Christine Hurt has written an interesting article on limited liability partnerships in bankruptcy. It’s available here.

Here’s the abstract:

Brobeck. Dewey. Howrey. Heller. Thelen. Coudert Brothers. These brand-name law firms had many things in common at one time, but today have one: bankruptcy. Individually, these firms expanded through hiring and mergers, took on expensive lease commitments, borrowed large sums of money, and then could not meet financial obligations once markets took a downturn and practice groups scattered to other firms. The firms also had an organizational structure in common: the limited liability partnership.

In business organizations classes, professors teach that if an LLP becomes insolvent, and has no assets to pay its obligations, the creditors of the LLP will not be able to enforce those obligations against the individual partners. In other words, partners in LLPs will not have to write a check from personal funds to make up a shortfall. Creditors doing business with an LLP, just as with a corporation, take this risk and have no expectation of satisfaction of claims by individual partners, absent an express guaranty. In bankruptcy terms, creditors look solely to the capital of the entity to satisfy claims. While bankruptcy proceedings involving general partnerships may have been uncommon, at least in theory, bankruptcy proceedings involving limited liability partnerships have recently become front-page news.

The disintegration of large, complex LLPs, such as law firms, does not fit within the Restatement examples of small general partnerships that dissolve fairly swiftly and easily for at least two reasons. First, firm creditors, who have no recourse to individual partners’ wealth, wish to be satisfied in a bankruptcy proceeding. In this circumstance, federal bankruptcy law, not partnership law, will determine whether LLP partners will have to write a check from personal funds to satisfy obligations. Second, these mega-partnerships have numerous clients who require ongoing representation that can only be competently handled by the full attention of a solvent law firm. In these cases, the dissolved law firm has neither the staff nor the financial resources to handle sophisticated, long-term client needs such as complex litigation, acquisitions, or financings. These prolonged, and lucrative, client matters cannot be simply “wound up” in the time frame that partnership law anticipates. The ongoing client relationship begins to look less like an obligation to be fulfilled and more like a valuable asset of the firm.

Partnership law would scrutinize the taking of firm business by former partners under duty of loyalty doctrines against usurping business opportunities and competing with one’s own partnership, both duties that terminate upon the dissolution of the general partnership or the dissociation of the partner. However, bankruptcy law is not as forgiving as the LLP statutes, and bankruptcy trustees view the situation very differently under the “unfinished business” doctrine. The bankruptcy trustee, representing the assets of the entity and attempting to salvage value for creditors, instead seeks to make sure that assets, including current client matters, remain in partnership solution unless exchanged for adequate consideration, even if the partners agree to let client matters stay with the exiting partners.

This Article argues that the high-profile bankruptcies of Heller Ehrman LLP, Howrey LLP, Dewey & LeBeouf, LLP, and others show in stark relief the conflict between general partnership law and bankruptcy law. The emergence of the hybrid LLP creates an entity with general partnership characteristics, such as the right to co-manage and the imposition of fiduciary duties, but with limited liability for owner-partners. These characteristics co-exist peacefully until they do not, which seems to be at the point of dissolution. Then, the availability of limited liability changes partners’ incentives upon dissolution. Though bankruptcy law attempts to resolve this, it conflicts with partnership law to create more uncertainty.

Like many of you, I have been discussing the Volkswagen emission scandal in my business law classes.

Yesterday, Michael Horn, President and CEO of Volkswagen Group of America testified before the House Committee on Energy and Commerce Subcommittee on Oversight and Investigations. Horn’s testimony is here. 

West Virginia University, home of co-blogger Joshua Fershee, is featured on the first page of the testimony as flagging possible non-compliance issues in the spring of 2014.

The testimony includes multiple apologies, acceptance of full responsibility, and the statement that these “events are fundamentally contrary to Volkswagen’s core principles of providing value to our customers, innovation, and responsibility to our communities and the environment.”

I plan to follow this story in my classes as the events continue to unfold. 

My wife and I both have many close family members in South Carolina, so the recent flood has been on our minds recently.

My first thoughts are with all of those affected by the flood.  

Relevant to this blog, the flood also reminds me of one of the opening passages in Conscious Capitalism by Whole Food’s co-CEO John Mackey. In that passage, Mackey recalls the massive flood in Austin, TX in 1981. At that time, Whole Foods only had one store, and the flood filled that store with eight feet of water. Whole Foods had loses of $400,000 and no savings and no insurance.

Mackey notes that “there was no way for [Whole Foods] to recover with [its] own resources” and then:

  • “[a] wonderfully unexpected thing happened: dozens of our customers and neighbors started showing up at the store….Over the next few weeks, dozens and dozens of our customers kept coming in to help us clean up and fix the store…It wasn’t just our customers who helped us. There was an avalanche of support from our other stakeholders as well [such as suppliers extending credit and deferring payment]. . . . It is humbling to think about what would have happened if all of our stakeholders hadn’t cared so much about our company then. Without a doubt, Whole Foods Market would have ceased to exist. A company that today has over $11 billion in sales annually would have died in its first year if our stakeholders hadn’t loved and cared about us–and they wouldn’t have loved and cared for us had we not been the kind of business we were.” pgs. 5-7

I have two questions. First, what decisions lead to that sort commitment from stakeholders? Second, does this sort of commitment only attach to small businesses? 

Asked another way, would Whole Foods still have that sort of stakeholder turnout today? If not, is it because they have not continued to make decisions that inspire stakeholders or simply because they have grown so large that stakeholders assume the company can fend for itself.

It is seemingly easier to make connection with a small, local business than with a large chain, but there do seem to be a few larger companies that still reach their stakeholders on an individual and personal level. Companies, of all sizes, seem to reach stakeholders through making thoughtful decisions in hiring, training, producing, and giving. Authenticity seems to be quite important, as does listening to stakeholders and taking action to address stakeholder needs.

Two weeks ago I wrote my first in a series of posts on the SEC’s proposed liquidity and redemption rules for mutual funds.  The first post, available here, focused on swing pricing.  Today’s post will focus on the liquidity management proposals contained in the proposed rules to address liquidity risk.

The proposed rules would require all open end mutual funds (not UITs, closed-end funds or money management funds) to create a written liquidity management program and to disclose it to the SEC via the proposed forms N-CEN and N-PORT.  Under the plan, funds would (1) classify and conduct ongoing reviews of liquidity of each of the fund’s positions in portfolio assets, (ii) assess and conduct periodic reviews of the fund’s liquidity risk, and (iii) manage the fund’s liquidity risk through a set-aside minimum portion of fund assets that are convertible within 3 business days at a price that does not materially affect the value of that asset immediately prior to sale.

Liquidity risk is born of concern that a fund “could not meet requests to redeem shares issued by the fund that are expected under normal conditions, or are reasonably foreseeable under stressed conditions, without materials affecting the fund’s net asset value.” (Proposed Rules at 44-45).

Fund classification of portfolio liquidity is in addition to the 15% illiquid asset cap under current SEC guidelines (Release Nos. 33-6927; IC-18612, March 12, 1992). The proposed liquidity classifications “would require a fund to assess the liquidity of its portfolio positions individually, as well as the liquidity profile of the fund as a whole” and unlike the 15% cap to take “into account any market or other factors in considering an asset’s liquidity,” and assess “whether the fund’s position size in a particular asset affects the liquidity of that asset.” (Proposed Rules at 62-63).  

A fund would assess the relative liquidity of each portfolio position based on the number of days within which it is determined, using information obtained after reasonable inquiry, that the fund’s position in an asset (or a portion of  that asset) would be convertible to cash at a price that does not materially affect the value of that asset immediately prior to sale.”  (Proposed Rules at 63-64).  Funds would report portfolio classification in one of 6 categories of liquidity ranging from 1 day conversion to cash to 30 days conversion to cash to be reported on proposed N-PORT form.

The liquidity factors include:

o Existence of an active market for the asset, including whether the asset is listed on an exchange, as well as the number, diversity, and quality of market participants;

o Frequency of trades or quotes for the asset and average daily trading volume of the asset (regardless of whether the asset is a security traded on an exchange);

o Volatility of trading prices for the asset;

o Bid-ask spreads for the asset;

o Whether the asset has a relatively standardized and simple structure;

o For fixed income securities, maturity and date of issue;

o Restrictions on trading of the asset and limitations on transfer of the asset;

o The size of the fund’s position in the asset relative to the asset’s average daily trading volume and, as applicable, the number of units of the asset outstanding; and

o Relationship of the asset to another portfolio asset.” 

(Proposed Rules at 80).

 -Anne Tucker

I recently received the following e-mail announcement. Accordingly, I have updated my list of law professor positions outside of law schools:

—–

The Department of Management in the College of Business and Economics, Boise State University,  invites applications for a tenure track faculty position in the area of Legal Studies in Business.

Management hosts the most majors in the College of Business and Economics, with over 1000 students currently majoring in General Business, Entrepreneurship Management, Human Resource Management, or International Business, and provides courses in four MBA programs. We are housed in the impressive Micron Business and Economics Building, which opened in the summer of 2012. The College of Business and Economics is AACSB-accredited.

Recognized as a university on the move, Boise State University is the largest university in Idaho, with enrollment of more than 22,000 students. The University is located in the heart of Idaho’s capital city, a growing metropolitan area that serves as the government, business, high-tech, economic, and cultural center of the state. Time Magazine ranked Boise #1 in 2014 for ‘getting it right’ with a thriving economy, a booming cultural scene, quality health care, and a growing university. Livability.com also ranked Boise first among the top 10 cities to raise a family in 2014 thanks to an abundant quality of life, a family-friendly culture, a vibrant downtown, and great outdoor recreation. To further enhance the superb quality of life Boise offers, the University has committed to sustaining the conditions necessary for faculty to enter and thrive in their academic careers, while meeting personal and family responsibilities.

Boise State University embraces and welcomes diversity in its faculty, student body, and staff. Accordingly, candidates who would add to the diversity and excellence of our academic community are encouraged to apply and to include in their cover letter information about how they can help us further these goals.

Minimum Qualifications:

  • J.D. degree with an excellent academic record from an ABA accredited law school.
  • Potential for outstanding teaching and research.
  • Willingness to be active in professional, university, and community service activities.

Preferred Qualifications: 

  • MBA or other advanced business related degree.
  • Demonstrated ability to engage in high quality teaching, including online teaching experience.
  • Journal publications in refereed, peer-reviewed business journals, legal journals, or law reviews.
  • Significant professional experience as a lawyer.
  • Ability and experience teaching and doing research across disciplines (e.g. accounting, health care law, economics) is a plus.

As some of you may know, I have been focused on crowdfunding intermediation in my research of late.  My articles in the U.C. Davis Business Law Journal and the Kentucky Law Journal both touch on that topic, and a forthcoming chapter in an international crowdfunding book and several articles in process follow along that trail.  (I also have the opportunity to look into gatekeeper intermediary issues outside the crowdfunding context at an upcoming symposium at Wayne State University Law School, about which I will say more in a subsequent post.)  The underlying literature on financial intermediation is super-interesting, and it continues to grow in breadth and depth as I research and write.

Given my interest in this area, I was delighted to see that Larry Cunningham is contributing to the debate, following on his already-rich work relating to Warren Buffett and Berkshire Hathaway.  As you may recall, Larry was our guest here at the Business Law Prof Blog back in 2014.  You can read my Q&A with him here and his posts here and here.

Larry recently posted an essay responding to Kathryn Judge‘s Intermediary Influence, 82 U Chi L Rev 573 (2015).  In her article, Professor Judge shows “how intermediaries acquire influence over time and how they have used that influence to promote high-fee arrangements.”  She then uses this descriptive analysis both to explain existing phenomena in the financial markets and to identify significant implications for the same.

Forthcoming in the University of Chicago Law Review Dialogue, Larry’s responsive essay, Berkshire versus KKR: Intermediary Influence and Competition, compares the infamous private equity firm Kohlberg Kravis Roberts to his beloved Berkshire Hathaway.  His focus?  The M&A market.  His bottom line?

I have extended Judge’s insights with an illustration from the acquisitions market, depicting one firm (KKR) that epitomizes intermediary influence, in contrast to a rival (Berkshire)—the anti-intermediary par excellence. The juxtaposition affirms the portrait of intermediary influence that Judge paints as well as the potential for correction through lower-priced competition and fee disclosure she posits.

I have given Larry’s essay a skim, and that quick pass has enticed me into giving both it and Professor Judge’s article a good, thorough read in the not-too-distant future.

As a life-long Detroit Lions fan, last night’s loss to the Seattle Seahawks was largely expected.  How they lost was new, though the fact that the Lions lost in a creative way, was also to be expected.  As actor Jeff Daniels said, being a Lions fan is more painful than being a Cubs fan.

In recent years, there is ample evidence that random and uncommon rules have shown up to hurt my already mediocre team. This got me to thinking, though, of the old adage, bad facts make bad law. For the Lions, I think that’s not necessarily apt.  It may be that bad football makes for better football later.   

To understand how one might get there, one needs to know a little what it’s like to be a Lions fan, so here’s a little insight into how life as a Lions fan works: 

I watched the start of the game last night with my ten-year-old son.  Part of the pre-game programming is all of the announcers and studio people make their pick for the game.  The ten or so predictions were unanimously for the Seahawks.  I turned to my son and said, “Well, the Lions will probably make a game of it then.”  He asked why.  I replied, “Because the Lions have a better chance to win when absolutely no one objective expects them to. I don’t know why. It’s just true.” 

He went to bed shortly after kickoff. Lest anyone think I am cruel, I am not trying too hard to make him a Lions fan.  I have tried to raise him and his little sister also as Saints fans.  I am not going to bandwagon an make them Pats fans or anything, but New Orleans was home for three years, so I can reasonably adopt the Saints.  I have been questioned on that choice as an alternative, and this year doesn’t look too hot, but in my defense, my kids’ team has a Super Bowl win in their lifetimes. More than I can say for me.

As the game went on, there was lost of social media complaining between me and my fellow Lions fans.  Most of it along the lines of: “Did they forgot how to throw downfield?” “This is awful.” “Where’s Barry Sanders?”  Then I posted something witty like, “Matt Stafford just checked down to me on my couch.” 

Despite an awful game, the Lions had a chance.  With time running out, the team seemed to learned they could throw the ball down the field more than three yards. 

The Lions were losing 13-10 with 1:51 left in the game when Stafford passed to Calvin Johnson, who dove for a touchdown.  Just before the goal line, Seahawks safety Kam Chancellor punched the ball out of his hands, and the ball tumbled into the end zone. Another Seahawks play clearly hit the ball out of the back of the end zone.  The play was call a touchback, giving Seattle the football at their own 20 yard line.  The problem is that NFL rules make batting the ball illegal, and the ball should have been awarded to the Lions at the 1 yard line.  

No call, and the Lions go on to lose.  And yes, there were lots of other chances the Lions had to win, and you can’t hope a refs call won’t go against you.  But it still stunk.  Again, a social media glimpse into the life of a Lions fan. 

Friend 1:  Could an ending be more Lions than that?

Me:  If you’re going to screw it up, do it with panache.  And no. 

Friend 2:  did you see the latest on ESPN.. apparently, it looks like it shouldn’t have been a touchback, but 1 and goal at the 6 inch line

Me:  That would be as about as Lions as it gets.

That’s a long-winded bit of rambling, but it’s cheaper than therapy.  

All teams run into odd rules, but mediocre teams have more ways of finding challenges. The Lions find challenges like no one else. They have a history of struggling with (i.e., losing, in part, because of) arcane rules, as this article explains: Illegal bat continues Lions’ proud tradition of getting hosed by the NFL rulebook. The Illegal Bat now joins the Calvin Johnson Rule and the Jim Schwartz rule.  

This mediocrity can have value, though.  Finding all these weird challenges can help make the game better by helping highlight risks for future games that matter.  Better officiating and better rules will not make the Lions a better football team, but the challenges they seem to goof into might make for more aware officials and better rules for playoff games, which usually feature better teams.

Of course, the Lions finally made the playoffs last year, only to lose, in part, because of an oddly changed call.  Nonetheless, if the Lions can’t be good, at least some good is coming from their games. Right?  

You don’t need to answer that. 

Alicia Plerhoples (Georgetown) has the details about the first benefit corporation IPO: Laureate Education.*

She promises more analysis on SocEntLaw (where I am also a co-editor) in the near future.

The link to Laureate Education’s S-1 is here. Laureate Education has chosen the Delaware public benefit corporation statute to organize under, rather than one of the states that more closely follows the Model Benefit Corporation Legislation. I wrote about the differences between Delaware and the Model here.

Plum Organics (also a Delaware public benefit corporation) is a wholly-owned subsidiary of the publicly-traded Campbell’s Soup, but it appears that Laureate Education will be the first stand-alone publicly traded benefit corporation.

*Remember that there are differences between certified B corporations and benefit corporations. Etsy, which IPO’d recently, is currently only a certified B corporation. Even Etsy’s own PR folks confused the two terms in their initial announcement of their certification.

The authors of the business associations casebook I use have, in their latest edition, reprinted some of the relevant statutes in the casebook. One section of the Revised Uniform Partnership Act even appears twice within a span of only eight pages. (I don’t mean citations to statutes; I mean the full language of the statute.)

The authors of the book I use (which shall remain nameless) are not alone. I’ve also seen this practice in other casebooks.

I just don’t get it.

I can understand putting a few statutes or regulations in a casebook if the students are only going to look at a couple of sections in the course. It eliminates the need for students to purchase a separate statutory supplement.

But it makes no sense in courses like Business Associations or Securities Regulation, where students will be looking at dozens, even hundreds, of pages of statutory and regulatory material. The students in those courses will still have to buy a statute book; including some of the same statutory material in the casebook just increases the size (and cost) of the casebook.

Including statutory material can also accelerate the casebook’s obsolescence. Some of the sections included come from uniform and model acts, which aren’t likely to change rapidly. But the book includes a number of selections from Delaware and other states. We all know that Delaware almost never changes its business associations statutes. (Stifled chuckle here.) What am I supposed to do next year if the statute changes? Tell my students to cross out the material?

My apologies for the rant, but this is one of a number of things these authors have done in their latest edition that really bug me. I may soon be accepting my co-blogger Joan Heminway’s invitation to try the B.A. book she co-authors. (I hope you don’t reproduce any statutory material, Joan.)

If I’m wrong, and there’s a legitimate justification for this, I’d be happy to eat my words, but I just don’t see the point.

UPDATE: For another view, check out Usha Rodrigues’s blog post over on The Conglomerate.