Today I will continue my quest seeking to get courts to appreciate the need to pay attention to detail as to LLCs. Sometimes courts misidentify LLCs as “limited liability corporations” (and not the correct “limited liability companies”) because they don’t know the difference. Other times it is because they copied the language from the pleadings. And other times it’s just typing “corporation” when “company” was intended.  All such errors are understandable but should be fixed.  

Today, we get an unpublished court opinion from last week that clearly has the correct information available, yet the opinion goofs anyway. The opinion states:    

Every Limited Liability Corporation (LLC) in Delaware is required to have a registered agent to receive service of process for the corporation. Service directly upon the owners of the LLC is not legally necessary if the registered agent is properly served. 

JERZY WIRTH Pl., v. AVONDALE IQ., LLC, Def., CV N10J-03776, 2018 WL 2383578, at *2 (Del. Super. May 25, 2018). Corporations and LLCs need registered agents, but here we are dealing with an LLC.  The accompanying footnote gets it right, so this is simply an attention to detail problem.  The footnote reads: 

See 18 Del. C. § 10-105 (a) Service of legal process upon any domestic limited liability company or any series thereof established pursuant to § 18-215(b) of this title shall be made by delivering a copy personally to any manager of the limited liability company in the State of Delaware, or the registered agent of the limited liability company in the State of Delaware… (emphasis added/ See also Thompson v. Colonial Court Apartments, LLC, 2006 WL 3174767 (November 1, 2006, Cooch, RJ. (denying a motion to vacate a default judgment when service was properly made upon the registered agent and the defendant failed to file a responsive pleading).

Id. at *2 n.3. Sigh.  There’s some punctuation that could be fixed in the footnote, too, but at least the content there is right, citing correctly to the LLC Act.  Getting the content is the most important issue, to be sure, but I think we can reasonably strive to get both right. 

To that end, here’s a modest proposal for courts (and lawyers) writing about LLCs: 

  • Do a global search for “limited liability corporations.” Unless you’re talking about the early days of corporations, you almost certainly need to change do a global change to “limited liability companies.” Start here, because this is almost always wrong. 
  • Consider (strongly) doing a global search for “corp” so you catch all versions of “corporation” and “corporate.” If you’re talking about an LLC, that should probably be replaced with “company” or “entity” or something similar (e.g., piercing the entity veil”). 
  • Similarly, if you’re talking about multiple business forms, do your “corp” search and choose “entity” as your modifier (e.g., “entity governance,” not “corporate governance”).
  • Double check your entity statutes to make sure you’re citing the right one. Too often LLC cases cite to the corporations statute because the case they are citing was about corporations.
  • Lastly, I’ll also note to check whether corporate law should be applied at all to LLCs in that circumstance, although that goes to substance, not mechanics. 

 

image from www.publicdomainpictures.net

For many, Memorial Day is just another Monday holiday–a time to relax a bit more in a busy work season.  For some, the celebration of Memorial Day means sales and barbecues and community parades, fairs, and similar events.  (I linked to events in my home town, Garden City, NY, and the greater Long Island area.)  Many view Memorial Day as a time to commemorate all veterans, something we also do on Veterans Day in the fall.  (The linked article celebrates the work of some entrepreneurial veterans in the Knoxville community.)  

Many of these ways of celebrating Memorial Day involve reflection of some kind.  At its core, Memorial Day seems to encourage a particular kind of reflection–a moment to recall and honor those who have died for our country in the course of military service.  That general encouragement is consistent with, but not completely reflective of, the text of the federal law establishing the holiday, which expressly calls for the President to call us to united prayer* for permanent peace:

The President is requested to issue each year a proclamation—

(1) calling on the people of the United States to observe Memorial Day by praying, according to their individual religious faith, for permanent peace;
(2) designating a period of time on Memorial Day during which the people may unite in prayer for a permanent peace;
(3) calling on the people of the United States to unite in prayer at that time; and
(4) calling on the media to join in observing Memorial Day and the period of prayer.

Peace, of course, prevents the death of military servants that occurs in war time.  That is a worthy objective.  The President’s proclamation for today can be found here.  He reminds us that “[t]he Congress, by Public Law 106-579, has also designated 3:00 p.m. local time on that day as a time for all Americans to observe, in their own way, the National Moment of Remembrance.”

Those who fight for our safety and freedom as members of the armed forces are special kinds of heroes.  Those who die in the act of that service sacrifice their own lives for ours.  That service and sacrifice is significant to me.  I plan to take a few moments out today–including the time I took to compose this post and also some time at 3:00 p.m.–to engage in reflection over what it means to spend and lose one’s life in service to country and to ask for permanent peace.  I hope that you will, too.

__

* I take the position that, notwithstanding the reference in the text of the law to religious faith, one need not align oneself with a particular religious faith to pray for permanent peace.  Dictionary definitions note secular definitions of the word as well as religious ones, e.g., here and here.  (Of course, pleadings include prayers for relief, so we lawyers know and recognize that the term has a more general meaning.)

Risk factor disclosures are required under SEC rules, and encouraged under the PSLRA (which insulates from private liability forward-looking statements that are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement,” 15 U.S.C. § 78u-5).  The theory is that investors, armed with adequate warnings, can make intelligent decisions about how to value a company’s securities.

Both the SEC in its guidance, and Congress when passing the PSLRA, emphasized that “boilerplate” warnings are not helpful; investors must be given specific, tailored information about the firm-specific risks that the company faces.  For example, the SEC instructs firms, “Do not present risks that could apply to any issuer or any offering. Explain how the risk affects the issuer or the securities being offered.”  17 C.F.R. § 229.303.  Meanwhile, in the PSLRA’s legislative history, the Conference Report states that “boilerplate warnings will not suffice…. The cautionary statements must convey substantive information about factors that realistically could cause results to differ materially from those projected.”

Scholars have documented that firm-specific risk warnings are helpful to investors.  For example, a while ago I blogged about a study by Karen K. Nelson and Adam C. Pritchard documenting how risk factor disclosures may assist investors.

The difficulty is, how does one distinguish boilerplate risk factors from “meaningful” firm-specific ones?  The impossibility of that task has frustrated several courts, with the First Circuit calling the PSLRA’s safe harbor a “license to defraud,” In re Stone & Webster, Inc., Securities Litig., 414 F.3d 187 (1st Cir. 2005), and the Second and Seventh Circuits expressing bewilderment as to how the adequacy of cautionary language is to be assessed, Slayton v. American Exp. Co., 604 F.3d 758 (2d Cir. 2010); Asher v. Baxter Int’l, 377 F.3d 717 (7th Cir. 2004).

Scholars have also assailed the judiciary for adopting unrealistic standards of how investors read and interpret corporate disclosures, and, in particular, for overestimating ordinary investors’ ability to digest corporate disclosures and correctly incorporate them into their decisionmaking. David A. Hoffman, The “Duty” to Be a Rational Shareholder, 90 Minn. L. Rev. 537 (2006); Stephen M. Bainbridge & G. Mitu Gulati, How Do Judges Maximize? (The Same Way Everybody Else Does—Boundedly): Rules of Thumb in Securities Fraud Opinions, 51 Emory L.J. 83 (2002); Stefan J. Padfield, Is Puffery Material to Investors? Maybe We Should Ask Them, 10 U. PA. J. Bus. & Emp. L. 339 (2008).

A new study by Richard A. Cazier, Jeff L. McMullin, and John Spencer Treu supports scholars’ intuition – and courts’ frustration – by demonstrating that standards generated by judges and the SEC appear to encourage firms to include lengthier, less informative risk disclosures in their SEC filings, despite the fact that long, boilerplate warnings may actually harm firms by increasing their cost of capital.  In Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language, the authors demonstrate that in the event of a lawsuit, judges are more likely to find risk factors adequate if they are lengthier and more boilerplate.  Moreover, the SEC is less likely to issue a comment letter if the risk factors match those of peer companies rather than identify firm-specific risks.  In other words, the legal system encourages firms to adopt practices that are the opposite of what would benefit the market. 

At this point, I just have to quote myself – sorry! – from an earlier blog post:

[A]ll of our measures of impact and harm and loss are, at this point, so far removed from reality as to border on complete legal fiction.  Materiality is a construct from case law, with numerous additional doctrines piled on to it by courts without any heed for actual evidence of how markets behave. …. [W]hat we call “harm” and “damage” for the purpose of private securities fraud lawsuits have become so artificial that it no longer seems as though we’re even trying to measure the actual real-world effects of fraud.  I believe private lawsuits are an essential supplement to SEC action but a system of fines or statutory damages would make so much more sense.

(As long as I’m plugging myself, I’ve also proposed having distinct damages and liability regimes for investors who can prove actual reliance, since I think the fraud on the market context often leads courts astray).  But more immediately, here’s hoping the SEC takes notice of these findings and incorporates them into its practice.

 

 

 

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Hello from Russia, a country I swore a few years ago I would not visit for pleasure because of its human rights violations. Not only did I visit St. Petersburg, Russia on a cruise stop, but I bought FIFA World Cup T-shirts. I stopped short of buying the Trump/Putin nesting dolls, but I couldn’t resist a picture. I attended the last World Cup in Brazil, and in between matches met with activists because I was looking at the effect of mega sporting events on human rights. Hundreds of thousands of people were displaced in Brazil to build new facilities and activists protested both the government and corporate sponsors.  Russia and Qatar (a future World Cup destination and another notorious human rights violator) were on my personal no-go lists. Alas, as regular readers of this blog know, I’m a perfect example of most consumers out there- I have some situational ethics when it comes to certain things. At least I’m self aware. 

 

There are only about 5 cruise ships in port today and the city was packed. On other days during the summer, thirteen cruise ships with 2000-4000 passengers each may be in the city. Thousands of other tourists come in by ferry, air, and rail. 

 

As I pushed my way through throngs of people at various tour stops, I wondered why Americans like me and U.S. businesses such as McDonalds and Subway were even allowed to be in Russia. In contrast, the U.S. government severely restricts what businesses can do in Cuba and where U.S. persons can stay. The Trump administration wants to make sure that U.S. dollars don’t go into the hands of the Cuban government and particularly the military. 

 

Today, I ate lunch with thousands of Americans in a state-owned restaurant and shopped in what may have been an official state-owned tourist shop. I could be wrong because there are 80,000 oligarchs in Russia. Maybe one of those billionaires/friends of Putin owns the shops and tour company we used. I’m certain though that the dollars that I spent in the Hermitage and churches (many of which are also museums) goes to the Russian treasury, notwithstanding the sanctions against Russia and 38 oligarchs and industries. 

 

I’m not alone in my desire to see Russia. Despite the news reports of alleged meddling in the elections and human rights abuses, U.S. tourists are flocking to Russia. This not only benefits the Russian government, but it also benefits U.S. companies such as cruise lines so I don’t anticipate any major changes to the tourism industry any time soon. There’s just too much money to be made. 

 

But as I have written before, I don’t understand the U.S. government’s hypocrisy of the government to allow extensive travel and commerce with Russia while continuing the embargo against Cuba.

 

FYI- by the time you read this, I will be somewhere near Finland. I teach next week and am not crazy enough to post this from Russia. I saw how guarded our tour guide was when talking about Putin and politics. I may not be allowed back into Russia in the future, but that’s ok. There are only 30 sunny days in St. Petersburg, and I had the opportunity to experience one of them. 

 

 

 

 

Although lawyers (and other professionals) are not baseball players, some clients may benefit by looking at outcome statistics when making decisions about who to hire for a particular job.  Still, it’s tough to figure out the right statistics to use.  What counts as a “win” may not always be clear.  A defense lawyer that “loses” on liability but “wins” with a small damages award probably has a happy client.  In a couple of op-eds, I’ve suggested that immigration court outcomes might be a useful place to start.  A recent news story has me thinking about the issue again.

Publishing outcome statistics by attorney might help asylum seekers that now bet their lives on particular attorneys.  The real question is whether they should know how different counsel might affect the odds. We’ve already got stats for the judges.  And outcomes vary dramatically by presiding judge.  For example, immigrants pressing asylum claims in recent years before Los Angeles’s Immigration Court Judge Lorraine J. Munoz had 97.1% of their claims denied.  In contrast, asylum seekers fare better before Los Angeles Immigration Court Judge Stephen L. Sholomson, winning 78.2% of their asylum claims.  

But we don’t have ready access to the stats about other officers of the court. Although the system assigns a judge, immigrants actually get to pick their lawyers, if they’re fortunate enough to afford one or find pro bono representation.  These imperfect outcome statistics may reveal unseen problems. Consider a recent lawsuit arguing that some New York immigration lawyers defrauded their clients with false promises. Notably, the suit joined by the Benjamin N. Cardozo School of Law’s immigration clinic uses statistics to make its case.  They found that the Hecht firm had filed over a thousand asylum applications from November 2006 to January 2017.  The Cardozo clinic could only confirm that two of those asylum applications were approved—an asylum claim win rate of about 0.2%.  Had they known the odds, some of the Hecht firm’s clients might have shopped around.

In theory, anyone can get this information with public records requests.  Sadly, few immigrants any practical ability to slog through the system to uncover the truth.  Because we do not make statistical information available to immigrants up front, insights into the truth lurk obscured behind piles of painstaking paperwork. Providing information about outcomes by particular professionals would help the public decide who to hire for help.  After all, one might want to avoid a heart surgeon if her patients die at double the rate of another down the street.  Immigration court practice offers a place to try increasing disclosure because immigrants may benefit from the information when picking lawyers. 

Although imperfect, statistical information may also counteract implicit biases that could lead to picking the wrong person. Without information, immigrants may be vulnerable to affinity frauds that exploit shared identity characteristics to establish misplaced trust.  One immigrant describes asking her accountant whether she could trust the Hecht firm.  He reportedly told her not to worry, saying “‘why would you think that? I’m Hispanic as well.’”  Exploiting the same human weakness, Madoff bilked billions by bamboozling coreligionists into trusting him.

Immigrants should be able to trust and verify.  Sadly, there are far too many scoundrels offering false hope for a fee.  Last year New York City’s Department of Consumer Affairs warned immigrants about “immigration service providers and immigration lawyers” that were “preying on the desperation and fear of immigrants, all so they can turn a profit.” These predators lure clients into bad decisions by telling them they have a shot at relief without disclosing that the lawyer almost never actually hits this long shot.  While a skilled shooter might strike the target more often, immigrants should know if they’re praying and paying for a lawyer that is simply spraying filings.  If we make outcome statistics readily available for individual attorneys, the worst fraudsters may fleece fewer immigrants.  Pairing immigrants with more competent counsel may also save lives by increasing the odds that courts will grant valid asylum claims.  Good lawyering may also benefit us all by limiting the damage that can be done by an erratic administration.

This proposal to give immigrants easier access to public information about outcomes in public courts has vehement critics.  Much of the opposition in my inbox after writing about this came from immigration lawyers concerned about how clients might react when trying to interpret the grim math.  In response to a prior piece pointing out concerns and highlighting empirical research about the risks from the worst of the immigration law bar, the American Immigration Lawyers Association called the idea “fake news.”  One AILA chapter even sent a letter demanding that I retract the idea.  The letter claimed that making this argument publicly and warning about the risk of exploitation from attorneys was unethical because it undermined respect “for the immigration bar” and “any faith the public may have in our system.”

These critics are not entirely wrong about the idea.  Releasing information will mean that immigrants will no longer have to place blind “faith” in our system or a particular lawyer. That’s a good thing. When an attorney tells an immigrant to scratch together ten grand for an asylum claim, the immigrant deserves the attorney’s batting average for these kinds of claims.  If it’s 0.2%, she should shop around. 

I was browsing through some recent veil piercing cases (because that’s how I roll), and I came across this gem: 

[I]t is unclear that merely using a corporation to limit personal liability rises to the level of fraud required to pierce the corporate veil.

Indagro SA v. Nilva, No. 16-3226, 2018 WL 2068660, at *3 (3d Cir. May 3, 2018). Given that limited liability is one of the primary benefits of incorporation, I think it is at least implied that using a corporation to limit personal liability is not fraud at all.  

Moreover, the corporation at issue was a New Jersey corporation, and the state law provides:

(2) Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts of the corporation, except that a shareholder may become personally liable by the reason of his own acts or conduct.

N.J. Stat. Ann. § 14A:5-30 (West). This is pretty unequivocal.  I get that fraud may be one of the acts that could give rise to personal liability, but the use of an entity to limit personal liability, when that is a core facet of the entity, is some pretty serious attempted bootstrapping.  

The case gets it right, in the end, but still, I had to point this out. To imply that it could be fraud to use a corporation for the purpose of limiting personal liability, without anything more, is simply incorrect.  

Call for Papers

AALS Section on Transactional Law and Skills

Transactional Law and Finance: Challenges and Opportunities
for Teaching and Research

2019 AALS Annual Meeting

New Orleans, Louisiana

The AALS Section on Transactional Law and Skills is proud to announce a call for papers for its program, “Transactional Law and Finance: Challenges and Opportunities for Teaching and Research.” This session will examine the role of finance in business transactions from various perspectives with the goal of inspiring more deliberate consideration of finance in law school teaching and legal scholarship.From structured finance to real estate, from mergers & acquisitions to capital markets, finance plays an important and fundamental role in transactional law. The intersection of transactional law and finance is dynamic, providing academics, practitioners, and the judiciary with both challenges and opportunities. For example, financial product innovation and new funding sources for entrepreneurs continue to expand. Meanwhile, the significant growth in merger appraisal litigation has cast a new spotlight on the ability to critically analyze financial models (with a critical issue being whether a particular model is appropriate for expert use to determine fair value in appraisal proceedings). At the same time, activist investors are impacting company boards and the way in which companies do business. Although these are just a few examples, they demonstrate the breadth and significance of finance in transactional law.

The Section on Transactional Law and Skills invites submissions from any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper on this topic to submit a 1 or 2-page proposal to the Chair of the Section by August 31, 2018. Papers accepted for publication as of August 31, 2018 that will not yet be published as of the 2019 meeting are also encouraged. The Executive Committee will review all submissions and select proposals for presentation as part of our AALS 2019 Section Meeting. Please note that presenters who are selected are responsible for paying their own annual meeting registration fees and travel expenses.

Please direct all submissions and questions to the Chair of the Section, Christina Sautter, at the following address:

Christina Sautter
Cynthia Felder Fayard Professor of Law
Byron R. Kantrow Professor of Law
Louisiana State University
Paul M. Hebert Law Center
Room 330
1 East Campus Drive
Baton Rouge, LA 70803

Email: csautter@lsu.edu

Tel: +1 225-578-1306