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 email@example.com 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.
Tuesday, April 9, 2019
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).
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.
Tuesday, April 2, 2019
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.
In the case before the Court, the defendant is a Missouri corporation and the plaintiff is a New Jersey corporation.
Thursday, March 28, 2019
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.
Wednesday, March 20, 2019
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.
"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.
Tuesday, March 12, 2019
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.; . Under Illinois law, service on a limited liability company is governed by section 1–50 of the Limited Liability Company Act. 805 ILCS 180/1–50; John 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).
Tuesday, March 5, 2019
Gregg D. Polsky, University of Georgia Law, recently posted his paper, Explaining Choice-of-Entity Decisions by Silicon Valley Start-Ups. It is an interesting read and worth a look. H/T Tax Prof Blog. Following the abstract, I have a few initial thoughts:
Perhaps the most fundamental role of a business lawyer is to recommend the optimal entity choice for nascent business enterprises. Nevertheless, even in 2018, the choice-of-entity analysis remains highly muddled. Most business lawyers across the United States consistently recommend flow-through entities, such as limited liability companies and S corporations, to their clients. In contrast, a discrete group of highly sophisticated business lawyers, those who advise start-ups in Silicon Valley and other hotbeds of start-up activity, prefer C corporations.
Prior commentary has described and tried to explain this paradox without finding an adequate explanation. These commentators have noted a host of superficially plausible explanations, all of which they ultimately conclude are not wholly persuasive. The puzzle therefore remains.
This Article attempts to finally solve the puzzle by examining two factors that have been either vastly underappreciated or completely ignored in the existing literature. First, while previous commentators have briefly noted that flow-through structures are more complex and administratively burdensome, they did not fully appreciate the source, nature, and extent of these problems. In the unique start-up context, the complications of flow-through structures are exponentially more problematic, to the point where widespread adoption of flow-through entities is completely impractical. Second, the literature has not appreciated the effect of perplexing, yet pervasive, tax asset valuation problems in the public company context. The conventional wisdom is that tax assets are ignored or severely undervalued in public company stock valuations. In theory, the most significant benefit of flow-through status for start-ups is that it can result in the creation of valuable tax assets upon exit. However, the conventional wisdom makes this moot when the exit is through an initial public offering or sale to a public company, which are the desired types of exits for start-ups. The result is that the most significant benefit of using a flow- through is eliminated because of the tax asset pricing problem. Accordingly, while the costs of flow-through structures are far higher than have been appreciated, the benefits of these structures are much smaller than they appear.
Before commenting, let me be clear: I am not an expert in tax or in start-up entities, so my take on this falls much more from the perspective of what Polsky calls "main street businesses." I am merely an interested reader, and this is my first take on his interesting paper.
To start, Polsky distinguishes "tax partnerships" from "C Corporations." I know this is the conventional wisdom, but I still dislike the entity dissonance this creates. Polsky explains:
Tax partnerships generally include all state law entities other than corporations. Thus, general and limited partnerships, LLCs, LLPs, and LLLPs are all partnerships for tax purposes. C corporations include state law corporations and other business entities that affirmatively elect corporate status. Typically, a new business will often need to choose between being a state-law LLC taxed as a partnership or a state-law corporation taxed as a C corporation. The state law consequences of each are nearly identical, but the tax distinctions are vast.
As I have written previously, I'd much rather see the state-level entity decoupled from the tax code, such that we would
have (1) entity taxation, called C Tax, where an entity chooses to pay tax at the entity level, which would be typical C Corp taxation; (2) pass-through taxation, called K Tax, which is what we usually think of as partnership tax; and (3) we get rid of S corps, which can now be LLCs, anyway, which would allow an entity to choose S Tax.
As Dinky Bosetti once said, "It's good to want things."
Anyway, as one who focuses on entity choice from (mostly) the non-tax side, I dispute the idea that "[t]he state law consequences of each [entity] are nearly identical, but the tax distinctions are vast." From governance to fiduciary duties to creditor relationships to basic operations, I think there are significant differences (and potential consequences) to entity choice beyond tax implications.
I will also quibble with Polsky's statement that "public companies are taxed as C corporations." He is right, of course, that the default rule is that "a publicly traded partnership shall be treated as a corporation." I.R.C. § 7704(a). But, in addition to Business Organizations, I teach Energy Law, where we encounter Master Limited Partnerships (MLPs), which are publicly traded pass-through entities. See id. § 7704(c)-(d).
Polsky notes that "while an initial choice of entity decision can in theory be changed, it is generally too costly from a tax perspective to convert from a corporation to a partnership after a start-up begins to show promise." This is why those of us not advising VC start-ups generally would choose the LLC, if it's a close call. If the entity needs to be taxed a C corp, we can convert. If it is better served as an LLC, and the entity has appreciated in value, converting from a C corp to an LLC is costly. Nonetheless, Polsky explains for companies planning to go public or be sold to a public entity, the LLC will convert before sale so that the LLC and C Corp end up in roughly the same place:
The differences are (1) the LLC’s pre-IPO losses flowed through to its owners while the corporation’s losses were trapped, but as discussed above this benefit is much smaller than it appears due to the presence of tax-indifferent ownership and the passive activity rules, (2) the LLC resulted in additional administrative, transactional, and compliance complexity (including the utilization of a blocker corporation in the ownership structure), and (3) the LLC required a restructuring on the eve of the IPO. All things considered, it is not surprising that corporate classification was the preferred approach for start-ups.
This is an interesting insight. My understanding is that the ability pass-through pre-IPO losses were significant to at least a notable portion of investors. Polsky's paper suggests this is not as significant as it seems, as many of the benefits are eroded for a variety of reasons in these start ups. In addition, he notes a variety of LLC complexities for the start-up world that are not as prevalent for main street businesses. As a general matter, for traditional businesses, the corporate form comes with more mandatory obligations and rules that make the LLC the less-intensive choice. Not so, it appears, for VC start-ups.
I need to spend some more time with it, and maybe I'll have some more thoughts after I do. If you're interested in this sort of thing, I recommend taking a look.