business Law programs are on Saturday, January 4th and are listed below. If you would like to highlight other programs, please respond in the comments, and I will add to the list.
- 10:30 am - 12:15 pm Agency, Partnership, LLCs, and Unincorporated Associations
Effective Methods for Teaching LLCs and Unincorporated Business Arrangements
- The program will explore: The ... topic of effectively teaching LLCs.
- 2:00 pm - 3:45 pm Business Associations
The Value Proposition for Business Associations in Tomorrow’s Legal Education
- The panel will be exploring: How does business associations teaching and scholarship contribute to the U.S. program of legal education? How could or should it contribute? What role does the basic law school course on business associations play in an optimized law school curriculum? What course content, pedagogy, and teaching tools best support that role? How does business associations scholarship inform and support that role?
- 4:00 pm - 5:45 pm Transactional Law and Skills
Value Creation By Business Lawyers in the 21st Century
- On the thirtieth anniversary of the influential article by Professor Ronald Gilson’s “Value Creation by Business Lawyers” this program will re-examine Professor Gilson’s thesis, evaluate the impact of the article, and discuss the prospects for business lawyers creating value in the 21st Century. The panel will feature Professor Gilson, invited participants, and scholarly works selected from a call for papers.
This is my first year attending the AALS conference, and am going whole hog with plans to also attend the mid-year meeting in June, which will be a workshop on Blurring Boundaries in Financial and Corporate Law. The call for papers (expired) includes a program description and is available here: http://www.aals.org/mm2014/AALS_2014_MM_RFP.pdf
Tuesday, December 10, 2013
A recent study, Who Owns West Virginia? (full report pdf), gives a glimpse into the land ownership in the state. The report finds that much of the state’s private land is "owned by large, mainly absentee corporations, [but] the list of top owners – once dominated by energy, land holding and paper companies – now includes major timber management concerns."
As reported by Ken Ward Jr. in the Charleston Gazette, the report finds that "[n]one of the state's top 10 private landowners is headquartered in West Virginia." Although it is accurate that the top ten owners are not indivdual owners, I will note that not all of the top ten owners are "corporations." There is at least one master limited partnership and one limited liability company (LLC). That may not mean much in the sense of absentee ownership, but it is a doctrinal distinction I maintain is still important.
It's not shocking that these entity owners would be out of state, especially because that was true back in 1974, too, when the last study was done. There are relatively few large entities chartered or headquartered in West Virginia, and it appears that many of the state chartered companies that were around in 1974 have since been acquired by larger, out-of-state entities. Absentee ownership is hardly a new, or even modern, phenomenon in the state. The report notes: "By 1810, as much as 93 percent of land in present day West Virginia was held by absentee owners, more than any other state in the region and likely any other state in the Union." Much of the ownership is still based in the region, though, as many of the large companies holding West Virginia land are based in Virginia.
Although the purchase of West Virginia’s land by timber management companies is perhaps the most interesting finding by investigators for this report, researchers also found:
The top 25 private owners own 17.6 percent of the state’s approximately 13 million private acres.
In six counties, the top ten landowners own at least 50 percent of private land. Of the six, five are located in the southern coalfields – Wyoming, McDowell, Logan, Mingo and Boone. Wyoming County has the highest concentration of ownership of any county.
Not one of the state’s top ten private landowners is headquartered in West Virginia.
Many of the counties – including Harrison, Barbour, Mineral, Lincoln, and Putnam – that had high concentrations of absentee corporate ownership (over 50%) in Miller’s 1974 study did not in this analysis.
Only three corporations that were among the state’s top ten landowners in 1974 remained on that list in 2011. If the sale of MeadWestvaco properties to Plum Creek Timber is completed, only two of the 1974 top owners will still be on the list.
Nationally timberland management concerns control about half of the nation’s timberlands that had been managed by industrial timber companies until the 1980s.
Finally, another potentially important finding is different level of entity ownership by region as related to the minerals beneath the land -- coal and natural gas. The study found:
There are also large geographical disparities in the share of large private landowners in the state. All but one of the counties where the top ten landowners owned at least 50 percent of the private land is in the southern coalfield coalfields - Wyoming, McDowell, Logan, Mingo and Boone. In the Marcellus gas field counties of the northeast and north-central part of the state, the private land ownership is less concentrated and tends to be owned more by individuals than large out-of-state corporations.
The study looked only at surface ownership, and not mineral rights ownership, so it's hard to tell if this gives an accurate look at the level of entity ownership in the Marcellus Shale. Moreover, mineral estates may be owned by private individuals who have leased their rights to entities, so it may be that even more of the state's property rights are effectively controlled by entities. The report indicates more study would be useful here, and I concur.
The takeaway: This report has the potential to be a good starting point for considering how to move the state forward in trying times. As the study notes: "[S]tudying patterns of land ownership in West Virginia through the lens of the 2011 tax data can help us understand our history, make wise policies in the present and better map the future of the state."
I think that's right. To me, a big cavaet is to ensure that the report be used to react to what is and to plan for what could be, rather then getting bogged down in what was or could have been. If people spend their time lamenting that outside corporations own land in the state, they will be missing the opportunity to do something positive for the future, like figuring out what can be done to promote sustainable development in the state by working with the current landowners. I hope the focus is primarily on the latter. There have already been enough missed opportunities.
Tuesday, December 3, 2013
Here in West Virginia, it's exam time for our law students. For my Business Organizations students, tomorrow is the day. For students getting ready to take exams, and for any lawyers out there who might need a refresher, the Kentucky Supreme Court provides a good reminder that LLCs are separate from their owners, even if there is only one owner.
Here's a basic rundown of the case, Turner v. Andrew, 2011-SC-000614-DG, 2013 WL 6134372 (Ky. Nov. 21, 2013) (available here): In 2007, an employee of M&W Milling was driving a feed-truck owned by his employer. A movable auger mounted on the feed-truck swung into oncoming traffic and struck and seriously damaged a dump truck owned by Billy Andrew, the sole member of Billy Andrew, Jr. Trucking, LLC, which owned the damaged truck. Andrew filed suit against the employee and M & W Milling claiming personal property damage to the truck and the loss of income derived from the use of damaged truck. Notably, the LLC was not a named plaintiff in the lawsuit.
Hey issue spotters: check out the last line of the prior paragraph. (Also: a bit of an odd twist is the Andrew chose not to respond to discovery requests, though that was not critical to the issue of whether the LLC had to be named for Andrew to recover.)
A limited liability company is a “hybrid business entity having attributes of both a corporation and a partnership.” Patmon v. Hobbs, 280 S.W.3d 589, 593 (Ky.App.2009). As this Court stated in Spurlock v. Begley, 308 S.W.3d 657, 659 (Ky.2010), “limited liability companies are creatures of statute” controlled by Kentucky Revised Statutes (KRS) Chapter 275. KRS 275.010(2) states unequivocally that “a limited liability company is a legal entity distinct from its members.” Moreover, KRS 275.155, entitled “Proper parties to proceedings,” states:
A member of a limited liability company shall not be a proper party to a proceeding by or against a limited liability company, solely by reason of being a member of the limited liability company, except if the object of the proceeding is to enforce a member's right against or liability to the limited liability company or as otherwise provided in an operating agreement.
Not surprisingly, courts across the country addressing limited liability statutes similar to our own have uniformly recognized the separateness of a limited liability company from its members even where there is only one member.