Unincorporated Entities

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Guest post by Jeffrey Lipshaw:

I’m honored to be asked to participate in this micro-symposium, and will (sort of) address the first two questions as I have restated them here.

  1. Does contract play a greater role in “uncorporate” structures than in otherwise comparable corporations and, more importantly, do I care?

                  Yes, as I’ll get to in #2, but indeed I probably don’t care. My friend and casebook co-author, the late great Larry Ribstein, was more than a scholar-analyst of the non- or “un-” corporate form; he was an enthusiastic advocate. It’s pretty clear that had to do with his faith in the long-term rationality of markets and their constituent actors and a concomitant distrust of regulatory intervention. Indeed, he argued the uncorporate form, based in contract, was more amenable than the regulatory-based corporate form to the creation of that most decidedly immeasurable quality, trust, and therefore the reduction of transaction costs. I confess I never quite understood the argument and tried to explain why, but only after Larry passed away, so I never got an answer. 

                  Unlike Larry (and a number of my fellow AALS Agency, Partnership, & LLC section members), I was never able to…

Next week, the BLPB is hosting a micro-symposium organized by the AALS section on Agency, Partnership, LLCs, and Unincorporated Associations.  Confirmed participants include Joan MacLeod Heminway (BLPB editor), Dan Kleinberger, Jeff Lipshaw, Mohsen Manesh, and Sandra Miller.

The micro-symposium will explore the role of private ordering in LLCs and other alternative business entities, a broad topic that encompasses many interesting questions:

(1) To what extent, and in what ways, does contract play a greater role in LLCs and LPs than in otherwise comparable corporations? Is it helpful to conceptualize private ordering in this context as contractual?

(2) Does unfettered private ordering reliably advance the interests of even the most sophisticated parties? Does it waste judicial resources? In their book chapter, The Siren Song of Unlimited Contractual Freedom, two distinguished Delaware jurists, Chief Justice Leo Strine and Vice Chancellor J. Travis Laster, raise these concerns and argue in favor of more standardized fiduciary default rules. 

(3) Should the law impose fiduciary duties of loyalty and care as safeguards against abuse of the unobservable discretion managers enjoy because those duties reflect widely held social norms that most investors would expect to govern the conduct of managers?

(4) If…

The Georgia Attorney General’s (AG) office is trying to make the case that the Georgia Pipeline Act does not allow any entity other than a corporation to use the statute’s eminent domain power.  Palmetto Pipeline is seeking a certificate for authorization to use that power, provided in GA Code § 22-3-82 (2014): 

(a) Subject to the provisions and restrictions of this article, pipeline companies are granted the right to acquire property or interests in property by eminent domain for the construction, reconstruction, operation, and maintenance of pipelines in this state . . . .

The state AG has argued that a pipeline company must be a corporation, and thus a limited liability company (LLC)  cannot use the statutory power.  The AG is right.  In the Pipeline Act’s definitions section, it provides, at GA Code § 22-3-81 (2014), 

As used in this article:

. . . .

(2) “Pipeline company” means a corporation organized under the laws of this state or which is organized under the laws of another state and is authorized to do business in this state and which is specifically authorized by its charter or articles of incorporation to construct and operate pipelines for the

…

Readers of this blog know how much I hate courts that call LLCs “corporations.” (If you’re a new reader, welcome. And now you know, too.)  I am also one who likes to remind people that entity choices come with both rights and obligations, as do choices about whether to have an entity at all. Recent events in Illinois touch on both of these issues. 

A recent news story from Chicago’s NBC affiliate laments a recent court decision in Illinois that requires entities to have counsel if they are to make an appeal, even in the administrative process related to a parking ticket.  The story can be found here.  The short story is this: if one registers a vehicle in the name of a corporation, then the corporation must be represented by counsel to contest the ticket.  The reason for this determination comes from a non-parking related decision from 2014. 

In that decision, Stone Street Partners LLC v. City of Chicago Department of Administrative Hearings, the court determined that “the City’s administrative hearings, like judicial proceedings, involve the admission of evidence and examination and cross-examination of sworn witnesses–all of which clearly constitute the practice of law.” 12 N.E.3d…

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

…

As you may have seen elsewhere already (but just to make it abundantly clear):

THE UNIVERSITY OF TENNESSEE COLLEGE OF LAW invites applications from both entry-level and lateral candidates for as many as two full-time, tenure-track faculty positions to commence in the Fall Semester 2016. The College is particularly interested in the subject areas of business law, including business associations and contracts; gratuitous transfers/trusts and estates; and health law. Other areas of interest include legal writing, torts, and property.

A J.D. or equivalent law degree is required. Successful applicants must have a strong academic background. Significant professional experience is desirable. Candidates also must have a strong commitment to excellence in teaching, scholarship, and service.

In furtherance of the University’s and the College’s fundamental commitment to diversity among our faculty, students body, and staff, we strongly encourage applications from people of color, persons with disabilities, women, and others whose background, experience, and viewpoints would contribute to a diverse law school environment.

The Faculty Appointments Committee will interview applicants who are registered in the 2015 Faculty Appointments Register of the Association of American Law Schools at the AALS Faculty Recruitment Conference in Washington, D.C. Applicants who are not registered in the…

Last September, I authored a post here on the BLPB on judicial opinions and related statutes regarding LLCs as non-signatories to LLC operating agreements (simply termed “LLC agreements” in Delaware and a number of other states).  I recently posted a draft of an essay to SSRN that includes commentary on that same issue as part of a preliminary exploration of the law on LLC operating agreements as contracts.  (Readers may recall that I mentioned this work in a post last month on the Law and Society Association conference.)  I am seeking comments on this draft, which is under editorial review at the SMU Law Review as part of a symposium issue of essays in honor of our departed business law colleague, Alan R. Bromberg, who had been an SMU Dedman School of Law faculty member for many years before his death in March 2014.  My SSRN abstract for the essay, entitled “The Ties That Bind: LLC Operating Agreements as Binding Commitments,” reads as follows:

This essay, written in honor and memory of Professor Alan R. Bromberg as part of a symposium issue of the Southern Methodist University Law Review, is designed to provide preliminary answers to two questions. First: is…

For those of you who teach agency (and the related concept of independent contractors) the following recent case example will make for a fun and culturally relevant example for many of your students.  

In March, 2015, the California Labor Commissioner’s Office issued an opinion finding that a  driver for the ride-hailing service mobile app company, Uber, should be classified as an employee, not an independent contractor.  The opinion details the control Uber exercised over the driver including setting the payment rates and terms, quality controls, service platforms, user communications, liability insurance requirements, and background checks all the while maintaining that drivers are independent contractors.  Citing to S. G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341, 350-51, 769 P.2d 399 (1989), the Commission analyzed the following elements:

(a) whether the one performing services is engaged in a distinct occupation or business;

(b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;

(c) the skill required in the particular occupation;

(d) whether the principal or the worker supplies the instrumentalities, tools, and the place of

…

A recent unanimous decision from the Supreme Court of the United Kingdom, Anson v. Commissioners for Her Majesty’s Revenue and Customs [2015] UKSC 44, determined that a U.S. limited liability company (LLC) formed in Delaware will be treated for U.K. tax purposes as a partnership, and not a corporation. This is a good thing, as it provides the LLC members the ability to reap more completely the benefits of the entity’s choice of form.

What is not so good is that the court left unaddressed a lower court determination as follows, was quoted in para. 47: 

“Delaware law governs the rights of the members of [the LLC] as the law of the place of its incorporation, and the LLC agreement is expressly made subject to that law. However, the question whether those rights mean that the income of [the LLC] is the income of the members is a question of domestic law which falls to be determined for the purposes of domestic tax law applying the requirements of domestic tax law ….” (para 71) (emphasis added)

An LLC does not have a place of incorporation!  It has a place of formation.  Here is the link to Delaware’s Certificate of…