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Plain Bay alleges that it is a citizen of Florida for diversity purposes as it is a Florida limited liability company incorporated in Florida with its principal place of business in Florida and that Yates is a citizen of California for diversity purposes as he “is a citizen of the United States and a resident of the State of California[.]” . . . In order for this Court to properly exercise jurisdiction over a case, “the action must be between ‘citizens of different States.’ ” 28 U.S.C. § 1332(a)(1).

Plain Bay Sales, LLC v. Gallaher, 9:18-CV-80581-WM, 2020 WL 961847, at *2 (S.D. Fla. Feb. 28, 2020) (emphasis added). 
 
Yates, though, was a UK citizen, who lived in Florida, and thus, “the Court concludes that, for diversity purposes, Yates should be considered a citizen of Florida.” Id. The court eventually determines that Yates would destroy diversity, but Plain Bay removed him as a defendant, and as a dispensable party, diversity was restored. 
 
Okay, but there is a problem here. Two really. First, Plain Bay was not “incorporated” anywhere. It was formed. It is an LLC, not a corporation.  But more important, Plain Bay’s citizenship has not been

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The Honorable Aida M. Delgado-Colón made me smile today.  As BLPB readers know, An LLC By Any Other Name, Is Still Not a Corporation. Finally, I received a notice of a court acknowledging this fact and requiring a party to refer to their legal entity correctly. Judge Delgado-Colón writes: 

Pursuant to this Court’s sua sponte obligation to inquire into its own subject matter jurisdiction and noticing the unprecedented increase in foreclosure litigation in this District, the Court ordered plaintiff to clarify whether it is a corporation or a limited liability company (“LLC”).

REVERSE MORTGAGE FUNDING, LLC, Pl., v. THE ESTATE OF ANGEL RAFAEL ANTONINI-NAZARIO, et al, Defendants., CV 16-3092 (ADC), 2020 WL 881019, at *1 (D.P.R. Feb. 20, 2020).  
 
The opinion continues:
Here, the Court cannot ascertain that diversity exists among the parties. Rule 11(b) of the Federal Rules of Civil Procedure holds attorneys responsible for “assur[ing] that all pleadings, motions and papers filed with the court are factually well-grounded, legally tenable and not interposed for any improper purpose.” Mariani v. Doctors Associates, Inc., 983 F.2d 5, 7 (1st Cir. 1993) (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990). Despite Rule

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The United States Bankruptcy Court for the Western District of Kentucky has opened my eyes to some bankruptcy law issues I hadn’t previously seen. The court also committed what I consider to be a cardinal sin: the court refers to an LLC as a “limited liability corporation.”  An LLC is a “limited liability company,” which is a statutorily different entity than a corporation. 

The court states: “Sunnyview and TR are limited liability corporations. They are not individuals and do not meet the definition of insiders under 11U.S.C.§ 101(31)(B)[sic].” In re: Bullitt Utilities, Inc., No. 15-34000(1)(7), 2020 WL 547278, at *6 (Bankr. W.D. Ky. Jan. 24, 2020) (emphasis added). Other than being LLCs, and not corporations, this appears to be correct. The statute, 11 U.S.C.§ 101(31), provides: 

(31)The term “insider” includes—

. . . . 
(B)if the debtor is a corporation—
(i)
director of the debtor;
(ii)
officer of the debtor;
(iii)
person in control of the debtor;
(iv)
partnership in which the debtor is a general partner;
(v)
general partner of the debtor; or
(vi)
relative of a general partner, director, officer, or person in control of the debtor;

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Although I had to miss the American Bar Association’s LLC Institute this past year, it looks like I can still get the benefit of some of the wisdom shared there in written form.  FSU Law Dean Emeritus and Alumni Centennial Professor Don Weidner has posted an article, LLC Default Rules Are Hazardous to Member Liquidity, based on the thoughts he shared as the keynote speaker at that annual event.  The SSRN abstract follows:

This article is based on the author’s Keynote Address at the 2019 LLC Institute sponsored by the American Bar Association’s Business Law Section. It traces and critiques the shift in the default rules in LLC law away from partnership law and toward corporate law, using the Uniform LLC Acts of 1996 and 2006 as exemplars of the national trend. It focuses on two key issues: the removal of liquidity rights, both the right to dissolve and the right to be bought out, and the removal of easy access to member remedies. It argues that, on both key issues, the default rules have moved away from enforcing the presumed intent of small groups of entrepreneurs who form businesses without the benefit of counsel. By…

As a new dean in a new city, I have had the opportunity to meet hundreds of impressive lawyers in Omaha.  I have been incredibly impressed by the sophisticated practices at the very law firms I have visited. For “midsized” firms, there are lawyers doing incredible work here that is the same work being done on the coasts, including some amazing M & A work. 

But here in Omaha, just like every city around the country, law firms have “corporate” practices.  But really, those are business law practices or transactional practices.  Almost every corporation of significant size also owns some LLCs (limited liability companies) and perhaps other entities. And certainly these firms, especially those working with real estate companies, will work with LLCs and other pass through entities.  

So, consistent with my prior posts on this subject, I urge lawyers and firms to acknowledge the full scope of what we do.  It’s not just corporate.  It’s so much more. And that’s a good thing. I just ask that we embrace business practice or transactional practice to try to include all we do.   

Prof. Bainbridge recently posted, Here’s the thing I don’t understand about the implied covenant of good faith and fair dealing. He explains: 

In Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019), the court reviews the Delaware law of the implied covenant:

“In order to plead successfully a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.” Fitzgerald v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998). In describing the implied contractual obligation, the plaintiffs must allege facts suggesting “from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of . . . had they thought to negotiate with respect to that matter.” Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986). That is because “[t]he implied covenant seeks to enforce the parties’ contractual bargain by implying only those terms that the parties would have agreed to during their original negotiations if they had thought

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Once again, a court seems to arrive at the correct outcome, while making mistakes in the describing entity type. As usual, the court mislabeled a limited liability company (LLC).  Here we go:  

Andrea and Timothy Downs each held a 50% interest in a corporation, Downs Holdings, Inc. It held limited liability corporation (“LLC”) and limited partnership (“LP”) ownership interests. Eventually, the Downs agreed to dissolve the corporation and, as shareholders, passed a corporate resolution electing dissolution.

In re: ANDREA STEINMANN DOWNS, Debtor. NORIO, INC., Appellant, v. THOMAS H. CASEY, Chapter 7 Tr., Appellee., No. 8:16-BK-12589-CB, 2019 WL 6331564, at *1 (B.A.P. 9th Cir. Nov. 25, 2019) (emphasis added). 
 
The Downs did not follow the necessary formalities to dissolve Downs Holdings, Inc., and had instead ask that the corporation’s management company “distribute the payments and monies owed to Downs Holdings to each shareholder separately, 50% to Mr. Downs and 50% to Ms. Downs.” Id. Further, it appeared that the Downs asked to be treated as separate interest holders for both the LLC and LP. Id. Ms. Downs later borrowed $50,000 from Norio, Inc. and pledged pledged her claimed interests in the LLC and the LP as collateral. Id. at

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Over at Kentucky Business Entity Law Blog, Tom Rutledge recently posted Respectfully, I Dissent: Dean Fershee and Elimination of Fiduciary Duties, in response to my recent paper, An Overt Disclosure Requirement for Eliminating the Fiduciary Duty of Loyalty. Tom and I have crossed paths many times over the past few years, and I greatly value his insight, expertise, and opinion. On this one, though, we will have to agree to disagree, but I recommend checking out his writing.  You may well agree with him.  

I actually agree with Tom in most cases when he says, “I do not believe there is justification for protecting people from the consequences of the contracts into which they enter.” Similarly, I generally agree with Tom “that entering into an operating agreement that may be amended without the approval of a particular member constitutes that member placing themselves almost entirely at the mercy of those with the capacity to amend the operating agreement . . . . ”  Nonetheless, I maintain that there is a subtle but significant difference where, as in Delaware, such changes can be made to completely eliminate (not just reduce or modify) the fiduciary duty of loyalty. 

As applied, Tom may…

Last Friday, a new opinion from the United States Court of Appeals for the First Circuit tackled a complex application of the Employee Retirement Income Security Act of 1974 (ERISA) law that required an analysis of “federal partnership law,” which assessed whether two entities had created a “partnership-in-fact, as a matter of federal common law.”  Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 16-1376, 2019 WL 6243370, at *5 (1st Cir. Nov. 22, 2019). I hate the idea of “federal partnership law,” but I concede it is a thing for determining certain responsibilities under the tax code and ERISA. I still maintain that rather than discussing federal entity law and entity type in these cases, we should instead be discussing liability under certain code sections as they apply to the relevant persons and/or entities.  Nonetheless, that’s not the state of the law.

Even though I don’t like the concept of federal partnership law, I can work with it. As such, I think it is fair to ask courts to respect entity types if they are going to insist on using entity types to determine liability. Alas, this is too…

It’s been a minute since I took some time to look at whether courts are still treating LLCs as corporations.  Spoiler alert: They are.  Last week, the Southern District of Florida gave a shining example:

Defendants argue that Vista, a limited liability corporation, is a citizen of any state of which a member of the company is a citizen for diversity purposes. Because the January 26, 2018 written agreement (“Agreement”) granted the PJM Defendants a 10% ownership interest in Vista, Defendants maintain that Vista is a Florida citizen by virtue of the PJM Defendants’ Florida citizenship, thereby destroying complete diversity. . . .

Plaintiffs contend that Vista is a California corporation and complete diversity exists. In support, Plaintiffs proffer Vista’s California LLC records which show that Armen Temurian is the entity’s only member. Defendants argue that these records are self-serving, and that the plain language of the Agreement contradicts these records and establishes the PJM Defendants’ ownership in Vista.  . . .

The Agreement expressly recognizes that the PJM Defendants have obtained a 10% ownership of all Vista current and future direct and indirect entities, which contradicts Plaintiffs’ proffered California LLC records on their face. . . . Because Vista is a

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