Friday, July 10, 2009

Deductibility of LLC Tax Losses. Garnett v. Commissioner (Tax Ct. 2009)

Over on Tax Prof, Paul Caron notes the recent opinion in Garnett v. Commissioner, 132 T.C. No. 19 (June 30, 2009), that allows LLC members to apply its losses to offset other income.

posted by Gary Rosin

July 10, 2009 in LLC Cases | Permalink | Comments (0) | TrackBack (0)

Thursday, July 9, 2009

Incorporation Transparency and Law Enforcement Assistance Act (S. 569.IS)

Who owns America?  American business entities?  That's what Senator Carl Levin (MI) wants to know.   In 2008, Senator Levin (and co-sponsors, including then Senator Obama) introduced the Incorporation Transparency and Law Enforcement Act (S. 2956).   Earlier this year, Senator Levin (and co-sponsors) reintroduced the Act as S.569.IS.  on June 18, 2009, the Senate Homeland Security and Governmental Affairs Committee held a hearing on Examining State Business Incorporation Practices: A Discussion of the Incorporation Transparency and Law Enforcement Assistance Act.  Leslie Reynolds of the National Association of Secretaries of State (NASS) gave this summary of the hearing:

* * *  Sec. Elaine Marshall, NC Secretary of State and NASS Company Formation Task Force Co-Chair was one of the witnesses invited by Chair Lieberman (I-CT).

There were a total of five witnesses (all of their prepared testimony can be found on the [Senate Homeland Security and Governmental Affairs (HSGAC)] hearing page,along with the webcast of the hearing.) Witnesses representing the state perspective were Secretary Marshall and Harry Haynsworth, ULC drafting committee chair for the Uniform Law Enforcement Access to Entity Information Act (ULEAEIA). The Justice Department (DOJ), Immigration & Customs Department (ICE) and the ADA's office in New York City had witnesses testifying from the perspective of law enforcement.

Three Senators were present for the hearing - Chair Lieberman (I-CT), Sen. Levin (D-MI) and Sen. Carper (D-DE). Chair Lieberman stayed for the first round of questions, but left and asked Sen. Levin to chair the second round of questions. The hearing lasted two and a half hours, with a 20 minute break for a floor vote.

The full opening statements of the Senators present can be found on the HSGAC hearing page.  Chair Lieberman commended the work of the Permanent Subcommittee staff and the commitment of Sen. Levin on this issue. He said there should be a way to draft balanced "sunshine" legislation which would provide the information that law enforcement needs and protect investor privacy without burdensome administrative costs to implement. Sen. Levin said that states were forming 2 million businesses each year without knowing who is behind them. He also said that states were reluctant to admit there was a problem. Sen. Carper (D-DE) said that he hoped that the committee seriously considered the offer of Haynsworth and the ULC to move forward working together and that the solution will be a balance of interests between privacy and transparency.

Janice Ayala of ICE said that her agency has recognized for quite some time that the state incorporation process poses a serious threat . She cited several examples of investigations that have taken place over the past few years and said that shell companies (those that exist only on
paper - her definition) are being formed by criminals in the US and then they are opening bank accounts overseas. She also said that criminals are purchasing "shelf companies - aged companies" that are being promoted on the Internet and used to conduct criminal activities. She
said that the solution is federal legislation but does not credit S.569 as the solution.

Jennifer Shasky of DOJ said that federal legislation must include four components:

   (1) law enforcement must have access to the names and contact information for those who have control over a company and the company's assets;

   (2) define "beneficial owner" the same across all 50 states and collect name, address and photo ID from ALL recognized as beneficial owner,

   (3) obtain beneficial ownership information in an accurate and timely fashion which means it must be maintained on site in the state of formation, and it must be updated any time info changes and it must be certified annually, and

   (4) there must be a federal enforcement component.


Secretary Marshall outlined the work of the NASS task force, our request of the Uniform Law Commissioners and the ABA on drafting Uniform Law and the impact that S. 569 would have on NC specifically from a filing office standpoint. She explained, in detail, the challenges that state offices would face implementing S.569 - that you would be the front lines when it came to implementing- and the public education challenges you would face both in staffing and in costs.

Mr. Kaufman of the NY City ADA's office said his office supports S.569 because they deal with the fallout of "shell companies" everyday. He called the issue a "no-brainer" and said that "these shell companies ust come to an end." He said that as a country we have a "moral obligation" to lead on this issue and it is embarrassing when conducting an investigation with international authorities. He said that from a law enforcement perspective, the Uniform Law Commissioners draft is "worse than nothing" because it alerts an entity directly when they are being investigated. Often the law enforcement officials represented appeared to believe that those engaged in criminal activity would file truthful information. When Sec. Marshall pointed out that it was unlikely that criminal enterprises would file truthful information, Mr. Kaufman of the ADA's office said false information was still helpful because once caught, prosecutors could show criminal intent with the filing of false information - this still wouldn't aid in the investigation.

Harry Haynsworth of the Uniform Law Commissioners said that the solution has to be state legislation with a uniform standard because corporate law has been a matter for states. He is concerned that S.569 would result in massive unintentional non-compliance and that information would be frequently be outdated. He made an offer to move forward, working with the committee, to work on federal legislation that would require states to implement ULC version or they would be subject to federal legislation (S.569). The federal legislation would also include funding and federal penalties for non-compliance.

Sen. Levin asked Ms. Shasky if DOJ supported his bill. She said that DOJ thinks the bill needs to be amended to include photo ID for all beneficial owners not just international owners. DOJ also wants the beneficial ownership information updated anytime there is a change, not just updated annually. DOJ also wants to add an annual certification of the information. She did clarify that the Administration does not have an official position on S.569. ICE reported that Homeland Security is working on a position. Kaufman of the ADA's office again said he thinks that the issue is a no-brainer and he doesn't understand the state and business community perspective that the requirements will impose a burden. Law enforcement witnesses made it clear that they wanted the referenced provisions in place to address what they acknowledged were [0.1%] of the businesses out there conducting illegal activity.  Secretary Marshall and Harry Haynsworth referenced the fact that they were working on behalf of the 99.9% of the businesses conducting legitimate activities. Levin said that his approach to collecting the information was much simpler than the ULC approach.

Marshall and Haynsworth argued that the definition of beneficial ownership was extremely difficult to implement from a business filing perspective. Sen. Levin and law enforcement did not agree and said that the U.S. Treasury, Financial Action Task Force and S.569 all defined "beneficial ownership." To support his point, Mr. Haynsworth read from the July 5, 2007 Financial Action Task Force Third Mutual Evaluation Report of the United Kingdom, page 234 Sec. 1132 and 1133.

(list spacing and hot-links added).

The NASS has established a Company Formation Task Force on this issue.  Its website has a veritable history on this issue, with links to more information.

posted by Gary Rosin

July 9, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 1, 2009

Buy or Sell Right in LLC Agreement Not Arbitrable. Gilbert Street Developers, LLC v. La Quinta Homes, LLC (Cal. App. 2009)

Gilbert Street Developers, LLC v. La Quinta Homes, LLC, 94 Cal. Rptr. 3d 918 (Cal. Ct. App. 2009) the Court was called upon to interpret two parts of an LLC's operating agreement. The agreement provided for arbitration of "[a]ny controversy or dispute arising out of or relating to this agreement or the breach thereof (exclusive of matters which are expressly within the discretion of the Members)...."  94 Cal. Rptr. at 919 n.1; Slip Op. at 2 n.1 (emphasis added).  The agreement also provided that, under certain circumstances, one member could set a price, and demand that the other member buy or sell at that price.  94 Cal. Rptr. at 927-28; Slip Op. at 13-15. The question of arbitrability turned on whether the buy or sell provisions fell withing the exclusion for discretionary matters:

The Yee parties argue that there really isn‟t any discretion in the operation of the buy out agreement, other than, obviously the initial choice to invoke it. For them, it is essentially a machine that grinds to one of two inexorable results (you‟re bought out or you get bought out) once a lever is thrown.

   * * *

* * * A simple binary choice as here (shall I buy or shall I sell?) qualifies under the ordinary person‟s definition of discretion as well. Discretion is simply the act of separating or distinguishing, and that includes binary choices as well as ranges.

94 Cal. Rptr. at 928; Slip Op. at 15-16.

Interestingly, the buy-or-sell provisions could only be invoked "[i]n the event of a dispute among the Members which cannot be resolved[.]"   94 Cal. Rptr. at 927; Slip Op. at 13 (emphasis added).  To me, the real issue is whether arbitration would "resolve" the dispute.  In any event, the agreement provided for two dispute-resolution mechanisms, and did not clearly address how they related to each other.

posted by Gary Rosin

July 1, 2009 in LLC Cases | Permalink | Comments (0) | TrackBack (0)

Two Articles on Lawyers

I have not yet read these articles, but they caught my eye:

  1. Sande Buhai, Lawyers as Fiduciaries, 53 St. Louis U. L.J. 553 (2009); and

  2. Benjamin P. Cooper, The Lawyer’s Duty to Inform His client of His Own Malpractice, 61 Baylor L. Rev. 174 (2009).

posted by Gary Rosin

July 1, 2009 in Scholarship | Permalink | Comments (0) | TrackBack (0)

Friday, June 26, 2009

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

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

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

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

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

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

posted by Gary Rosin

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

Thursday, June 25, 2009

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

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

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

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

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

posted by Gary Rosin

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

Wednesday, June 24, 2009

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

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

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

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

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

* * *

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

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

What about three-year survival of actions under Section 25.15.303

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

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

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

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

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

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

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

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

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

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

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

  • If the legislature intended for dissolution, rather than cancellation of the certificate of formation, to apply to LLCs not timely reinstated, the statutes should be amend to provide for an initial administrative suspension of the right to do business, followed by an administrative dissolution.
  • Alternatively, it can change the survival statute to survival for three years after cancellation.

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

posted by Gary Rosin

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

Tuesday, June 23, 2009

Series LLCs & Assumed Names

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

  • a series with asset and liability partitioning may be a separate entity:  "A series with limited liability shall be treated as a separate entity to the extent set forth in the articles of organization."   § 37-40(a).

  • the existence of a series begins when a certificate of designation is filed, § 37-40(d),

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

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

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

posted by Gary Rosin

June 23, 2009 in Commentary | Permalink | Comments (1) | TrackBack (0)

Monday, June 22, 2009

Welcome Brad Borden, New Contributing Editor

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


posted by Gary Rosin

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

Welcome Tom Geu, New Contributing Editor

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


posted by Gary Rosin

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

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

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

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

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

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

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

posted by Gary Rosin

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

Friday, June 19, 2009

Texas Closes Door on Ederer Liability to Other Partners in LLPs

In Ederer v. Gursky, 9 N.Y.3d 514, 881 N.E.2d 204, 851 N.Y.S.2d 108, 2007 N.Y. Slip Op. 09960 (2007), the New York Court of Appeals interpreted the New York LLP shield to allow claims by partners for breach of obligations of other partners, or of the partnership.  See my earlier post, Liability of LLP partners To Each Other

Section 47 of Senate Bill 1442 amends Section 152.801(a) of the Texas Business Organizations Code to read as follows:

     (a) Except as provided by Subsection (b) or the partnership agreement, a partner in a limited liability partnership is not personally liable to any person, including a partner, directly or indirectly, by contribution, indemnity, or otherwise, for a debt or obligation of the partnership incurred while the partnership is a limited liability partnership.

Oddly, the Legislature chose to add "or the partnership agreement" to the introductory exception.  Like the RUPA, Texas has a central provision regarding partner autonomy and its limits.  TBOC § 152.002.  While the Legislature may have felt a "belt and suspenders" approach was necessary to catch the attention of the courts, it seems bad policy to start dropping in references to the partnership agreement.

posted by Gary Rosin

June 19, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 17, 2009

Contracting re Fiduciary Duties in Texas UBEs

Yet another way in which unincorporated business entities (UBEs) under the Texas Business organizations code ("TBOC") differ is the ability to contract as to fiduciary duties.

General Partnerships (Chapter 152).  Section 152.002(B)(2)-(4) are parallel to RUPA section 103(b)(3)-(5).  That is, no eliminations of the Section 152.204-.207 duties, but excluded specific activities or standards, so long as not manifestly unreasonable.

Limited Partnerships (Chapter 153).  Chapter 153 is a RULPA-type statute, so Section 153.003(a) generally incorporates Chapter 152, and a general partner has the same rights, powers and restrictions, and liabilities as a partner in a general partnership, § 153.152.

Limited Liability Companies (Chapter 101).  Section 101.401 is based on the early version of Delaware LLC 18-1101(c)(2):  the company agreement may "expand or restrict" duties, including fiduciary duties, and related liabilities.  As suggested by the Delaware Supreme Court in Gotham Partners, L.P. v. Hallwood Realty Partners, L.P.,817 A.2d 160, expanding or restricting probably does not include eliminating.  Id. at  166-68.  Such an interpretation would be consistent with Section 152.002(b)(2-(4), but without an express "manifestly unreasonable" limitation.  Would a "manifestly unreasonable" limitation be the equivalent of an elimination?

posted by Gary Rosin

June 17, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 16, 2009

More Texas & Creditors of Owners

We have already noted the preemption of Sections 9.406 & 9.408of the Texas UCC and the elimination of the right to foreclose a charging order on an ownership interest in a Texas LLC.  The rights of creditors of owners of interests in Texas unincorporated business entities (UBEs) under the Texas Business Organizations Code ("TBOC") vary widely, depending on the form of UBE:

  • Ownership interests in all forms of Texas UBEs subject to TBOC--(general) partnerships, limited partnerships and LLCs--are excluded from 9.406 and 9.408 of the Texas Business & Commerce Code.  TBOC §§ 101.106(c) & 154.001(d) (added by Sections 39 and 57 of Senate Bill 1442) (TBOC Chapter 154 is one of two mini-hubs that apply to both (general) partnerships and limited partnerships).
  • TBOC chapter 152, and its predece

ssor statute, deleted the concept of charging orders, as applied to interests in (general) partnerships.  Compare TBOC §§ 152.401-.406 with TBOC §§ 101.108-.112 and TBOC §§ 153.251-.257.  As a result, the traditional remedies--attachment, garnishment, etc.--are available to creditors of owners of interests in (general) partnerships.

  • A charging order is the exclusive remedy for a judgment creditor of an owner to reach an ownership interests in either a limited partnerships or an LLC.  TBOC §§ 101.112 (LLCs) & 153.256 (limited partnerships).
  • Senate Bill 1442 amended TBOC Section 101.112 by adding Subsection (c), which prohibits foreclosure of charging orders on ownership interests in LLCs.  SB 1442, § 40.  [Correction]  A similar change was made to TBOC Section 153.256 (charging orders against ownership interests in limited partnerships).  SB 1442 § 53. [Hat tip to Stephen Paine for reminding me of the dangers of posting when you are tiered!.

    In part, these differences are a matter of path dependence (adoption of new statutes at different times).  I had hoped that the most-recent legislative session might harmonize creditor remedies.  Instead, they beefed up the limited partnership and LLC charging order provisions, and left general partnerships hanging. 

    To paraphrase the old saw, when the legislature is session, you need to lock-up your spouses, children and pets!  That's why we only let them meet for five months every two years!

    posted by Gary Rosin
    (with edits 06/16/2009)

  • June 16, 2009 in Legislative Developments | Permalink | Comments (1) | TrackBack (0)

    Friday, June 12, 2009

    More Texas Hurdles for Creditors of LLC Members or Limited Partners

    Tom Rutledge has already pointed out that SB 1442 pre-emptsSection 9.406 and 9.408 of the Texas UCC.  Sections 40 and 53 of the bill go even further, and adds language that prohibits the foreclosure of a "charging order lien", whether "under this code or any other law," for ownership interests in LLCs and in limited partnerships.  Tex. Bus. Org. Code §§ 101.112(c) & 153.256(c)  (emphasis added).

    posted by Gary Rosin
    revised 06/19/2009

    June 12, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack (0)

    Texas Adopts Series LLCs

    Among things, SB 1442 amends the Texas Business Organizations Code  to provide for series LLCs.  Id.at § 45 (adding Subchapter M, §§ 101.601 et/ seq.).  The Bill Analysis describes the amendment as follows:

    S.B. 1442 authorizes the creation of a series limited liability company by allowing a limited liability company agreement to establish or provide for the establishment of one or more designated series of members, managers, membership interests, or assets

       that has separate rights, powers, or duties with respect to specified property or obligations of the company or profits and losses associated with specified property or obligations, or

       that has a separate business purpose or investment objective.

    The bill sets out provisions relating to

       the enforceability of the obligations and expenses of a series against its assets,

       the holding of assets associated with a series, and

       the requirements for a notice of limitation on the liabilities of a series.

    The bill 

       establishes the general powers of a series;

       provides that a member or manager associated with a series or a member or manager of the company is not liable for a debt, obligation, or liability of a series unless the company agreement specifically provides otherwise; and

       allows the company agreement to expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person associated with a series has to the series or the company, a member or manager associated with the series, or a member or manager of the company.

    The bill

       authorizes the company agreement to establish classes or groups of members or managers associated with a series and

       sets forth provisions relating to

    the governing authority of a series,

    the effect of certain events on a manager or member with respect to a series,

    the status of a member with respect to a distribution,

    the establishment of a record date for allocations and distributions, and

    the making of distributions with respect to a series.

    The bill establishes that the provisions of law related to limited liability companies apply to a series limited liability company and its associated members and managers, to the extent the provisions governing each company are not inconsistent.

    The bill

       authorizes a series and its business and affairs to wind up and terminate without causing the winding up of the company[,]

       provides that the series terminates on the completion of the winding up process[,}.

       ... specifies the conditions that require the winding up of a series and sets out procedures for the winding up and termination[, and]

       ...  provides for the revocation of a voluntary winding up, the cancellation of an event requiring a winding up, the authority of a series to continue business following either situation, and the winding up by order of a district court with appropriate jurisdiction.

    Id. at 4-5 (indentations added).

    While the general approach of Subchapter M is a statute-within-a-statute, Section 101.609 includes a general incorporation of Chapter 101 (The tex. Bus. Org. Code "spoke" for LLCs):

    Sec. 101.609. APPLICABILITY OF OTHER PROVISIONS OF CHAPTER; SYNONYMOUS TERMS.

         (a) To the extent not inconsistent with this subchapter, this chapter applies to a series and its associated members and managers.

         (b) For purposes of the application of any other provision of this chapter to a provision of this subchapter, and as the context requires:

         (1) a reference to "limited liability company" or "company" means the "series";

         (2) a reference to "member" means "member associated with the series"; and

         (3) a reference to "manager" means "manager associated with the series."

    posted by Gary Rosin

    June 12, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack (0)

    Friday, May 29, 2009

    The Ubiquity of Agency Law. Conwell v. Gray Loon Outdoor Marketing Group, Inc. (Ind. 2009)

    When talking to a former student, perhaps the most frequent observation is that they regularly use agency law in their practices.  For example, consider the opinion in Conwell v. Gary Loon Outdoor Marketing Group, Inc., No. 82S04-0806-CV-00309 (Ind. May 19, 2009).  Conwellinvolved the ownership of a website designed (and hosted) by Gray Loon for Piece of America (LP) (PoA).  When PoA didn't pay Gray Loon, it took the website off its server, and refused to give the website files to PoA.  Later the files were destroyed.  PoA sued, claiming that Gray Loon had converted its property. 

    At this point, you may be wondering how agency law applies.  Under copyright law, the owner of the copyright in a work is the author of the work, unless the work was a "work for hire."  Apparently, in deciding whether there was a work for hire, it makes a difference whether the work was done by an employee or by an independent contractor.  If the former, it is presumed to be work for hire, unless otherwise agreed.  If the latter, it is presumed not to be a work for hire, unless agreed in writing.  Slip Op., at 12-15.

    The only other interesting aspect of the case is the way the Court analyzed the status of Gray Loon.  The Court quoted the standard used by the U.S. Supreme Court, and then concluded:

    Considering these factors, it seems plain enough that Gray Loon was an independent contractor rather than POA's employee. The website was thus not a "work made for hire."

    Slip Op., at 15.  That's it.  Nothing about how the facts fit into the factors.  A great example of how not to write an opinion, or an essay on an exam. 

    Speaking of exams, back to grading.

    Hat tip to Ben Barros, PropertyProf blog.

    posted by Gary Rosin

    May 29, 2009 in Agency Cases | Permalink | Comments (0) | TrackBack (0)

    Tuesday, May 26, 2009

    Texas adopts 9-406/408 Carve-outs for LLC and Partnership Interests

    Section 39 of Texas S.B. 1442 provides, inter alia, for 9-406 and 9-408 carve-outs for membership interests in an LLC. Specifically, it is provided that a new subsection (c) will be added to Section 101.106 of the Texas Business Organizations Code to provide:

    Sections 9.406 and 9.408, Business & Commerce Code, do not apply to a membership interest in a limited liability company, including the rights, powers and interests arising under the company’s certificate of formation or company agreement or under this code. To the extent of any conflict between this subsection and Section 9.406 or 9.408, Business & Commerce Code, this subsection controls. It is the express intent of this subsection to permit the enforcement, as a contract among the members of a limited liability company, of any provision of a company agreement that would otherwise be ineffective under Section 9.406 or 9.408, Business & Commerce Code.

    A similar revision appears at section 57, there addressing interests in a partnership. You may also want to take a look at sections 60 and 61 of that bill, which amend 9-406 and 9‑408 to expressly provide that they do not apply to interests in either an LLC or a partnership.

    The effective date is 9/1/09.

    posted by Thomas E. Rutledge

    Update:  The House Bill Analysis of Section 39 describes the amendments as follows:

    Provides that Sections 9.406 (Discharge of Account Debtor; Notification of Assignment; Identification and Proof of Assignment; Restrictions on Assignment of Accounts, Chattel Paper, Payment Intangibles, and Promissory Notes Ineffective) and 9.408 (Restrictions on Assignment of Promissory Notes, Health-Care-Insurance Receivables, and Certain General Intangibles Ineffective), Business & Commerce Code, do not apply to a membership interest in a limited liability company, including the rights, powers, and interests arising under the company's certificate of formation or company agreement or under this code. Provides that to the extent of any conflict between this subsection and Section 9.406 or 9.408, Business & Commerce Code, this subsection controls. Provides that it is the express intent of this subsection to permit the enforcement, as a contract among the members of a limited liability company, of any provision of a company agreement that would otherwise be ineffective under Section 9.406 or 9.408, Business & Commerce Code.

    Id. at 9 (emphasis added).

    posted by Gary Rosin

    May 26, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack (0)

    Friday, May 8, 2009

    AALS Call for Papers

    The AALS Section on Agency, Partnerships. LLCs and Unincorporated Associations has issued a call for papers for the 2010 annual meeting of the AALS (2010 New Orleans) on the topic of "Vicarious, Individual and Limited Liability:  Responsibility for Wrongful Conduct and Unincorporated Firms".

    Tort raise claims both theoretical and practical  questions when an individual tortfeasor is associated with an unincorporated firm.  Should the firm's organizational status shield the individual from liability, comparable to a shield against contract claims?  When does an individual's conduct constitute tortious conduct, especially when the individual works as part of a group?

    And when, and to what extent, is the firm itself--or its owners--subject to liability?  The circumstances under which any firm--(whether or not incorporated--should be subject to vicarious liability are highly contested, most recently in the Exxon Valdez latigation before the United States Supreme Court.

    More generally, should the law differentiate between unincorporated and incorporated firms and their owners in resolving such questions?

    Drafts, abstracts or outlines should be submitted no later than September 1, 2009 to the Section's Chair, Deborah De Mott, [email protected],

         postd by Gary Rosin

    May 8, 2009 in Scholarship | Permalink | Comments (0) | TrackBack (0)

    Wednesday, May 6, 2009

    LLCs and Fiduciary Duties: A Glimmer of Hope for Delaware

    I have criticized many Delaware opinions for dicta saying that there are no fiduciary duties in Delaware LLCs unless they are expressly contracted for (what I have called the "mere contractual entity" approach).  The recent opinion in Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC,C.A. No. 3658-VCS (Del. Ch. Ct. April 20, 2009) (Mem. Op.) ("Bay Center"), gives me reason to hope that Delaware has not lost its way.  In Bay Center,Vice Chancellor Strine denied a motion to dismiss, among other things, claims of breach of fiduciary duty.  In discussing the fiduciary duty claim, Strine began by emphasizing the inherently fiduciary character of the relationship between an LLC's manager and the LLC and its members.  Slip Op. at 17-18. 

    Another important aspect of the opinion is VC Strine's treatment of a purported waiver of fiduciary duties in section 6.2 of the LLC Agreement:

    Section 6.2  Liability of Members.  . . .  Except for any duties imposed by this Agreement . . . each Member shall owe no duty of any kind towards the Company or the other Members in performing its duties and exercising its rights hereunder or otherwise.

    Slip Op.at 19 (emphasis in original).  Strine found that Section 6.2 conflicted with Section 6.1(b), which provided

    Section 6.1  Relationship of Members. Each Member agrees that, to the fullest extent permitted by the Delaware Act and except as otherwise expressly provided in this Agreement or any other agreement to which the Member is a party: . . . (b) The Members shall have the same duties and obligations to each other that members of a limited liability company formed under the Delaware Act have to each other.

    Slip Op. at 18-19 (emphasis in original).  As a result, the LLC Agreement was ambiguous.  Even though, to survive on a motion to dismiss, plaintiffs must offer only areasonable interpretation that supports their claim, VC Strine indicated that a reading of the LLC Agreement as allowing fiduciary duties under Section 6.1(b) was more reasonable than a reading that Section 6.2 controlled.  Accord to VC Strine, the latter reading would make Section 6.1(b) meaningless.  Slip Op.at 19-20.  Last, VC Strine invoked traditional principles of interpretation of fiduciary waivers:

    And, the interpretive scales also tip in favor of preserving fiduciary duties under the rule that the drafters of chartering documents must make their intent to eliminate fiduciary duties plain and unambiguous.  As a result, the defendants’ interpretation of the fiduciary duty provisions of the LLC Agreement is not the most reasonable interpretation, let alone the only reasonable interpretation.

    Slip Op. at 20 (footnote omitted) (emphasis added).

    For additional discussion of various aspects of Bay Center, see analysis by Prof. Larry Ribstein, and by Francis G.X. Pileggi.

        posted by Gary Rosin

    May 6, 2009 in LLC Cases | Permalink | Comments (2) | TrackBack (0)