Monday, October 28, 2019
The recent Tennessee Court of Appeals decision in Mulloy v. Mulloy has me thinking. Here is the case synopsis:
Two brothers formed a limited liability company to own and lease a commercial property. When the tenant sought to expand, both brothers sought to find a suitable space for the tenant to lease. The younger of the two brothers found a property that would ideally suit the tenant’s needs, a fact that was communicated to his brother. The older brother purchased the property through a newly created limited liability company without his younger sibling’s involvement. The older brother’s new limited liability company then leased the new property to the tenant. The younger brother brought a derivative suit against his brother and the newly formed limited liability company, claiming usurpation of a corporate opportunity belonging to the limited liability company that the brothers had formed together and tortious interference with business relationships. The younger brother also claimed unjust enrichment. Following a trial, the chancery court found in favor of the older brother and his newly formed limited liability company and dismissed the complaint. After our review of the record, we affirm.
The facts are quite a bit more complex than that. But you get the idea.
First, let me make Josh Fershee's point for him: limited liability company (LLC) members cannot usurp "corporate" opportunities, since they are not corporations. Indeed, the court in Mulloy repeatedly refers to the doctrine in that way and cites to corporate law precedent we all know and love. This despite an accurate citation to Tennessee's statutory standard for the usurpation of LLC opportunities: requiring members to hold in trust for the LLC "any property, profit or benefit derived by the member in the conduct . . . of the LLC’s business, or derived from a use by the member of the LLC’s property, including the appropriation of any opportunity of the LLC.” Tenn. Code Ann. § 48-249-403(b)(1).
But the big surprise for me was "we affirm." Why? I just kept thinking of Meinhard v. Salmon. Apart from he fact that this case involves a Tennessee LLC and two brothers, the material facts are substantially similar. Yet, the result is different. The Mulloy court reasons that the property acquisition opportunity at issue was not the LLC's, but rather the older brother's (even though the brothers' jointly owned LLC existed to lease property to a specific tenant--the same tenant to which the older brother rents the new property--property that the younger brother originally identified). The court references facts that do help the older brother here. But something just smells wrong about this. The lack of candor in this situation is particularly disturbing.
So, that set me to wondering if there was a way to get that "punctilio of an honor, the most sensitive" back into the judicial sightline. Immediately, I thought of Anderson v. Wilder--a 2003 Tennessee Court of Appeals case in which the court applies the close corporation shareholder fiduciary duties under Massachusetts corporate law to members in a Tennessee LLC. However, it then occurred to me that Anderson was decided under Tennessee's "old" LLC Act; but the LLC in Mulloy opted into Tennessee's modernized, "new" LLC Act, which became effective on January 1, 2006. The new LLC Act is modeled in part on the Revised Uniform Limited Liability Company Act and provides as follows, in pertinent part (in Tenn. Code Ann. § 48-249-403(a) and (b) (emphasis in italics added)):
- "The only fiduciary duties a member owes to a member-managed LLC and the LLC's other members and holders are the duty of loyalty and the duty of care . . . ."
- "A member's duty of loyalty to a member-managed LLC and the LLC's other members and holders of financial rights is limited to the following: (1) To account to the LLC and to hold as trustee for it any . . . benefit derived by the member in the conduct . . . of the LLC's business, or derived from a use by the member of the LLC's property, including the appropriation of any opportunity of the LLC . . . ."
These statutory provisions would appear to foreclose an argument that members of an LLC organized under the new LLC Act have a fiduciary duty of utmost good faith and loyalty to each other under Anderson (or otherwise at common law). Much as I hate to admit it, that's the way a court should, and likely would, see this.
What do you think? Is my concern about the holding in the appellate court opinion in Mulloy warranted? Or do we treat the Mulloy brothers like "big boys" and agree with the appellate and trial courts? Your views are welcomed. I am looking for some creative arguments here . . . .
Monday, September 16, 2019
I am pleased to announce that The University of Tennessee College of Law is again hosting editors of this blog for a symposium focusing on current topics in business law. The website for the symposium, which is sponsored by UT Law's Clayton Center for Entrepreneurial Law, is here. Faculty and students from UT Law will comment on presentations given by my fellow BLPB bloggers. Participating editors of the BLPB in this year's program include Colleen Baker, Ben Edwards, Josh Fershee, me, Doug Moll, Haskell Murray, and Stefan Padfield. The lunchtime panel features me and two of my UT Law colleagues exploring the legal meaning and understanding of mergers and other business combinations from various perspectives, including business associations law, bankruptcy and UCC law, and federal income tax law. That, alone, is surely worth the price of entry!
If you live in or near Knoxville, please come and join us. Continuing legal education credit is available to members of the Tennessee bar. If you cannot make it to the symposium, however, a video recording of the proceedings will later be available on UT Law's website, with an expected option for online continuing legal education credits. (Last year's program is available here with a continuing legal education credit option.) In addition, the written proceedings of the symposium are scheduled to be published in the spring volume of Transactions: The Tennessee Journal of Business Law.
I am looking forward to having many of my BLPB co-editors in town for this program. It's always a special time when we are together.
Tuesday, August 20, 2019
A recent California court order granting a motion for final settlement in an antitrust class action suit appears to have left LLCs out as "person(s)" in the definitions. Here's the clause, which is repeated a few times in the Settlement Agreement:
(w) “Person(s)” means an individual, corporation, limited liability corporation, professional corporation, limited liability partnership, partnership, limited partnership, association, joint stock company, estate, legal representative, trust, unincorporated association, government or any political subdivision or agency thereof, and any business or legal entity and any spouses, heirs, predecessors, successors, representatives or assignees of any of the foregoing.
IN RE: LITHIUM ION BATTERIES ANTITRUST LITIGATION, 2019 WL 3856413, Slip Copy (N.D.Cal. Aug. 16, 2019) (emphasis added).
A "limited liability corporation" and a "corporation" are the same thing. I am certain the "limited liability corporation" language was intended to cover "limited liability companies" or LLCs. But it doesn't cover LLCs, which are different entities. Of course, the fact that the definition includes all "unincorporated associations," LLCs are included, but this is sloppy and in my humble view, should never have been approved.
California has been know to make this distinction murky (see here) and some California courts like to just plain get it wrong. But this is a settlement that is being reviewed by the court, and I am willing to bet this language is in all sorts of settlement agreements because they are cutting and pasting the definitions from settlement to settlement.
From now on, I say courts should deny these agreements when proposal gets things like this wrong. Or better yet, reduce the legal fees, so it doesn't harm the class, but let's the lawyers know they should be drafting carefully. Sure, it's not a huge deal in this case, but it sure would be nice if more courts would send the message that LLCs are not corporations. Because they're not.
Wednesday, August 14, 2019
Yesterday was the first day of 1L Orientation at Creighton University School of Law, which meant it was really my first day of school as a dean, too. I've been on the job for a month, but summer school has a very different feel. This morning I also dropped my son off for this first day of high school. (And my daughter starts 6th grade tomorrow.) It's a lot of firsts in our new city, at our new schools, and it's exciting. And perhaps a little intimidating. I am sure it was for our 1Ls, just like it was back when I started law school. And I was about to turn 30.
There's lots of good advice for new law students our there (here, for example), so I focused my brief welcome to our new 1Ls on introducing myself and laying out my expectations for all of us. This is obviously specific to Creighton Law, though I think and hope it is true at a lot of other places, too. I didn't actually write out a speech, but here's the gist:
First, I let our new students know that we’re in this together. I chose to be here, and so did they. We all had options, and this is where we chose to be. I wanted to mark that so that we can remember why, when things get tough, we're here in the first place. The reason is at least slightly different for all of us, but we made the same choice.
Next, I wanted them to know this: I have your back. I have told the same thing to our faculty and staff, too. That doesn't mean I can always say yes, but it does mean that I will work to see you, hear you, and help you.
I also made clear that I would not ignore the past, but I will work to make sure we do not relive it, either. Our institution (like many others) has faced many challenges, internally and externally. We have a path forward and a group of people committed to our students. I also wanted to make sure that they knew that even when, as a faculty, some of us disagree with each other, we all agree that our students come first.
I then talked about how I plan to help us move forward: by building a foundation based on trust, faith, and hope. Trust in each other. Faith in our institution and values, spiritual and otherwise. And hope that working together, we can build a better, and more just, future for everyone. I noted that a key thing about faith and trust, is that they are personal choices. No one can give them to others. We can be trustworthy, which I will work to do. And we can support others in their faith. But we each chose whether to trust and have faith. By choosing to do this job, I am putting a lot of trust and faith into this institution and its people, and I hope others will do the same.
Finally, I told our students what I need them to know:
You are a remarkable group. Every one of you belongs here, or you wouldn’t be here. We expect you to succeed, and we will help you succeed. I ask you to do everything you can to be all in. Be open and committed to what you are doing. This is a lot of work if you do it right, and it’s a lot of fun, too.
Good wishes to all of you in whatever your new beginnings may be. It's going to be a heck of a year.
Tuesday, August 6, 2019
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.
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.
Monday, August 5, 2019
I am just back from the 2019 Southeastern Association of Law Schools (SEALS) conference. I participated in several different kinds of activities this year. This post reports out on each.
I first served as a participant in a series of discussion groups tailored to provide information to aspiring law professors. The attendees included newly minted fellows and VAPs, mid-to-later-career lawyers/judges looking to switch to full-time law faculty (some already adjuncts or visitors), and (in general) law practitioners testing the waters for possible engagement with the Association of American Law Schools faculty recruitment process. SEALS has served selected prospective law professors with a specialized track of preparative programming for a number of years. This set of discussion groups represents an extension of that type of programming, on a more general informational level, to a wider audience of folks interested in careers in law teaching.
I also presented in a discussion group, sponsors by West Academic, on "Teaching to Engage." Steve Friesland of Elon Law moderated the session. I shared some of my "first class" and assessment simulations for business law doctrinal and experiential courses. I learned from many others who shared their own ways of engaging students. It was a rich discussion.
The anual SEALS "Supreme Court and Legislative Update: Business and Regulatory Issues" featured a presentation from me on a few cases and things to watch for from a legislative viewpoint. I was joined on the panel by several super-fun business and administrative law colleagues. One of them, Lou Virelli, posted a summary of the session on the SEALS Blog. You can find it here.
Michigan State law prof Carla Reyes's "New Scholar" presentation of her draft paper currently entitled "Autonomous Business Reality," was fascinating. I was proud to serve as her assigned mentor for this session. I hope I lived up to that role, considering she is a leader in law-and-technology research and I already cite to her work on blockchain technology! Humbling to be a mentor under those circumstances, for sure.
As part of the Free Speech Workshop, I related the history and current status of student free speech issues involving registered student organizations at The University of Tennessee, Knoxville, based on my experience as a faculty advisor to a controversial student organization on our campus. That presentation was part of a larger discussion group on campus free speech issues. My UT Law colleague David Wolitz was a co-discussant. Howard Wasserman of FIU Law summarized the session here.
Last--but certainly not least--I co-moderated/moderated two substantive law SEALS discussion groups.
First, John Anderson of Mississippi College Law (with only a bit of help from me) organized and moderated a session entitled "Insider Trading Stories," in which participants focused on the narratives underlying insider trading cases--known and unknown. This proved to be an incredibly robust and diverse discussion, highlighting issues in insider trading theory, policy, and doctrine. Longer versions of some of the discussion group offerings will be presented at a symposium at UT Law in the fall, sponsored by the Tennessee Journal of Law and Policy (TJLP). The TJLP will publish the edited papers in a forthcoming volume. I was pleased to see BLPB co-blogger Marcia Narine Weldon in the room!
Second, I moderated a discussion group entitled "Benefit Corporation (or Not)? Establishing and Maintaining Social Impact Business Firms." The program description of the session 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.
The final group pf participants included researchers/writers from the United Kingdom and Canada as well as the United States. BLPB co-blogger (and newly minted dean) Josh Fershee was among the group, and BLPB co-blogger Marcia Narine Weldon was again in attendance. The discussion was spirited and there were more than a few "aha" moments for me.
All-in-all, a busy--but enlightening--week's work.
It soon will be time to propose programs for the 2020 SEALS annual meeting, to be held in Fort Lauderdale, Florida. The date of the conference is likely to be moved up to start on July 30 to accommodate the very early (and getting earlier) starts for schools in the Southeastern United States (and probably elsewhere, too). If you have business law program ideas or would like to moderate or participate in a business law program, please contact me by email. I find that this conference (especially the discussion groups) helps to energize my teaching and scholarship in meaningful ways. Perhaps you also would find this a great place to jumpstart the academic year.
Tuesday, July 30, 2019
I made a similar post on social media last night, but with the first bar exam of my time as a law school dean beginning this morning, I thought I post those thoughts here. To this taking this bar exam (and any future bar exam):
You have worked hard, now is the time for you to show what you know. I wish you success. As you get ready to sit for the exam, your preparation is done. But there are still things you can do to improve your odds. Here’s what I ask you to do when you take the #BarExam:
*Be thorough.* Answer every question, written and multiple choice. Leave nothing blank. Give yourself a chance.
*Be focused.* Pay attention to time. Don’t spend twenty-five minutes on one multiple choice question or fail to get to an essay. Spend no more than your allotted time for each question, give an answer, and move on. Come back if you have time after everything else is answered.
*Be relentless.* If you make a mistake, do your best to work around it. If you don’t know something, give it your best guess and move on. Don’t give up. Don’t walk away. Don’t quit. You can do this.
And last, but not least, try to remember that this exam does not define you. The results don’t make you good or bad. This test is not who you are. It is is simply a result. It’s an important one, and it can impact you. But don’t ever let it define you.
My thoughts and good wishes are with you.
Wednesday, July 24, 2019
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.
Tuesday, July 16, 2019
I have been a dean for two days. So, obviously, I have it all figured out. (That's very much a joke).
My sample size is small, but it seemed like a good time for me to take a shot at comparing what it's like to be a new dean versus what it's like to be a new professor. Admittedly, I am working hard to remember what it was like to be a professor in his first two days. I have the benefit of hindsight with that, while my life as dean is very much real time. But hey, it's a blog, so I will give it a try.
- As a new professor, I was worried (very worried) that I did not know everything about the subject matter and that it would be obvious. As a new dean, I expect that others don't expect me to know everything, and if they do, I know they're wrong.
- As a new professor, I wanted everyone to like me. As a new dean, I'd still appreciate that. But I don't need it, and I don't expect it, and I know it is impossible. (It's impossible as a professor, too, by the way, if you do your job, but you can get closer to 100%.).
- As a new professor, my goals were largely personal. They were aligned with my institution, but they were about my goals. Promotion. Tenure. Publication. Citation. As a new dean, my goals are far more institutional. Bar passage. Jobs for students. Faculty opportunity. A high-quality and inclusive workplace.
- As a new professor, I was hopeful. I wanted to have an impact on students, policy, and our future. As new dean, I am hopeful. And I want the same things, too. My role is very different, by my goal is the same.
Short list, I suppose, but those are the comparisons the stick out to me.
I don't have any expectation that being a new dean is any easier than being a new professor. But one thing I learned as a new professor was that I need to be myself. As a new dean, I will make mistakes, just as I did as a new professor. I hope not to, but that's not how the world works. And it's not how learning works. Learning involves testing, trying, failing, and seeking solutions.
What's next? I will work to be myself. That's one advantage I have. When I started as a professor, I thought maybe I should be like other professors, and I worked to be "a professor." Dumb. I want to make sure any mistakes I make are mine and not me trying to be something I am not. I am not trying to be a dean. I just am one. If nothing else, I hope that will make it easier for people to forgive mistakes.
To my new professor and new dean colleagues, good luck. Let's try to be ourselves and show our students and faculty and staff colleagues that genuineness has value. Because it does. It combines well with hard work, too.
Tuesday, July 9, 2019
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
3 Gore Capital is in fact a limited liability company.
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)[.]”
Tuesday, July 2, 2019
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.
Monday, June 24, 2019
One of the things that I obsessed over (alone and together with other new business law prof colleagues) as I began my teaching career was how to teach the first day of classes in my courses. I was given some great advice by many folks. Here are a few of the most valuable things people told me--advice that I use all the time, in my first-class sessions and, in some cases, beyond.
Have a solid class plan. This may go without saying, but my obsession paid off in that I was prepared, and therefore more confident (although my legs were shaking behind the podium anyway . . . ). I actually typed up my class notes for the first semester's worth of classes I taught. (I learned that, while I can read class notes competently, I always extemporaneity anyway . . . . I no longer read typewritten class notes, but many of my colleagues who are experienced and effective teachers still do.) But typing up my notes helped to reinforce key parts of the material for me and identify course themes.
Use the first class as an opportunity to introduce the semester's task, including both substantive law coverage and other learning objectives. I use a device in each doctrinal and experiential course to offer students a window on what we are covering and how that will be done. I include a piece on my expectations (e.g., reading the syllabus, frequently checking the course management site, reading email, producing timely and thoughtful work). Be as clear as possible about your expectations for your students. (As Josh Fershee said, "it's important to be as clear as possible about the what and the why.") Write them into your syllabus, of course; but also reinforce them verbally on the first day and at every logical juncture in the course where they may be relevant.
Consider using a motivating hypothetical or in-class project to help launch the course or illustrate coverage or themes. In my Business Associations course, after using a PechaKucha presentation as a brief introduction, I assign a few students in key roles in a new business with each other, and we use the remaining class time to talk through their expectations and how the law might address them. In my Corporate Finance course (which I teach as a planning and drafting seminar), we begin with a nebulous drafting assignment. In my Securities Regulation course, we begin with the financing of a vaguely described business in which the students are invited to invest. These three sample introductory sessions are just few among the many that could be used for these or related courses. Use your knowledge of where your course is headed to construct something relevant to your materials and course plan.
Arrive at class ten minutes early. Engage the students in an informal way as they arrive and get settled. Ask about how they are, what they did last summer, compliment them genuinely on something, what kind of coffee they are enjoying, etc. Anything that comes naturally in the way of light personal banter can work. (Continue this in subsequent classes, by the way. It's a great way to develop a deeper relationship and trust network with your students. This can come in handy when you flub up on something--which you inevitably will do, based on my experience and the experiences of folks I know.)
I am sure there is more I could say, but these items are the key ones, from my vantage point. What can you add? Leave comments to help our new colleagues along a bit.
Tuesday, June 18, 2019
My colleagues started this series off well with Part I and Part II in the series, and I will try to build on their thoughts. There are so many decisions to make when you get started, including what book to use, what style you will use in the classroom, and what form or forms of assessment you will use. To start, I will echo Joan Heminway's advice because I think it is so critical: First, be yourself.
It's easy to to think of teachers you liked and think you need to teach like them to be effective. While we can all learn a lot from our best teachers, if you look closely, I think you'll find that the thing best ones have in common (in addition to being prepared) is that they are true to themselves. That is not to say that every person is the same in classroom as they are outside. Some people need to be actors -- they take on a persona when they hit the classroom. Others wear their hearts on their sleeves. Others are clinical, and still others are relaxed and casual.
You may not know immediately your full style or classroom voice, but in my experience you know pretty quickly what isn't your thing. My advice is to make sure you don't stick with something you know doesn't feel even a little bit right for you. You can experiment and push yourself to try new things, and you should. Just don't continue down a path that makes you feel like you're going the wrong way. Your students will feel it, too. Every time.
As for assessment, you'll need to decide: Will you use one big final exam? Will you have a participation grade? How about writing assignments or exercises? Will your exam be open book or closed book? There are lots of options, and none are inherently right or wrong, though some may be better than others, especially for you and/or your school. Here are some guidelines I use in deciding what to do:
(1) If there is a manageable way to incorporate more writing in to the class, do it. That might mean graded assignments, but it might mean in-class writing where students exchange their thoughts and compare it against a model or example answer. It might mean multiple small papers or a series of blog posts. The more students write, the better they will get at is. And it doesn't have to mean you will be grading 5 papers from 50 students in a semester. As long as their is some accountability -- that is, someone other than the student will read it -- I have found it valuable. Asking students to write for and assess themselves has value, too, but in my experience the participation rate for those assignments tends to be lower and with less commitment for many students.
(2) If you're not sure what to choose, or you're agnostic, find out what your colleagues tend to do, and do something different. For example, many of my colleagues have used open-book exams, so I chose to give a closed-book exam for Business Organizations. This gives students a different experience, which I think is valuable. If all my colleagues gave closed-book exams, I'd probably give an open-book one. I have done both types, by the way, and both are fine, though I prefer the output I get from closed-book exams. Students tend to write what they know instead of searching for the "perfect" answer in the book. If no one gives take-home exams, maybe consider that (though I hated those as a student and I don't like them as a teacher, your mileage may vary). Different assessment styles provide one way to give students an experience they need as professionals to work with different partners or judges or clients. Not every experience is the same, and the best lawyers are adaptable.
(3) Whatever you choose for any of these things, be intentional. Do it for a reason that is more than that's what my professor did or that's what people do here. You may choose a path for both reasons, but make sure you have considered other options and then made a conscious decision to follow that path. Be honest and open with yourself about why you chose that path. It will give you some comfort in your decision, as well as make it easier to see why you might want to change course in the future if your goals are not being met.
(4) Be open with your students about what you are doing. For me, that means explaining my thought process and why my rules are as they are. My students know why, for example, I am giving a closed-book exam, do or do not use participation points, will or will not be flexible on deadlines, or why they may not want to tell me the reason they are missing class. Note that this works even for professors who are notoriously Socratic and won't answer much of anything directly. For the good ones, it is at least clear what they will not do. That said, for me, it's important to be as clear as possible about the what and the why. Here is an example: in my energy law seminar, I tend to be flexible with deadlines (within reason) on due dates for drafts and papers, especially with advance notice. This is because the dates are somewhat arbitrary and designed as guidelines so I can provide feedback and students have time to internalize and incorporate my feedback. So, my students know that. But when I taught first-year legal writing, deadlines were absolute (or nearly so) with penalties up to including a failing grade for being one minute late. Why? One of my teaching goals there was to teach about severe and irrevocable deadlines that can be linked to court filings, statutes of limitation, and the like.
Anyway, that's a little about how I approach things. Good luck, and don't forget to give yourself a break. As hard as we try, not everything will go perfectly. And sometimes what seemed like the right path was wrong. Or it just went poorly. Try to figure out why, whether it was the idea, the execution, or an external factor, so you can decide whether to scrap it or just try again. Even the best teachers are not perfect. But they are careful, committed, and intentional. Start there, and good things will tend to follow.
Wednesday, June 5, 2019
The AALS Section on Agency, Partnership, LLCs, and Unincorporated Entities is pleased to announce a Call for Papers from which up to three presenters will be selected for the section's program to be held during the AALS 2020 Annual Meeting in Washington, DC. The program will explore decisions and strategies for choice of business form. As unincorporated business forms have matured and those who use them have learned their advantages and disadvantages, key decisions about choice of form have changed in important and interesting ways. In addition, accelerating advances in technology promise to play surprising roles in the formation and operation of unincorporated firms.
Please submit an abstract or draft of an unpublished paper to Kelli Alces Williams at firstname.lastname@example.org before August 5, 2019. Please remove the author’s name and identifying information from the submission. Please include the author’s name and contact information in the submission email.
Papers will be selected after review by members of the Executive Committee of the Section. Authors of selected papers will be notified by August 30, 2019. The Call for Paper presenters will be responsible for paying their registration fee, hotel, and travel expenses.
Tuesday, May 28, 2019
I'll start with the exciting news that my Business Organizations students were 48 for 48 in recognizing that LLCs are not corporations. In fact, a number of my students specifically referred to "LLCs (NOT corporations) ..." in their exams. It's nice to be heard. I believe that's at least three years in a row without such a mistake, and maybe longer. I have evidence, at least on this issue, repetition is effective.
As for this summer, it is going to be an interesting one. I have now finished grading my last classes as a part of West Virginia Univerity College of Law. As some readers may know, I have accepted the opportunity to join Creighton University School of Law as the next dean. (For those wondering, my wife Kendra will be joining the Creighton Law faculty, as well, where, as was true at WVU, she will teach family law as a full professor.) After Kendra's run for Congress ended, she told me it was "my turn," and that I should pursue my goals. I don't think either of us expected such a big change so quickly.
Long before all of this became a reality, and after the campaign, we planned a family vacation to Europe for a month, so we'll be doing that with the kids -- Bulgaria, Germany, Italy, and Greece. Buying and selling a house, moving across the country, and starting new jobs (and new schools for the kids) will all be part of the mix, too, but hey, what's life without some adventure?
The fact that we're willing to leave should tell people just how much we believe in this opportunity. We have an absolutely incredible life already, with dear friends, amazing students, and a community of supportive and caring people. (Not to mention an absolutely gorgeous location.) And yet we're moving. I have high hopes and high expectations -- both for me and for my new institution. It's worth stating clearly that we have loved West Virginia and we have had incredible opportunities to grow both personally and professionally. I want people to know that we are not so much leaving West Virginia as we are going to Creighton, a possibility I wouldn't have without my time here at WVU.
I very much appreciate that, and because of all we have learned and experienced, new adventures await.
Tuesday, May 14, 2019
So, this post is about shameless self-promotion and a cautionary tale. A while back I was asked to write the West Virginia section of Texas A &M Journal of Property Law's Oil and Gas Survey. It's a short overview of recent developments, and one of the many perils of the law review process is how long such things take to get to print.
Even worse than a slow timeline, a miscommunication meant that my final round of edits did not make it into the piece, and there are a couple of errors. The editors were appropriately apologetic, and I know it all happened in good faith. I take some ownership, too, in that I was not at all demanding about knowing the schedule for the next round of edits or the overall timeline.
Ultimately, despite the (nonsubstantive) errors, I hope the piece will be helpful to some folks. There are some interesting oil and gas cases happening in West Virginia (and around the country), and how they turn out could have a significant impact on the oil and gas business.
Here's the abstract to my article, which you can find here:
This Article summarizes and discusses important recent developments in West Virginia’s oil and gas law, including legislative action and case law. This Article is divided into three Sections. First, West Virginia’s evolution in its approach to fractional mineral owner disputes in the Marcellus Shale. After multiple efforts to pass a forced pooling bill, the state settled instead on a cotenancy solution. Second, West Virginia addressed flat-rate royalties, following two court cases, a legislative response, and a subsequent court challenge to the legislation. Finally, this Article discusses three developments in lease interpretation: (1) what will be deemed “reasonably necessary” for oil and gas development in West Virginia; (2) if implied pooling rights are included in West Virginia leases that are silent on the matter; and (3) whether non-executory and non-participating royalty owners have rights to approve pooling.
Tuesday, May 7, 2019
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).
Thursday, May 2, 2019
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
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
Tuesday, April 23, 2019
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:
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.
Tuesday, April 16, 2019
My friend and colleague, Priya Baskaran, asked me to post the following, which I am happy to do:
Over the past year, a critical mass of law school faculty and staff have expressed interest in establishing an AALS Section on Community Economic Development (CED). The proposed section will provide a dynamic, collaborative environment to enhance the scholarship, activism, and direct legal work of CED-focused faculty and professional staff. Notably, the section will help bridge existing gaps between various actors in the CED universe by increasing opportunities for networking and enabling greater synergy and collaboration between scholars and experts in various substantive subjects and disciplines related to CED. Interested faculty and professional staff are invited to read the full petition.
I think this is a great idea, and I will be signing the petition (here). I have been working with an interdisciplinary group on my campus, WVU Center for Innovation in Gas Research and Utilization (CIGRU). We are a multidisciplinary group of researchers who are experts in science, engineering, environmental, policy, law, and finance. The CIGRU conducts research and services relevant to gas, oil, and chemicals. Our experimental research includes broad areas covering catalysis, reaction engineering, material science, power generation, and gas turbine. The CIGRU undertakes U.S. government- and industry-funded research projects developing clean and renewable energy technologies. Our services include air emission control, regulatory and policy, law and finance relevant to shale gas.
I have been leading CIGRU's Economic and Community Development Group for the past few years. About 18 months ago, CIGRU earned a five-year seed grant awarded by the West Virginia Higher Education Policy Commission, under its Research Challenge Grant program. The WVU gas utilization team includes eight CIGRU researchers, working in partnership with Marshall University, the WVU Energy Institute, the WVU Bureau for Business and Economic Research, the West Virginia Chemical Alliance Zone, Morgantown’s National Energy Technology Laboratory and the Mid-Atlantic Technology, Research and Innovation Center. So, this idea resonates with me. I think this is a great idea, and it has my support. If you agree, I hope you'll sign on, too.
For anyone interested, CIRGUs grant announcement and a description of the program are available after the jump.