Tuesday, August 20, 2019

The City University of New York (CUNY) School of Law - Business Law Professor Position

The City University of New York (CUNY) School of Law seeks highly-qualified candidates for a tenured or tenure-track faculty appointment to begin in Fall 2020. The principal responsibility of this faculty member will be to teach business law related courses, including Business Associations, U.C.C. Survey, and Contracts. All faculty are also expected to teach our first-year Lawyering course on a rotating basis, and all faculty are expected to teach in both the day and evening programs on a rotating basis.

CUNY SCHOOL OF LAW: "LAW IN THE SERVICE OF HUMAN NEEDS"

CUNY School of Law is a national leader in progressive legal education: we are ranked first in the country for public interest law and third in the county for clinical programs, and we are one of the most diverse law schools in the nation.

Our mission at CUNY School of Law is two-fold: training public interest attorneys to practice law in the service of human needs; and providing access to the profession for members of historically underrepresented communities. The Law School advances that mission though an innovative curriculum that brings together the highest caliber of clinical training with traditional doctrinal legal education to train lawyers prepared to serve the public interest. The basic premise of the law school's program is that theory and abstract knowledge cannot be separated from practice, practical skill, professional experience and the social, cultural, and economic context of law. The curriculum therefore integrates practical experience, professional responsibility, and lawyering skills with doctrinal study at every level.

QUALIFICATIONS

 Successful candidates will have:

a)      J.D., L.LB., or Ph.D in a law-related discipline;

b)      admission to law practice;

c)      social justice lawyering experience;

d)      a demonstrated commitment to the mission of CUNY School of Law;

e)      availability and willingness to teach in the day and evening programs on a rotating basis;

f)       availability and willingness to teach the first-year Lawyering course on a rotating basis (experience teaching legal writing preferred);

g)      commitment to scholarly engagement (established scholarly record preferred);

(a)   a demonstrated commitment to excellent teaching (ability to teach in both a classroom and clinical setting preferred); and

(b)   demonstrated success as a faculty member, including the ability to collaborate with others and share responsibility for committee and department assignments.

COMPENSATION

CUNY offers faculty a competitive compensation and benefits package covering health insurance, pension and retirement benefits, paid parental leave, and savings programs. We also provide mentoring and support for research, scholarship, and publication as part of our commitment to ongoing faculty professional development.

HOW TO APPLY

Interested candidates should apply at www.cuny.edu by accessing the employment page, logging in or creating a new user account, and searching for this vacancy using the Job ID (20886) or Title (Assistant, Associate, or Full Professor of Law) then selecting "Apply Now" and providing the requested information. (Link at : 
https://cuny.jobs/queens-ny/assistant-associate-or-full-professor-of-law/07654EF690374350BED697DD5EBAE1F4/job/)

The application requires a CV/resume and a cover letter, indicating the position to which you are applying.

August 20, 2019 in Business Associations, Corporations, Haskell Murray, Jobs, Law School | Permalink | Comments (0)

Friday, August 16, 2019

Is Boycotting a Bust?

     Last week, I led a “legal hack” for some of the first year students during orientation. Each participating professor spoke for ten minutes on a topic of our choice and then answered questions for ten minutes. I picked business and human rights, my passion. I titled my brief lecture, “Are you using a product made by slaves, and if you are, can you do anything about it”?

     In my ten minutes, I introduced the problem of global slavery; touched on the false and deceptive trade practices  litigation levied against companies; described the role of shareholder activists and socially responsible investors in pressuring companies to clean up supply chains; raised doubts about the effectiveness of some of the disclosure regimes in the US, EU, and Australia; questioned the efficacy of conscious consumerism; and mentioned blockchain as a potential tool for provenance of goods. Yes. In ten minutes. 

     During the actual hack later in the afternoon, I had a bit more time to flesh out the problem. I developed a case study around the Rana Plaza disaster in which a building collapse in Bangladesh killed over 1,000 garment workers six years ago. Students brainstormed solutions to the problems I posed with the help of upperclassmen as student facilitators and community stakeholders with subject matter expertise. At the end of the two-hour brainstorming session, the students presented their solutions to me.  

     We delved deeper into my subject matter as I asked my student hackers to play one of four roles: a US CEO of a company with a well-publicized CSR policy deciding whether to stay in Bangladesh or source from a country with a better human rights record; a US Presidential candidate commenting on both a potential binding treaty on business and human rights and a proposed federal mandatory due diligence regime in supply chains; a trade union representative in Bangladesh prioritizing recommendations and demands to EU and US companies; and a social media influencer with over 100 million followers who intended to use his platform to help an NGO raise awareness.

     This exercise was identical to an exercise I did in March in Pakistan with 100 business leaders, students, lawyers, government officials, and members of civil society as part of an ABA Rule of Law Initiative. The only difference was that I asked Pakistanis to represent the Bangladesh government and I asked the US students to represent a political candidate. 

     In both Pakistan and Miami, the participants had to view the labor issues in the supply chain from a multistakeholder perspective. Interestingly, in both Pakistan and Miami, the participants playing the social media influencer rejected the idea of a boycott. Even though multiple groups played this role in both places, each group believed that seeking a boycott of companies that used unsafe Bangladeshi factories would cause more harm than good. 

     Of note, the Miami Law students did their hack during the call for a boycott of Soul Cycle due to Steve Ross’ decision to hold a fundraiser for President Trump. In my unscientific poll, three out of three students who patronized Soul Cycle refused to boycott. When it came to the fictionalized case study, all groups raised concerns that a boycott could hurt garment workers in Bangladesh and retail workers in the US and EU. Some considered a “buycott” to support brands with stronger human rights records. 

     I’ve written before about my skepticism about long term boycotts, especially those led by millennials. Some of these same students echoed my concerns about their own lack of sustained commitment on proposed boycotts in the past. The “winning” hack- #DoBetterBangladesh was a multipronged strategy to educate consumers, adopt best practices of successful campaigns such as the Imokalee

farm workers, and form acoalition with other influencers to encourage consumer donations to reputable NGOs in Bangladesh. After seeing what these student groups could do in just two hours, I can’t wait to see what they can accomplish after three years of law school. 

August 16, 2019 in Corporations, CSR, Current Affairs, Ethics, Human Rights, International Business, Law School, Marcia Narine Weldon, Shareholders, Teaching | Permalink | Comments (0)

Wednesday, August 14, 2019

Business Law Professor Jobs - Posted in 2019-20

This is my fifth year compiling a list of open business law professor positions in law schools and other settings (mostly business schools).

See the 2018-19, 2017-18, 2016-17, 2015-16 (law schools; business schools), and 2014-15 (law schools, business schools) lists to get a sense of what the market for business law professors has looked like over the past few years.

I will likely update this list from time to time; feel free to e-mail me with additions. Updated 8/16/19.

Law School Professor Positions – Business Area Identified

  1. Chicago-Kent
  2. City University of New York (CUNY)
  3. Ohio State University
  4. Pennsylvania State University
  5. Southern Illinois University
  6. Suffolk University (transactional legal clinic)
  7. University of Akron
  8. University of California-Davis (transactional legal clinic)
  9. University of Cincinnati
  10. University of Dayton
  11. University of Kansas
  12. University of Kentucky
  13. University of Massachusetts - Dartmouth
  14. University of Nebraska
  15. University of Richmond
  16. University of Wisconsin
  17. Vanderbilt University
  18. Washington University (St. Louis)
  19. Wayne State University

Legal Studies Professor Positions (Mostly Business Schools)

  1. Boise State University
  2. California State University-Los Angeles (real estate law focus)
  3. California State University-Northridge
  4. Christopher Newport University
  5. Hagerstown Community College
  6. Ithaca College (full-time, non-tenure track)
  7. Morgan State University
  8. Sam Houston State University (2 positions)
  9. St. Bonaventure University (spring 2020 start)
  10. Texas State University
  11. Tulane University (visiting lecturer, full-time, non-tenure track)
  12. University of Georgia
  13. University of North-Texas (full-time, non-tenure track)

August 14, 2019 in Business Associations, Business School, Corporations, Haskell Murray, Jobs, Law School | Permalink | Comments (0)

Tuesday, August 6, 2019

LLC Mistakes Closer Than Kevin Bacon

I decided to track the path of "limited liability corporation" (which should be "limited liability company" when referring to an LLC) in a recent court case.  It's my thing.  Anyway, this gem popped up today: 

This Court previously held “although wage, investment, and other economic losses may flow to an individual from discriminatory harm suffered by a corporation, those injuries are not ‘separate and distinct’ from those suffered by that corporation.” Club Xtreme, Inc. v. City of Wayne, 2010 WL 1626415 at *5 (E.D. Mich. Apr. 21, 2010). Under Michigan law, rules with respect to corporations apply equally to limited liability corporations. Hills and Dales General Hosp. v. Pantig, 295 Mich.App. 14, 21 (2011). As such, a limited liability company is its own “person,” separate and distinct from its owners. Id. Here, Darakjian is separate and distinct from his LLC, TIR.

Darakjian v. City of Birmingham, 2019 WL 3412883 (E.D.Mich.) at * 4. 
 
First, "Club Xtreme?"  Yeah, that's my Michigan. 
 

Second, "Under Michigan law, rules with respect to corporations apply equally to limited liability corporations." True as to LLCs, but, um, no, LLCs are not corporations. So where did that come from? 

Well, this part of "bad law" originates here, as noted: "The rules respecting the corporate form apply equally to limited liability corporations." Hills & Dales Gen. Hosp. v. Pantig, 295 Mich. App. 14, 21, 812 N.W.2d 793, 797 (2011). Except that, and good on them, the case Hills and Dales cites is Florence Cement Co. v. Vettraino, 292 Mich. App. 461, 477, 807 N.W.2d 917, 926 (2011), which only talks about a "limited liability company." This one is an easy Kevin Bacon game. It's just two degrees back.  I suppose that's good, right? Still ...

Do these mistakes, in this instance, impact the outcome? No. But that's not the point. There are cases where LLC versus corporation does matter. And these mistakes will provide citations for incorrect outcomes.  

August 6, 2019 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Monday, July 29, 2019

Social Enterprise Lawyering: More Than Mere Legal Competence is Required . . . .

For last year's Business Law Prof Blog symposium at UT Law, I spoke on issues relating to the representation of business firms classified or classifiable as social enterprises.  Last September, I wrote a bit about my presentation here.  The resulting essay, Lawyering for Social Enterprise, was recently posted to SSRN.  The SSRN abstract follows.

Social enterprise and the related concepts of social entrepreneurship and impact investing are neither well defined nor well understood. As a result, entrepreneurs, investors, intermediaries, and agents, as well as their respective advisors, may be operating under different impressions or assumptions about what social enterprise is and have different ideas about how to best build and manage a sustainable social enterprise business. Moreover, the law governing social enterprises also is unclear and unpredictable in respects. This essay identifies two principal areas of uncertainty and demonstrates their capacity to generate lawyering challenges and related transaction costs around both entity formation and ongoing internal governance questions in social enterprises. Core to the professionalism issues are the professional responsibilities implicated in an attorney’s representation of social enterprise businesses.

To illuminate legal and professional responsibility issues relevant to representing social enterprises, this essay proceeds in four parts. First, using as its touchstone a publicly available categorization system, the essay defines and describes types of social enterprises, outlining three distinct business models. Then, in its following two parts, the essay focuses in on two different aspects of the legal representation of social enterprise businesses: choice of entity and management decision making. Finally, reflecting on these two aspects of representing social enterprises, the essay concludes with some general observations about lawyering in this specialized business context, emphasizing the importance of: a sensitivity to the various business models and related facts; knowledge of a complex and novel set of laws; well-practiced, contextual legal reasoning skills; and judgment borne of a deep understanding of the nature of social enterprise and of clients and their representatives working in that space.

I hope that this essay is relatable and valuable to both academics and practicing lawyers.  Feedback is welcomed.  So are comments.  

Also, I will no doubt be talking more about aspects of this topic at a SEALS discussion group later this week entitled "Benefit Corporation (or Not)? Establishing and Maintaining Social Impact Business Firms," which I proposed for inclusion in this year's conference and for which I will serve as a moderator.  The description of the discussion group is as follows:

As the benefit corporation form nears the end of its first decade of "life" as a legally recognized form of business association, it seems important to reflect on whether it has fulfilled its promise as a matter of legislative intent and public responsibility and service. This discussion group is designed to take on the challenge of engaging in that reflective process. The participating scholars include doctrinal and clinical faculty members who both favor and tend to recommend the benefit corporation form for social enterprises and those who disfavor or hesitate to recommend it.

As you can see from the SEALS program for the meeting, the participants represent both academics (doctrinal and clinical) and practitioners who care about social enterprise and entity formation.   If you are at SEALS, please come and join us!

July 29, 2019 in Business Associations, Compliance, Conferences, Corporate Governance, Corporations, Joan Heminway, Lawyering, Social Enterprise | Permalink | Comments (4)

Friday, July 26, 2019

Sex, Lies, and M&A

I'm at the tail end of teaching my summer transactional lawyering course. Throughout the semester, I've focused my students on the importance of representations, warranties, covenants, conditions, materiality, and knowledge qualifiers. Today I came across an article from Practical Law Company that discussed the use of #MeToo representations in mergers and acquisitions agreements, and I plan to use it as a teaching tool next semester. According to the article, which is behind a firewall so I can't link to it, thirty-nine public merger agreements this year have had such clauses. This doesn't surprise me. Last year I spoke on a webinar regarding #MeToo and touched on the the corporate governance implications and the rise of these so-called "Harvey Weinstein" clauses. 

Generally, according to Practical Law Company, target companies in these agreements represent that: 1) no allegations of sexual harassment or sexual misconduct have been made against a group or class of employees at certain seniority levels; 2) no allegations have been made against  independent contractors; and 3) the company has not entered into any settlement agreements related to these kinds of allegations. The target would list exceptions on a disclosure schedule, presumably redacting the name of the accuser to preserve privacy. These agreements often have a look back,  typically between two and five years with five years being the most common. Interestingly, some agreements include a material adverse effect clause, which favor the target. 

Here's an example of a  representation related to "Labor Matters" from the June 9, 2019 agreement between Salesforce.com, Inc. and Tableau Software, Inc.

b) The Company and each Company Subsidiary are and have been since January 1, 2016 in compliance with all applicable Law respecting labor, employment, immigration, fair employment practices, terms and conditions of employment, workers' compensation, occupational safety, plant closings, mass layoffs, worker classification, sexual harassment, discrimination, exempt and non-exempt status, compensation and benefits, wages and hours and the Worker Adjustment and Retraining Notification Act of 1988, as amended, except where such non-compliance has not had, and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.

c) To the Company's Knowledge, in the last five (5) years, (i) no allegations of sexual harassment have been made against any employee at the level of Vice President or above, and (ii) neither the Company nor any of the Company Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or misconduct by any employee at the level of Vice President or above.

The agreement has the following relevant definitions:

"Knowledge" will be deemed to be, as the case may be, the actual knowledge of (a) the individuals set forth on Section 1.1(a) of the Parent Disclosure Letter with respect to Parent or Purchaser or (b) the individuals set forth on Section 1.1(a) of the Company Disclosure Letter with respect to the Company, in each case after reasonable inquiry of those employees of such Party and its Subsidiaries who would reasonably be expected to have actual knowledge of the matter in question.

Even though I like the idea of these reps. in theory, I have some concerns.  First, I hate to be nitpicky, but after two decades of practicing employment law on the defense side, I have some questions. What's the definition of "sexual misconduct"? What happens of the company handbook or policies do not define "sexual misconduct"? The Salesforce.com agreement did not define it. So how does the target know what to disclose? Next, how should an agreement define "sexual harassment"? What if the allegation would not pass muster under Title VII or even under  a more flexible, more generous definition in an employee handbook? When I was in house and drafting policies, a lot of crude behavior could be "harassment" even if it wouldn't survive the pleading requirements for a motion to dismiss. Does a company have to disclose an allegation of harassment that's not legally cognizable? And what about the definition of "allegation"? The Salesforce.com agreement did not define this either. Is it an allegation that has been reported through proper channels? Does the target have to go back to all of the executives' current and former managers and HR personnel as a part of due diligence to make sure there were no allegations that were not investigated or reported through proper channels? What if there were rumors? What if there was a conclusively false allegation (it's rare, but I've seen it)? What if the allegation could not be proved through a thorough, best in class investigation? How does the target disclose that without impugning the reputation of the accused? 

Second, I'm not sure why independent contractors would even be included in these representations because they're not the employees of the company. If an independent contractor harassed one of the target's employees, that independent contractor shouldn't even be an issue in a representation because s/he should not be on the premises. Moreover,  the contractor, and not the target company, should be paying any settlement. I acknowledge that a company is responsible for protecting its employees from harassment, including from contractors and vendors. But a company that pays the settlement should ensure that the harasser/contractor can't come near the worksite or employees ever again. If that's the case, why the need for a representation about the contractors? Third, companies often settle for nuisance value or to avoid the cost of litigation even when the investigation results are inconclusive or sometimes before an investigation has ended. How does the company explain that in due diligence? How much detail does the target disclose? Finally, what happens if the company legally destroyed documents as part of an established and enforced document retention and destruction process? Does that excuse disclosure even if someone might have a vague memory of some unfounded allegation five years ago?

But maybe I protest too much. Given the definition of "knowledge" above, in-house and outside counsel for target companies will have to ask a lot more and a lot tougher questions. On the other hand, given the lack of clarity around some of the key terms such as "allegations," "harassment," and "misconduct," I expect there to be some litigation around these #MeToo representations in the future. I'll see if my Fall students can do a better job of crafting definitions than the BigLaw counsel did. 

July 26, 2019 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Law School, Lawyering, Litigation, M&A, Management, Marcia Narine Weldon, Teaching | Permalink | Comments (0)

Wednesday, July 24, 2019

LLCs (Still Not Corporations) Win Some, Lose Some in New Opinion

In 2010, an Illinois court reviewed Delaware business law making the following observations:

With respect to a limited liability corporation, Delaware law states that “[u]nless otherwise provided in a limited liability company agreement, the management of a limited liability company shall be vested in its members....” 6 Del.C. § 18–402. Thus, pursuant to Delaware law, directors are generally provided with authority for managing the corporation and members are generally provided with authority for managing the limited liability company. The bankruptcy court therefore properly found that a member of a LLC would be an analogous position to a director of a corporation under Delaware law.

Longview Aluminum, L.L.C. v. Brandt, 431 B.R. 193, 197 (N.D. Ill. 2010), aff'd sub nom. In re Longview Aluminum, L.L.C., 657 F.3d 507 (7th Cir. 2011).

Well, initially, it must be noted that an LLC is not a corporation at all.  As the quoted Delaware law observes, it is a “limited liability company.” Corporations and LLCs are distinct entities. 

I’ll also take issue with adopting the bankruptcy court’s finding “that a member of an LLC would be an analogous position to a director of a corporation under Delaware law.”  I will concede that a member of an LLCmaybe an analogous position to a director of a corporation under Delaware law, but that is not inherently true. 

The Longview Aluminumcourt had determined that, “under Delaware law, a corporation generally must ‘be managed by or under the direction of a board of directors . . . .’” 8 Del. Code § 141. While that’s technically accurate, it understates that general nature of Delaware directors. Note that the statue is mandatory in nature (“shall”), and then provides limited changes:

The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

8 Del. Code § 141(a).

Remember, the Longview Aluminumcourt stated that, “[w]ith respect to a limited liability corporation, Delaware law states that ‘[u]nless otherwise provided in a limited liability company agreement, the management of a limited liability company shall be vested in its members....’ 6 Del.C. § 18–402.”  Id.

But Delaware LLC law provides:

“Unless otherwise provided in a limited liability company agreement, the management of a limited liability company shall be vested in its members in proportion to the then current percentage or other interest of members in the profits of the limited liability company owned by all of the members, the decision of members owning more than 50 percent of the said percentage or other interest in the profits controlling . . . .” 

6 Del. Code § 18-402.

That’s different in structure than directors. Directors act as a body, usually with one vote per director. This default provision provides for a very different structure, providing that one member with over 50% of the interests is controlling.  That’s not like a board at all.  And furthermore, those members  in charge of the entity may not have any fiduciary duties to the LLC. The Delaware LLC Act states:

“To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement . . . .” 6 Del. C. § 18-1101(c).

Corporate directors have some version of fiduciary duties. Again, a notable difference.  It appears that the Longview Aluminumcourt (affirming the bankruptcy court) may have been right to extend the corporate director concept to the LLC managers in that case because of the structure of the LLC’s operating agreement.  But the court went on to imply that a member of a LLC is“an analogous position to a director of a corporation under Delaware law.” That very much overstates things.

Why discuss this 2010-11 case at length now? Because this section was cited last week:

“[I]n referencing a director, Section 101(31)(B) was intended to refer to the party that “managed” the debtor corporation.” Longview Aluminum, L.L.C. v. Brandt, 431 B.R. 193, 197 (N.D. Ill. 2010) (citing 11 U.S.C. § 101(31)(B)). “With respect to a limited liability corporation, Delaware law states that ‘[u]nless otherwise provided in a limited liability company agreement, the management of a limited liability company shall be vested in its members ....” Id. (quoting 6 Del.C. § 18–402).

In re Licking River Mining, LLC, No. 14-10201, 2019 WL 2295680, at *41 (Bankr. E.D. Ky. July 19, 2019), as amended (July 19, 2019).

Fortunately, other than failing to correct the mistake of calling an LLC a corporation, the Licking River Miningseems to have gotten the outcome right.  The court determined that a 25% member interest lacked control because all LLC “decisions were to be made either by a majority of the LLC interests or by the entity's managing member.”Id.Good call, and hopefully this case will clarify (and correct) any negative implications from the Longview Aluminum case.  But even if it does, it gives longer life to an incorrect reference to LLCs and increases the likelihood it will be cited repeatedly. 

Win some, lose some, I guess.

 



 

July 24, 2019 in Corporations, Delaware, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)

Tuesday, July 9, 2019

Tennessee Court Subtly Affirms that LLCs Are Not Corporations

A recent Tennessee court decision subtly notes that limited liability companies (LLCs) are not, in fact corporations. In a recent Tennessee federal court opinion, Judge Richardson twice notes the incorrect listing of an LLC as a "limited liability corporation."  

First, the opinion states:

The [Second Amended Complaint] alleges that Defendant Evans is a resident of Tennessee, Defendant #AE20, LLC is a California limited liability company, and Defendant Gore Capital, LLC is a Delaware limited liability “corporation.”3

Gore Capital is in fact a limited liability company.

FERNANDO CAMPS, Pl., v. GORE CAPITAL, LLC, KARL JAMES, ANGELA EVANS, and #AE20, LLC, Defendants., 3:17-CV-1039, 2019 WL 2763902, at *1 and n.3 (M.D. Tenn. July 2, 2019) (emphasis in original). 

Judge Richardson later notes, in footnote 11:

Plaintiff states that he was sent documents that listed Gore’s (not #AE20’s) principal place of business as being in Chattanooga, Tennessee, although the SAC lists Gore as a “Delaware limited liability corporation (sic)[.]”
Id. 2019 WL 2763902, at *6 n.11 (M.D. Tenn. July 2, 2019). 
 
Given all the times I have complained about courts not correcting such mistakes, I figured I should give this opinion a well-deserved shout out for getting this right.  Thank you. 

July 9, 2019 in Business Associations, Corporations, Current Affairs, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (1)

Tuesday, July 2, 2019

If Sole Ownership of an Entity Means Alter Ego, then Veil Piercing Will Be Inevitable

Veil piercing continues its randomness. Back in April, in Hawai'i Supreme Court decision, Calipjo v. Purdy, 144 Hawai'i 266, 439 P.3d 218 (2019), the court determined that there was evidence to support a trial court jury's decision to pierce the veil of an multiple entities and hold the sole member/shareholder of the entities liable.  (An appellate court had determined that there was insufficient evidence to support veil piercing.)

The decision may be sound, but the evidence for the decision makes the outcome seemingly inevitable. In determining there was evidence to support the jury's decision, the court notes the plaintiff's allegations were that "sole ownership and control is one of many factors that can establish alter ego and, therefore, evidence of Purdy’s ownership and control was pertinent to this claim."  The court then explains, 

In this case, the jury was presented with evidence that Purdy exercised exclusive ownership and control over Regal Corp. and Regal LLC. Purdy testified that he was the sole shareholder, director, and officer of Regal Corp. and the sole member and manager of Regal LLC. This court has held that “sole ownership of all of the stock in a corporation by one individual” is one relevant factor to determine alter ego. Id. (quoting Associated Vendors, 26 Cal. Rptr. at 814). Purdy’s testimony supports the jury’s determination that Purdy exercised exclusive ownership and control over Regal Corp. and Regal LLC; it constitutes evidence that Purdy was the sole owner and manager of either company.

Note, though, that the plaintiff claimed that "sole ownership and control ... can establish alter ego."  The court more accurately  states that ownership and control are a factor.  They are not dispositive or else limited liability for a single-member LLC, corporation, or other limited liability entity would be a fiction.  The jury instructions, though, seem to eliminate the possibility that an entity and a single shareholder or member could be separate.  The jury was told: 

You should consider the following facts in determining whether or not to disregard the legal entity of Regal Capital Corporation and return a verdict in favor of plaintiff against Defendant Jack Purdy, as an individual.

One, whether or not defendant Jack Purdy owned all or substantially all the stock in Regal Capital Corporation; two, whether or not Jack Purdy exercised discretion and control over the management of Defendant Regal Capital Corporation; three, whether or not Defendant Jack Purdy directly or indirectly furnished all or substantially all of the financial investment in Defendant Regal Capital Corporation; four, whether or not Regal Capital Corporation was adequately financed either originally or subsequently for the business in which it was to engage.

Five, whether or not there was actual participation in the affairs of Regal Capital Corporation by its stockholders and whether stock was issued to them. Six, whether or not Regal Capital Corporation observed the [formalities] of doing business as a corporation such as the holding of regular meetings, the issuance of stock, the filing of necessary reports and similar matters. Seven, whether or not Defendant Regal Capital Corporation [dealt] exclusively with Defendant Jack Purdy, directly or indirectly in the real estate sales development activities in this case. Eight, whether or not Defendant Regal Capital Corporation existed merely to do a part of business of Defendant Jack Purdy.

So, here was have an undercapitalization factor, and that could be separate from the shareholder/member, and we have the traditional "corporate formalities" test, but even there, these instructions imply that the entity must have additional shareholders to be "real." For numbers one, two, three, five, seven, and eight, a jury would almost always have to find that those factors would support veil piercing for any sole shareholder corporation or single-member LLC.  I don't think that's either the intent or the substance of current law in most jurisdictions, though the Hawai'i Supreme Court clearly disagrees with me. 

In this case, there seems to be at least some evidence of fraud, and I'm more than willing to defer to a jury if they determined that the defendant had sole control of his entities and he used those entities to commit fraud.  I just object to court's apparent comfort level with the idea having sole control of an entity or entities, and exercising that control, on its own suggests something nefarious.  

I know people use LLCs and corporations to engage in all sorts of bad behavior, and I'd like to see that punished more often than it seems to be.  But relaxing the application of legal standards to get there is not a good way to do it.  If the law should be changed, then legislatures should get to work on that.  If we think single-owner entities are a bad idea (I don't think they are inherently so), let's deal with that through legislation so that at least everyone knows the rules. 

Ultimately, it's not as though current veil piercing jurisprudence has been clear or sound or predictable. There has always been a random nature to it. However, for single-member entities, if the current trends continue, the randomness of veil piercing will not attach not to the outcome of a lawsuit -- it will attach to whether or not someone brings suit at all.  

July 2, 2019 in Contracts, Corporations, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)

Wednesday, May 22, 2019

Exam Grading -- No LLCs as Corporations (So Far)

It has been kind of a unique end of the semester, and I am working feverously to get through my Business Organizations exams. I'm getting there.  So far, I have had zero exams reference a "limited liability corporation."  If this holds, it will be at least three years in a row.  

I have had a couple of folks refer to LLC veil piercing as piercing the "corporate" veil (another no-no), and I did have some other "corporate" references to LLCs (e.g., "an LLC's corporate formalities"), so we're not all the way there. But so far, I am seeing improvement, and I appreciate the effort.  

Here's hoping for 48 of 48 describing the LLC (as an entity) correctly.  I hope the rest of my colleagues are holding up well here in the home stretch. Good luck to all. 

May 22, 2019 in Business Associations, Corporations, LLCs, Teaching | Permalink | Comments (0)

Friday, May 10, 2019

Managing Compliance Across Borders Conference at the University of Miami- June 26-28

 

 

 

Join me in Miami, June 26-28.

 

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Managing Compliance Across Borders

June 26-28, 2019

Managing Compliance Across Borders is a program for world-wide compliance, risk and audit professionals to discuss current developments and hot topics (e.g. cybersecurity, data protection, privacy, data analytics, regulation, FCPA and more) affecting compliance practice in the U.S., Canada, Europe, and Latin America. Learn more

See a Snapshot: Who Will Be There?
You will have extensive networking opportunities with high-level compliance professionals and access to panel discussions with major firms, banks, government offices and corporations, including:

  • BRF Brazil
  • Carnival Corporation
  • Central Bank of Brazil
  • Endeavor
  • Equal Employment Opportunity Commission
  • Eversheds Sutherland
  • Fidelity Investments
  • Hilton Grand Vacations
  • Ingram Micro
  • Jones Day
  • Kaufman Rossin
  • LATAM Airlines
  • Laureate Education, Inc.

 

  • MasterCard Worldwide
  • MDO Partners
  • Olin Corporation
  • PwC
  • Royal Caribbean Cruises
  • Tech Data
  • The SEC
  • TracFone Wireless
  • U.S. Department of Justice
  • Univision
  • UPS
  • XO Logistics
  • Zenith Source

 

Location
Donna E. Shalala Student Center
1330 Miller Drive
Miami, FL 33146

 

CLE Credit
Upwards of 10 general CLE credits in ethics and technology applied for with The Florida Bar

 

Program Fee: $2,500 $1,750 until June 1 
Use promo code “MCAB2019” for discount 

Non-profit and Miami Law Alumni discounts are available, please contact:
Hakim A. Lakhdar, Director of Professional Legal Programs, for details

Learn More: Visit the website for updated speaker information, schedule and topic details.

This program is designed and presented in collaboration with our partner in Switzerland

University of St. Gallen

 

 

 

 

 

 

 

May 10, 2019 in Compliance, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, International Business, Law Firms, Law School, Marcia Narine Weldon, White Collar Crime | Permalink | Comments (0)

Tuesday, May 7, 2019

It Is Best to Be Precise When Asking Others to Be Precise (LLC edition)

A recent report and recommendation from a U.S. magistrate recommends that the referring court find that a plaintiff did not provide the facts needed to support taking diversity jurisdiction.  The magistrate is correct, but the recommendation is a little ironic in that it seems to be chiding the plaintiff for a lack of precision, and well, this: 

Here, Peeples' amended complaint contains the bare assertions that the address for Xlibris Publishing is in Bloomington, Indiana, while his address is in Mobile, Alabama. The bare allegation respecting the Defendant is insufficient as it does not identify whether Xlibris is a corporation or, instead, an unincorporated entity such as a limited liability corporation. Moreover, if Xlibris is a corporation, the complaint does not delineate its state(s) of incorporation and the state where it has its principal place of business. See Flintlock Constr. Servs., LLC v. Well-Come Holdings, LLC, 710 F.3d 1221, 1224 (11th Cir. 2013) (“A corporation is considered a citizen of every state in which it has been incorporated and where it has its principal place of business.”). And, if an unincorporated entity such as a limited liability corporation,3 the amended complaint does not allege every state in which each of its members are citizens. See, e.g., Lewis v. Seneff, supra, at *3 (Without the information concerning the citizenship of each limited liability company's membership, Plaintiffs have not shown that this Court has subject matter jurisdiction.”).

3 It appears to the undersigned that Xlibris Publishing is a limitedliability corporation. See www.xlibris.com (last visited, April 4, 2019, at 3:30 p.m.) (Xlibris website shows that it is an LLC).

MARIO ANDJUAN PEEPLES, Pl., v. XLIBRIS PUBLISHING, Def.., CA 19-0070-JB-C, 2019 WL 1983817, at *5 (S.D. Ala. Apr. 8, 2019), report and recommendation adopted sub nom. Peeples v. Xlibris Publg., CV 19-0070-JB-C, 2019 WL 1983055 (S.D. Ala. May 3, 2019).
 
In two spots in the above excerpt, the recommendation refers to a "limited liability corporation" when it clearly means "limited liability company" (the latter being used in other sentences in the excerpt).  
 
As I said, the analysis seems correct, despite the incorrect language. Mistakes happen, but still, it shouldn't be that hard to get it right (and the incorrect term showed up twice!).  As evidence, I haven't seen "limited liability corporation" in more than two years on one of my Business Organizations exams, and I haven't seen it yet this year, either.
 
This mission continues.  
 

May 7, 2019 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Thursday, May 2, 2019

The Department of Health and Human Services Is Trying to Make Me Sick

Okay, not really. But my daily Westlaw search for "limited liability corporation" recently started delivering contract award announcements from the Department of Health and Human Services (DHHS) related to contract awards. DHHS reconds many "business types" for their records, such as "Minority Owned Business" and "For Profit Organization. And now, apparently, "limited liability coroporation" is one of them.  ARRRRRGHH! LLCs are "limited liability companies" and are not corporations.  An internet search shows that there are at least 78 of these DHHS designations out there (and I'll wager there are more).  

Following is an excerpt of one such announcement.  You'll note that, according to the announcement, Seba Professional Services LLC is both a "Partnership or Limited Liability Partnership" and a "Limited Liability Corporation."  Sigh.  Really, they're making my stomach hurt: 

Department of Health and Human Services awarded contract of IGF::CT::IGF PATIENT MESSENGER AND TRANSPORT SERVICES to SEBA PROFESSIONAL SERVICES LLC

Washington: This contract was awarded to seba professional services llc with a potential award amount of $6,117,056. Of this amount, 100% ($6,117,056) has been obligated.
 
Awarding Agency:
Department of Health and Human Services
 
. . . .
 
Recipient:
SEBA PROFESSIONAL SERVICES LLC
. . . .
 
Business Types
Woman Owned Business
Women Owned Small Business
Economically Disadvantaged Women Owned Small Business
Minority Owned Business
Black American Owned Business
Partnership or Limited Liability Partnership
Limited Liability Corporation
For Profit Organization
DoT Certified Disadvantaged Business Enterprise
Self-Certified Small Disadvantaged Business
8a Program Participant
 
 

May 2, 2019 in Corporations, Current Affairs, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Tuesday, April 23, 2019

Can A Board's Knowing Violation of the Law Also Be Entirely Fair? How About Moral?

Prof. Justin Pace, Haworth College of Business,  Western Michigan University recently sent me his paper, Rogue Corporations: Unlawful Corporate Conduct and Fiduciary Duty. In it, he discusses Delaware's "per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm." 

In the paper, he considers this concept from a moral and ethical perspective, which are interesting in their own right, though I remain more interested in the doctrine itself.  The paper is worth a look.  A few comments of my own, after the abstract:

Abstract

On February 28, 2018, Dick’s Sporting Goods announced that it would no longer sell long guns to 18- to 20-year-olds. On March 8, 2018, Dick’s was sued for violating the Michigan Elliott-Larsen Civil Rights Act, which prohibits discrimination on the basis of age in public accommodations. Dick’s and Walmart were also sued for violating Oregon’s ban on age discrimination. In addition to corporate liability under various state civil rights acts, directors of Dick’s and Walmart face the threat of suit for breaching their fiduciary duties—suits that may be much harder to defend than the more usual breach of fiduciary duty suit.

Delaware corporation law appears to have an underappreciated per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm.

This paper examines the relevant legal doctrine but also takes a step back to consider what the rule should be from an ethical and a moral standpoint. To do so, rather than apply traditional corporate governance arguments, this paper considers broader moral theories. In addition to the utilitarian calculus that is so ubiquitous in corporate governance scholarship via the law and economics movement, this paper considers the liberalism of both John Rawls and Robert Nozick. But liberalism may seem less persuasive given the rise of illiberalism politically on both the American right and left. Given that, this paper also considers two non-liberal models: one a populist modification of Charles Taylor’s democratic communitarianism and the other Catholic Social Thought.

Unsurprisingly, the proper rule depends on which moral theory is applied. If that theory is liberalism (of either form covered), then a per se approach is troubling. Harm to the corporation must be shown, and either the Delaware legislature or the corporate players, depending on the form of liberalism, must acquiesce to a per se rule. Counterintuitively, it is the per se rule that runs counter to basic democratic norms. It gives the power to litigate in response to harm not to the party harmed but to a third party. Given the divergent results from applying different moral theories, and given the democratic difficulty, the Delaware legislature should clarify the standard. It will likely find that a harsh, per se standard is unjustified.

First, I have always thought that some people read DGCL § 102(b)(7) too literally (or at least broadly).  The statute reads:

(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters: 

. . . .

(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director:  (i) For any breach of the director's duty of loyalty to the corporation or its stockholders;  (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;  (iii) under § 174 of this title;  or (iv) for any transaction from which the director derived an improper personal benefit.  No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective.  All references in this paragraph to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a)of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.

I have never been one to believe that directors face potential liability for any type of "knowing violation of law."  Anyone who has seen a UPS or FedEx truck in New York City knows that the drivers knowingly park illegally and risk tickets (which they often get) for doing the job. It is a cost of doing business, and I find it hard to believe any court would hold directors liable for such a thing, though directors certainly know (or should) of the practice. That would make for one of the most absurd Caremark-like cases ever, in my view.

Prof. Pace argues in his paper:

A per se standard might prove lucrative. It opens up liability for losses normally insulated by business judgment rule. If Nike loses market share because it made Colin Kaepernick the face of a large marketing campaign, shareholders cannot successfully sue because that decision is protected by the business judgment rule. But if Dick’s Sporting Goods loses market share because it stops selling long guns to 18- to 20-year-olds, shareholders presumably can sue and recover based on that market share, even though civil liability for violating state bars on age discrimination may be negligible.

Perhaps, but I would still think that most courts would likely work around this. First, I think a court could easily calculate damages as the modest civil liability incurred, not the lost market share.  Second, in Dick's Sporting Goods situation, as I observed elsewhere, "it is worth noting that Dick's sales dropped, but profits rose after the decision because the company cut costs by replacing some guns with higher-margin items." If there is no harm, is there a foul? Or maybe better said, it is possible that there is no director liability unless one can show actual harm. 

I will concede that DGCL § 102(b)(7) likely eliminates business judgment rule protection for directors where one can show a knowing violation of the law. However, getting past the business judgment rule does not automatically lead to liability.  It simply allows the court to review the board's decision, but the plaintiff still must show harm. And I am not at all sure one can show harm in the Dick's gun sales circumstance. It is, in my view, entirely fair. I also gather that I am may be in the minority on this one.  But a good conversation, either way.  

April 23, 2019 in Corporations, CSR, Delaware, Joshua P. Fershee | Permalink | Comments (3)

Friday, April 12, 2019

Why Businesses Should Not Ignore the Operation Varsity Blues Scandal

As a former compliance officer who is now an academic, I've been obsessed with the $25 million Varsity Blues college admissions scandal. Compliance officers are always looking for titillating stories for training and illustration purposes, and this one has it all-- bribery, Hollywood stars, a BigLaw partner, Instagram influencers, and big name schools. Over fifty people face charges or have already pled guilty, and the fallout will continue for some time. We've seen bribery in the university setting before but those cases concerned recruitment of actual athletes. 

Although Operation Varsity Blues concerns elite colleges, it provides a wake up call for all universities and an even better cautionary tale for businesses of all types that think of  bribery as something that happens overseas. As former Justice Department compliance counsel, Hui Chen, wrote, "bribery. . .  is not an act confined by geographies. Like most frauds, it is a product of motive, opportunity, and rationalization. Where there are power and benefits to be traded, there would be bribes." 

My former colleague and a rising star in the compliance world, AP Capaldo, has some great insights on the scandal in this podcast. I recommend that you listen to it, but if you don't have time, here are some questions that she would ask if doing a post mortem at the named universities. With some tweaks, compliance officers, legal counsel, and auditors for all businesses should consider: 

1) What kind of training does our staff receive? How often?

2) Does it address the issues that are likely to occur in our industry?

3) When was the last time we spot checked these areas for compliance ? In the context of the universities, were these scholarships or set asides within the scope of routine audits or any other internal controls or reviews?

4) What factors or aspects of the culture could contribute to a scandal like this? What are our red flags and blind spots? Do we have a cultural permissiveness that could lead to this? In the context of the implicated universities, who knew or had reason to know?

5) How can we do a values-based analysis? Do we need to rethink our values or put some teeth behind them?

6) How are our resources deployed?

7) Do we have fundamental gaps in our compliance program implementation? Are we too focused on one area or another?

8) Are integrity and hallmarks of compliant behavior part of our selection/hiring process?

Capaldo recommends that universities tap into their internal resources of law and ethics professors who can staff  multidisciplinary task forces to craft programs and curate cultures to ensure measurable improvements in compliance and a decrease in misconduct. I agree. I would add that as members of the law and business community and as alums of universities, we should ask our alma maters or employers whether they have considered these and other hard questions. Finally, as law and business professors, we should use this scandal in both the classroom and the faculty lounge to reinforce the importance of ethics, internal controls, compliance with law, and shared values.

 

April 12, 2019 in Business School, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Law Firms, Law School, Lawyering, Management, Marcia Narine Weldon, Sports, Teaching | Permalink | Comments (0)

Tuesday, April 9, 2019

Court Says No Successor Liability Attaches When There Was No Entity

A 2017 opinion related to successor liability just posted to Westlaw.  The case is an EEOC claim "against the Hospital of St. Raphael School of Nurse Anesthesia (“HSR School”) and Anesthesia Associates of New Haven (“AANH”), alleging gender discrimination and retaliation in violation of Title VII of the Civil Rights Act of 1964 . . . ." The plaintiff was seeking to join Yale New Haven Hospital (“YNHH”). MARGARITE CONSOLMAGNO v. HOSPITAL OF ST. RAPHAEL SCHOOL OF NURSE ANESTHESIA and ANESTHESIA ASSOCIATES OF NEW HAVEN, P.C., 3:11CV109 (DJS), 2017 WL 10966446, at *1 (D. Conn. Mar. 27, 2017). 

 
 
Apparently, the HSR School trained nurse anesthetists was owned and run by AANH a Connecticut “professional corporation.”  The plaintiff was in the HSR School for about six months before she was dismissed, she claimed, because of " gender discrimination and retaliation for reporting a staff member’s inappropriate sexual conduct." Id. The plaintiff sought to join YNHH because that entity took over running an anesthesia school that had been, in some form, the HSR school.  
 
The successor liability part is rather interesting, though largely devoid of facts from the transaction.  The court ultimately concludes that even though YNHH resumed a similar school, it was not a successor entity and could not be joined.  
 
A challenging part about the case is that entities are described, but often not clearly and with conflicting entity-type language.  For example, although AANH was a "professional corporation," the court explained that " [t]he AANH anesthesiologists, who were also partners in AANH, were responsible for deciding how the HSR School would operate." Id. at *2. One of the doctors was also referred to as an "ownership partner in AANH." Id. at *3. I suspect that anesthesiologists, like lawyers, traditionally created firms that were partnerships, so the principals often call themselves "partners," regardless of their actual entity type. Still, it would be nice for courts to clarify the actual roles of those involved.  
 
Furthermore, in describing the HSR School, the court states, 
 
There is no evidence that the HSR School had an existence that was independent of AANH. In fact, the HSR School was going to cease operating due to the fact that AANH was going to cease operating. The HSR School was not a limited liability corporation (“LLC”), private corporation (“P.C.”), or other legal entity registered with the Connecticut Secretary of State. (Tr. 141-142). There is no evidence that the HSR School had its own assets, bank account, or tax identification number. There is no evidence that the HSR School itself (as opposed to AANH) ever paid anyone for rendering services to the HSR School. There is no evidence that anyone other than AANH had operated the HSR School. Consequently, the Court finds that the predecessor in interest, for the purpose of assessing successor liability, is AANH.
Id. at *6. Ultimately, it appears the court has determined this was some version of an asset purchase  (even though neither party provided a copy of the asset purchase agreement), so the liability stayed with AANH.  This appears to be correct, but it's hard to know without that document.
 
And it is hard to know what the obligations are when additional relevant possible parties are.  The court further determined that the potential successor entities, "YNHH and Yale University are two separate corporate entities with separate governance structures."  Except there is no statement as to what types of entities they are, where they were formed, or anything else other than a reference to testimony from a witness who said YNHH was a separate entity from Yale University.  It would seem to me that some of the related documentation would be valuable, but the court has spoken.  
 
And fair enough. But I have to correct this: "The HSR School was not a limited liability corporation company (“LLC”), private professional corporation (“P.C.”), or other legal entity."  

April 9, 2019 in Business Associations, Corporations, Joshua P. Fershee, Lawyering, LLCs, M&A, Partnership | Permalink | Comments (0)

Tuesday, April 2, 2019

Still Howling at the Moon: Not All Businesses Are Corporations!

A new case from the Southern District of Texas recently appeared, and it is yet another case in which the entity type descriptions are, well, flawed. The case opens: 

Before the Court is the defendant’s, Arnold Development Group, LLC (the “defendant”) motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(2) and (3) (Dkt. No. 5), the plaintiff’s, Conesco Industries, LTD.; d/b/a DOKA USA, LTD. (the “plaintiff”) response to the defendant’s motion to dismiss (Dkt. No. 18) and the defendant’s reply in support of its motion (Dkt. No. 20).
 . . . .
The plaintiff is a New Jersey limited partnership doing business in Texas and throughout the United States. The defendant is a Missouri limited liability corporation.
CONESCO INDUSTRIES, LTD. d/b/a DOKA USA, LTD., Pl., v. ARNOLD DEVELOPMENT GROUP, LLC, Def.., 4:18-CV-02851, 2019 WL 1430112, at *1 (S.D. Tex. Mar. 29, 2019) (emphasis added). 
 
Everybody who reads this blog knew that was coming because I am writing about the case. Arnold Development Group, LLC, is not a limited liability corporation. It is a limited liability company.
 
So, fine, this kind of error is not remarkable, given my numerous posts on the subject. But the opinion, in the discussion section, follows with this gem: 
In the case before the Court, the defendant is a Missouri corporation and the plaintiff is a New Jersey corporation
Id. at *2. Nuh-uh.  The opinion had already established that we're dealing with a Missouri LLC and New Jersey limited partnership. Neither entity is a corporation.  
 
Fortunately, entity status here does not seem to have any clear impact on the personal jurisdiction analysis (this about specific jurisdiction), but still. The case was dismissed without prejudice, which means at least some of this language could come to bear in future versions of the litigation.  Here's hoping that the parties, and the next reviewing court (should there be one), are a little more careful with describing the entity types.  

April 2, 2019 in Corporations, Joshua P. Fershee, Lawyering, LLCs, Partnership | Permalink | Comments (0)

Thursday, March 28, 2019

Nike, Avenatti, and the Business Judgment Rule

 
This Michael Avenatti extortion case is fascinating to me. I am not really sure why, other than it seems so absurd.  You may recall Avenatti as the lawyer who represented Stormy Daniels in her lawsuits against President Trump. He is a big personality and known for being outlandish at times.  
 
According to federal prosecutors, Avenatti tried to extort Nike for millions of dollars because he claimed to have evidence that Nike employees were illegally paying people to help recruit college basketball players.  Apparently, Avenatti believed he would be able to get Nike to pay him millions of dollars in exchange for the evidence. Instead, he ended up with the FBI. 
 
The New York Time reports:
According to people with knowledge of the cases, once Nike heard Mr. Avenatti’s claims, it acted to inform federal officials of the allegation that the company’s employees were paying players. The nature of the discussion with Mr. Avenatti raised the possibility that extortion was taking place.
That is, as soon as Nike was on notice of a potential problem right to the authorities.  How very Allis-Chalmers of them.  I am a fan of that old business judgment rule case, which state “it appears that directors are entitled to rely on the honesty and integrity of their subordinates until something occurs to put them on suspicion that something is wrong. If such occurs and goes unheeded, [only] then liability of the directors might well follow . . . “ Graham v. Allis-Chalmers Mfg. Co., 41 Del. Ch. 78, 85, 188 A.2d 125, 130 (1963).  So, as soon as Nike was on notice of wrongdoing, they disclosed it to officials.  
 
Nike took action to deal with the problem quickly, rather than acting like Caremark did years ago, when "there was an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss [from fines resulting from bad employee behavior]." By taking action, Nike likely insulates the company (or at least mitigates the harm) it could face from alleged wrongdoing. Rather than engaging in a cover up (and potentially paying to hide the problem), the company acted proactively by disclosing the actions.  
 
Was this Avenatti's first attempt at such a thing?  It seems unlikely one would start with a company like Nike, but maybe the potential payoff seemed worth it. On the other hand, maybe such tactics have worked in other circumstances with smaller companies, so it seemed like a good idea. 
 
Regardless, it seems like Nike handled this wisely. The company recognized the issue before it, and fairly quickly realized that any of the alleged bad behavior was already done.  When such things happen, it is disappointing, to be sure, but it can't be undone.  The only question then is, "how are you going to respond."  For my money, going to the authorities was the right call, even though Nike had to know some bad press was going to follow.  
 
Now, I recognize it is possible that Nike knew about the behavior and reported nothing until Avenatti showed up. It would be interesting to find out, and if so, the analysis of whether they should have reported earlier would be an interesting one.  For example, would the company have faced more or less scrutiny had they reported on their own?  Or did they inoculate themselves to some degree by waiting and having the alleged Nike behavior overshadowed by Avenatti's alleged acts? Tough questions that require the exercise of business judgment. Thank goodness there is a rule about that.  

March 28, 2019 in Corporations, Current Affairs, Joshua P. Fershee, White Collar Crime | Permalink | Comments (2)

Wednesday, March 20, 2019

Clue, LLC Edition: This Time, the Judge (or the Judge's Clerk) Did It

Get this, from a March 15 ruling and order on a motion for summary judgment: 

Greenwich Hotel Limited Partnership [GHLP] is a limited partnership organized under the laws of Connecticut, and is the owner of the Hyatt Regency Greenwich hotel. Answer to First Amended Complaint, dated Dec. 16, 2016 (“Am. Ans.”), ECF NO. 62, at 8. Hyatt Equities, L.L.C. (“Hyatt Equities”) is a limited liability corporation incorporated in Delaware, and is the general partner of Greenwich Hotel Limited Partnership. Id. at 9. The Hyatt Corporation (“Hyatt Corp.”) is a limited liability corporation incorporated in Delaware, and is the agent of Greenwich Hotel Limited Partnership. Id. at 9.

Benavidez v. Greenwich Hotel LP, 3:16-CV-191 (VAB), 2019 WL 1230357, at *1 (D. Conn. Mar. 15, 2019). 
 
Once more, for the people in back: LLCs are "limited liability companies," not "limited liability corporations."As such, LLCs are not "incorporated." LLCs are formed or organized. In addition, corporations are entities that provide shareholders limited liability, but they are generally not referred to as "limited liability corporations" because they might be confused with a separate and distinct entity type, the LLC.  
 
Whenever I read a case with this kind of language, I wonder how it happened.  Sometimes, like today, I go to the docket (thanks, Bloomberg Law) to see if the source of the wrongdoing (evil doing) was the party/lawyer or the judge/judge's clerk.  This time, it's pretty clear the lawyer got it right.  The case made it easy, as the ruling cited to the Answer to First Amended Complaint, which I pulled.  Here's how the lawyer's answer framed these "facts": 

"Upon information and belief, defendant Hyatt Equities is a limited liability company organized under the laws of the State of Delaware, and is the general partner of GHLP.

. . . .

Upon information and belief, defendant Hyatt Corporation is a corporation organized under the laws of the State of Delaware and is the agent of GHLP."

Benavidez v. Greenwich Hotel LP, 3:16-CV-191, Answer to First Amended Complaint, dated Dec. 16, 2016 (“Am. Ans.”), ECF NO. 62, at 9. This is all properly stated, but somehow it didn't translate to the ruling and order.  

Kudos to the filing attorneys on getting it right. I wonder if this is something that can be corrected? One would hope.  Okay, at least I hope so. 

March 20, 2019 in Corporations, Joshua P. Fershee, Lawyering, LLCs, Partnership | Permalink | Comments (0)

Tuesday, March 12, 2019

LLCs Are Not Corporations, Spring Break Edition

It is Spring Break at WVU, so I am using this time to finish some paper edits and catch up on my email. Last week, I got an email about a recent case from the United States District Court for the Northern District of Illinois. It is a headache-inducing opinion that continues the trend of careless language related to limited liability companies (LLCs). 

The opinion is a civil procedure case (at this point) regarding whether service of process was effective for two defendants, one a corporation and the other an LLC.  The parties at issue, (collectively, “Defendants”) are: (1) Ditech Financial, LLC f/k/a Green Tree Servicing, LLC (“Ditech Financial”) and (2) Ditech Holding Corporation f/k/a Walter Investment Management Corp.’s (“Ditech Holding”). The court notes that it is unclear whether there is diversity jurisdiction, because

“the documents submitted by Defendants with their motion to dismiss suggest that there may be diversity of citizenship in this case. See [12-1, at 2 (stating Ditech Holding is a Maryland corporation with a principal office in Pennsylvania) ]; [12-1, at 2 (stating Ditech Financial is a Delaware limited liability corporation with a principal office in Pennsylvania) ].”

Clayborn v. Walter Investment Management Corp., No. 18-CV-3452, 2019 WL 1044331, at *8 (N.D. Ill. Mar. 5, 2019) (emphasis added).  

Why do courts insist on telling us the state of LLC formation and principal place of business, when that is irrelevant as to jurisdiction for an LLC?  Hmm. I supposed that fact that courts keeping calling LLCs “corporations” might have something to do with it.  The court does seem to know the rule for LLCs is different than the one for corporations, noting that “Plaintiff has not pled or provided the Court with any information regarding the citizenship of each member of Ditech Financial LLC. “ Id.

Despite this apparent knowledge, the court goes on to say:

Under Illinois law, “a private corporation may be served by (1) leaving a copy of the process with its registered agent or any officer or agent of the corporation found anywhere in the State; or (2) in any other manner now or hereafter permitted by law.” 75 ILCS 5/2-204. At least one court to consider the issue has concluded that Illinois state law does not allow service of a summons on a corporation via certified mail. Ward v. JP Morgan Chase Bank, 2013 WL 5676478, at *2 (S.D. Fla. Oct. 18, 2013); see also 24 Illinois Jurisprudence: Civil Procedure § 2:20; 13 Ill. Law and Prac. Corporations § 381. Plaintiff has not cited, nor has the Court located, any support for the proposition that a summons and complaint sent by certified mail constitutes one of the “other manner[s] now or hereafter permitted by law” to effectuate service. Consequently, the Court concludes that Plaintiff has not properly served Ditech Holding under Illinois law, and therefore cannot have served Ditech Financial.2 [see below]

Id. Now the case gets more confusing.  Note that last line above: the court implies that proper service of the corporate parent may have been sufficient to serve the LLC, too. Footnote 2 of the opinion properly clarifies this, though the court then provides another baffling tidbit.

Footnote 2 provides:

Even if Plaintiff had properly served Ditech Holding, it would not have properly effectuated service upon Ditech Financial. Ditech Financial appears to be a limited liability company.[1]; [12]. Under Illinois law, service on a limited liability company is governed by section 1–50 of the Limited Liability Company Act. 805 ILCS 180/1–50John Isfan Construction, Inc. v. Longwood Towers, LLC, 2 N.E.3d 510, 517–18 (Ill. App. Ct. 2016). Under section 1–50 of the Limited Liability Company Act, a plaintiff may only serve process upon a limited liability company by serving “the registered agent appointed by the limited liability company or upon the Secretary of State.” Pickens v. Aahmes Temple #132, LLC, 104 N.E.3d 507, 514 (Ill. App. Ct. 2018) (quoting 805 ILCS 180/1–50(a)). To properly serve Ditech Financial, Plaintiff would have had to deliver a copy of the summons and complaint to Ditech Financial’s registered agent in Illinois: CT Corporation System. [12, at 5.]

The court had already stated the Ditech Financial was an LLC, though it had called it a “limited liability corporation.” Is the court unclear about the entity type?  If entity type is in question, it would seem worthy of note in the body of the opinion. The court properly cites to the LLC Act, but it inconclusive as to whether Ditech Financial is, in fact, an LLC.    

To make matters worse, the court repeats, in footnote 3, its earlier mistake as to  what an LLC really is:

Service on a limited liability corporation, such as Ditech Financial, must be effectuated in the same manner as service on a corporation such as Ditech Holding. See, e.g., Grieb v. JNP Foods, Inc., 2016 WL 8716262, at *3 (E.D. Pa. May 13, 2016) (evaluating the effectiveness of service of process on a limited liability company under Pa. R. Civ. P. 424).

The court ultimately dismisses the claim without prejudice, which seems proper.  But the rest of this? Sigh. If you need me, I’ll be the one in back banging his head on the table. image from media.giphy.com

March 12, 2019 in Agency, Corporations, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)