Partnership

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Limited liability companies (LLCs) are often viewed as some sort of a modified corporation.  This is wrong, as LLCs are unique entities (as are, for example, limited partnerships), but that has not stopped lawyers and courts, including this nation’s highest court, from conflating LLCs and corporations.  

About four and a half years ago, in a short Harvard Business Law Review Online article, I focused on this oddity, noting that many courts

seem to view LLCs as close cousins to corporations, and many even appear to view LLCs as subset or specialized types of corporations. A May 2011 search of Westlaw’s “ALLCASES” database provides 2,773 documents with the phrase “limited liability corporation,” yet most (if not all) such cases were actually referring to LLCs—limited liability companies. As such, it is not surprising that courts have often failed to treat LLCs as alternative entities unto themselves. It may be that some courts didn’t even appreciate that fact. (footnotes omitted).

I have been writing about this subject again recently, so I decided to revisit the question of just how many courts call LLCs “limited liability corporations” instead of “limited liability companies.”  I returned to Westlaw, though this time…

Over at the Kentucky Business Entity law blog, Thomas Rutledge discusses a recent decision from the United States District Court for the Southern District of Indiana, affirming a Bankruptcy Court decision that finding that when a member of an LLC with voting control personally files bankruptcy, that right to control the LLC became a vested in the trustee because the right was part of the bankruptcy estate. The case is In re Lester L. Lee, No. 4-15-cv-00009-RLY-WGH, Adv. Proc. No. 14-59011 (S.D. Ind. August 10, 2015) (PDF here).

A key issue was that the bankruptcy filer (Lester Lee) had 51% of the vote, but no shares. The court then explains:

7.  . . . [t]he Operating Agreement states . . .

(D) Each member shall have the voting power and a share of the Principal and income and profits and losses of the company as follows:

Member’s Name (Share) (Votes)

Debra Jo Brown (20%)  (10)

Brenda R. Lee (40%) (20)

Larry L. Lee (20%) (10)

Melinda Gabbard (20%) (10)

Lester L. Lee (0%) (51)

. . . .

8. . . . Trustee’s counsel became aware of the Debtor’s 51% voting rights as a member, and that pursuant to

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Over at The Conglomerate, Usha Rodrigues says, “Larry Ribstein was wrong.” Usha argues that she’s right to teach LLCs at the end of the course, and Larry was of the mind that LLCs should play a more prominent role in the business entities course.  

For my teaching, I’m with Larry on this, though I am also of the mind that Usha (and other teachers) may have different goals, so taking another tack is not wrong.  I’m pretty sure we’re all better teachers when we are true to ourselves and our thinking.  For me, anyway, I am, without a doubt, at my worst in the classroom (and probably out) when I try to mimic someone else. 

So here’s how Usha explains her thinking:

I don’t leave LLCs til the end of the semester because I think they’re unimportant.  It’s because the cases are so damn thin.  It’s still such a new form, I just don’t see much there there.  Most of them wind up being trial courts who read the statute in completely stupid ways.  Blech.

So I teach corporations and partnerships emphasizing fiduciary duty, default vs. mandatory rules, and the importance of the code.  In fact,

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Understandably, business law professors get upset when people who should know better- judges for example- mischaracterize LLCs. I say we should be even more angry at the law clerks drafting the opinions. Many judges had no exposure to LLCs in law school but clerks graduating today certainly have. 
 
Given the ubiquity of LLCs now, I was surprised to learn that among the many outstanding CALI (Computer-Aided Legal Instruction) lessons, there are none on LLCs. (Hat tip to co-blogger Steve Bradford- my students love him now). I have volunteered to work on at least one and maybe more in the coming months. I canvassed some colleagues for their must-haves for these LLC lessons. In no particular order, here’s the current list:
 

1) Difference between LLCs, corporations and partnerships 

2) Del. and ULLCA coverage of fiduciary duties, and especially the issue of contractual waiver and default 

3) Ease of formation
 
4) Expense of formation
 
5) Ease of maintenance    
 
6) Expense of maintenance
 
7) Restrictions re. business purpose or activity
 
8) Continuity of life/limitations on existence
 
9) Label for/characteristics (incl. transferability) of ownership interests
 
10) Restrictions re. owners (number, type, or other)
 
11) Authority to

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In 2007, J. W. Verret (George Mason) and then Chief Justice Myron Steele authored an article entitled Delaware’s Guidance: Ensuring Equity for the Modern Witenagemot, which discussed “some of the extrajudicial activities in which members of the Delaware judiciary engage to minimize the systemic indeterminacy resulting from the resolution of economic disputes by a court of equity.”

One of these extrajudicial activities is authoring or co-authoring law review articles.  In this post, I am not going to weigh in on whether Delaware judges should be authoring law review articles, but rather, I simply note that there are two recent law review articles and one recent book chapter by Delaware judges that warrant our attention. 

Vice Chancellor Travis Laster – Evidence-Based Corporate Law.

John Maynard Keynes is said to have observed, “When the facts change, I change my mind. What do you do, sir?” In Delaware’s Choice, Professor Subramanian argues that the facts underlying the constitutionality of Section 203 have changed. Assuming his facts are correct, and the Professor says that no one has challenged his account to date, then they have implications for more than Section 203. They potentially extend to Delaware’s jurisprudence regarding a board’s ability to

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At West Virginia University College of Law, we started classes yesterday, and I taught my first classes of the year: Energy Law in the morning and Business Organizations in the afternoon.  As I  do with a new year coming, I updated and revised my Business Organizations course for the fall.  Last year, I moved over to using Unicorporated Business Entities, of which I am a co-author.  I have my own corporations materials that I use to supplement the book so that I cover the full scope of agency, partnerships, LLCs, and corporations.  So far, it’s worked  pretty well.  I spent several  years with  Klein, Ramseyer and Bainbridge’s Business Associations, Cases and Materials on Agency, Partnerships, and Corporations (KRB), which is a great casebook, in its own right.

I did not make the change merely (or even mostly) because I am a co-author. I made the change because I like the structure we use in our book. I had been trying to work with KRB in my structure, but this book is designed to teach in with the organization I prefer, which is more topical than entity by entity.  I’ll note that a little while ago, my co-blogger Steve…

Kinder Morgan, a leading U.S. energy company, has proposed consolidating its Master Limited Partnerships (MLPs) under its parent company. If it happens, it would be the second largest energy merger in history (the Exxon and Mobil merger in 1998, estimated to be $110.1 billion in 2014 dollars, is still the top dog). 

Motley Fool details the deal this way:

Terms of the deal
The $71 billion deal is composed of $40 billion in Kinder Morgan Inc shares, $4 billion in cash, $27 billion in assumed debt. 

Existing shareholders of Kinder Morgan’s MLPs will receive the following premiums for their units (based on friday’s closing price):

  • Kinder Morgan Energy Partners: 12%
  • Kinder Morgan Management: 16.5%
  • El Paso Pipeline Partners: 15.4%
Existing unit holders of Kinder Morgan Energy Partners and El Paso Pipeline Partners are allowed to choose to receive payment in both cash and Kinder Morgan Inc shares or all cash. 
As I understand it, the exiting holders of the partnerships would have to pay taxes on the merger (this is partnership to a C-corp), but please, consult your tax professional.  
 
The goal here is said to be to increase dividend potential and use the C-corp structure to

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This past week, I joined a group of our business law prof colleagues at the National Business Law Scholars Conference out at Loyola Law School in Los Angeles.  Headlined by a keynote presentation on “the audience” for business law scholarship from Frank Partnoy and an author-meets-reader session on Michael Dorff‘s new book, Indispensable and Other Myths: The True Story of CEO Pay, the conference featured a staggeringly interesting array of panels on everything from standard corporate governance to financial regulation.  Kudos to the planning committee.

Steve Bainbridge presented Must Salmon Love Meinhard? Agape and Partnership Fiduciary Duties in an opening concurrent panel. If you haven’t read it yet, I recommend it.  Admittedly (as I told Steve), I have an especial interest in the Meinhard case and in the expressive function of decisional law.  But most of us in the business law professor group teach the case in one course or another, and his paper is relevant to many in that context.

The NBA’s handling of what the NBA concluded was Donald Sterling’s now-infamous, racist-language-laden phone call with V. Stiviano has generated a lot of commentary (including my own).  As one might expect, the incident has led to some oft-repeated assertions that are not quite right.  So, in taking a break from my grading, I thought I’d deal with a couple of those issues right now. 

To start, if Sterling is forced to sell the Clippers, the NBA and the other team owners are not “taking” anything away from him that he has a right to keep.  He is an owner subject to an agreement that, according to NBA Commissioner Adam Silver, allows the league to force Sterling to sell upon a three-fourths vote of other league owners.  As such, the league has, and has always had, the power to decide if Sterling would be allowed to own a team.  (Why the league owners didn’t act twenty years ago is a legitimate question, but one for another day.)

 That Sterling can be forced to sell should not be news to lawyers, at any rate.  This case reminds me of Lawlis v. Kightlinger & Gray, 562 N.E.2d 435 (Ind. App. 4th Dist. 1990). The case is taught in many Business Organizations courses. In that case, Lawlis was a partner the Kightlinger & Gray law firm. At some point, his alcoholism became a problem, and eventually he told the partners of his issues. Lawlis and his partners reached an agreement about how to move forward (one with a “no-second chances” provision).  Lawlis got things together for a bit, then returned to drinking, and he was given a second chance.  Lawlis apparently got sober and eventually insisted the firm should increase his partnership participation.  Instead, the firm decided to expel him by a 7-to-1 vote (Lawlis was the sole vote against expulsion).  Lawlis sued. 

The court was not convinced, and I would hope any court would look the same way at a vote to remove Sterling as an NBA owner. Even if they needed cause, I would opine that the league has it, but the likely don’t need it.  The Lawlis court explained: 

All the parties involved in this litigation were legally competent and consenting adults well educated in the law who initially dealt at arm’s length while negotiating the . . .  agreements here involved. At the time the partners negotiated their contract, it is apparent they believed . . . the “guillotine method” of involuntary severance, that is, no notice or hearing, only a severance vote to terminate a partner involuntarily need be taken, would be in the best interests of the partnership. Their intent was to provide a simple, practical, and above all, a speedy method of separating a partner from the firm, if that ever became necessary for any reason. We find no fault with that approach to severance.

 Where the remaining partners in a firm deem it necessary to expel a partner under a no cause expulsion clause in a partnership agreement freely negotiated and entered into, the expelling partners act in “good faith” regardless of motivation if that act does not cause a wrongful withholding of money or property legally due the expelled partner at the time he is expelled.

Lawlis,562 N.E.2d at 442-43.

Some have lamented that Sterling will still be a rich man from this, no matter what.  That is true, and the NBA has no way to change that.  Sterling must be properly compensated if he were forced to sell the team. But that’s the point.  In America, Sterling (like anyone else) is permitted (within the bounds of the law) to say racist and misogynist things and be a generally awful person without anyone taking away property.  On the other hand, it appears Sterling agreed to buy a team in a league with an agreement that has a guillotine clause that allows the league to force him to sell.  So be it.

Here are five other related points worth noting (at least, I think so), even if they are not as business-law focused. Click below for more.

Business law has a broad overlap with tax, accounting, and finance.  Just how much belongs in a law school course is often a challenge to determine.  We all have different comfort levels and views on the issue, but incorporating some level of financial literacy is essential.  Fortunately, a more detailed discussion of what to include and how to include it is forthcoming.  Here’s the call: 

Call For Papers

AALS Section on Agency, Partnerships LLCs, and Unincorporated Associations

Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax

2015 AALS Annual Meeting Washington, DC

Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law. Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play. In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation. Yet many law professors still struggle with the reality…