LLCs

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Today is my annual check-up on the use of “limited liability corporation” in place of the correct “limited liability company.”  I did a similar review last year about this time, and revisiting the same search led to remarkable consistency. This is disappointing in that I am hoping for improvement, but at least it is not getting notably worse. 

Since January 1, 2016, Westlaw reports the following using the phrase “limited liability corporation”:

  • Cases: 363 (last year was 381)
  • Trial Court Orders: 99 (last year was 93)
  • Administrative Decisions & Guidance: 172 (last year was 169)
  • Secondary Sources: 1116 (last year was 1071)
  • Proposed & Enacted Legislation: 148 (last year was 169)

As was the case last year, I am most distressed by the legislative uses of the phrase, because codifying the use of “limited liability corporation” makes this situation far murkier than a court making the mistake in a particular application. 

New York, for example, passed the following legislation:

Section 1. Subject to the provisions of this act, the commissioner of parks and recreation of the city of New York is hereby authorized to enter into an agreement with the Kids’ Powerhouse Discovery Center Limited Liability Corporation for the maintenance

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A friend of mine is considering teaching his constitutional law seminar based almost entirely on current and future decisions by the President-elect. I would love to take that class. I thought of that when I saw this article about Mr. Trump’s creative use of Delaware LLCs for real estate and aircraft. Here in South Florida, we have a number of very wealthy residents, and my Business Associations students could value from learning about this real-life entity selection/jurisdictional exercise. Alas, I probably can’t squeeze a whole course out of his business interests. However, I am sure that using some examples from the headlines related to Trump and many of his appointees for key regulatory agencies will help bring some of the material to life.

Happy Grading!

I often complain about courts and their unwillingness to require plaintiffs to make appropriate claims about veil piercing in the context of limited liability companies (LLCs).  That is, courts too often allow plaintiffs to seek to “pierce the corporate veil” of LLCs, which (of course) do not have corporate veils.  They have limited liability veils, but they are decidedly not corporate.  I will complain about that again, but in the process, I will note that the court does a great job of general veil piercing analysis that is worthy noting.  
 
In Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC, on Oct. 20, 2016, the Supreme Court, Appellate Division, First Department, New York, decided to dismiss a veil piercing claim based on what I see as very sound reasoning.  I would have like the court to note it was not a corporation, and instead an LLC, that the plaintiff sought to pierce, but nonetheless, I think the court got the rest right.  The court found that the plaintiff failed to plead a sufficient veil–piercing claim and explained, “both parties were very sophisticated, and negotiated in minute detail all aspects of their agreements to build

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Here we go again: 

Plaintiff seeks to collect the outstanding balance owed from Defendant Healthcare Enterprises, L.L.C. d/b/a Princesse Pharmacy and Defendant Octavio RX, Enterprises, L.L.C., d/b/a Christian’s Pharmacy & Medical Supplies (collectively “Corporate Defendants”) as well as Defendant Christian. (Dkt. No. 13 at 3). Plaintiff alleges that Corporate Defendants “are shell corporations or alter egos of [Defendant] Christian, owner of the different establishments known as Princesse Pharmacy, [and] Christian’s Pharmacy & Medical Supplies.”
Cesar Castillo, INC. v. Healthcare Enterprises, L.L.C., CV 2012-108, 2016 WL 5660437, at *1 (D.V.I. Sept. 27, 2016). 
 
So, the “Corporate Defendants” are actually formed as a limited liability company (LLC).  As so often happens, the court get this wrong. This is one of the challenges that come from veil piercing law that treats all such cases a “piercing the corporate veil” instead of “piercing the entity veil” or piecing the veil of limited liability.”  The court ultimately dismisses the veiling piercing claim as to Christian individually because there were no factual allegations in the complaint sufficient to support veil piercing.  I would have dismissed it for making an impossible assertion.  Following is the from th complaint: 
The defendants Octavio Rx Enterprises, LLC and Healthcare

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On Monday, Doug Moll posted a great question about RUPA 404(e), which also got some great comments. I started to write a reply comment, but it got so long, I though it worked better as a separate post.  Doug asks the following (whole post here):

Under the “cabining in” language of RUPA (1997), the action has to fit within § 404(b) to be considered a breach of the duty of loyalty.  Section 404(b)(1) prevents the “appropriation of a partnership opportunity.”  When a partner attempts to block the partnership from taking an opportunity to protect the partner’s own related business, can it be argued that the partner is, at least indirectly, seeking to appropriate the opportunity for himself?

Alternatively, might the partner’s vote violate the § 404(b)(3) obligation to “refrain from competing with the partnership”?

Here’s where I come out it: 

As I think about it, I am with Frank Snyder’s comment that “a partner is entitled to pursue her own interests in voting her partnership interest, unless there’s some agreement to the contrary.”  I also think, though, that § 404(e) sanctions self-interested votes, subject to “the obligation of good faith and fair dealing” required under § 404(d).  

So, I…

Here’s a new one on the “LLC as corporation” front.  A court in the Southern District of New York says the following:

[T]his Court has subject matter jurisdiction, since the parties are diverse and the amount in controversy exceeds $75,000. Hermes and Swain are “citizens” of different states; Hermes, a French limited liability corporation, has its headquarters in New York, while Swain is a New Jersey resident.

Hermés of Paris, Inc. v. Swain, 2016 WL 4990340, at *2 (S.D.N.Y., 2016)

In most such circumstances, when a court refers to a “limited liability corporation,” it meant to say “limited liability company.” See, e.g., Avarden Investments, LLC v. Deutsche Bank Nat’l Trust Co., No. 16-CV-014-LM, 2016 WL 4926155, at *2 (D.N.H. Sept. 15, 2016) (“Avarden is a limited liability company organized under the laws of New Hampshire. New Hampshire law permits a limited liability corporation to assign management responsibility of a limited liability company to a ‘manager.’ RSA 304-C:13.”). But not this time.

Bloomberg says Hermès of Paris, Inc. operates as a subsidiary of Hermes International SA.  The French version of an LLC is not an SA, it often viewed as an SARL.  

So, technically, a corporation is a…

What does it mean to opt out of fiduciary duties?  In follow-up to my co-blogger Joan Heminway’s post, Limited Partnership Law: Should Tennessee Follow Delaware’s Lead On Fiduciary Duty Private Ordering?, I will go a step further and say all states should follow Delaware’s lead on private ordering for non-publicly traded unincorporated business associations. 

Here’s why:  At formation, I think all duties between promoters of an unincorporated business association (i.e., not a corporation) are always, to some degree, defined at formation. This is different than the majority of other agency relationships where the expectations of the relationship are more ingrained and less negotiated (think employee-employer relationship).  

As such, I’d make fiduciary duties a fundamental right by statute that can be dropped (expressly) by those forming the entity.  I’d put an additional limit on the ability to drop fiduciary duties: the duties can only be dropped after formation if expressly stated in formation documents (or agreed unanimously later). That is, if you didn’t opt out at formation, tell all those who could potentially join the entity how you can change fiduciary duties later. This helps limit some (though not all) freeze-out options, and I think it would encourage investors to check the entity documents …

So, I am very anti-fraud, and I think cheaters should not prosper.  But I also think courts should know what they are talking about, especially in criminal cases. The following is from a new Second Circuit case: 
Although we review claims of insufficiency de novo, United States v. Harvey, 746 F.3d 87, 89 (2d Cir. 2014), it is well recognized that “a defendant mounting such a challenge bears a heavy burden” because “in assessing whether the evidence was sufficient to sustain a conviction, we review the evidence in the light most favorable to the government, drawing all inferences in the government’s favor and deferring to the jury’s assessments of the witnesses’ credibility.”  . . . 
[W]e reject Jasmin’s challenge to her Hobbs Act conviction. The evidence presented at trial more than sufficiently describes the consideration received by Jasmin in exchange for her official actions as Mayor, including the $5,000 in cash from Stern, “advance” cash for their partnership, and shares in the limited liability corporation that would develop the community center.
United States v. Jasmin, No. 15-2546-CR, 2016 WL 4501977, at *2 (2d Cir. Aug. 29, 2016). 
 
I can’t actually figure out exactly what’s going on

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Just in case you haven’t gotten the message yet:  Delaware law means fiduciary duty freedom of contract for alternative entities.  In May 2016, the Delaware Chancery Court upheld a waiver of fiduciary duties in a master limited partnership.  In Employees Retirement System of the City of St. Louis v. TC Pipelines GP, Inc., Vice Chancellor Glasscock upheld challenges to an interested transaction (sale of a pipeline asset to an affiliated entity) that was reviewed, according to the partnership agreement, by a special committee and found to be fair and reasonable.  The waiver has been described as “ironclad” to give you a sense of how straight forward this decision was. No close call here.  

Vice Chancellor Glasscock’s letter opinion starts:

Delaware alternative entity law is explicitly contractual;1 it allows parties to eschew a corporate-style suite of fiduciary duties and rights, and instead to provide for modified versions of such duties and rights—or none at all—by contract. This custom approach can be value enhancing, but only if the parties are held to their bargain. Where equity holders in such entities have provided for such a custom menu of rights and duties by unambiguous contract language, that language must control judicial review of

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Anyone who reads this blog knows that I have issues with how people mess up the distinction between LLCs (limited liability companies) and corporations. In some instances, it is a subtle, likely careless, mistake.  Other cases seem to be trolling me.  Today, I present you such a case: Sky Cable, LLC v. Coley, 2016 WL 3926492 (W.D.Va., July 18, 2016).  H/T: Jay D. Adkisson. The case describes the proceedings as follows: 

DIRECTV asks the court to reverse-pierce the corporate veil and declare that Randy Coley is the alter ego of his three limited liability companies, such that the assets held by those LLCs are subject to the judgment in this case.

Okay, so claiming to pierce the “corporate veil” of an LLC is wrong (it doesn’t have a “corporate” anything), but it’s also exceedingly common for lawyers and courts to make such an assertion. This case takes the improper designation to the next level.  

First, the court describes the LLCs in questios as “the Corporate Entities.”  It then goes on to discuss “Coley’s limited liability companies.”  Ugh.  The court further relates, “DIRECTV stated that in a forthcoming motion, it would ask the court to reverse-pierce the corporate…