If I have learned anything over the years, it is that I should not expect any court to be immune from messing up entities. Delaware, as a leader in business law and the chosen origin for so many entities, though, seems like a place that should be better than most with regard to understanding, distinguishing, and describing entities.  Sometimes they get things rights, as I argued here, and other times they don’t.  A recent case is another place where they got something significant incorrect. 

The case starts off okay:

Plaintiffs brought this action under federal diversity jurisdiction, 28 U.S.C. § 1332(a)(1), asserting that complete diversity of citizenship exists among the parties. In Defendants’ Motion to Dismiss, however, they argue that complete diversity of the parties is lacking. Federal jurisdiction under § 1332(a)(1) requires complete diversity of citizenship, meaning that “no plaintiff can be a citizen of the same state as any of the defendants.” Midlantic Nat. Bank v. Hansen, 48 F.3d 693, 696 (3d Cir. 1995); Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553 (2005). 

Cliffs Nat. Res. Inc. v. Seneca Coal Res., LLC, No. CV 17-567, 2018 WL 2012900, at *1 (D. Del. Apr. 30, 2018).
 
But, the court continues (my comments below): 
A natural person is a citizen of “the state where he is domiciled,”1 and a corporation is a citizen of the state where it maintains its principal place of business, as well as the state where it is incorporated. Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 418 (3d Cir. 2010). For purposes of § 1332, the citizenship of a limited liability corporation2 (“LLC”) is determined “by the citizenship of each of its members.” Id. Plaintiff Cliffs Natural Resources Inc. is incorporated in Ohio, and Plaintiff CLF Pinnoak LLC is incorporated3 in Delaware and maintains its principal place of business in Ohio. Third Am. Compl. ¶¶ 3–4, ECF No. 162. In moving to dismiss this action for lack of jurisdiction, Defendants assert that Seneca Coal Resources, LLC, a Delaware corporation,4 includes members who are Ohio citizens, thus destroying complete diversity as required for § 1332.
1 Or she? Is it that hard to note that the statute applies, regardless of gender?  
2 No. A citizenship of a “limited liability company” is determined by the citizenship of its members. 
3 Nope, again.  An LLC is formed, not incorporated. 
4 And one more time, no. It’s a Delaware LLC.  There’s a whole act just for LLCs. 
 
This is a rather run of the mill goof, and it appears the court when on to assess the issues before it correctly, even refering to LLCs correctly later in the opinion. I share it in part because this reminded me of another thing that bugs me: I still hate this rule for diversity jurisdiction of LLCs.  I know I am not the first to have issues with this rule. 
 
I get the idea that diversity jurisdiction was extended to LLCs in the same way that it was for partnerships, but in today’s world, it’s dumb. Under traditional general partnership law, partners were all fully liable for the partnership, so it makes sense to have all partners be used to determine diversity jurisdiction.  But where any partner has limited liabilty, like members do for LLCs, it seems to me the entity should be the only consideration in determing citizenship for jurisdiction purposes. It works for corporations, even where a shareholder is also a manger (or CEO), so why not have the same for LLCs.  If there are individuals whose control of the entity is an issue, treat and LLC just like a corporation. Name individuals, too, if you think there is direct liability, just as you would with a corporation. For a corporation, if there is a shareholder, director, or officer (or any other invididual) who is a guarantor or is otherwise personally liable, jurisdiction arises from that potential liability.
 
Okay, so I admit I am being a little lax in my civil procedure descritpions, but you get the point.  We should hold shareholders to the same standards as member or limited partners (or not). If we want a liability test or a control test, lets use that.  Or maybe I have missed something. I often reinforce the idea that LLCs, partnerships, and corporations are different entities, so different rules are often appropriate. Still, for this issue, I think the distinction between LLCs and corporations in this instance is false (or at least poorly justified).   I am open to other views, but for now, that’s where I am on it right now.  
 
Lastly, it’s Election Day here in West Virginia and in many places around the country.  I found my candidate — I encourage you to find yours and go vote. Make your voice heard. 
 

I was fascinated by Ann Lipton’s post on April 14.  I started to type a comment, but it got too long.  That’s when I realized it was actually a responsive blog post.  

Ann’s post, which posits (among other things) that corporate chief executives might be required to comply with their fiduciary duties when they are acting in their capacity as private citizens, really made me think.  I understand her concern.  I do think it is different from the disclosure duty issues that I and others scope out in prior work.  (Thanks for the shout-out on that, Ann.)  Yet, I struggled to find a concise and effective response to Ann’s post. Here is what I have come up with so far.  It may be inadequate, but it’s a start, at least.

Fiduciary duties are contextual.  One can have fiduciary duties to more than one independent legal person at the same time, of course, proving this point. (Think of those overlapping directors, Arledge and Chitiea in Weinberger.  They’re a classic example!)  What enables folks to know how to act in these situations is a proper identification of the circumstances in which the person is acting.

So, for example, an agent’s duty to a principal exists for actions taken within the scope of the agency relationship. The agency relationship is defined by the terms of the agreement between principal and agent as to the object of the agency. The principal controls the actions of the agent within those bounds based on that agreement.

Similarly, a director’s or officer’s conduct is prescribed and proscribed within the four corners of the terms of their service to the corporation. They owe their duties to the corporation (and in Revlon-land or other direct-duty situations, also to the stockholders). The problem then becomes defining those terms of service. For directors, a quest for evidence of the parameters of their service should start with the statute and extend to any applicable provisions of the corporate charter, bylaws, and board policies and resolutions more generally. For officers, the statute typically doesn’t provide much content on the nature or extent of their services. The charter may not either. Typically, the bylaws and board policies and resolutions, as well as any employment or severance agreement (the validity of which is largely a matter outside the scope of corporate law), would define the scope of service of an officer.

I have trouble envisioning that the scope of service (and therefore, reach of fiduciary duties) for a typical director or officer would extend to, e.g., private ownership of other entities and decisions made in that capacity.  Yet, even where there is no technical conflicting interest or breach of a duty of loyalty, there is a clear business interest in having corporate managers—especially highly visible ones—act in a manner that is consistent with corporate policy or values when they are not “on the job.”  While voluntary corporate policy or private regulation may have a role in policing that kind of director or officer activity (through service qualifications or employment termination triggers, e.g.), I do not think it is or should be the job of corporate law—including fiduciary duty law—to take on that monitoring and enforcement role.

Nevertheless, I remain convinced that better (more accurate ad complete) disclosure of (at least) inherent conflicts of interest may be needed so investors and other stakeholders can evaluate the potential for undesirable conduct that may impact the nature or value of their investments in the firm.  As Ann notes, significant privacy rights exist in this context, too.  There’s more work to be done here, imv.

Thanks for making me think, Ann.  Perhaps you (or others) have a comment on this riposte?  We shall see . . . .

Zohar Goshen and Sharon Hannes have just posted to SSRN an interesting paper, The Death of Corporate Law, arguing that markets and private ordering have begun to supplant adjudication as a mechanism for resolving corporate disputes because the increasing sophistication of investors has made private resolutions less costly. 

There are many excellent insights in the piece, which furthers the taxonomy developed by Goshen and Richard Squire in Principal Costs: A New Theory for Corporate Law and Governance to add the costs of adjudication into the mix.  Yet there may be some ways that the theory is incomplete.  For example, the authors focus on the effect of shareholders’ rising “competence” – because of the concentration of investment in the hands of institutions – rather than on shareholders’ rising power, which (according to some) may not be accompanied by greater competence at all.  Managers have acted to counteract that rising power (dual class stock regimes, delays in going public), which might represent an efficient bargain to which investors are agreeing (the authors’ view), or simply a forthcoming source of dispute.

But the other piece that’s missing, of course, is the role of securities law.  Investors’ rising power and/or competence is not merely a function of markets; it’s a regulatory choice, due to everything from new CD&A disclosures and say-on-pay provisions to the expansion of Rule 14a-8 to permit its use for proxy access bylaws (and, heck, the existence of 14a-8 in the first place), to the loosening of restrictions of on investment in private funds.  And what regulators giveth, regulators can taketh away.  Thus, there are new efforts to, among other things, limit say-on-pay and shareholder proposals, and to regulate proxy advisors.  There is even new Labor Department guidance meant to limit funds’ involvement in corporate governance (which I may or may not make the subject of another post). 

At the same time, it’s hard not to notice that we likely would be revisiting the old corporate disputes, but with respect to relationships between retail investors in funds and fund managers themselves, were it not for the fact that federal law occupies most of that space.

Point is, reports of corporate law’s death may be slightly, if not greatly, exaggerated.  Perhaps another way of putting it is simply to note (as others have done) that the locus of regulation has shifted from flexible, ex post review to mandatory ex ante rulemaking.

In 2015, I and several academics and other experts traveled to Guatemala as part of the Lat-Crit study space. The main goal of the program was to examine the effect of the extractive industries on indigenous peoples and the environment. During our visit, we met with indigenous peoples, government ministers, the chamber of commerce, labor leaders, activists (some who had received multiple death threats), and village elders.

Our labor of love, From Extraction to Emancipation Development Reimagined, edited by Raquel Aldana and Steve Bender, was released this week. My chapter “Corporate Social Responsibility in Latin America: Fact or Fiction” introduces the book. I first blogged about CSR in the region in 2015 in the context of a number of companies that had touted their records but in fact, had been implicated in environmental degradation and even murder. Over the past few years, one of the companies I blogged about, Tahoe Resources, has been sued in Canada for human rights violations, the Norwegian pension fund has divested, and shareholders have filed a class action based on allegations re: the rights of indigenous people.

Although the whole book should be of interest to business law professors and practitioners, chapters of particular interest include a discussion of the environment and financial institutions, the Central American experience with investor protections under CAFTA, whether corporations should be treated as persecutors under asylum law, climate adaptation and climate justice, the impact of mining on self-determination, environmental impact assessments, and labor as an extractive industry.

Other chapters that don’t tie directly to business also deserve mention including my mentor Lauren Gilbert’s closing chapter on gender violence, state actions, and power and control in the Northern Triangle, and other chapters on the right to water and sanitation in Central America, community-based biomonitoring, and managing deforestation.

We encourage you to buy the book and to invite the chapter authors to your institutions to present (shameless plug for panels, but we would love to share what we have learned). 

 

Here’s how this week’s post came to be.  I thought: “I should probably write about something other than LLCs being mischaracterized by courts. Maybe I will add some thoughts about Joan’s post about her thoughtful new essay, Let’s Not Give Up on Traditional For-Profit Corporations for Sustainable Social Enterprise. But first, I’ll read through the cases that call LLCs ‘limited liability corporations.'”  And read them I did.  I was about to let it go, but then I read something that (as usual) made me cringe. It’s from a 2012 opinion that apparently just showed up on Westlaw. Here it is:
II. UNDISPUTED FACTS.
 
. . . . The facts, viewed in the light most favorable to the Plaintiffs, are as follows. Plaintiff Edgar Lopez is a New Mexico resident. Compl. at 1, ¶ 1. Lopez owns and operates Plaintiff IMA, LLC, a New Mexico limited liability corporation that formerly managed the Perry Corners Shopping Center. . . . Lopez is the managing partner and the only surviving voting member of Hunt Partners, LLC, a Nevada corporation that has its principal place of business in New Mexico. . . . . Hunt Partners wholly owns, as the “sole equity member,” another LLC called “Perry Corners Shopping Center, LLC,” a Delaware Corporation with its principal place of business in New Mexico, which, in turn, owns as its only asset the Perry Corners Shopping Center, which is located in Georgia.
Lopez v. Killian, No. 10CV0882 JCH/GBW, 2012 WL 13080169, at *3 (D.N.M. Mar. 2, 2012) (emphasis added). 
 
Again, LLCs are not corporations.  They are limited liability companies.
 
More important, though, these “facts” are not undisputed.  I pulled the complaint.  The plaintiffs are Edgar Lopez and IMA, Inc., not IMA, LLC, as the opinion states.  As such, it is true that the IMA is a “limited liability corporation,” which is a rather old timey way of referring to the modern corporation, but true.  I looked up (here) the entity information from the New Mexico Secretary of State’s office, and it’s clear that IMA, Inc., is a “Domestic Profit Corporation” under New Mexico’s statute, Chapter 53: Corporations, articles 11 through 18.  I will note that article 19 of that chapter is “Limited Liability Companies.” [Banging head on desk.] 
 
My initial thought here was to put sole responsibility on the court. “How could the court get this wrong in the facts section when it has the case caption correct with IMA, Inc.?” Odd, to be sure. But the complaint reveals the likely source of some of this information. Counsel for Lopez/IMA, Inc. states specifically: “2. Plaintiff IMA, Inc. is a New Mexico Limited Liability Company owned and managed by Edgar Lopez.” [More banging of head.] (Side note: it appears unrelated, but filing counsel withdrew shortly after defendants’ motion to dismiss was filed.)
 
Also, in the complaint,”Hunt Partners, LLC,” is described as a “Nevada Limited Liability Company,” which appears correct, but later in the complaint, the entity is described as follows: “Hunt Partners, LLC, i.e., the parent Nevada Corporation.” The complaint further refers to the various LLCs as corporations in multiple places, and claims that the defendants do not “have the right to manage or control the corporation known as Perry Comers Shopping Center LLC.” I would not have imagined this case would have a high likelihood of success based on this complaint. (Note: This case was ultimately dismissed for lack of prosecution.)  
 
I also pulled the defendants’ motion to dismiss to see how they dealt with the entities.  That filing has it right.  The motion states clearly: “This case involves a Delaware Limited Liability Company known as Perry Corners Shopping Center, LLC (“Perry LLC”) that owns a shopping center in Georgia [sic]. Perry LLC is wholly owned by Hunt Partners, LLC, a Nevada Limited Liability Company (“Hunt LLC”).”  Kudos, counsel, on the entity treatment. (Missed a typo there, as I sometimes do, too, but I appreciate getting the substance right.)  
 
This is obviously not going to change overnight.  Attorneys, please try to be accurate in how you describe entities.  One of the issues in the case had to do with personal jurisdiction, and the rules for jurisdiction are quite different for corporation and LLCs.  The distinction is not only important for the sake of accuracy; it could be outcome determinative.  And courts, you’re the last line of defense. It’s still the court’s job to get the law right, even if the parties have gotten it wrong.
 
Here’s a thought for lawyers, clerks, and judges: where there is an entity involved, look the entity up.  It doesn’t take too long, and it can help you be more accurate, it might save you time in the long run, and it’s just not that hard. I know I am not alone in this mission to properly identify entities.  We can do this, but we really, really, need some help.  
 
 
The AALS Section on Taxation is pleased to announce the following Call for Papers. Selected papers will be presented at a works-in-progress session at the 2019 AALS Annual Meeting in New Orleans, LA from January 2-6, 2019. The works-in-progress session is tentatively scheduled for Saturday, January 5.
 
Eligibility: Scholars teaching at AALS member schools or non-member fee-paid schools with seven or fewer years of full-time teaching experience as of the submission deadline are eligible to submit papers. For co-authored papers, both authors must satisfy the eligibility criteria.
 
Due Date: 5 pm, Wednesday, August 8, 2018.
 
Form and Content of submission: We welcome drafts of academic articles in the areas of taxation, tax policy, public finance, and related fields. We will consider drafts that have not yet been submitted for publication consideration as well as drafts that have been submitted for publication consideration or that have secured publication offers. However, drafts may not have been published at the time of the 2019 AALS Annual Meeting (January 2019). We welcome legal scholarship across a wide variety of methodological approaches, including empirical, doctrinal, socio-legal, critical, comparative, economic, and other approaches.
 
Submission method: Papers should be submitted electronically as Microsoft Word documents to the following email address: tax.section.cfp@gmail.com by 5 pm on Wednesday, August 8, 2018. The subject line should read “AALS Tax Section CFP Submission.” By submitting a paper for consideration, you agree to attend the 2019 AALS Annual Meeting Works-in-Progress Session should your paper be selected for presentation.
 
Submission review: Papers will be selected after review by the AALS Tax Section Committee and representatives from co-sponsoring committees. Authors whose papers are selected for presentation will be notified by Thursday, September 28, 2018.
 
Additional information: Call-for-Papers presenters will be responsible for paying their own AALS registration fee, hotel, and travel expenses. Inquiries about the Call for Papers should be submitted to: AALS Tax Section Chair, Professor Shu-Yi Oei, Boston College Law School, oeis@bc.edu.

My essay on the use of traditional for-profit corporations as a choice of entity for sustainable social enterprise firms was recently published in volume 86 of the UMKC Law Review.  I spoke on this topic at The Bryan Cave/Edward A. Smith Symposium: The Green Economy held at the UMKC School of Law back in October.  The essay is entitled “Let’s Not Give Up on Traditional For-Profit Corporations for Sustainable Social Enterprise,” and the SSRN abstract is included below:

The past ten years have witnessed the birth of (among other legal business forms) the low-profit limited liability company (commonly known as the L3C), the social purpose corporation, and the benefit corporation. The benefit corporation has become a legal form of entity in over 30 states. The significant number of state legislative adoptions of new social enterprise forms of entity indicates that policy makers believe these alternative forms of entity serve a purpose (whether legal or extra legal).

The rise of specialty forms of entity for social enterprise, however, calls into question, for many, the continuing role of the traditional for-profit corporation (for the sake of brevity and convenience, denominated “TFPC” in this essay) in social enterprises, including green economy ventures. This essay argues that TFPCs continue to be a viable—and in many cases desirable or advisable choice of entity for sustainable social enterprise firms. The arguments presented are founded in legal doctrine, theory, and policy and include both legal and practical elements.

Somehow, I managed to cite to four BLPB co-bloggers in this single essay: Josh, Haskell, Stefan, and Anne.  Evidence of a business law Vulcan mind meld?  You decide . . . .  

Regardless, comments, as always, are welcomed as I continue to think and write about this area of law and practice.