I had a plan to write on something else today, but I got a note from Keith Bishop sharing his blog post, which he was right to think I would appreciated.  In his post, Bishop discusses a California case: 

The LLC May Well Be The Platypus Of Business Organizations

What happens to the attorney-client privilege when a corporation dissolves?  Magistrate Judge Sallie Kim recently answered that question in Virtue Global Holdings Ltd. v. Rearden LLC, 2016 U.S. Dist. LEXIS 53076 (N.D. Cal. April 5, 2016):

When a corporation ceases to exist, “the corporate powers, rights and privileges of the corporation shall cease.” Cal. Corp. Code §1905(b). In that case, no entity holds the attorney-client privilege for Original MO2. City of Rialto, 492 F.Supp.2d at 1197 (“a dissolved corporation is not entitled to assert the attorney-client privilege”).

I am somewhat baffled by the ruling because the entity asserting the privilege in the case was not a corporation at all (Section 1905 is in the General Corporation Law).  The entity attempting to claim the privilege was, according to the information provided in the opinion, indubitably a California limited liability company.  Thus, the court should be citing the California Revised Uniform Limited Liability Company Act, not the General Corporation Law.

California, like many others states, seems to make the error relatively often.

Today, though, I will pick on the news.  A Google News search of “limited liability corporation” for the past twenty-four hours provides a few such instances.  (Note for new readers, an LLC is a “limited liability company,” not corporation.) 

I’ll highlight two.  According to one news outlet, the University of Illinois just extended a $2 million line of credit to an entity do research in Singapore.

To set up shop in another country, the university created a limited liability corporation, Singapore Research LLC. The LLC then established a private entity in Singapore which allows the center to compete legally for government grants.

Oops. Next, another news outlet reports:

A Nevada energy company said it wants to purchase an unfinished nuclear power plant from the Tennessee Valley Authority (TVA) and use the site in northeast Alabama to produce electricity with new technology.

Michael Dooley, managing partner of Phoenix Energy of Nevada, told the Associated Press his company wants to use the mothballed Bellefonte Nuclear Plant site as the base for a new, non-nuclear generation method.

. . . 

Phoenix Energy of Nevada describes itself as a privately-held Nevada limited liability corporation, incorporated in October 2010, Kallanish Energy learns.

This time, though, the report is right.  Phoenix Energy of Nevada, LLC (PENV) says on its web page it “is a Veteran owned closely and privately held viable early stage mid-market Nevada State Limited Liability Corporation (LLC) Small Business Company founded and incorporated in October 2010.” Nope. It’s an LLC.   

I know I complain about this a lot, but there is value in getting it right. Reporters should get it right, and those who own the entity really should get it right.  One of these days some court will find that an LLC didn’t follow the corporate formalities required of a “limited liability corporation” and they won’t even know to object.  

I concede when one writes things like “company” and “corporation” a lot, a mistake may occur from time to time, especially when the distinction is not, on its face, crucial. My concern is less that people make mistakes. It’s more that they don’t know they are making one.  That’s where I come in.  

On the plus side, I am about halfway through grading my Business Organizations exams, and not one person has called an LLC a corporation. 

This is just to give everyone a “heads up” on a symposium being held this fall (Friday, October 21 and Saturday, October 22) to honor Lyman Johnson and David Millon.  The symposium is being sponsored by the Washington & Lee Law Review (which will publish the papers presented), and I am thrilled to be among the invited speakers.  I will have more news on the symposium and my paper for it as the date draws nearer.  But I wanted everyone to know about this event so that folks could plan accordingly if they want to attend.  I understand Lexington, Virginia is lovely in late October . . . .  Actually, it’s always been lovely when I have been up there! And the honorees and contributors are a stellar group (present company notwithstanding).  I hope to see some of you there.

At the 2017 AALS annual meeting, January 3-7 in San Francisco, the AALS Sections on Agency, Partnerships LLCs, and Unincorporated Associations & Nonprofit and Philanthropy Law will hold a joint session on LLCs, New Charitable Forms, and the Rise of Philanthrocapitalism.

In December 2015, Facebook founder Mark Zuckerberg and his wife, Dr. Priscilla Chan, pledged their personal fortune—then valued at $45 billion—to the Chan-Zuckerberg Initiative (CZI), a philanthropic effort aimed at “advancing human potential and promoting equality.” But instead of organizing CZI using a traditional charitable structure, the couple organized CZI as a for-profit Delaware LLC. CZI is perhaps the most notable example, but not the only example, of Silicon Valley billionaires exploiting the LLC form to advance philanthropic efforts. But are LLCs and other for-profit business structures compatible with philanthropy? What are the tax, governance, and other policy implications of this new tool of philanthrocapitalism? What happens when LLCs, rather than traditional charitable forms, are used for “philanthropic” purposes?

From the heart of Silicon Valley, the AALS Section on Agency, Partnerships LLCs, and Unincorporated Associations and Section on Nonprofit and Philanthropy Law will host a joint program tackling these timely issues. In addition to featuring invited speakers, we seek speakers (and papers) selected from this call.
Any full-time faculty of an AALS member or fee-paid school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1- or 2-page proposal by June 1, 2016. The Executive Committees of the Sections will review all submissions and select two papers by July 1, 2016. If selected, a very polished draft must be submitted by November 30, 2016. All submissions and inquiries should be directed to the Chairs of the Sections at the email addresses below:

Mohsen Manesh
Associate Professor
University of Oregon School of Law
mohsen@uoregon.edu

Garry W. Jenkins
Associate Dean for Academic Affairs
John C. Elam/Vorys Sater Professor of Law
Moritz College of Law,State University
jenkins.434@osu.edu 

[Please keep in mind as you read this post that my daughter is a Starbucks partner.  Any pro-Starbucks bias in this post is unintended.  But you should factor in my affiliation accordingly.]

Maybe it’s just me, but the publicity around the recent suit against Starbucks for putting too much ice in their iced beverages made me think of Goldilocks and her reactions to that porridge, those chairs, and those beds.  First it was McDonald’s, where the coffee was too hot.  Now it’s Starbucks, where the coffee is too cold–or, more truthfully, is too watered down from frozen water . . . .  (And apparently I missed a Starbucks suit earlier this year on under-filing lattes . . . .)  

Different types of tort suits, I know.  I always felt bad about the injury to the woman in the McDonald’s case, although the fault issue was truly questionable.  The recent Starbucks case just seems wrong in so many ways, however.  This is a consumer dispute that is best addressed by other means.  I admit to believing this most recent suit is actually an abuse of our court system.

How might a customer who is truly concerned about a substandard beverage attempt to remedy the wrong?

Continue Reading Monday Business Law Fun: Goldilocks, Consumer Protection, and Over-Caffeinating

Thought Josephine Sandler Nelson’s recent Oxford Business Law Blog post on Volkswagen might be of interest to our readers. It is reposted here with permission.

——————-

Fumigating the Criminal Bug: The Insulation of Volkswagen’s Middle Management

New headlines each day reveal wide-spread misconduct and large-scale cheating at top international companies: Volkswagen’s emissions-defeat devices installed on over eleven million cars trace back to a manager’s PowerPoint from as early as 2006. Mitsubishi admits that it has been cheating on emissions standards for the eK and Dayz model cars for the past 25 years—even after a similar scandal almost wiped out the company 15 years ago. Takata’s $70 million fine for covering up its exploding air bags in Honda, Ford, and other car brands could soon jump to $200 million if a current Department of Justice probe discovers additional infractions. The government has ordered Takata’s recall of the air bags to more than double: one out of every five cars on American roads may be affected. Now Daimler is conducting an internal investigation into potential irregularities in its exhaust compliance.

A recent case study of the 2015-16 Volkswagen (‘VW’) scandal pioneers a new way to look at these scandals by focusing on their common element: the growing insulation and entrenchment of middle management to coordinate such large-scale wrongdoing. “The Criminal Bug: Volkswagen’s Middle Management” describes how VW’s top management put pressure on the rest of the company below it to achieve results without inquiring into the methods that the agents would use to achieve those results. The willing blindness of top executives to the methods of the agents below them is conscious and calculated. Despite disclosure-based regulation’s move to strict-liability prosecutions, the record of prosecutorial failure at trial against top executives in both the U.S. and Germany demonstrates that assertions of plausible deniability succeed in protecting top executives from accountability for the pressure that they put on agents to commit wrongdoing.

Agents inside VW receive the message loud and clear that they are to cheat to achieve results. As even the chairman of the VW board has admitted about the company, “[t]here was a tolerance for breaking the rules”. And, contrary to VW’s assertion, no one believes that merely a “small group of engineers” is responsible for the misconduct. Only middle management at the company had the longevity and seniority to shepherd at least three different emissions-control defeat devices through engine re-designs over ten years, to hide those devices despite heavily documented software, and to coordinate even across corporate forms with an outside supplier of VW’s software and on-board computer.

The reason why illegal activity can be coordinated and grow at the level of middle management over all these years is rooted in the failure of the law to impose individual accountability on agents at this level of the corporation. Additional work by the same author on the way in which patterns of illegal behavior in the 2007-08 financial crisis re-occur in the 2015-16 settlements for manipulations of LIBOR, foreign currency exchange rates, and other parts of the financial markets indicates that middle management is further protected from accountability by regulators’ emphasis on disclosure-based enforcement. In addition, U.S. law has lost the ability to tie together the behavior of individuals within a corporation through conspiracy or other types of prosecutions.

Previous research has shown that the more prominent the firm is, and the higher the expectations for performance, the more likely the firm is to engage in illegal behavior. Now we understand more about the link between the calculated pressure that top executives put on their companies and the protection of middle management that supports the patterns of long-term, large-scale wrongdoing that inflict enormous damage on the public. It is not solely VW that needs to fumigate this criminal bug: the VW case study suggests that we need to re-think the insulation from individual liability for middle management in all types of corporations.

This post originally appeared on the Oxford Business Law Blog, May 5, 2016.

The latest example of dramatic institutional failure – that somehow was entirely accidental – comes to us from MetLife.

The story begins with variable annuities, a product that might be suitable if you’re trying to shelter your assets from a lawsuit, but otherwise one whose chief virtue lies in its capacity to serve as a litmus test for the honesty of your broker. 

After the financial crisis, insurance companies decided that their outstanding variable annuities were too good for existing customers, and began offering very high commissions to any brokers who could persuade their clients to exchange an older one for a newer, less generous model.

Enter MetLife.  From 2009 to 2014, MetLife brokers churned $3 billion worth of variable annuities, resulting in $152 million in dealer commissions.  Customers were told that the newer annuity was less expensive or comparable, when in fact, 72% of the time, this was, shall we say, not so much true.   For example, 30% of the replacement applications falsely stated that the new contract was less expensive than the old one.  Applications also failed to disclose benefits and guarantees that the customer would forfeit in making the exchange, understated the value of existing benefits, and overstated the value of the benefits on the new contracts. 

MetLife approved the exchange applications despite the errors.  And as icing on the cake, sent false quarterly account statements that understated customer fees on their variable annuities.

For these sins, FINRA charged MetLife with “negligently misrepresent[ing] … material facts” and failure to “reasonably supervise” its annuity replacement business.  Without admitting or denying wrongdoing, MetLife consented to censure, a $20 million fine, and to pay damages to customers up to $5 million.

Now, forgive me for being perhaps a touch cynical, but it strikes me as a bit farfetched to imagine that a 5 year course of conduct that affected nearly 75% of a $3 billion business line represented merely “negligent” behavior – i.e., a mere failure to exercise due care – especially at a time when exchanges were being pushed precisely to persuade customers to shed the desirable features of older annuities.

 

Notably, these “mistakes” never resulted in customers being falsely told the new contract was worse than the old one; somehow, these happy accidents consistently worked to benefit MetLife at the customers’ expense.  It’s hard not to suspect MetLife would have discovered the errors a lot more quickly if they were working in the other direction.

In recent years, the SEC and DOJ have both promised to put more teeth into investigations of corporate misconduct by pursuing individuals, avoiding “neither admit nor deny” settlements, and calling out intentional misbehavior for what it is.  I guess FINRA hasn’t gotten the Yates Memo.

With this post I warmly welcome John Linarelli to the Business Law Professor Blog as a guest blogger for the month of May.  Professor Linarelli, Chair in Commercial Law at Durham Law School, has crossed the Atlantic and different disciplines throughout his career.  His research engages with issues of inequality, specifically focusing on economic and commercial issues.  Recent scholarly publications include his forthcoming co-authored book, to be published with Oxford University Press, Beyond Global Capitalism: Reclaiming the Future of International Law and his 2015 article Concept and Contract in the Future of International Law, 67 Rut. U. L. Rev. 61.  Interested readers can view Professor Linarelli’s full academic bio and his SSRN page for more information.  Look for new BLPB content from Professor Linarelli later this month.

Understanding that American academics and practicing lawyers may be unfamiliar with Durham University, Professor Linarelli provided us with an overview.  He writes a helpful introduction and provides a charming view into some different academic traditions:

Durham Law School usually ranks as one of the top 5 law schools in the UK.  In the UK-wide Research Excellence Framework (REF) exercise in 2014, of which all university participate, we ranked third.  Our students are incredible and a good number go off to the big City of London law firms upon completion of their practice qualifications. Lord Justice Hughes on the UK Supreme Court is an alum. We also run several LLM programmes, including in Corporate Law, International Trade and Commercial Law, European Trade and Commercial Law, and International Law and Governance.  

Continue Reading Introducing Guest Blogger John Linarelli to the BLPB

It is commencement season – our commencement at Belmont University is tomorrow. Commencement season means commencement speeches. Commencement speeches often comes with an extra helping of cliché advice. If I had to guess, no piece of cliché advice is more common in commencement speeches than “follow your passion in your career.”

For example, in Steve Job’s famous Stanford commencement speech he said:

You’ve got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.

Jim Carey, in an otherwise pretty original and somewhat odd commencement speech, included some of the cliché “follow your passion” advice when he said:

My father could have been a great comedian, but he didn’t believe that was possible for him, and so he made a conservative choice. Instead, he got a safe job as an accountant, and when I was 12 years old, he was let go from that safe job and our family had to do whatever we could to survive. I learned many great lessons from my father, not the least of which was that you can fail at what you don’t want, so you might as well take a chance on doing what you love.

Like almost any cliché, the “follow your passion” instruction contains some wisdom. I do think there are students who take conventional jobs out of fear, and fear shouldn’t drive a decision as important as career choice. That said, I also think this cliché advice can do a good bit of harm. I see students overly focused on trying to find work that fits with their current interests — music, sports, travel, etc. — or work that they think will “change the world” and make them feel good in the process. As a result, students often ignore work that may seem ordinary, but is just as important, if not as glamorous.

Accounting, mentioned in Jim Carey’s speech, is actually one of those areas that students often pass over as “ordinary work” or turn to reluctantly, out of fear.  Few people I know have a natural passion for accounting. But I have seen a passion for accounting develop over time. As the philosopher William James said: 

Action seems to follow feeling, but really action and feeling go together; and by regulating the action, which is under the more direct control of the will, we can indirectly regulate the feeling, which is not.

Most work is “ordinary” work. Even the splashy work celebrated in commencement speeches (and indirectly celebrated by the choice of commencement speakers) has ordinary elements, or was, at the very least, preceded by less unique work. I worry that students, attempting to follow the advice of Jobs, Carey, and others, bounce from job to job trying to find work that makes them feel good immediately and all the time. While I don’t necessary think “do what you love” is bad advice, I think it needs to be tempered with “find work the world needs and that fits your talents,” “do good work wherever you are,” and “know that most work is needed and important, even if it does not grab headlines.” I wish we took more time at our universities to celebrate the day-in, day-out grind of the faithful, ordinary worker. And I am trying to impart to my students that their future work matters, even if it seems common and doesn’t receive much recognition.