Tuesday, August 11, 2020

Bankruptcy Law Chair - Mercer Law

The Mercer University School of Law seeks a candidate to fill the  Southeastern Bankruptcy Law Institute & W. Homer Drake Jr. Endowed Chair in Bankruptcy Law.  The faculty member will teach Bankruptcy Law and business related courses.  Candidates who will add to the diversity of our faculty are particularly encouraged to apply.  Mercer University is an AA/EEO/ADA employer.  Applicants should have a J.D. degree from an accredited university/college, a commitment to excellence in teaching, and demonstrated potential for excellence in research and scholarship.  Interested applicants will need to complete the brief online application at: http://hr.mercer.edu/jobs/ and attach a current CV with the names and contact information for three references.  For information contact Professor Stephen Johnson, Chair, Appointments Committee, Mercer University School of Law, Johnson_s@law.mercer.edu.

August 11, 2020 in Bankruptcy/Reorganizations, Joan Heminway, Jobs | Permalink | Comments (0)

Tuesday, February 11, 2020

LLCs: The Uncola (Bankruptcy Edition)

The United States Bankruptcy Court for the Western District of Kentucky has opened my eyes to some bankruptcy law issues I hadn't previously seen. The court also committed what I consider to be a cardinal sin: the court refers to an LLC as a "limited liability corporation."  An LLC is a "limited liability company," which is a statutorily different entity than a corporation. 

The court states: "Sunnyview and TR are limited liability corporations. They are not individuals and do not meet the definition of insiders under 11U.S.C.§ 101(31)(B)[sic]." In re: Bullitt Utilities, Inc., No. 15-34000(1)(7), 2020 WL 547278, at *6 (Bankr. W.D. Ky. Jan. 24, 2020) (emphasis added). Other than being LLCs, and not corporations, this appears to be correct. The statute, 11 U.S.C.§ 101(31), provides: 

(31)The term “insiderincludes

. . . . 
(B)if the debtor is a corporation
(i)
director of the debtor;
(ii)
officer of the debtor;
(iii)
person in control of the debtor;
(iv)
partnership in which the debtor is a general partner;
(v)
general partner of the debtor; or
(vi)
relative of a general partner, director, officer, or person in control of the debtor;
The court continues, "If considered to be corporations, none of the entities meet the definition of a [sic] 'insider'”. Id. The LLCs at issue are creditors, without any express control, so it is correct that they could not be insiders on their own. The court also determined there was "no evidence" that the individual in control of the two LLCs had used his power in a manner that resulted in "inequitable conduct," so the LLCs under his control could not be held liable under any theory of vicariously liability (e.g., entity veil piercing). 
 
Based on the court's factual determinations, this all appears to come out correctly, notwithstanding the mischaracterization of the LLC. 
 
More frustrating, for me, is my discovery that bankruptcy law does, in fact, characterize a "corporation" as follows: 
(9) The term “corporation”— (A) includes— (i) association having a power or privilege that a private corporation, but not an individual or a partnership, possesses; (ii) partnership association organized under a law that makes only the capital subscribed responsible for the debts of such association; (iii) joint-stock company; (iv) unincorporated company or association; or (v) business trust; but (B) does not include limited partnership.
 
So, while I acknowledge the statute, I strenuously object. (We all know how effective that is.) Corporations are just not partnerships and they are really, really not unincorporated companies or associations. That would be like saying Coca-Cola or Pepsi are an "Uncola. (Yes, I am dating myself with that reference.) 
 
Couldn't we just use something like "Covered Entity" for the definition?  
 
Anyway, in closing, I will once again note that cases like this run the risk of creating bad law where an LLC is in control of a corporation. The court here states that the LLC is not and individual, but an LLC (I think) is a "person" under the definitions. The statute provides that "[t]he term 'person' includes individual, partnership, and corporation ...." 11 USC § 101(41). And as per 11 USC § 101(9), "corporation" includes unincorporated companies. Thus, I hope that the fact that LLCs in this case were not individuals, does not lead a potential future court to miss that they also need to consider whether an LLC might be a "person in control of the debtor."

February 11, 2020 in Bankruptcy/Reorganizations, Corporations, Joshua P. Fershee, LLCs, Unincorporated Entities | Permalink | Comments (0)

Monday, December 9, 2019

Calling LLCs "Corporations" Is Sometimes Harmless Error, But It Can't Be Ignored

Once again, a court seems to arrive at the correct outcome, while making mistakes in the describing entity type. As usual, the court mislabeled a limited liability company (LLC).  Here we go:  

Andrea and Timothy Downs each held a 50% interest in a corporation, Downs Holdings, Inc. It held limited liability corporation (“LLC”) and limited partnership (“LP”) ownership interests. Eventually, the Downs agreed to dissolve the corporation and, as shareholders, passed a corporate resolution electing dissolution.

In re: ANDREA STEINMANN DOWNS, Debtor. NORIO, INC., Appellant, v. THOMAS H. CASEY, Chapter 7 Tr., Appellee., No. 8:16-BK-12589-CB, 2019 WL 6331564, at *1 (B.A.P. 9th Cir. Nov. 25, 2019) (emphasis added). 
 
The Downs did not follow the necessary formalities to dissolve Downs Holdings, Inc., and had instead ask that the corporation's management company "distribute the payments and monies owed to Downs Holdings to each shareholder separately, 50% to Mr. Downs and 50% to Ms. Downs." Id. Further, it appeared that the Downs asked to be treated as separate interest holders for both the LLC and LP. Id. Ms. Downs later borrowed $50,000 from Norio, Inc. and pledged pledged her claimed interests in the LLC and the LP as collateral. Id. at *2.
 
Because Downs Holdings, Inc., was the named interest holder in the LLC and the LP, and it had not been dissolved, and because there was no showing "that the assets transferred from Downs Holdings to Ms. Downs, the bankruptcy court did not err when it determined that Norio, Inc. lacked secured status.  Id. at *5. 

That all seems about right.  At the beginning of the opinion, the court states, 
 
We acknowledge that some of the bankruptcy court’s findings lack support in the record, but we ignore harmless error because the bankruptcy court’s ultimate conclusion is correct: Downs Holdings owned the relevant assets, and Ms. Downs could not pledge them to Norio as collateral for the loan.
Id.at *1. Calling a LLC a corporation in this context is, this time, anyway, harmless error. But I am not inclined to ignore it. I mean, the entity type is specifically at issue in this case, with respect to the corporate form. Making sure the corporation and the LLC are clearly recognized as distinct entity types may not be essential to finding right outcome, but it sure would be appropriate.  

December 9, 2019 in Bankruptcy/Reorganizations, Corporations, Family Business, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Tuesday, October 16, 2018

And So, I Brag: Business Law Students with Initiative

I try not to use this space too often to brag on my students--the folks whose quest for knowledge gets me up in the morning.  But three of my students have been co-authors of two separate pieces in the American Bar Association's Business Law Today publication since May.  The initiative and the follow-through that these students (two of whom have graduated and are now in private practice) exhibited is truly extraordinary.  And so, I brag . . . .

Most recently, my current student Samuel Henninger has co-authored an article with a practitioner on preference payments in bankruptcy entitled "I Scream, You Scream, We All Scream at Preference Claims."  Samuel graduates in May 2019. He will clerk for a local bankruptcy court judge next year and then practice with Waller Lansden Dortch & Davis, LLP in Nashville after his clerkship concludes.

Back in May, my former students Brian Adams and Bo Cook co-authored an article together entitled "Limiting the Scope of Post-Closing Actions in Private Mergers & Acquisitions: The Role of Non-Reliance and Integration Clauses in Delaware," delving into enforcement issues in mergers and acquisitions relating to allegations of fraud based on "extra-contractual representations."  Brian and Bo graduated in the spring of this year (2018).  Brian is a newly minted associate at Polsinelli PC in Nashville and Bo holds the same august position at Bass Berry & Sims PLC also in Nashville.

Few students understand the significant contribution that these kinds of articles may make in solving the problems of practicing lawyers and, potentially, the judiciary.  Fewer yet have the chutzpah to think that their article of this kind, if submitted, would make it to publication.  Even fewer students would undertake and complete the tailored research and writing that an article of this kind takes.  These three guys deserve some real credit, in my estimation.  And so, I brag!

October 16, 2018 in Bankruptcy/Reorganizations, Joan Heminway, M&A | Permalink | Comments (1)

Monday, July 11, 2016

Innovative Teaching in Bankruptcy and Reorganizations

OK.  I know it's not yet quite time to panic about syllabi and such for the fall semester.  But that first day of class does approach, and I know some of you out there have already given some thought to innovating your teaching for the fall.  Maybe you're new to teaching or teaching a new (or new-to-you) course.  Maybe you're trying to spice up or change the direction of a course you've taught for a while.  Maybe this post will give you some new food for thought . . . .

For a number of years, my colleague George Kuney, the Director of the business law center at UT Law, has asked students to invest in a particular Chapter 11 bankruptcy case as a capstone experience in his Bankruptcy and Reorganizations course.  The students, working in pairs or small groups,  are required to review all of the documents in the case docket and provide summaries that integrate those filings with learning from the course and supplemental research.  George makes the resulting case studies available to the public.  The cumulation of case studies created by students in this course has gotten quite impressive over the years.  And the case studies get significant readership.

I often have said that it's hard for a law student to identify gaps in knowledge unless the student undertakes to write or speak about the law.  George's exercise offers students the opportunity to both write and speak about the law in a practical setting.  The final work product is a joint writing, but along the way, the students engage verbally to discuss between or among themselves what to present and how to present it in the final case study.

The project also helps students to see the immediate relevance of the law they are learning to find and apply in the course.  Someone out there is using that law right now in a context that requires issue and rule identification and legal analysis and judgment.  The students review and assess the decisions and actions of legal counsel and their clients real-time--just as the news media is reporting on those decisions and actions, in some cases.  Wow.

I see a lot of value in this method of teaching.  I am playing around with changing my Securities Regulation course (which next will be offered in the spring) to incorporate a smaller-scale version of an exercise like this.  It may take me a while to come up with something that works, but I am going to give it a go.  Let me know if you've used a project like this in any of your classes.  I would be curious to know what folks are doing in this regard.

July 11, 2016 in Bankruptcy/Reorganizations, Joan Heminway, Teaching | Permalink | Comments (0)

Friday, February 26, 2016

Bruckner on Bankrupting Higher Education

Matthew Bruckner (Howard) recently posted an interesting article on bankruptcy reorganization and universities. Given the challenges facing many schools, his article should be one that attracts attention. The article can be downloaded here and the abstract is below.

--------------

Many colleges and universities are in financial distress but lack an essential tool for responding to financial distress used by for-profit businesses: bankruptcy reorganization. This Article makes two primary contributions to the nascent literature on college bankruptcies by, first, unpacking the differences among the three primary governance structures of institutions of higher education, and, second, by considering the implications of those differences for determining whether and under what circumstances institutions of higher education should be allowed to reorganize in bankruptcy. This Article concludes that bankruptcy reorganization is the most necessary for for-profit colleges and least necessary for public colleges, but ultimately concludes that all colleges be allowed to reorganize in chapter 11.

February 26, 2016 in Bankruptcy/Reorganizations, Business Associations, Business School, Haskell Murray, Law School, Nonprofits, Research/Scholarhip | Permalink | Comments (0)

Friday, December 11, 2015

Amazon Prime Now and the Rise of Community-Building Retailers

Amazon Prime Now has debuted in Nashville. Amazon Prime Now offers free two-hour delivery on many items for Prime members. The service is amazing and is already changing the way I shop. I really dislike shopping malls, especially during the busy holiday season, but I also dislike waiting weeks (or even days) for shipments to arrive, so Amazon Prime Now is a perfect solution.

With Amazon Prime Now expanding, I imagine even more brick and mortar retailers will be headed to bankruptcy unless they find a way to differentiate their companies and add more value.

Brick and mortar retailers may find differentiation through community building services. I already see some retailers attempting this. Running footwear and apparel stores are offering free group runs starting from their storefronts and/or group training programs for a fee. Grocery stores are offering group cooking classes. Book stores are offering book clubs. The list goes on.

These brick and mortar retailers are finding it more and more difficult to compete with e-retailers on price and convenience. With the rise in technology, however, face to face community seems to be increasingly rare. Brick and mortar retailers that aid in community building may be able to justify higher prices for their goods, and the fee-based training programs may add another solid revenue stream.

Similarly, in my classes, I consistently ask myself: How am I providing value beyond what students could receive from an online course? I have made changes (like more group work, more case method work, more writing-based assessments, and more face to face advising) in response to this question, and I continue to look for ways to improve. Adapt or die.

December 11, 2015 in Bankruptcy/Reorganizations, Business School, Entrepreneurship, Haskell Murray, Law School, Web/Tech | Permalink | Comments (4)

Friday, October 9, 2015

Christine Hurt on LLPs in Bankruptcy

Christine Hurt has written an interesting article on limited liability partnerships in bankruptcy. It's available here.

Here's the abstract:

Brobeck. Dewey. Howrey. Heller. Thelen. Coudert Brothers. These brand-name law firms had many things in common at one time, but today have one: bankruptcy. Individually, these firms expanded through hiring and mergers, took on expensive lease commitments, borrowed large sums of money, and then could not meet financial obligations once markets took a downturn and practice groups scattered to other firms. The firms also had an organizational structure in common: the limited liability partnership.

In business organizations classes, professors teach that if an LLP becomes insolvent, and has no assets to pay its obligations, the creditors of the LLP will not be able to enforce those obligations against the individual partners. In other words, partners in LLPs will not have to write a check from personal funds to make up a shortfall. Creditors doing business with an LLP, just as with a corporation, take this risk and have no expectation of satisfaction of claims by individual partners, absent an express guaranty. In bankruptcy terms, creditors look solely to the capital of the entity to satisfy claims. While bankruptcy proceedings involving general partnerships may have been uncommon, at least in theory, bankruptcy proceedings involving limited liability partnerships have recently become front-page news.

The disintegration of large, complex LLPs, such as law firms, does not fit within the Restatement examples of small general partnerships that dissolve fairly swiftly and easily for at least two reasons. First, firm creditors, who have no recourse to individual partners’ wealth, wish to be satisfied in a bankruptcy proceeding. In this circumstance, federal bankruptcy law, not partnership law, will determine whether LLP partners will have to write a check from personal funds to satisfy obligations. Second, these mega-partnerships have numerous clients who require ongoing representation that can only be competently handled by the full attention of a solvent law firm. In these cases, the dissolved law firm has neither the staff nor the financial resources to handle sophisticated, long-term client needs such as complex litigation, acquisitions, or financings. These prolonged, and lucrative, client matters cannot be simply “wound up” in the time frame that partnership law anticipates. The ongoing client relationship begins to look less like an obligation to be fulfilled and more like a valuable asset of the firm.

Partnership law would scrutinize the taking of firm business by former partners under duty of loyalty doctrines against usurping business opportunities and competing with one’s own partnership, both duties that terminate upon the dissolution of the general partnership or the dissociation of the partner. However, bankruptcy law is not as forgiving as the LLP statutes, and bankruptcy trustees view the situation very differently under the “unfinished business” doctrine. The bankruptcy trustee, representing the assets of the entity and attempting to salvage value for creditors, instead seeks to make sure that assets, including current client matters, remain in partnership solution unless exchanged for adequate consideration, even if the partners agree to let client matters stay with the exiting partners.

This Article argues that the high-profile bankruptcies of Heller Ehrman LLP, Howrey LLP, Dewey & LeBeouf, LLP, and others show in stark relief the conflict between general partnership law and bankruptcy law. The emergence of the hybrid LLP creates an entity with general partnership characteristics, such as the right to co-manage and the imposition of fiduciary duties, but with limited liability for owner-partners. These characteristics co-exist peacefully until they do not, which seems to be at the point of dissolution. Then, the availability of limited liability changes partners’ incentives upon dissolution. Though bankruptcy law attempts to resolve this, it conflicts with partnership law to create more uncertainty.

October 9, 2015 in Bankruptcy/Reorganizations, C. Steven Bradford, Partnership, Research/Scholarhip | Permalink | Comments (0)

Tuesday, August 18, 2015

LLCs, Freedom of Contract, Bankruptcy, and Planning Ahead

Over at the Kentucky Business Entity law blog, Thomas Rutledge discusses a recent decision from the United States District Court for the Southern District of Indiana, affirming a Bankruptcy Court decision that finding that when a member of an LLC with voting control personally files bankruptcy, that right to control the LLC became a vested in the trustee because the right was part of the bankruptcy estate. The case is In re Lester L. Lee, No. 4-15-cv-00009-RLY-WGH, Adv. Proc. No. 14-59011 (S.D. Ind. August 10, 2015) (PDF here).

A key issue was that the bankruptcy filer (Lester Lee) had 51% of the vote, but no shares. The court then explains:

7.  . . . [t]he Operating Agreement states . . .

(D) Each member shall have the voting power and a share of the Principal and income and profits and losses of the company as follows:

Member’s Name (Share) (Votes)

Debra Jo Brown (20%)  (10)

Brenda R. Lee (40%) (20)

Larry L. Lee (20%) (10)

Melinda Gabbard (20%) (10)

Lester L. Lee (0%) (51)

. . . .

8. . . . Trustee’s counsel became aware of the Debtor’s 51% voting rights as a member, and that pursuant to applicable law, “this noneconomic interest became property of the estate subject to control of the Trustee on the filing of the petition pursuant to 11 U.S.C. § 541.”

Here's Rutledge's take: 

On appeal, the Court’s primary focus was upon whether the right to vote in an LLC constitutes “property of the estate,” defined by section 541(a)(1) of the Bankruptcy Code as “all legal or equitable interest of the Debtor in property as of the commencement of the case. After finding that Lee could be a “member” of the LLC notwithstanding the absence of any share in the company’s profits and losses or the distributions it should make, the Court was able to determine that Lee was a member. In a belt and suspenders analysis, the Court determined also that the voting rights themselves could constitute “economic rights in the company” affording him the opportunity to, for example, “ensure his continued employment as manager” thereof.

In a response to Rutledge's blog, Prof. Carter Bishop notes,

The court did not state the trustee could exercise those voting rights.  The next step is crucial. If the operating agreement is an executory contract of a multi-member LLC, BRC 365 will normally respect LLC state law restrictions as “applicable law” and deny the trustee the right to exercise the debtor’s voting rights (similar outcome to a non-delegable personal service contract).This was a managing member of a multi-member LLC, so I assume BRC 365 blocks the trustee’s exercise.

Rutledge notes that could be the case, but it's also possible the Lee court was saying we already decided that -- voting rights are part of the estate.  

I find all of this interesting and important to think about, especially given my limited bankruptcy knowledge. My main interest, though, is how might we plan around such a situation?  Many LLC statutes provide some options.  

For example, some states allow those forming an LLC to adopt a provision in the Operating Agreement that makes bankruptcy an event that triggers "an event of dissociation,” which would make the filer (or his or her successor in interest) no longer a member. See, e.g., Indiana Code sec. 23-18-6-5(b) ("A written operating agreement may provide for other events that result in a person ceasing to be a member of the limited liability company, including insolvency, bankruptcy, and adjudicated incompetency.").  This raises the question, then, of whether the bankruptcy code trumps this LLC code such that the bankruptcy filing creates an estate that makes it so the state LLC law cannot operate to eliminate the filer as a member. 

The answer is no, the state law doesn't trump the bankruptcy code, but the state provision can still have effect.  A recent Washington state decision (petition for review granted), relying on Virginia law, determined that where state law dissociates a member upon a bankruptcy filing, the trustee cannot be a member, and thus the trustee cannot exercise membership rights: 

[I]nstead of dissociating the debtor, Virginia law operated to dissociate the bankruptcy estate itself. The court concluded, “Consequently, unless precluded by § 365(c) or (e), his bankruptcy estate has only the rights of an assignee.
 
Given the similarities between Virginia's and Washington's treatment of LLC members who file for bankruptcy, we adopt the reasoning of Garrison–Ashburn [253 B.R. 700 (Bankr. E.D. Va. 2000)]. By applying Washington law, we conclude that RCW 25.15.130 dissociates a bankruptcy estate such that it retained the rights of an assignee under RCW 25.15.250(2), but not membership or management rights, despite the provisions of 11 U.S.C. § 541(c)(1).
Nw. Wholesale, Inc. v. PAC Organic Fruit, LLC, 183 Wash. App. 459, 485, 334 P.3d 63, 77 (2014) review granted sub nom. Nw. Wholesale, Inc. v. Ostenson, 182 Wash. 2d 1009, 343 P.3d 759 (2015).

The court then needed to decided whether § 365 allows a member to retain his or her membership. Under Washington partnership law, as applied to the bankruptcy code, the court explained:  

under § 365, the other partners are not obligated to accept an assumption of the partnership agreement. Partnerships are voluntary associations, and partners are not obligated to accept a substitution for their choice of partner. The restraint on assumability also makes the deemed rejection provision of § 365 inapplicable to the partnership agreement. Therefore, § 365(e)'s invalidation of ipso facto provisions does not apply, and state partnership law is not superseded. The debtor-partner's economic interest is protected by other sections of the bankruptcy code, but he no longer is entitled to membership. 

Nw. Wholesale, Inc. v. PAC Organic Fruit, LLC, 183 Wash. App. 459, 489, 334 P.3d 63, 79 (2014) review granted sub nom. Nw. Wholesale, Inc. v. Ostenson, 182 Wash. 2d 1009, 343 P.3d 759 (2015). The court then applied the same reasoning to LLC law, concluding "that that 11 U.S.C. § 541 and § 365 did not preempt Washington law that" removes members in the limited liability company upon a bankruptcy filing.  
 
The fact that Indiana law provides the option to make (instead of automatically making) bankruptcy a dissociating event, it seems to me, shouldn't change the outcome if Washington's analysis is right, and I think it is. LLC members be able to pick their members, and protecting that right even in the face of bankruptcy is important. 
 
In the Lee case, state LLC law did not provide that bankruptcy was a dissociating event and the parties did not choose to make that the case.  I am all for LLCs allowing the members to make such a decision (either way), but here, LLC members did not do so (at their own peril).  I agree with Prof. Bishop that an open question remains as to whether the trustee can vote, and I hope the answer is no. But one can make that outcome a lot more likely by planning ahead.  

August 18, 2015 in Bankruptcy/Reorganizations, Business Associations, Joshua P. Fershee, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (0)