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The NBA’s handling of what the NBA concluded was Donald Sterling’s now-infamous, racist-language-laden phone call with V. Stiviano has generated a lot of commentary (including my own).  As one might expect, the incident has led to some oft-repeated assertions that are not quite right.  So, in taking a break from my grading, I thought I’d deal with a couple of those issues right now. 

To start, if Sterling is forced to sell the Clippers, the NBA and the other team owners are not “taking” anything away from him that he has a right to keep.  He is an owner subject to an agreement that, according to NBA Commissioner Adam Silver, allows the league to force Sterling to sell upon a three-fourths vote of other league owners.  As such, the league has, and has always had, the power to decide if Sterling would be allowed to own a team.  (Why the league owners didn’t act twenty years ago is a legitimate question, but one for another day.)

 That Sterling can be forced to sell should not be news to lawyers, at any rate.  This case reminds me of Lawlis v. Kightlinger & Gray, 562 N.E.2d 435 (Ind. App. 4th Dist. 1990). The case is taught in many Business Organizations courses. In that case, Lawlis was a partner the Kightlinger & Gray law firm. At some point, his alcoholism became a problem, and eventually he told the partners of his issues. Lawlis and his partners reached an agreement about how to move forward (one with a “no-second chances” provision).  Lawlis got things together for a bit, then returned to drinking, and he was given a second chance.  Lawlis apparently got sober and eventually insisted the firm should increase his partnership participation.  Instead, the firm decided to expel him by a 7-to-1 vote (Lawlis was the sole vote against expulsion).  Lawlis sued. 

The court was not convinced, and I would hope any court would look the same way at a vote to remove Sterling as an NBA owner. Even if they needed cause, I would opine that the league has it, but the likely don’t need it.  The Lawlis court explained: 

All the parties involved in this litigation were legally competent and consenting adults well educated in the law who initially dealt at arm’s length while negotiating the . . .  agreements here involved. At the time the partners negotiated their contract, it is apparent they believed . . . the “guillotine method” of involuntary severance, that is, no notice or hearing, only a severance vote to terminate a partner involuntarily need be taken, would be in the best interests of the partnership. Their intent was to provide a simple, practical, and above all, a speedy method of separating a partner from the firm, if that ever became necessary for any reason. We find no fault with that approach to severance.

 Where the remaining partners in a firm deem it necessary to expel a partner under a no cause expulsion clause in a partnership agreement freely negotiated and entered into, the expelling partners act in “good faith” regardless of motivation if that act does not cause a wrongful withholding of money or property legally due the expelled partner at the time he is expelled.

Lawlis,562 N.E.2d at 442-43.

Some have lamented that Sterling will still be a rich man from this, no matter what.  That is true, and the NBA has no way to change that.  Sterling must be properly compensated if he were forced to sell the team. But that’s the point.  In America, Sterling (like anyone else) is permitted (within the bounds of the law) to say racist and misogynist things and be a generally awful person without anyone taking away property.  On the other hand, it appears Sterling agreed to buy a team in a league with an agreement that has a guillotine clause that allows the league to force him to sell.  So be it.

Here are five other related points worth noting (at least, I think so), even if they are not as business-law focused. Click below for more.

Ed Whelan at National Review Online (h/t: Prof. Bainbridge) asks, in light of a recent Fourth Circuit opinion, “Will those who (wrongly) think that for-profit corporations are incapable of exercising religion for purposes of RFRA object as vigorously to the concept that for-profit corporations can have a racial identity for purposes of Title VI? If not, why not?”

I have been following the Hobby Lobby case with interest, though I am just delving into its depths now.  After starting through the various amicus briefs, my initial reaction is that the law has not evolved to where it needs to be with respect to protecting those engaging in the widespread use of entities.  As is often the case, my initial reaction is that the answer to Mr. Whelan’s question is somewhere in the middle: I think for-profit corporations are capable of exercising religion under RFRA, but in this case I don’t see the necessary substantial burden, at least when balanced with an individual’s right to make such decisions, to carry the day. (Reasonable minds can disagree on this, but that’s my take). 

Taking a broader look, though, view entities should be able to take on the race, gender…

This article popped up from the local paper (home of internet sensation Marilyn Hagerty) serving the area of my prior instituion: 

Committee recommends no liquor license for Rumors bar in Grand Forks

The Grand Forks City Council Service/Safety Committee recommended Tuesday that the city deny a liquor license transfer for Rumors bar in Grand Forks.

The committee originally recommended the full council deny the license earlier this month because of the previous felony charges against Blake Bond, Jamestown, N.D., one of the partners in Sin City LLC, the applicant of the license.

The council then sent the issue back to the committee, but when representatives from Sin City failed to show up at Tuesday’s meeting, the committee voted to recommend denying the license again. . . . .

A quick note for the reporter, who wouldn’t necessarily know this:  LLCs don’t have partners. They have members.  So, the more accurate statement would be that Mr. Bond “is one of the members of Sin City, LLC.”  The North Dakota Limited Liability Company Act definitions provision explains that:

“Member” means a person, with or without voting rights, reflected in the required
records of a limited liability company as the owner

…

Right? 

I understand that I may be one of the few people who seems to actually care about such a thing, but it seems to me courts really should be careful about their descriptions of limited liability entities.  I have written about this before (here, here, and here), but it continues to frustrate me.  

One of the things that got me thinking about this again (but let’s be honest, it seems I am always thinking about this) is a post over at The Conglomerate.  There, Christine Hurt (who, to be clear, is a lot smarter and more knowledgeable than I) discusses the Illinois governor’s interest in generating more jobs by shifting to “the $39 limited liability company.”  In her post, she makes a couple references to incorporation in the context of LLC formation.  But, in fairness, that’s a blog post, and I can’t claim that I have always been as precise as I should be in my blog writing, either.  

Courts, however, should be more careful.  The U.S. Court of Appeals for the Ninth Circuit, for example, loves to call limited liability companies “limited liability corporations” in their cases.  Take, for example, CarePartners, LLC v. Lashway, 545 F.3d…

Here in West Virginia, it’s exam time for our law students.  For my Business Organizations students, tomorrow is the day.  For students getting ready to take exams, and for any lawyers out there who might need a refresher, the Kentucky Supreme Court provides a good reminder that LLCs are separate from their owners, even if there is only one owner.  

Here’s a basic rundown of the case, Turner v. Andrew, 2011-SC-000614-DG, 2013 WL 6134372 (Ky. Nov. 21, 2013) (available here):   In 2007, an employee of M&W Milling was driving a feed-truck owned by his employer.  A movable auger mounted on the feed-truck swung into oncoming traffic and struck and seriously damaged a dump truck owned by Billy Andrew, the sole member of  Billy Andrew, Jr. Trucking, LLC, which owned the damaged truck.  Andrew filed suit against the employee and M & W Milling  claiming personal property damage to the truck and the loss of income derived from the use of damaged truck.  Notably, the LLC was not a named plaintiff in the lawsuit.

Hey issue spotters: check out the last line of the prior paragraph. (Also: a bit of an odd twist is the Andrew chose not to respond to discovery requests, though…

Early this month, the United States
District Court for the Middle District of
Pennsylvania decided Gentex Corp. v. Abbott, Civ. A. No. 3:12-CV-02549,  (M.D.Pa. 10-10-2013).  The outcome of the case is not really objectionable (to me), but some of the
language in the opinion is. As with many courts, this court conflates LLCs and
corporations, which is just wrong.  The
court repeatedly applies “corporate” law principles to an LLC, without
distinguishing the application.  This is
a common practice, and one that I think does a disservice to the evolution of
the law applying to both corporations and LLCs.

I noted this in a Harvard Business Law Review Online article a while back:

Many courts thus 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).

To be…