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A reminder that Emory’s 2021 conference on transactional law and skills education is next Friday, June 4, 2021. It is virtual and registration is only $50. Register here.

Today, I'm submitting a guest post by Professor Jen Randolph Reise of Mitchell Hamline School of Law.  On Friday the 11th, I'll post my reflections from the Emory conference. Jen and I have bonded over our mission to bring practical skills into the classroom. Her remarks are  below:

I’m looking forward to hearing from many leaders in transactional legal education, including keynote speakers Joan MacLeod Heminway, Marcia Narine Weldon, and Robert J. Rhee on the theme of “Emerging from the Crisis: Future of Transactional Law and Skills Education.” Marcia will also be talking about her experience launching a transactional program at Miami, joined by three of her adjunct professors.

For my part, I’ll be presenting a Try-This session sharing how I have used exercises that integrate key technological resources and techniques into teaching doctrinal courses. I’ve written in this blog before in praise of practice problems, especially in the asynchronous or flipped classroom. These exercises take that one step farther by creating a self-paced, guided discovery and low-stakes practice of some skills…

Limited liability companies (LLCs) are often viewed as some sort of a modified corporation.  This is wrong, as LLCs are unique entities (as are, for example, limited partnerships), but that has not stopped lawyers and courts, including this nation's highest court, from conflating LLCs and corporations.  

About four and a half years ago, in a short Harvard Business Law Review Online article, I focused on this oddity, noting that many courts

seem to view LLCs as close cousins to corporations, and many even appear to view LLCs as subset or specialized types of corporations. A May 2011 search of Westlaw’s “ALLCASES” database provides 2,773 documents with the phrase “limited liability corporation,” yet most (if not all) such cases were actually referring to LLCs—limited liability companies. As such, it is not surprising that courts have often failed to treat LLCs as alternative entities unto themselves. It may be that some courts didn’t even appreciate that fact. (footnotes omitted).

I have been writing about this subject again recently, so I decided to revisit the question of just how many courts call LLCs “limited liability corporations” instead of “limited liability companies.”  I returned to Westlaw, though this time…

A recent unanimous decision from the Supreme Court of the United Kingdom, Anson v. Commissioners for Her Majesty’s Revenue and Customs [2015] UKSC 44, determined that a U.S. limited liability company (LLC) formed in Delaware will be treated for U.K. tax purposes as a partnership, and not a corporation. This is a good thing, as it provides the LLC members the ability to reap more completely the benefits of the entity's choice of form.

What is not so good is that the court left unaddressed a lower court determination as follows, was quoted in para. 47: 

“Delaware law governs the rights of the members of [the LLC] as the law of the place of its incorporation, and the LLC agreement is expressly made subject to that law. However, the question whether those rights mean that the income of [the LLC] is the income of the members is a question of domestic law which falls to be determined for the purposes of domestic tax law applying the requirements of domestic tax law ….” (para 71) (emphasis added)

An LLC does not have a place of incorporation!  It has a place of formation.  Here is the link to Delaware's Certificate of…

Over at The Conglomerate, Usha Rodrigues says, "Larry Ribstein was wrong." Usha argues that she's right to teach LLCs at the end of the course, and Larry was of the mind that LLCs should play a more prominent role in the business entities course.  

For my teaching, I'm with Larry on this, though I am also of the mind that Usha (and other teachers) may have different goals, so taking another tack is not wrong.  I'm pretty sure we're all better teachers when we are true to ourselves and our thinking.  For me, anyway, I am, without a doubt, at my worst in the classroom (and probably out) when I try to mimic someone else. 

So here's how Usha explains her thinking:

I don't leave LLCs til the end of the semester because I think they're unimportant.  It's because the cases are so damn thin.  It's still such a new form, I just don't see much there there.  Most of them wind up being trial courts who read the statute in completely stupid ways.  Blech.

 

So I teach corporations and partnerships emphasizing fiduciary duty, default vs. mandatory rules, and the importance of the code.  In fact,

…

I continue to document how courts (and lawyers) continue to conflate (and thus confuse) LLCs and corporations, so I did a quick look at some recent cases to see if anything of interest was recently filed. Sure enough, there are more than few references to "limited liability corporations" (when the court meant "limited liability companies."  That's annoying, but not especially interesting at this point.  

One case did grab my eye, though, because because of the way the court lays out and resolves the plaintiffs' claim.  The case is McKee v. Whitman & Meyers, LLC, 13-CV-793-JTC, 2014 WL 7272748 (W.D.N.Y. Dec. 18, 2014).  In McKee, theplaintiff filed a complaint claiming several violations of the Fair Debt Collection Practices Act against defendants Whitman & Meyers, LLC and Joseph M. Goho, who failed to appear and defend this action, leading to a default judgment. After the default judgment was entered, defense counsel finally responded.  

This case has all sorts of good lessons.  Lesson 1: don't forget that all named parties matter.  Get this: 

Defense counsel admits that he was under the mistaken assumption that default was to be taken against the corporate entity only. See Item 17. However, default was entered

…

Okay, so limited liability is probably not going away, though it appears that some would have it that way. "Eroding" is probably a better term, but that's less provocative.  

In a piece at Forbes.com Jay Adkisson has posted his take on the Greenhunter case  (pdf here), which I wrote about here. Mr. Adiksson is a knowledgeable person, and he knows his stuff, but he seems okay with the recent development of LLC veil piercing law in a way that I am not. For me, many recent cases similar to Greenhunter are off the mark, philosophically, economically, and equitably, in part because they run contrary to the legislation that created things like single-member LLCs.

One of my continuing problems with this case (as is often my problem with veil piercing cases), is that there are often other grounds for seeking payment other than veil piercing.  Conflating veil piercing with other theories makes veil piercing and other doctrines murkier. More important, they make planning hard.  Neither of these outcomes is productive.  

In Greehunter, Adkisson notes the court’s determination of the “circumstances favoring veil piercing.”  To begin:

+ There was a considerable overlap of the LLC’s and Greenhunter’s ownership,

…

In Business Organizations today, I spent some time reviewing the differences between varying entity types.  I made the point that courts often make mistakes on this front, especially with LLCs and corporations, and it reminded me I needed to follow up on my own pet LLC protection project. 

Over the years, I have taken more than a passing interest in how often courts refer to (and ultimately treat) LLCs. I have this thing where I think LLCs are not treated as well doctrinally as they should. In February of this month, I made the argument,  Courts Should Get the Doctrinal Distinction Between LLCs and Corporations, and I have made other similar arguments (here, here, and here).  

As part of this I committed to noting when courts refer to LLCs as "limited liability corporations" and not "limited liability companies," as they should.  Almost one year ago, I noted this continuing theme, repeating the search I did for a 2011 article, where I found in a May 2011 search of Westlaw’s “ALLCASES” database that there were 2,773 documents with the phrase “limited liability corporation," in describing an LLC. (That article is here.)  Things are not getting much better.

(Note:  This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides.  The previous installment can be found here (NLPB) and here (BLPB).)

What It Is:   So now that we’ve told you (in Part I) what the benefit corporation isn’t, we should probably tell you what it is.  The West Virginia statute is based on Model Benefit Corporation Legislation, which (according to B Lab’s website) was drafted originally by Bill Clark from Drinker, Biddle, & Reath LLP.  The statute, a copy of which can be found, not surprisingly, at B Lab’s website, “has evolved based on comments from corporate attorneys in the states in which the legislation has been passed or introduced.”  B Lab specifically states that part of its mission is to pass legislation, such as benefit corporation statutes.

As stated by the drafter’s “White Paper, The Need and Rationale for the Benefit Corporation: Why It is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public” (PDF here), the benefit corporation was designed to be “a new type of corporate legal entity.”  Despite this claim, it’s likely that the entity should be looked at as a modified version of traditional corporation rather than at a new entity. 

To read the rest of the post, please click below. 

The Louisiana Supreme Court recently denied the state's attempt to collect sales tax on the sale of an RV to a Montana LLC. Thomas v. Bridges, No. 2013-C-1855 (La. 2014).  The LLC was formed for the sole purpose of avoiding RV sales tax (saving the buyer as much as $47,000).  The state argued that the LLC veil should be pierced and the tax should be assessed to the LLC's sole member claiming fraud. The court disagreed, explaining that "taking actions to avoid sales tax does not constitute fraud. Although tax evasion is illegal, tax avoidance is not." 

There were problems with the state's attempt from the outset.  First, the sale occurred  in Louisiana, but the RV was housed in Mississippi.  Even if the LLC were to be disregarded, Mississippi, it seems to me, would be the state that should be asserting the claim.  Second, the state attempted to collect from the LLC's member before ever trying to collect from the LLC.  Thus,  the veil-piercing claim was being used as a post hoc justification for the attempt to recover from the LLC's member and was not properly raised below.  

This "legal loophole" (which is redundant because if it's a loophole, it's legal and…

The Supreme Court of Appeals of West Virginia recently had the opportunity to address the role (if any) of veil piercing in West Virginia LLCs.  The state statute is silent on the subject, but the court determined veil piercing was there, anyway.  It was close, though, as the West Virginia Circuit Court took on the following question with the corresponding answer: 

Does West Virginia's version of the Uniform Limited Liability Company Act, codified at W. Va. Code § 31B el seq., afford complete protection to members of a limited liability company against a plaintiff seeking to pierce the corporate veil?

ANSWER: YES

 Kubican v. The Tavern, LLC, 2012 WL 8523515 (W.Va.Cir.Ct.)

Under West Virginia LLC law:

[T]he debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, are solely the debts, obligations and liabilities of the company. A member or manager is not personally liable for a debt, obligation or liability of the company solely by reason of being or acting as a member or manager. . . . The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company

…