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June 26, 2009

Employer-Supplied Laptops & Attorney-Client Privilege. Stengart v. Loving Care Agency, Inc. (N.J. Super. Ct. App Div. 2009)

Employer lent Employee an employer-owned laptop for use at home.  Shortly before Employee resigned, she used the laptop to send and receive emails using her own email account to communicate with an attorney about suing Employer for discrimination.  After Employee resigned (and returned the laptop), she sued Employer.  Employer made an image of the laptops hard drive, and found the emails.  Were the emails protected by the attorney-client privilege?  That was the issue before the Court in Stengart v. Loving Care Agency, Inc., No. A-3506-08T1 (N.J. Super. App. Ct. June 26, 2009) (unpublished).  The Court held that the emails were protected: 

  1. It was not clear that Employer had adopted and promulgated an electronic communications policy, Slip Op. at 4-8;
  2. It was not clear that the purported policy applied to emails sent from a personal account, Slip Op. at 8-12;
  3. As applied,the purported policy to personal email was unenforceable because it did not further any legitimate business of Employer, Slip Op. at 13-23; and
  4. The policy was unenforceable because it intruded on the attorney-client privilege:

In weighing the attorney-client privilege, which attaches to the emails exchanged by plaintiff and her attorney, against the company's claimed interest in ownership of or access to those communications based on its electronic communications policy, we conclude that the latter must give way. Even when we assume an employer may trespass to some degree into an employee's privacy when buttressed by a legitimate business interest, we find little force in such a company policy when offered as the basis for an intrusion into communications otherwise shielded by the attorney-client privilege.

Slip Op. at 25-26 (emphasis added).

Hat-tip to Mike Frisch, Legal Profession Blog (No Right to Rummage).

posted by Gary Rosin

June 26, 2009 in Agency Cases | Permalink | Comments (0)

June 25, 2009

Exhausted Commuters: No Employer Duty to Public. Nabors Drilling USA Inc. v. Escoto (Tex. 2009)

Hornbook law so basic that it has its own name, the coming-and-going rule:  employee negligence in coming and going to work are outside the scope of employment, to the employer is not vicariously liable for an employee's negligence while commuting.  To be sure, there are scattered cases imposing liability on an employer for its own negligence.  In Otis Engineering Corp. v. Clark, 668 S.W.2d 307 (Tex.1983), an employer that had sent an intoxicated worker home early, and had poured the employee into his car, was found negligent, and liable for the inevitable accident on the way home.

Nabors Drilling USA, Inc. v. Escoto,No. 06-0890 (Tex. June 19, 2009), involved yet another accident while commuting from a drilling company job-site.  The employee (Ambriz) worked one-week on and one-week off, with 12-hour shifts (alternating a week of days, a week off, and a week of nights.  One morning, the employee fell asleep at the wheel.  The plaintiff argued that the drilling company was negligent, but the Court declined to extend Otis.   First, there was no showing the drilling company knew the employee "was impaired when leaving work on the day of the accident." Slip Op., at 6.  Second, the drilling company did not

... affirmatively exercise control over the incapacitated employee.  Unlike the employer in Otis, however, Nabors did not exercise any post-incapacity control over its employee. Ambriz completed his shift without incident and was not sent home early because of any impairment. Nabors did not instruct Ambriz to drive home or escort him to his car. * * * We have never extended Otis to create a duty where an employer’s only affirmative act of control preceded the employee’s shift and incapacity and amounted only to establishing work conditions that may have caused or contributed to the accident.

Slip Op. at 7-8 (citations omitted) (emphasis in original).

posted by Gary Rosin

June 25, 2009 in Agency Cases | Permalink | Comments (0) | TrackBack

June 24, 2009

Dissolution, Cancellation and LLC Survival Statutes. Chadwick Farm Owners Ass'n v. FHC LLC (Wash. 2009)

We all know how survival statutes work--or at least we think we do.  The recent opinion in Chadwick Farm Owners Ass'n v. FHC LLC,  207 P.3d 1251 (Wash. 2009) (en banc) (majority and dissenting opinions) may change that.

Under the Washington Limited Liability Company Act, Wash. Rev. Code, Chapter 25.15, dissolution of an LLC starts winding up.  § 25.15.270.  Dissolution does not impair remedies against the LLC, its managers or members, unless an action or proceeding is started within three years of dissolution.  § 25.15.303.  Those winding up the affairs have the right to bring or defend lawsuits after dissolution, but only until the filing of certificate of cancellation.  § 25.15.295(2).  The filing of a certificate of cancellation cancels the certificate of formation, § 25.15.080, and terminates the existence of the LLC as a separate entity, § 52.15.070(c). 

Chadwick Farm Owners Ass'ninvolved LLCs that had been administratively dissolved under Section 25.15.280.  An administratively dissolved LLC has two years to seek reinstatement.  § 25.15.290(1).  What happens if the LLC is not reinstated within two years?  Here the statutes conflict.  Under Section 52.15.270(6), that triggers dissolution (again?) of the LLC.  Under Section 25.15.290(4), the secretary of state "shall cancel the limited liability company's certificate of formation."  Which controls?  The majority in Chadwick Farm Owners Ass'n held that Section 25.15.290(4)controlled, and that pending suits against the LLC abated once a certificate of cancellation had been filed:

 Under the statutory scheme applying to limited liability companies that are administratively dissolved, if the company does not seek reinstatement it must wind up the company’s affairs within that two year period, because once the two years pass, the company no longer exists and has no power to act. While the company still exists, and during the time it is winding up (the time following dissolution and before cancellation of the certificate of formation), it has the power to prosecute and defend suits.  But once the company is canceled, it can no longer prosecute or defend suits; it no longer exists as a legal entity.

* * *

* * * The statutes do not permit an administratively dissolved limited liability company to continue winding up, including prosecuting and defending suits, on its own schedule after cancellation of the company’s certificate of formation.  * * *  There is no basis to treat a member canceled limited liability company differently than an administratively dissolved company.

207 P.3d at 1257-58 (citations and footnotes omitted).

What about three-year survival of actions under Section 25.15.303

By its plain language, RCW 25.15.303 provides that (1) dissolution does not affect any claim against a limited liability company and (2) there is a three-year limitations period from the date of dissolution in which to commence suit against a limited liability company. The statute never mentions “cancellation.” Of utmost importance, the legislature did not alter any provision in chapter 25.15 RCW and thus it left intact the statutes discussed above which provide that a limited liability company maintains its existence as a separate legal entity during dissolution but only until cancellation. In particular, as noted, RCW 25.15.295(2) unambiguously states that after a limited liability company is dissolved and before cancellation, i.e., during the winding up period, a manager or other representative who winds up the company’s affairs may “prosecute and defend suits” only until cancellation.

The Condominium Association in Emily Lane contends, however, that all canceled limited liability companies are also first dissolved companies, and logically the statute applies to dissolved companies that later cancel themselves. Amicus Washington State Trial Lawyers Association Foundation makes a similar argument.

However, there is a clear distinction between dissolution and cancellation.A dissolved company still exists for the purpose of winding up, during which it can sue or be sued. But once a limited liability company’s certificate of formation is canceled, it no longer exists as a separate legal entity for any purpose.  RCW 25.15.303 does not even mention cancellation, and the legislature did not alter any of the existing provisions in the Act. On its face, and read in the context of the entire Act, RCW 25.15.303 means that an action against a limited liability company, whether arising before or after dissolution, must be brought within three years of dissolution, but an action against a limited liability company will abate upon cancellation.

The plain language in RCW 25.15.303 and the other provisions in the Act resolve the statute’s meaning. * * *

207 P.3d at 1259 (emphasis added) (citations and footnotes omitted).

What happens after other dissolutions?  Could the members (or managers) file a certificate of cancellation, and stiff plaintiffs in pending suits?  Yes, but the Court warns:

* * * [That does] not take into account the whole statutory scheme, however. A dissolved limited liability company must, under the Act, properly complete the winding up process, which includes paying or making arrangements to pay known obligations and claims, even if unmatured or contingent. Members of a limited liability company who fraudulently attempt to use the provisions of the act to avoid liability and members who wind up a limited liability company improperly expose themselves to individual liability....

207 P.3d at 1261 (emphasis added); see also, id. at 1262-64 (discussing individual liability for improper winding up).

Finally, the Court rejected the argument that its interpretation was not the "bvest" result:

We recognize, however, that these arguments reflect the homeowners’ view that the statute is unfair when it is applied according to its express terms. However, if the result here is not what the legislature envisioned it is, nonetheless, what the statute plainly provides. We understand from the house and senate bill reports that a comprehensive review of the Act is underway. If the result here is not what the legislature wants, it will be positioned to make additional changes deemed necessary. It is not, however, the province of this court to rewrite RCW 25.15.303 or any other provision of the Act.

207 P.3d at1261.  So, the Washington legislature has some work to do.  I offer a couple of thoughts

Also, the potential of personal liability, if widely known, may reduce the number of LLC "walk-aways," where the owners of an unsuccessful LLC abandon it to administrative dissolution, and make no attempt to wind up its affairs in an orderly fashion.

posted by Gary Rosin

June 24, 2009 in LLC Cases | Permalink | Comments (0) | TrackBack

June 23, 2009

Series LLCs & Assumed Names

Delaware, § 18-215(a), Illinois, 805 ILCS 180/37‑40(a), and Texas, Tex. Bus. Org Code § 601.101 (added by Section 45 of SB 12442), all allow the operating agreement (however named) to 'establish" one or more series.  Only Illinois conditions asset and liability partitioning on the filing of a certificate of designation, § 37-40(b), that specifies the name of the series, § 37-40(d).  Also, only llinois expressly provides that

But what about assumed name filing requirements?  Presumably, that ought not to be an issue in Illinois--the name is already of record, and would not be an assumed name of the LLC itself.  Or at least, that's the way I'd set it up. 

In Delaware and Texas, not only is establishing an LLC entirely private, but also a series is not formally a separate entity.  The use of a series name would then seem to require a filing under the assumed name statute.  For example, under Tex. Bus. & Commerce Code Section 71.002(2)(H), an LLC's name in its "certificate of formation or comparable document" is not an assumed name. Interestingly, although Section 62 of SB 1442 amended TBCC section 71.002, it did not amend subdivision (2)(H). 

A question for practitioners who are UB readers : how are handling the assumed name issue?

posted by Gary Rosin

June 23, 2009 in Commentary | Permalink | Comments (1) | TrackBack

June 22, 2009

Welcome Brad Borden, New Contributing Editor

Please welcome Prof. Brad Borden (Washburn) as a Contributing Editor.  Professor Borden is a wide-published partnership tax theorist, with special interest in taxation of property transactions and entity taxation. He written two books on tax-free like-kind exchanges.  Brad is currently working on two books., one that will compile his theoretical work on partnership taxation, and the other will incorporate legal and financial aspects into tax analysis and planning of real estate ventures. Professor Borden is an active member of the American Bar Association's Section of Taxation, where he currently serves as Chair of the Sales, Exchanges & Basis Committee.

posted by Gary Rosin

June 22, 2009 in About This Blog | Permalink | Comments (0) | TrackBack

Welcome Tom Geu, New Contributing Editor

I welcome Prof. Tom Geu (South Dakota) as a contributing editor of the UB blog.  Tom serves as a Reporter for the Uniform Cooperative Association Act for the National Conference of Commissioners on Uniform State Laws (NCCUSL) and has been an advisor to other NCCUSL drafting projects including the Uniform Limited Liability Company Act (both the 1994 and 2006 versions), the Model Entities Transaction Act, and the Uniform Limited Partnership Act (2001).  He is a member of the board of directors of the South Dakota Bar’s Business Section. 

posted by Gary Rosin

June 22, 2009 in About This Blog | Permalink | Comments (0) | TrackBack

Texas: "Reasonable Compensation" and Limitations on LLC & LP Distributions

Section 101.206 of the Texas Business Organization Code (TBOC) prohibits an LLC from making distributions when the fair value of its assets is, or would become, less than its total liabilities.  Section 41 of Senate Bill 1442 amended TBOC Section 101.206 so as to exclude "reasonable compensation" from the limitations of Section 101.206:

   (f) For purposes of this section, "distribution" does not include an amount constituting reasonable compensation for present or past services or a reasonable payment made in the ordinary course of business under a bona fide retirement plan or other benefits program.

Similar language was included in the limitations of distributions of an LLC series, TBOC § 101.613(h) (Section 43 of SB 1442), andof a limited partnership, TBOC § 153.210(b) (Section 52 of SB 1442).

First, In the context of partnerships, TBOC Section 151.001(2) had already defined "distribution" as a transfer to a partner in the partner's "capacity as a partner". I would think that any amount a limited partnership had agreed to pay a partner as compensation for services would not transfers to the partner as partner. If the legislature wanted to make that clear, the logical place to do that would have been TBOC section 151.001(2). TBOC Chapter 151 is a "mini-hub," its provisions apply to all partnerships, and to all uses of "distribution" in Chapters 151 through 154. Adding the limitation to Section 153.210 limits the scope of the carve out.

Second, Chapter 152 (general partnerships) has no limitations on distributions. Before the advent of the LLC, that made sense; all partners were liable for partnership obligations. With the introduction of the LLP (you can blame, or credit, Texas for that), limitations on distributions seem appropriate. But neither Texas nor the RUPA have any such limitations, leaving creditors to fraudulent transfer law.

posted by Gary Rosin

June 22, 2009 in Commentary, Legislative Developments | Permalink | Comments (0) | TrackBack