LLCs

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Keith Paul Bishop, at the California Corporate and Securities Blog, provides an example of a court that actually pays attention to entity type. As he says, “it is nice to see that some judges do recognize that LLCs are not corporations.” It sure is.  In the case he cites, D.R. Mason Constr. Co. v. GBOD, LLC, 2018 U.S. Dist. LEXIS 41236, the court gets a lot right:

[A]lthough Plaintiff’s Complaint does separately mention the term “shareholder,” [*13]  the Court will not draw the inference that this term means Plaintiff was promised traditional “stock.” This inference would not be reasonable in these circumstances because Plaintiff alleges in its Complaint that Defendant GBOD is a limited liability company, not a corporation. (Compl. ¶ 3.) Under California law, LLCs distribute “membership interests,” not shares of stock. See Cal. Corp. Code § 17704.07. Consequently, Plaintiff’s pleading indicates the financial instrument at issue is not traditional stock. Moreover, courts tasked with deciding whether LLC membership interests constitute a security under the Exchange Act generally evaluate whether such interests are “investment contracts,” not “stocks.”

It is nice to see a court that acknowledges the different entity types and frustrating that this is not the norm. As…

My goodness. In a recent case, a Massachusetts court deals with issues related to Bling Entertainment, LLC, which is, as you would expect, a limited liability company.  It is NOT a partnership (as the court correctly notes), but …

Yiming alleges Bling Defendants—as “managers, controlling members, and fellow members of Bling”—owed a duty of utmost good faith and loyalty to Yiming that they breached through their actions of fraud, self-dealing, embezzlement, and mismanagement. D. 16 ¶¶ 70-71. “It is well settled that partners owe each other a fiduciary duty of the utmost good faith and loyalty.” Karter v. Pleasant View Gardens, Inc., No. 16-11080-RWZ, 2017 U.S. Dist. LEXIS 50462, at *13 (D. Mass. Mar. 31, 2017) (quoting Meehan v. Shaughnessy, 404 Mass. 419, 433 (1989)). Bling is not a partnership, however, but is rather a limited liability corporation. D. 16 ¶ 10.
YIMING WANG, Plaintiff, v. XINYI LIU, YUANLONG HUANG, ZHAONAN WANG, BLING ENTERTAINMENT, LLC, SHENGXI TINA TIAN & MT LAW, LLC, Defendants., No. 16-CV-12581, 2018 WL 1320704, at *6 (D. Mass. Mar. 13, 2018).
 
Negative. Well, the first part is right.  Bling is an LLC, not a partnership. But it is not a corporation.

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A recent Georgia case highlights a whole host of things that frustrate me with litigation related to limited liability companies (LLCs).  This one features an LLC making incorrect arguments and a court sanctioning that silliness. For example

Baja Properties argues that it is exempted from the rule set out in OCGA § 43-41-17 (b) by a provision in OCGA § 43-41-17 (h). Subsection (h) states, in part:
Nothing in this chapter shall preclude any person from constructing a building or structure on real property owned by such person which is intended upon completion for use or occupancy solely by that person and his or her family, firm, or corporation and its employees, and not for use by the general public and not offered for sale or lease. In so doing, such person may act as his or her own contractor personally providing direct supervision and management of all work not performed by licensed contractors.
Baja Properties, LLC v. Mattera, No. A17A1875, 2018 WL 1247432, at *2 (Ga. Ct. App. Mar. 9, 2018) (emphasis added).  Baja Properties is, naturally, an LLC, not a corporation.  
 
The Goldens, who are the members of the Baja LLC, go on to: 
 

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Another unforced error on the LLC front, again with a limited liability company being called a corporation.   

This time, it is a recent Texas appellate court case where the court states: “In its pleadings, AMV contends that it is presently a limited liability corporation known as ArcelorMittal Vinton LLC.”  Wallace v. ArcelorMittal Vinton, Inc., 536 S.W.3d 19, 21 n.1 (Tex. App. 2016), review denied (Mar. 31, 2017).  As is so often the case, that is not accurate. 

In its brief, the entity AMV simply stated, that it was a Defendant-Appellee as named in the suit, ArcelorMittal Vinton, Inc., was “n/k/a [now known as] ArcelorMittal Vinton LLC.” Carla WALLACE, Plaintiff-Appellant, v. ARCELORMITTAL VINTON, INC., Defendant-Appellee., 2015 WL 7687420 (Tex.App.-El Paso), 1.  AMV’s counsel never said it was a corporation.  The court did that on its own.

Sigh.  Even in Texas, LLCs are not corporations. I swear!  I looked at the statute.

And yet, a close look at the statute shows why this gets confusing for some people.  The Texas statute provides specific cross-references to certain business provisions (emphasis added):

Sec. 101.002.  APPLICABILITY OF OTHER LAWS. 

(a)  Subject to Section 101.114, Sections 21.223, 21.224, 21.225, and 21.226 apply…

I suspect click-bait headline tactics don’t work for business law topics, but I guess now we will see. This post is really just to announce that I have a new paper out in Transactions: The Tennessee Journal of Business Law related to our First Annual (I hope) Business Law Prof Blog Conference co-blogger Joan Heminway discussed here. The paper, The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy, is now available here.

To be clear, my argument is not that I don’t like social enterprise. My argument is that as well-intentioned as social enterprise entity types are, they are not likely to facilitate social enterprise, and they may actually get in the way of social-enterprise goals.  I have been blogging about this specifically since at least 2014 (and more generally before that), and last year I made this very argument on a much smaller scale.  Anyway, I hope you’ll forgive the self-promotion and give the paper a look.  Here’s the abstract: 

Social benefit entities, such as benefit corporations and low-profit limited liability companies (or L3Cs) were designed to support and encourage socially responsible business. Unfortunately, instead

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A brand new Arizona case continues the trend of incorrectly discussing limited liability companies (LLCs) as limited liability corporations, but it does allow for an interesting look at how entities are sometimes treated (or not) in laws and regulations. Here’s the opening paragraph of the case:

Noah Sensibar appeals from the superior court’s ruling affirming the Tucson City Court’s finding that he had violated the Tucson City Code (TCC). He argues that the municipal ordinance in question is facially invalid because it conflicts with a state statute shielding members or agents of a limited liability corporation from personal liability. 

City of Tucson v. Noah Sensibar, No. 2 CA-CV 2017-0087, 2018 WL 703319 (Ariz. Ct. App. Feb. 5, 2018).

About three years ago, the City of Tucson alleged that Sensibar, as “the managing member and statutory agent of Blue Jay Real Estate LLC, an Arizona corporation, was responsible for building code violations.” Id. (emphasis added). Notwithstanding the incorrect characterization of the entity type, it looks like the court at least reasonable (though not clearly correct) to hold Sensibar individually liable.  Here’s why:

The Tuscon City Code states that “Any owner or responsible party who commits, causes, permits, facilitates or aids or abets…

As regular readers know, I am particular about language and meaning, especially in the business-entity space related to limited liability companies (LLCs).  I think because of that, I was drawn to a new paper from Shu-Yi Oei (Boston College), The Trouble with Gig Talk: Choice of Narrative and the Worker Classification Fights, 81 Law & Contemp. Probs. ___ (2018).  The abstract: 

The term “sharing economy” is flawed, but are the alternatives any better? This Essay evaluates the uses of competing narratives to describe the business model employed by firms like Uber, Lyft, TaskRabbit, and GrubHub. It argues that while the term “sharing economy” may be a misnomer, terms such as “gig economy,” “1099 economy,” “peer-to- peer economy” or “platform economy” are just as problematic, possibly even more so. These latter terms are more effective in exploiting existing legal rules and ambiguities to generate desired regulatory outcomes, in particular the classification of workers as independent contractors. This is because they are plausible, speak to important regulatory grey areas, and find support in existing laws and ambiguities. They can therefore be deployed to tilt outcomes in directions desired by firms in this sector.

This Essay’s analysis suggests that narratives that are

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I have had reason to look back on some foundational scholarship in LLCs recently, and one article really stood out for me. Larry Ribstein’s The Deregulation of Limited Liability and the Death of Partnership. It’s another snow day with kids, so I haven’t had a lot of time to delve into the thoughts this raised for me, so I’ll let Larry’s words speak for themselves.  Keep in mind this is from 1992:  

The popularity of the partnership form of business1 indicates that an organizational form in which some owners can be held personally liable for the firm’s debts is efficient for many firms. This could be because, for many firms, individual liability reduces the firm’s credit costs more than it increases owners’ risk-bearing, monitoring, or other costs. This Article, however, suggests an alternative explanation: the partnership form is attractive for many firms on the margin only because of the regulatory costs of limited liability, including double corporate taxation and limitations on organizational form.

Recent developments provide a valuable opportunity to test this explanation. Many lawyers and legislators have become interested in a new limited liability business form, the “limited liability company” (LLC), that lets firms adopt limited liability

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No one will  be shocked that my last post of the year is about a court referring to a limited liability company (LLC) as a “limited liability corporation.”  It’s wrong to do so, and it’s my thing to point out when it happens.  This case is especially striking (and perhaps upsetting) because of the context of the reference.  In this 2015 case that just showed up on Westlaw (or at least, in my alerts), “Plaintiff argues that because Defendants are all limited liability corporations they must identify and prove the citizenship of their various members and that they have failed to do so.” Skywark v. Healthbridge Mgmt., LLC, No. 15-00058-BJR, 2015 WL 13621058, at *1 (W.D. Pa. July 22, 2015).  They mean LLCs, not corporations.  Okay, so far this is a pretty typical mistake.  But wait! 

In this case, the defendants did not allege the citizenship of the members of the defendants’ LLCs in their initial Notice of Removal, so the plaintiffs claimed that a filed  amendment was more than “technically defective.” In claiming the amendment was “minor, the defendants rely cited  O’Boyle v. Braverman, No. 08-553, 2008 U.S. Dist. LEXIS 62180 (D.N.J. Aug. 12, 2008), which found

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A recent case in Washington state introduced me to some interesting facets of Washington’s recreational marijuana law.  The case came to my attention because it is part of my daily search for cases (incorrectly) referring to limited liability companies (LLCs) as “limited liability corporations.”  The case opens: 

In 2012, Washington voters approved Initiative Measure 502. LAWS OF 2013, ch. 3, codified as part of chapter 69.50 RCW. Initiative 502 legalizes the possession and sale of marijuana and creates a system for the distribution and sale of recreational marijuana. Under RCW 69.50.325(3)(a), a retail marijuana license shall be issued only in the name of the applicant. No retail marijuana license shall be issued to a limited liability corporation unless all members are qualified to obtain a license. RCW 69.50.331(1)(b)(iii). The true party of interest of a limited liability company is “[a]ll members and their spouses.”1 Under RCW 69.50.331(1)(a), the Washington State Liquor and Cannabis Board (WSLCB) considers prior criminal conduct of the applicant.2

LIBBY HAINES-MARCHEL & ROCK ISLAND CHRONICS, LLC, Dba CHRONICS, Appellants, v. WASHINGTON STATE LIQUOR & CANNABIS BOARD, an Agency of the State of Washington, Respondent., No. 75669-9-I, 2017 WL 6427358, at *1 (Wash. Ct. App.

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