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Joan Heminway

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Professor Heminway brought nearly 15 years of corporate practice experience to the University of Tennessee College of Law when she joined the faculty in 2000. She practiced transactional business law (working in the areas of public offerings, private placements, mergers, acquisitions, dispositions, and restructurings) in the Boston office of Skadden, Arps, Slate, Meagher & Flom LLP from 1985 through 2000.

She has served as an expert witness and consultant on business entity and finance and federal and state securities law matters and is a frequent academic and continuing legal education presenter on business law issues. Professor Heminway also has represented pro bono clients on political asylum applications, landlord/tenant appeals, social security/disability cases, and not-for-profit incorporations and related business law issues. Read More

Earlier this week, Keith Paul Bishop observed on his blog, “Professor Joshua Fershee has been fighting the good fight on limited liability company nomenclature, but I fear that he is losing.”   I am not willing to concede that I am losing (yet), but I have to concede that I am winning less often than I’d hoped.  

Bishop noted my “helpful checklist” from last week for those writing about LLCs, but he argues, “it may be time to give up the fight and bestow an entirely new name on LLCs that is less likely to be confused with corporations. I am still not ready to give up the fight, but it is an interesting thought, and there are some options.

One path I have proposed before that I think would help: Let Corps Be Corps: Follow-Up on Entity Tax Status.  In that post, I suggested that the IRS should just stop using state-law entity designations, and thus stop having “corporate” tax treatment. I explained:

My proposal is not abolishing corporate tax . . . .  Instead, the proposal is to have entities choose from options that are linked the Internal Revenue Code, and not to

…

Today I will continue my quest seeking to get courts to appreciate the need to pay attention to detail as to LLCs. Sometimes courts misidentify LLCs as “limited liability corporations” (and not the correct “limited liability companies”) because they don’t know the difference. Other times it is because they copied the language from the pleadings. And other times it’s just typing “corporation” when “company” was intended.  All such errors are understandable but should be fixed.  

Today, we get an unpublished court opinion from last week that clearly has the correct information available, yet the opinion goofs anyway. The opinion states:    

Every Limited Liability Corporation (LLC) in Delaware is required to have a registered agent to receive service of process for the corporation. Service directly upon the owners of the LLC is not legally necessary if the registered agent is properly served. 

JERZY WIRTH Pl., v. AVONDALE IQ., LLC, Def., CV N10J-03776, 2018 WL 2383578, at *2 (Del. Super. May 25, 2018). Corporations and LLCs need registered agents, but here we are dealing with an LLC.  The accompanying footnote gets it right, so this is simply an attention to detail problem.  The footnote reads: 

See 18 Del. C.

…

I was browsing through some recent veil piercing cases (because that’s how I roll), and I came across this gem: 

[I]t is unclear that merely using a corporation to limit personal liability rises to the level of fraud required to pierce the corporate veil.

Indagro SA v. Nilva, No. 16-3226, 2018 WL 2068660, at *3 (3d Cir. May 3, 2018). Given that limited liability is one of the primary benefits of incorporation, I think it is at least implied that using a corporation to limit personal liability is not fraud at all.  

Moreover, the corporation at issue was a New Jersey corporation, and the state law provides:

(2) Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts of the corporation, except that a shareholder may become personally liable by the reason of his own acts or conduct.

N.J. Stat. Ann. § 14A:5-30 (West). This is pretty unequivocal.  I get that fraud may be one of the acts that could give rise to personal liability, but the use of an entity to limit personal liability, when that is a core facet of the entity, is some pretty serious…

A recent Georgia case considers whether a “sole owner” of an LLC can be held liable for negligent actions of his or her LLC. Of course, once again, the limited liability company (LLC), is called by the court a “limited liability corporation,” and the court proceeds to apply corporate law. Here’s the relevant excerpt:
The Goldens contend that the trial court erred by denying their motion for summary judgment as to negligence claims asserted against them personally. They assert that corporate law insulates them from liability and that, while a member of an [sic] limited liability corporation may be liable for torts in which he individually participated, Ugo Mattera has pointed to no evidence that the Goldens specifically directed a particular negligent act or participated or cooperated therein. We agree with the Goldens that they were entitled to summary judgment on Ugo Mattera’s negligence claim.
An officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefor, and an officer of a corporation who takes no part in the commission of a tort committed by the corporation is not personally liable unless he specifically directed the particular act to be done

…

If I have learned anything over the years, it is that I should not expect any court to be immune from messing up entities. Delaware, as a leader in business law and the chosen origin for so many entities, though, seems like a place that should be better than most with regard to understanding, distinguishing, and describing entities.  Sometimes they get things rights, as I argued here, and other times they don’t.  A recent case is another place where they got something significant incorrect. 

The case starts off okay:

Plaintiffs brought this action under federal diversity jurisdiction, 28 U.S.C. § 1332(a)(1), asserting that complete diversity of citizenship exists among the parties. In Defendants’ Motion to Dismiss, however, they argue that complete diversity of the parties is lacking. Federal jurisdiction under § 1332(a)(1) requires complete diversity of citizenship, meaning that “no plaintiff can be a citizen of the same state as any of the defendants.” Midlantic Nat. Bank v. Hansen, 48 F.3d 693, 696 (3d Cir. 1995); Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553 (2005). 

Cliffs Nat. Res. Inc. v. Seneca Coal Res., LLC, No. CV 17-567, 2018 WL 2012900, at *1

…

Here’s how this week’s post came to be.  I thought: “I should probably write about something other than LLCs being mischaracterized by courts. Maybe I will add some thoughts about Joan’s post about her thoughtful new essay, Let’s Not Give Up on Traditional For-Profit Corporations for Sustainable Social Enterprise. But first, I’ll read through the cases that call LLCs ‘limited liability corporations.'”  And read them I did.  I was about to let it go, but then I read something that (as usual) made me cringe. It’s from a 2012 opinion that apparently just showed up on Westlaw. Here it is:
II. UNDISPUTED FACTS.
 
. . . . The facts, viewed in the light most favorable to the Plaintiffs, are as follows. Plaintiff Edgar Lopez is a New Mexico resident. Compl. at 1, ¶ 1. Lopez owns and operates Plaintiff IMA, LLC, a New Mexico limited liability corporation that formerly managed the Perry Corners Shopping Center. . . . Lopez is the managing partner and the only surviving voting member of Hunt Partners, LLC, a Nevada corporation that has its principal place of business in New Mexico. . . . . Hunt Partners wholly owns, as the “sole

…

As I am inclined to do with cases and statutes, I spent some time this week chasing down incorrect definitions of the LLC (correctly defined as a “limited liability company”).  I did some perusing of the Code of my home state of West Virginia for incorrect uses of “limited liability corporation,” where limited liability company was intended.  As I expected, there are multiple errors. Take, for example: 

§ 31D-11-1109. Conversion of a domestic corporation to a domestic limited liability company.

. . . .

(i) When a corporation has been converted to a limited liability corporation pursuant to this section, the limited liability company shall, . . . .

This part of the Code uses “limited liability company” correctly throughout this provision, except in this one spot.  This should be cleaned up, but it appears to be an error related to repeated use of corporation and company in the same statute (as opposed to a misunderstanding of the concept).

 The West Virginia Code has adopted the use of “limited liability corporation” in place of “limited liability company” in a couple definitions provisions, too, which could be a little more problematic. 

In the Motor Fuel Excise Tax portion of the…

Oh boy. A 2010 case just came through on my “limited liability corporation” WESTLAW alert (that I get every day).  This one is a mess. Recall that LLCs are limited liability companies, which are a separate entity from partnership and corporations, despite often having some similar characteristics to each of those. 

CBOE, along with the six other exchanges, has an interest in OPRA but OPRA was not incorporated as a separate legal entity until January 1, 2010, when it incorporated as a limited liability corporation. Id. (describing the restructuring of OPRA following its incorporation). At the time this lawsuit was filed, however, there remains a question as to whether there were any formalities in place to separate OPRA from CBOE operations. In short, the parties dispute whether, at the time the suit was filed, OPRA operated independently or was operated jointly with CBOE.
*2 To this end, Realtime asserts that the lack of any corporate governance at OPRA [an LLC], such as Articles of Association or a partnership agreement, renders OPRA “simply a label with no formal business structure.” RESPONSE at 2, 4 (citing SEC RELEASE at 2) (“OPRA was not organized as an association pursuant to Articles of

…

I often use my space here to complain about courts and lawmakers being imprecise with regard to limited liability companies (LLCs).  Today, I will focus on my home state of West Virginia, which recently passed a bill to support (and provide loans for cooperatives designed to provide) much-needed broadband development in the state. I applaud the effort, but the execution was not great.  

Here’s an example from the West Virginia Code: 

12-6C-11. Legislative findings; loans for industrial development; availability of funds and interest rates.

. . . .

(f) The directors of the board shall bear no fiduciary responsibility with regard to any of the loans contemplated in this section.

This applies to a cooperative board that takes on loans for broadband projects.  But it doesn’t make sense. I think they used “fiduciary” when they meant “financial,” as I assume they meant to say that the board members of the organization would not have “financial liability.”  I am pretty sure they did not mean to remove fiduciary duties.  Then again, who knows. Maybe they are fine with the directors using loans for personal vacations.  (Just kidding. I am pretty sure they’d care.)  I know that in finance, the term fiduciary…

In recent weeks, the Tennessee General Assembly has been wrestling with a bill (house and senate versions here and here) that changes the governing board of The University of Tennessee (UT), where I teach.  Non-controversially, the UT FOCUS Act, as it is commonly called (Focusing on Campus and University Success at UT), decreases the size of UT’s board of trustees.  Currently, the board of trustees comprises 27 members–five ex officio members and 22 appointed members.  Tenn. Code Ann. § 49-9-202.  Most would agree that 27–or even 22–is a relatively unmanageable number of board members, without good cause, for most governing boards.  But the composition requirements for the board (with this newly reduced number of trustees) are where the rubber hits the road.

The Bill Summary for the measure, as reported on the Tennessee General Assembly website, succinctly describes the current board composition, which is established by statute.  I include the relevant text from the Bill Summary here.

The ex officio members are: the governor, the commissioner of education, the commissioner of agriculture, and the president of the university, who are voting members; and the executive director of the Tennessee higher education commission (THEC), who is a nonvoting member. Of the 22 additional members: one must be appointed from each congressional district (presently there are nine congressional districts); two additional members each must reside in Knox and Shelby counties; one additional member each must reside in Weakley, Hamilton, and Davidson counties; one additional member must reside in Anderson, Bedford, Coffee, Franklin, Lincoln, Moore or Warren County; one additional member is a non-Tennessee resident; two additional members, one voting and one non-voting, must be members of the faculty of the University of Tennessee who served as faculty senate president, or the equivalent, at a University of Tennessee institution during the academic year immediately preceding appointment as a trustee, appointed according to a sequence detailed in present law; and two additional members who are students at a UT institution, one voting and one nonvoting, appointed from the various institutions on a rotating basis pursuant to present law.

Present law requires that at least one third of the appointive members be members of the principal minority political party in the state and that at least one third of the appointive members must be alumni of the University of Tennessee. All appointive members are appointed by the governor subject to confirmation by the senate, but appointments are effective until adversely acted upon by the senate. In making appointments to the board of trustees, the governor must strive to ensure that at least one person appointed to serve on the board is 60 years of age or older, and that at least one person appointed to serve on the board is a member of a racial minority. Present law requires that the membership of the board reflect the percentage of females in the population generally. Appointive members serve terms of six years beginning June 1 of the year of appointment, and members are eligible to succeed themselves.

(emphasis added)  Of particular importance for purposes of this post are the italicized portions of the description.  The UT FOCUS Act calls for no faculty or students–no state employees altogether–on the board as voting or non-voting members.  I am concerned about this aspect of the bill because of its effect on the expertise of UT’s board.  No amount of board orientation can imbue board members with the knowledge that faculty and students have.

The apparent tension here is between the value of that expertise–boots-on-the-ground knowledge of shared governance, curriculum design and execution, the role of co-curricular and extra-curricular programming, faculty/staff/student relations, and other matters unique to current participation in the university’s campus communities–and a perceived conflict of interest (since faculty and students would be effectively governing themselves).

The Association of Governing Boards of Universities and Colleges (AGB) and the American Association of University Professors (AAUP) agree that university governing boards generally lack knowledge of faculty affairs.  A 2017 publication of the AGB notes in this regard:

Participants in all three categories in our listening sessions (board members, presidents, and faculty) acknowledged—and indeed emphasized—that there is a huge information gap between boards and faculty. They noted that board members often have very little— if any—understanding of the nature of faculty work, of the nature of academic culture, of the real meaning of academic freedom, and of the history and importance of faculty self-governance and the faculty role in shared governance. . . .

The AAUP website features a report on a 2012 Cornell University study of faculty trustees that includes a related observation.

Discussions of “best practices” for governing boards consistently cite improved relationships with the faculty as one of the characteristics of highly effective boards. We are in an era of increasingly “activist” boards, leading to significant mutual distrust between boards and faculty members and creating an impetus for improving faculty-board relations.

As a former faculty senate president at UT Knoxville, I understand and appreciate all of this.