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 applicable law, “this noneconomic interest became property of the estate subject to control of the Trustee on the filing of the petition pursuant to 11 U.S.C. § 541.”

Here’s Rutledge’s take: 

On appeal, the Court’s primary focus was upon whether the right to vote in an LLC constitutes “property of the estate,” defined by section 541(a)(1) of the Bankruptcy Code as “all legal or equitable interest of the Debtor in property as of the commencement of the case. After finding that Lee could be a “member” of the LLC notwithstanding the absence of any share in the company’s profits and losses or the distributions it should make, the Court was able to determine that Lee was a member. In a belt and suspenders analysis, the Court determined also that the voting rights themselves could constitute “economic rights in the company” affording him the opportunity to, for example, “ensure his continued employment as manager” thereof.

In a response to Rutledge’s blog, Prof. Carter Bishop notes,

The court did not state the trustee could exercise those voting rights.  The next step is crucial. If the operating agreement is an executory contract of a multi-member LLC, BRC 365 will normally respect LLC state law restrictions as “applicable law” and deny the trustee the right to exercise the debtor’s voting rights (similar outcome to a non-delegable personal service contract).This was a managing member of a multi-member LLC, so I assume BRC 365 blocks the trustee’s exercise.

Rutledge notes that could be the case, but it’s also possible the Lee court was saying we already decided that — voting rights are part of the estate.  

I find all of this interesting and important to think about, especially given my limited bankruptcy knowledge. My main interest, though, is how might we plan around such a situation?  Many LLC statutes provide some options.  

For example, some states allow those forming an LLC to adopt a provision in the Operating Agreement that makes bankruptcy an event that triggers “an event of dissociation,” which would make the filer (or his or her successor in interest) no longer a member. See, e.g., Indiana Code sec. 23-18-6-5(b) (“A written operating agreement may provide for other events that result in a person ceasing to be a member of the limited liability company, including insolvency, bankruptcy, and adjudicated incompetency.”).  This raises the question, then, of whether the bankruptcy code trumps this LLC code such that the bankruptcy filing creates an estate that makes it so the state LLC law cannot operate to eliminate the filer as a member. 

The answer is no, the state law doesn’t trump the bankruptcy code, but the state provision can still have effect.  A recent Washington state decision (petition for review granted), relying on Virginia law, determined that where state law dissociates a member upon a bankruptcy filing, the trustee cannot be a member, and thus the trustee cannot exercise membership rights: 

[I]nstead of dissociating the debtor, Virginia law operated to dissociate the bankruptcy estate itself. The court concluded, “Consequently, unless precluded by § 365(c) or (e), his bankruptcy estate has only the rights of an assignee.

 
Given the similarities between Virginia’s and Washington’s treatment of LLC members who file for bankruptcy, we adopt the reasoning of Garrison–Ashburn [253 B.R. 700 (Bankr. E.D. Va. 2000)]. By applying Washington law, we conclude that RCW 25.15.130 dissociates a bankruptcy estate such that it retained the rights of an assignee under RCW 25.15.250(2), but not membership or management rights, despite the provisions of 11 U.S.C. § 541(c)(1).
Nw. Wholesale, Inc. v. PAC Organic Fruit, LLC, 183 Wash. App. 459, 485, 334 P.3d 63, 77 (2014) review granted sub nom. Nw. Wholesale, Inc. v. Ostenson, 182 Wash. 2d 1009, 343 P.3d 759 (2015).

The court then needed to decided whether § 365 allows a member to retain his or her membership. Under Washington partnership law, as applied to the bankruptcy code, the court explained:  

under § 365, the other partners are not obligated to accept an assumption of the partnership agreement. Partnerships are voluntary associations, and partners are not obligated to accept a substitution for their choice of partner. The restraint on assumability also makes the deemed rejection provision of § 365 inapplicable to the partnership agreement. Therefore, § 365(e)‘s invalidation of ipso facto provisions does not apply, and state partnership law is not superseded. The debtor-partner’s economic interest is protected by other sections of the bankruptcy code, but he no longer is entitled to membership. 

Nw. Wholesale, Inc. v. PAC Organic Fruit, LLC, 183 Wash. App. 459, 489, 334 P.3d 63, 79 (2014) review granted sub nom. Nw. Wholesale, Inc. v. Ostenson, 182 Wash. 2d 1009, 343 P.3d 759 (2015). The court then applied the same reasoning to LLC law, concluding “that that 11 U.S.C. § 541 and § 365 did not preempt Washington law that” removes members in the limited liability company upon a bankruptcy filing.  
 
The fact that Indiana law provides the option to make (instead of automatically making) bankruptcy a dissociating event, it seems to me, shouldn’t change the outcome if Washington’s analysis is right, and I think it is. LLC members be able to pick their members, and protecting that right even in the face of bankruptcy is important. 
 
In the Lee case, state LLC law did not provide that bankruptcy was a dissociating event and the parties did not choose to make that the case.  I am all for LLCs allowing the members to make such a decision (either way), but here, LLC members did not do so (at their own peril).  I agree with Prof. Bishop that an open question remains as to whether the trustee can vote, and I hope the answer is no. But one can make that outcome a lot more likely by planning ahead.  

Bad PowerPoint is ubiquitous. PowerPoint presentations are like writing: anyone can do them, but few people can do them well. And the number of people who think they do them well is much greater than the number of people who actually do.

As anyone who has attended a legal conference can attest, many of us don’t have a clue about how to design effective PowerPoint presentations. The result is distracted audiences, confusing presentations, and ineffective teaching.

The fault is not in the PowerPoint tool. The fault is in how people use the tool. As Peter Norvig has said,

PowerPoint doesn’t kill meetings. People kill meetings. But using PowerPoint is like having a loaded AK-47 on the table: You can do very bad things with it.

As I mentioned in an earlier post, I spoke at this summer’s annual conference of the Center for Computer-Assisted Legal Instruction (CALI). My topic was How to Ruin a Presentation with PowerPoint. That presentation is now available on YouTube.

My presentation focuses on some of the most common mistakes people make in creating PowerPoint presentations and discusses how to improve your PowerPoint presentations. My comments aren’t limited to the Microsoft product. Almost everything I say is also applicable to other presentation software and most of what I say also applies to graphics created for videos.

My focus is on slide design and content, not on the intricacies of PowerPoint. I don’t try to teach you all the magic things PowerPoint can do or make you a power user of PowerPoint. In fact, many of the amazing things PowerPoint can do aren’t particularly good for presentations. Instead, I point out the horrors of bad PowerPoint and give people some simple hints for making more effective presentations.

The hour-long presentation is here, if you want to watch it.

The CALI conference, as usual, included a number of excellent presentations on teaching with technology and innovations in legal education. You can see all of the videos here.

If you’re an academic interested in technology, you really ought to attend one of the CALI annual conferences. There’s a nice mix of law school technologists, librarians, and faculty. I always learn something new. Everyone I know who has gone has come away wanting to go again.

The school year begins soon, and I’ll be teaching Business Enterprises.  (That’s what Tulane calls the basic BA/Corps class.)

One of my first tasks was to select a casebook.  There are a lot of options, and it was interesting for me to analyze how each reflects the philosophy/policy preferences of its authors.  I suppose I should have predicted that the Klein/Ramseyer/Bainbridge book would open its discussion of corporations with the Boilermakers case, and its characterization of corporate governance documents as a “contract” among shareholders.  The Allen/Kraakman/Subramanian book heavily emphasizes economic analyses.   Unsurprisingly, the casebook partially authored by my co-blogger Joan Heminway (i.e., the Branson/Heminway/Loewenstein/Steinberg/Warren book) demonstrates a particular interest in alternative entities, and Hazen/Markham seems to feel derivative actions have dominated far too much academic attention (and also that Dodge v. Ford Motor Co. needs to be retired).

One significant point of variation is how far the books go in integrating state and federal law.  As federal securities regulation expands, it clearly poses a problem for casebook authors (and business professors!) in terms of organizing the material in a coherent fashion.  It’s harder to simply divide the class into state governance law and federal disclosure law (which is how I remember learning it, anyway), and the casebook authors all have different approaches.  Ultimately, I chose the Hazen/Markham book, in part because organizationally, it comes closest to reflecting how I think about matters in my own head, so I figured it would be easiest for me to teach. 

I’m still assigning Dodge, though.

 

 

An Academy of Legal Studies in Business (“ALSB”) colleague suggested I do a post listing recent promotion and tenure news for fellow legal studies professors. I think that this is a worthy thing to celebrate on the blog.

Below I have listed the recent P&T news sent to me by ALSB listserv members. I may update this list as I receive more news. Congrats all! 

Brian Halsey (West Chester) – promoted to Professor and appointed as Director of the MBA Program

Henry Lowenstein (Coastal Carolina) – awarded the William J. Baxley, Jr. Applied Business Endowed Professorship for 2015-16

Joshua Perry (Indiana) – promoted to Associate Professor with Tenure and awarded the endowed W. Michael & William D. Wells Life Sciences Faculty Fellowship

Denise Smith (Eastern Illinois) – promoted to Professor

Nancy White (Central Michigan) – named Chair of the Finance and Law Department

Eric Yordy (Northern Arizona) – promoted to Associate Professor with Tenure

Apparently the corporate tax inversion crackdown by the Obama administration is not working. The Financial Times reported this week that three companies have announced plans to redomicile in Europe in just one week. I’m not sure that I will have time to discuss inversions in any detail in my Business Associations class, but I have talked about it in civil procedure, when we discuss personal jurisdiction.

From my recent survey monkey results of my incoming students, I know that some of my students received their business news from the Daily Show. In the past I have used Jon Stewart, John Oliver, and Stephen Colbert to illustrate certain concepts to my millennial students. Here are some humorous takes on the inversion issue that I may use this year in class. Warning- there is some profanity and obviously they are pretty one-sided. But I have found that humor is a great way to start a debate on some of these issues that would otherwise seem dry to students. 

1)   Steve Colbert on corporate inversions-1– note the discussion on fiduciary duties

2)    Steve Colbert on corporate inversions interviews Allan Sloan

3)   Jon Stewart- inversion of the money snatchers and on corporate personhood toward the end.

For those of you who are political junkies like me, I thought I would share a video that I showed when I taught a seminar on corporate governance, compliance, and social responsibility. This video focuses on political campaigns, and for a number of reasons, this campaign season seems to be in full gear already. Indeed, Professor Larry Lessig from Harvard is mulling a run for president in part to highlight the need for reform in campaign financing. Below is Stephen Colbert’s take on SuperPACs and political financing.

1) Colbert’s shell corporation– note the discussion of the incorporation in Delaware and the meeting of the board of directors

Enjoy, and best of luck for those starting classes next week.

This weekend I will be in Panama filling in at the last minute for the corporate law session for an executive LLM progam. My students are practicing lawyers from Nicaragua, El Salvador, Costa Rica and Paraguay and have a variety of legal backgrounds. My challenge is to fit key corporate topics (other than corporate governance, compliance, M & A, finance, and accounting) into twelve hours over two days for people with different knowledge levels and experiences. The other faculty members hail from law schools here and abroad as well as BigLaw partners from the United States and other countries.

Prior to joining academia I spent several weeks a year training/teaching my internal clients about legal and compliance matters for my corporation. This required an understanding of US and host country concepts. I have also taught in executive MBA programs and I really enjoyed the rich discussion that comes from students with real-world practical experience. I know that I will have that experience again this weekend even though I will probably come back too brain dead to be coherent for my civil procedure and business associations classes on Tuesday.

I have put together a draft list of topics with the help of my co-bloggers and based in part on conversations with some of our LLM and international students who have practiced law elsewhere but who now seek a US degree: 

Agency– What are the different kinds of authority and how does that affect liability? 

Business forms:             

Key issues for entity selection

– ease of formation

–  ownership and control

– tax issues

–  asset protection/liability to third parties for obligations of the business /piercing the veil of limited liability

–  attractiveness to investors

–  continuity and transferability

Main types of business forms in the United States

-Sole Proprietorship

-Partnership/General and Limited

– Corporation

                     – C Corporation

                     – S Corporation

– Limited Liability Company

 Fiduciary Duties/The Business Judgment Rule

 Basic Securities Regulation/Key issues for Initial Public Offering/Basic Disclosures (students will examine the filings for an annual report and an IPO)

Insider Trading

The Legal System in the United States

                    –how do companies defend themselves in lawsuits brought in the United States?

                     -key Clauses to Consider when drafting dispute resolution clauses in cross border contracts

Corporate Social Responsibility- Business and Human Rights 

Enterprise Risk Management/What are executives of multinationals worried about? 

Yes, this is an ambitious (crazy) list but the goal of the program is to help these experienced lawyers become better business advisors. Throughout the sessions we will have interactive exercises to apply what they have learned (and to keep them awake). So what am I missing? I would love your thoughts on what you think international lawyers need to know about corporate law in the US. Feel free to comment below or to email me at mnarine@stu.edu. Adios!

It is orientation time for West Virginia University College of Law, and I am sure other law schools around the country. If not, it’s coming soon. I always like the buzz of the new students returning to the building, though it is a little bittersweet as the time I had for other projects is clearing nearing the end. All in all, though, I miss the students and the activity, so I’m happy the new year is getting ready to start. 

The combination of excitement and trepidation (if not fear) seems to be what stands our to me the most. It makes sense. Law school is a big undertaking, and it’s not easy.  And it can be hard because it can be challenging both academically and socially.  As my wife has noted, “Law school can be more like high school than high school.”  (I had a distinct advantage in skipping a lot of that because we were married when we started law school.)

To that end, here are my suggestions, based on the promises I made to myself when I left my job and went back to law school. Give it a try (and I welcome additions to the list in comments.)

I promise: 

(1) To read everything assigned.  Really. Not like undergrad, but actually read it all.  Then read it again. And again if I need to.

(2) To be honest with myself about whether I really understand what I’ m reading so I know if I should read it again. 

(3) To view Black’s Law Dictionary as my friend and use it liberally, rather than guessing at words from context.  

(4) To remember I don’t know Latin very well (and see number 3 above). 

(5) To go to every class — every class — that I am able to attend and participate in that class so that I can learn what I know or don’t know, not to so show what I know (or think I know). 

(6) To recognize that no one class is more important (or easier or harder) than another.  I will not skip Torts or Contracts to work on my Legal Writing memo.  It all needs to happen. 

(7) To do my best to get enough sleep. 

(8) To remember that everyone has a story and not assume I know it. 

(9) To be friendly and build relationships so that the community I know is a community I want. 

(10) To do my best work and know that my real competition is myself, so that when I finish an exam or paper, even though I don’t know how well I did, I will know I did everything I could to do well. As John Wooden said, “Don’t measure yourself by what you have accomplished, but by what you should have accomplished with your ability.”

The law school in the state next door to mine is hiring faculty. Their football team isn’t as good as ours, but it’s a pretty good law school in spite of that deficiency. Here’s the listing:

THE UNIVERSITY OF IOWA COLLEGE OF LAW anticipates hiring several tenured/tenure track faculty members and clinical faculty members (including a director for field placement program) over the coming year. Our goal is to find outstanding scholars and teachers who can extend the law school’s traditional strengths and intellectual breadth. We are interested in all persons of high academic achievement and promise with outstanding credentials. Appointment and rank will be commensurate with qualifications and experience. Candidates should send resumes, references, and descriptions of areas of interest to:  Faculty Appointments Committee, College of Law, The University of Iowa, Iowa City, Iowa  52242-1113.

THE UNIVERSITY OF IOWA is an equal opportunity/affirmative action employer. All qualified applicants are encouraged to apply and will receive consideration for employment free from discrimination on the basis of race, creed, color, national origin, age, sex, pregnancy, sexual orientation, gender identity, genetic information, religion, associational preference, status as a qualified individual with a disability, or status as a protected veteran.

As I continue my (futile?) quest to exhaust my electronic reading pile before the fall semester begins, I recently read a nice article on business lawyering: Praveen Kosuri, Beyond Gilson: The Art of Business Lawyering, 19 LEWIS & CLARK L. REV. 463 (2013), also available on SSRN here.

Kosuri asks what distinguishes great business lawyers, and develops a three-tiered pyramid of the skills that transactional business lawyers need. At the bottom of the pyramid are what Kosuri calls foundational skills: reading and understanding contracts; research and drafting; financial literacy; and a basic knowledge of business law. The next level of the pyramid, which Kosuri calls transitional skills, includes negotiation; structuring deals; risk management; and transaction cost engineering. The top level of the pyramid, which Kosuri calls optimal skills, includes understanding business; understanding people; problem-solving; and advising.

Kosuri then considers who would be best at teaching each of those categories of skills and how to teach them. I don’t agree with everything he says, but the article is insightful and certainly worth reading.

Here’s the abstract:

Thirty years ago, Ronald Gilson asked the question, “what do business lawyers really do?” Since that time legal scholars have continued to grapple with that question and the implicit question of how business lawyers add value to their clients. This article revisits the question again but with a more expansive perspective on the role of business lawyer and what constitutes value to clients.

Gilson put forth the theory of business lawyers as transaction cost engineers. Years later, Karl Okamoto introduced the concept of deal lawyer as reputational intermediary. Steven Schwarcz attempted to isolate the role of business lawyer from other advisors and concluded the only value lawyers added was as regulatory cost managers. All of these conceptions of business lawyering focused too narrowly on the technical skills employed, and none captured the skill set or essence of the truly great business lawyer. In this article, I put forth a more fully developed conception of business lawyer that highlights skills that differentiate great business lawyers from the merely average. I then discuss whether these skills can be taught in law schools and how a tiered curriculum might be designed to better educate future business lawyers.