Ward on Iowa Limited Liability Company Law

Interesting PLR Involving LLCs and S Corps

IRS Private Letter Ruling 200927014 (March 20,2009), presents an interesting fact pattern.   The two individuals who own all of the shares of X, an S corporation, will each transfer their shares to two LLCs. They will manage their LLCs and retain all rights to profits, losses and distributions.  But each of them will also transfer certain management rights to Y.  It is not clear whether Y is an individual or an entity.  These rights include the right to participate in management of the LLCs, the right to vote on their business activities, merger or sale of substantially all of their assets, borrow money, make distributions, liquidate the LLCs, amend their operating agreements, and transfer their interests to others.  Y would also appoint new managers if the shareholders die while acting as managers. All of these actions would indirectly affect the S corporation.  Y is not a member of either LLC.

The IRS held that the transfer of the S corporation's shares to the LLCs and the role of Y in the management of the LLCs would not cause the corporation to lose its S corporation status. For tax purposes Y is not considered a member of either LLC and each LLC will be treated as owned, respectively, by the two former shareholders of X.  The shares of X are treated as owned directly by the two individuals.  The LLCs will be disregarded entities for tax purposes.

It appears from the ruling that Y will participate in management but not have sole responsibility for management.  It is not clear if Y has control, but the tenor of the ruling suggests that the outcome was not be dependent on control, but on the determination that for tax purposes membership status is based solely on the right to the economic interest in the LLC.

-Marc Ward

A Way Around the Successor Liability Doctrine?

Our sagging economy is resulting in a lot of business foreclosures.  This will mean a lot of litigation and quite a bit of new law.  Tredit Tire & Wheel Co. Inc. v. Regency Conversions, LLC et al, 2009 US Dist. LEXIS 50323 (E. D. Mich, June 12, 2009) is one example.

Tredit Tire supplied specially designed and manufactured tires to Regency for the conversion vans it created.  Regency was owned by TAG, its sole member.  TAG defaulted on its loan from WB Automotive Holdings, Inc. ("WBAH").  WBAH foreclosed and became the owner of all of TAG's assets including its membership in Regency.

WBAH loaned Regency $1 million and replaced its president with its own employee.  Its efforts to save Regency failed, however, and Regency ceased making payments to its vendors.

One of those vendors was Tredit Tire.  It sued Regency and WBAH for breach of contract alleging that it was holding $350,000 of inventory made specifically for Regency and was owed $195,000 for tires already delivered to Regency.  It sued WBAH on several theories including piercing the corporate veil.

The piercing claim was based on the fact that WBAH exercised control over Regency (replacing the president with its own employee) and made all of the tactical and strategic decisions for the company, including the decision to liquidate Regency and which vendors to pay and which to stiff.

WBAH contended that the Tredit Tire allegations were defeated by the successor liability doctrine which holds that a successor to another company's assets does not assume responsibility for its liabilities unless done so expressly or implicitly.

The court applied Michigan law which will pierce the corporate veil if (1) the subsidiary is a mere instrumentality of its parent, (2) the parent committed fraud or wrong, and (3) the plaintiff suffers an unjust loss.

The court concluded that the allegations, if proven, could show that Regency was a mere instrumentality of WBAH due to the control the parent asserted over its new subsidiary.  It also held that breach of contract was a sufficient "wrong" to meet the second test.  Finally, the third prong, an unjust loss, could be proven if the facts bear out plaintiff's contention that it was led to believe that its debts would be repaid by Regency once WBAH took over.

The defendant's contention that the successor liability doctrine should apply was turned aside by the court.  It found that the allegations, if proven, would mean that the piercing the corporate veil doctrine tests were met and liability could be imposed on WBAH.  In effect, the court said that the piercing doctrine trumps the successor liability doctrine.

This is dangerous ground for creditors.  If a creditor takes over 100% ownership of a debtor's subsidiary, who else is to make the tactical and strategic decisions for the subsidiary but its only owner?  A lot of the focus of this case suggests that installing its own employee as president of Regency was a mistake.  An outsider might have been a better choice.  But what if the outsider doesn't do what the sole owner expects?  Will replacing him or her also result in liability?  Scary stuff.

-Marc Ward

Was Time or Price Really "Of the Essence"?

Forgive me for being cynical, but in the case that follows it seems to me that price was the issue, not timely performance.

In High Development Corp. v. Star of the West Company, 2009 Iowa App. LEXIS 561 (June 17, 2009) the Iowa Court of Appeals held that "time is of the essence" provisions in real estate contracts must be read literally and restrictively.  High Development agreed to buy from Star of the West property located at 1101 Old Marion Road in Cedar Rapids.  The closing was scheduled for August 30.  High Development was not able to close on the 30th, but did tender payment the following day.  Star of the West refused to close on the 31st and kept the $5,000 down payment.  Within two weeks it had entered into another contract to sell the property to someone else.

High Development sued for specific performance and attorney fees.  The real estate contract provided that if the buyer failed to perform the seller may forfeit the contract under Iowa Code Chapter 656 or proceed by an action at law or equity.  Star of the West did neither.

The trial court concluded that the forfeiture clause in the contract was controlling and the sole remedy of the seller.  Because the buyer tendered the consideration the next day the ability of the seller to forfeit the contract was cut off.  The lower court granted the request for specific performance and awarded attorney fees to the buyer.  The court of appeals reversed.

The appellate court first concluded that Iowa Code Section 656.1 does not mean what it says when it states that the buyer's rights under a real estate contract if it fails to perform shall "not be forfeited or canceled except as provided in this chapter."  Statutory forfeiture is not the only remedy available to the seller.  The court interpreted Chapter 656 to apply to real estate installment contracts where the buyer has an equitable interest in the property as a result of having made several installment payments. In the case of a "one-time closing," according to the court of appeals, Chapter 656 is just one of several remedies available to a seller notwithstanding the language of 656.1.  The court fails to explain the difference between several installment payments and one down payment. 

In support of this conclusion the appellate court cites just one Iowa Supreme Court case.  However, in Passehl Estate v. Passehl, 712 NW 2d 408, 414 (Iowa 2006) the supreme court referred to Chapter 656 as "irrelevant" to the case and in the related footnote said the forfeiture provision "is inapplicable because the arguments in this case do not center on this provision and do not call for a forfeiture of the subject property."  To cite this case as authority for the proposition that statutory real estate foreclosure is just one of several remedies available to a seller in the event the buyer fails to perform is just simply wrong.

After interpreting one provision of the contract and the related Iowa Code provision loosely, the court of appeals shifts gears and interprets "time is of the essence" strictly and narrowly.  The closing date was August 30.  Period.  If buyer missed the date by even a day, which it did, the contract was breached because time was of the essence.  Recall that payment was tendered the very next day.  Seller refused and a couple of weeks later sold to someone else.  If time really was "of the essence" wouldn't seller have taken the money the very next day?  Or did it get wind of a better offer and was happy to "forfeit" the contract on a technical breach?  "Essence" according to my well-worn American Heritage dictionary means "the intrinsic or indispensable properties that identify something."  Subsequent events seem to prove that time was neither intrinsic nor indispensable to this deal.

The trial court should have been affirmed.

-Marc Ward

Attorney-Client Privilege and the Independent Contractor

In a case more interesting for its facts than the law, the US District Court for the Middle District of  Alabama recently considered whether the attorney-client privilege extended to an independent contractor of the client.  Hope for Families v. Warren, 2009 US Dist. LEXIS 46009 (April 21, 2009).  It's a good refresher and relies particularly on an Eight Circuit case for its ruling.  In re Bieter Co., 16 F.3d 929 (8th Cir. 1994).  The general answer is yes it can.

Now for the facts.  The independent contractor was a former state senator and lieutenant governor hired by a bingo parlor to (1) secure a document signed by the county sheriff authorizing Lukcy Palace to operate a bingo parlor (2) find an opponent to run against the sheriff and (3) run the campaign.  Apparently the lawsuit involved claims that the sheriff was conspiring with others to create a bingo monopoly in the county.  Think big Macon.  Sheriff Warren was re-elected.

-Marc Ward

A Pint is a Pound the World Around...

... and so is a deal.  That old saw was taught to me by a client years ago.  I haven't forgotten it, but sometimes businesspersons do.  If you ever have a client that feels he or she has been slighted by another party when the apparent "gentlemen's agreement" turns to nothing does your client have legal recourse?  In Iowa, maybe not.  But in Maryland, yes.

Take the case of Giant Food, Inc. v. Ice King,Inc., 536 A. 2d 1182 (Md. App. 1988).  The court held that despite the lack of a contract between the parties Ice King could recover damages for negligent misrepresentation by Giant Food.  For several months Ice King and Giant Food discussed the possibility of Ice King supplying ice to Giant Food.  All along, unbeknownst to Ice King, Giant Food was planning to build its own ice plant.  Ice Food believed it had a commitment to supply ice based on 30 or 40 communications between the parties, including authorization by Giant for Ice King to inform its bank of their "deal."

The court concluded that in light of the more than casual response of Giant Food "a businessman in [the Ice King representative's] shoes might have reasonably relied on the informal 'deal or gentlemen's agreement.'" In fact, Ice King had "the right to rely upon Giant, and Giant owed a duty to give the correct information."  When Ice King learned about the possibility of a new Giant ice plant and attempted to learn the truth the court held that it was incumbent on Giant to provide the "true facts."  When instead the Giant representative said "everything was all right" the assurance "was, at the very minimum, negligent."

So the next time a client believes he had a deal and was double-crossed, remember this case and supporting cases from New York and Prosser and Keeton on the Law of Torts, Section 107 (1984) and the Restatement (Second) of Torts, Section 552 (1977).*

-Marc Ward

*The research of Allison Miller, a second year law student at the University of Iowa and Dickinson summer associate, is the source of this case and analysis.

Members of 490A LLCs May Owe Fiduciary Duties to Each Other

In Bushi v. Sage Healthcare PLLC, 203 P. 3rd 694 (Idaho 2009), the Idaho Supreme Court held that members of Idaho LLCs owe one another fiduciary duties.  The court reached this conclusion even though the applicable Idaho LLC Act was silent on the issue (like Iowa, Idaho is transitioning from an original LLC statute to a new one, the latter providing that members do owe each other the fiduciary duties of care and loyalty).

These fiduciary duties can be breached even if the members act within the letter of the operating agreement.  In Bushi, the majority of the members, all save Bushi himself, amended the operating agreement to allow a member to be dissociated by majority vote and then promptly removed Bushi by a similar vote.  They contended that they had good reason to dissociate him because he was dating an employee and had used a company line of credit to pay personal expenses.  Bushi argued that he was dissociated in order to advance their personal financial interests.  Because taking an action that improperly advances their financial interests can be a breach of a fiduciary duty even if technically allowed by the operating agreement, the court concluded that a material factual issue remained that negated the entry of summary judgment.

The case also mentions a provision in the operating agreement that lawyers should consider inserting into their forms.  The operating agreement stated that "no Member shall have any vested rights in the [operating agreement] which may be modified through an amendment to the [operating agreement]."  This provision negated Bushi's assertion that he was denied the benefits of the original operating agreement.  In its original form the operating agreement did not permit the members to essentially expel another member.

-Marc Ward

Reverse Piercing Used to Defeat Fraud Claim

In a relatively novel approach, defendants in a bankruptcy proceeding asserted reverse piercing as a defense to a claim of fraudulent conveyance brought by the bankruptcy trustee.  The trustee was attempting to cause a third-party to pay $450,000 to the estate. In re Freelander Capital Management Corp., 2009 Bankr. LEXIS 1195 (US Bkrptcy. Ct., SD Fla, April 29, 2009).

The relevant facts are these.  On March 14, 2001 the debtor corporation loaned Designs, Inc. $500,000.  The debtor corporation was wholly-owned by Burton Freelander.  The sole shareholder of Designs was the debtor's second ex-wife.  On April 11, 2001 the ex-wife withdrew $500,000 from a Designs account and deposited the money in a joint account owned by Burton and this ex-wife.  A short time later Burton transferred $50,000 to the debtor's account.  In a nice twist, Burton used $375,000 of the money to pay off a judgment involving his first ex-wife.  All parties agreed that the second ex-wife thought the loan was from Burton and repaid to Burton.

The debtor filed Chapter 7 bankruptcy in 2003.  All involved agree that the second ex-wife never withdrew funds from the joint account, never deposited any more funds into the account, and believed the payment of the $500,000 was a repayment of the loan.  Nevertheless, the trustee asserted that the payment was a fraudulent conveyance and the second ex owed $450,000 to the debtor corporation.

The defendants, the second ex-wife and her corporation, Designs, Inc., asserted the doctrine of reverse veil piercing as their defense, claiming that the payment to the individual joint account was payment to the debtor corporation.  The bankruptcy court agreed.

Applying Connecticut law because the debtor was a Connecticut corporation, the court found that there was such a unity of interest between Burton and the debtor and dominance by Burton over the corporation that the independence of the corporation had ceased to exist.  The court further found that applying the doctrine of reverse piercing would achieve an equitable result and avoid unfair prejudice to the second ex-wife.  The point being that she had already made the payment, she would not be retaining anything of value, and the loss to the creditors (who had already received restitution or had weak claims) was outweighed by the hardship to her if she had to make a second payment of $450,000.

Key to the court's decision, it appears, is the fact that the trustee had little use for the money given the status of the creditors' claims.  Had there been substantial creditors with strong claims for the funds, the equities of the case might have caused a different result.

This as another example of the willingness of the courts to ignore the corporate form when it suits the equities of the situation.  Is that what the law is supposed to be about?

- Marc Ward

Fooling with the Shareholder Franchise Could Invite Judicial Scrutiny

As you all know, loan agreements include financial and non-financial covenants imposed on the borrower.  Failure to maintain a covenant leads to an event of default.  A financial covenant might be maintaining a certain debt-to-equity ratio.  A non-financial covenant might be preventing a change in control of the board of directors.  Changing the make-up of a board of directors, is of course, the right of the shareholders.  When a board of directors agrees that such a change could trigger a default under a loan it may be impermissibly intruding on the shareholders' franchise.

Here is what Vice Chancellor Lamb had to say on the subject in San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc., 2009 WL 1337150 (May 12, 2009):

“This case does highlight the troubling reality that corporations and their counsel routinely negotiate contract terms that may, in some circumstances, impinge on the free exercise of the stockholder franchise. In the context of the negotiations of a debt instrument, this is particularly troubling, for two reasons. First, as a matter of course, there are few events which have the potential to be more catastrophic for a corporation than the triggering of an event of default under one of its debt agreements. Second, the board, when negotiating with rights that belong first and foremost to stockholders (i.e., the stockholder franchise), must be especially solicitous to its duties both to the corporation and to its stockholders. This is never more true than when negotiating with debtholders, whose interests at times may be directly adverse to those of the stockholders. Outside counsel advising a board in such circumstances should be especially mindful of the board’s continuing duties to the stockholders to protect their interests. Specifically, terms which may affect the stockholders’ range of discretion in exercising the franchise should, even if considered customary, be highlighted to the board. In this way, the board will be able to exercise its fully informed business judgment.”

The case is on appeal.

-Marc Ward

Some Black Letter Law on Claims Against Directors

An opinion last week issued by the US District Court for the Northern District of Illinois provides a nice primer on claims that can be brought against directors, in this case directors of a wholly-owned subsidiary.  Seidel v. Byron, et al, 2009 US Dist LEXIS 40712 (May 12, 2009).

Seidel, the bankruptcy trustee for Mosaic Data Solutions brought an action against the former directors and officers of the debtor for breach of fiduciary duty and similar claims.  The trustee alleged that improper management of the company by the directors and officers led to its insolvency.  Specifically, he claimed that pledging the assets of Mosaic Data for no consideration so that its parent corporation could obtain financing in its bankruptcy was a breach of their fiduciary duty.

This is what you will glean from the case:

1.    Wholly-owned subsidiaries under Delaware law are expected to operate for the benefit of their parent corporations unless the subsidiary is insolvent.

2.    Under the trust fund doctrine directors of insolvent corporations are liable for the debts of the corporation when they breach their fiduciary duties by improperly distributing the corporate assets.

3.    Corporate creditors cannot file direct actions against directors for breach of fiduciary duties but may bring derivative actions against the directors of insolvent corporations for the breach of such duties (the beneficiary of a derivative action is the corporation).

4.    A motion to dismiss pursuant to the business judgment rule can be overcome if the pleading establishes a "reasonable doubt" about whether the actions of the directors are protected by the BJR.  As you may recall, the business judgment rule protects the actions of a board unless it is proven that the board breached its duty of loyalty, the duty of good faith or the duty of care.  That is, "if directors act loyally and carefully, they are not liable even if the transaction goes awry." (quoting Alliant Energy Corp. v. Bie, 277 F. 3d 916, 918 (7th Cir. 2002))

-Marc Ward

Missouri's Piercing Formulation

The Missouri courts have developed a nice formulation for applying the piercing the veil to corporations and LLCs.  It's a three-part test: (1) A showing of control, complete domination of not only finances, policy and business practices (the alter ego test); (2) a breach of the duty of the controlling party not to use such control to perpetrate a statute or commit a dishonest and unjust act; and (3) the breach was the proximate cause of the plaintiff's injury or unjust loss.  See Carpenters' District Council of Greater St. Louis v. J&J Contractors, LLC, 2009 US Dist LEXIS 36607 (April 29, 2009) quoting Mobius Management Systems, Inc. v. West Physician Search, LLC 175 SW 3d 186, 188-89 (Mo. Ct. App. 2005).

Unfortunately, there is a reference in the Mobius quote to undercapitalization that suggests undercapitalization at the time of the wrong doing may be a breach of this duty.  Such a holding would upset the concept of limited liability.

Although the court doesn't identify it as such, a good example of the application of this formulation to the parent-subsidiary relationship from another jurisdiction can be found in Transition Healthcare Associates, LLC v. Tri-State Health Investors, LLC, 2009 US App. LEXIS 636 (6th Cir. January 9, 2009).

-Marc Ward

Court of Appeals Applies BJR to LLCs

In Terminal Properties, Inc. v. Hampton Propane Terminal, L.C., 2009 Iowa App. LEXIS 231 (March 26, 2009) the Court of Appeals applied the Business Judgment Rule to LLCs formed under Iowa Code Chapter 490A.  The BJR protects corporate boards of directors from liability for their actions if they are disinterested, informed and there is a rationale basis for the actions.  It is not applicable to partnerships.  There probably wasn't much doubt that the rule applied to LLCs in light of the many similarities between the entities (limited liability, often centralized management, perpetual existence) but this case removes all doubt.

This is not important news to 489 LLCs because the BJR was codified in Iowa Code Chapter 489.409(7).

By the way, the trial court used a delightful phrase one will only find in Iowa when he likened the plaintiff's claims of conflict of interest to a "frog calling a garter snake green."  I believe that is the English translation of pari delicto.

-Marc Ward

The Distinction btwn "Company" and "Corporation" is not complicated

Why do so many people including the IRS and now the U S Supreme Court continually refer to unincorporated LLCs as "limited liability corporations"?  To wit:

" As a part of the scheme, respondents invested in various stock warrants through newly created limited liability corporations (LLCs), which are also respondents in this case."

-Justice Scalia, Arthur Anderson LLP v. Carlisle, 2009 US LEXIS 3463 (May 4, 2009)

There is clearly a flaw in the Harvard Law School curriculum.

The Duty of Loyalty and Manifest Unreasonableness

As you may know, Iowa Code 489.409(2) identifies three duties that constitute the duty of loyalty.  It is not an exhaustive list so there may be more, but for now let's leave it at three.  Section 489.110(4) says that so long as it is not "manifestly unreasonable" the duty of loyalty can be eliminated in an operating agreement.  I discussed somewhat tongue in cheek what that means a few months ago.

In a seeming contradiction, Section 489.110(7) prohibits an operating agreement from eliminating a manager's liability for monetary damages for the breach of the duty of loyalty.  But it is no contradiction at all because 110(4) deals with what constitutes a breach of the duty of loyalty and 110(7) concerns the consequences for breaching that which has been defined as a breach of the duty.

When is it "reasonable" to eliminate the duty of loyalty?  Although it is a Delaware corporate law case and not directly on point for LLCs, Sutherland v. Sutherland, 2009 Del. Chancery 46 (March 23, 2009) is instructive.  Sutherland involved a family corporation, a sister sued her two brothers and a cousin who were directors of the family corporation for using corporate funds for personal benefit.  ( I once represented two brothers in defense of breach of duty claims brought by their mother and sister, a very awkward role to play, but I digress).

The directors sought dismissal of the claims because the certificate of incorporation contained a clause they claimed eliminated the duty of loyalty in toto for the directors.  The court rejected that argument because it would "effectively eviscerate the duty of loyalty for corporate directors as it is generally understood under Delaware law."  The court then cited a Delaware corporate law provision very similar to 489.110(7).  But as I said, this type of provision is concerned with the consequences of a breach, not what constitutes a breach. 

But the broader point is this, a blanket elimination of the duty of loyalty didn't work in the context of a Delaware corporation and probably won't work with an Iowa LLC even when that possibility hangs tantalizingly within the framework of 489.110(4).  So don't use a meat cleaver when a scalpel is more effective.  Precise exclusions from the duty of loyalty are more likely to be upheld.

-Marc Ward

Does 489 or 490A Apply to Foreign LLCs?

If you read the transition provisions of Iowa Code 489.1304 regarding the move from 490A (it still applies to LLCs formed before January 1, 2009 until January 1, 2011) to 489 you will not see the word "foreign." 

So let's say you have a client that is a foreign LLC.  It was formed in its home state several years ago and wants to come into the state for the first time.  It asks if it is required to register to do business in this state. 

Do you consult 490A or 489?  It matters because the rules for registering foreign LLCs are different under the two statutes.  For example, owning real property "without more" does not require registration under 490A but owning "income-producing" real property does under 489.

Iowa Code 489.1304 is of no help on its face, but I think it is reasonable to conclude that foreign LLCs coming into this state for the first time in 2009 and 2010 should be treated like newly formed domestic LLCs and 489 should apply.  Foreign LLCs that were in the state before 2009 should be able to continue to rely on 490A until January 1, 2011. 

Of course on January 1, 2011, 490A disappears and a lot of foreign LLCs will be required to register with the state.  An obligation that will probably be honored in the breach.

-Marc Ward

A Troubling Development out of Delaware re Operating Agreements

In Mickman v. Am. Int'l Processing, LLC, 2009 Del. LEXIS 43 (April 1, 2009) the Delaware Chancery Court drew this conclusion in a comparison to corporations: "Based on the flexible and less formal nature of LLCs, it is reasonable to consider evidence beyond the four corners of the operating agreement, where, as here, the plaintiff has presented admissible evidence that, notwithstanding the language of the operating agreement, suggests the parties to that agreement intended to make, and believed they had made, the plaintiff a member of the LLC."

At first blush I thought an integration/merger clause in the operating agreement would solve this or a provision requiring all amendments to be in writing.  The opinion is silent as to whether the operating agreement in this case contained such provisions.  But I am not so sure.  Then I remembered something from law school called the parol evidence rule and thought that should clear things up.  Nope.

In Iowa the parol evidence rule "forbids the use of extrinsic evidence to vary, add to, or subtract from a written agreement." Montgomery Props. Corp. v. Econ. Forms Corp, 305 NW 2d 470, 476 (Iowa 1981).  But this is limited to negotiations or agreements that are prior to or contemporaneous with the written instrument. Garland v. Brandstad, 648 NW 2d 65, 69 (Iowa 2002).

In this case you have an operating agreement that presumably identified two persons as the members of an LLC and extrinsic evidence after the fact (i.e. a tax return) showing three. 

I take exception with the Chancery Court that LLCs are less formal than corporations, less rigid, yes, and certainly more flexible, but in any case no less entitled to application of the same contract rules as apply to corporations.

The reason the Iowa LLC Committee adopted 489.111(4) (there is no comparable provision in the Uniform Act) was to avoid this situation.  Section 111(4) says "An operating agreement in a signed record that excludes modification or rescission except by a signed record cannot be otherwise modified or rescinded."

Is this court saying that such a limitation can be ignored because LLCs are informal organizations and members don't mean what they say in a contract?  I hope not.  It does reinforce in my mind the absolute necessity of restricting amendments to those that are in writing and agreed to by (usually) all of the members.

-Marc Ward

Another Reason to Stay Off the High Seas

Federal Maritime law appears to take an expansive view of the piercing the corporate veil doctrine.  The standard is to pierce the veil when to do so would "achieve an equitable result." Williamson v. Recovery Ltd. P'ship, 542 F.3d 43, 53 (2d Cir. 2008).  Ugh.  So its all about fairness?

In In re Rickmers Genoa Litigation, 2009 LEXIS 30430 (SDNY Mrch 31, 2009), the court applied a very inclusive and loose 15-factor test to determine whether to pierce the veil.  See if you recognize any of your clients here:

"(1) common or overlapping stock ownership between parent and subsidiary; (2) common or overlapping directors and officers; (3) use of same corporate office; (4) inadequate capitalization of subsidiary; (5) financing of subsidiary by parent; (6) parent exists solely as holding company of subsidiaries; (7) parent's use of subsidiaries' property and assets as its own; (8) informal intercorporate loan transactions; (9) incorporation of subsidiary caused by parent; (10) parent and subsidiary's filing of consolidated income tax returns; (11) decision-making for subsidiary by parent and principals; (12) subsidiary's directors do not act independently in interest of subsidiary but in interest of parent; (13) contracts between parent and subsidiary that are more favorable to parent; (14) non-observance of formal legal requirements; (15) existence of fraud, wrongdoing or injustice to third parties."

Ten out of 15 can easily apply to the most innocent of corporate structures.

Now watch how the court applies these factors.  The parentheticals are my commentary:

"Here, the evidence presented raises triable issues as to whether piercing the corporate veil is warranted. The Non-Moving Parties have pointed to the facts that: ESMT is a wholly-owned subsidiary of ESM Group and may have been created to circumvent U.S. import laws or obtain lower prices for certain materials previously imported by ESM Group ("circumvent" is a loaded term, how about minimize impact?  And lower prices are bad?); ESM Group directors sit on ESMT's board, sometimes constituting the entire ESMT board (not uncommon in small companies, particularly Iowa bank holding companies); ESM Group provides substantial financing to ESMT (a common reason to create a holding company is to raise capital); ESM Group designed ESMT's plant to manufacture SS-89 and supplied the capital, machinery, and expertise necessary to start the operation (sharing resouces); ESM Group developed the specifications for SS-89, gave that formula to ESMT (capital contribution), and instructed ESMT personnel on how to make SS-89; ESM Group conducts oversight of ESMT production facilities and procedures (sharing resources again); a significant majority of ESMT's output is sold to ESM Group, and ESM Group fulfills its SS-89 needs from ESMT (division of labor); although apparently sufficiently capitalized, ESMT's net profits were comparatively small in 2004 and 2005 (bad times?  poor management?). This evidence tends to show that ESMT was transacting ESM Group's business rather than its own business. Taking this evidence as a whole, it is sufficient to create a triable issue as to whether veil piercing is warranted in this case."

These cases give me the willies.

-Marc Ward

Delaware Refines the Breach of the Duty of Loyalty

In Lyondell Chemical Company v. Ryan, 2009 Del. LEXIS 152 (March 25, 2009) the Delaware Supreme Court clarified what it means for directors to breach their duty of loyalty by failing to act in good faith.  Recent decisions on this issue include In re Walt Disney Co. Deriv. Litig., 906 A.2d 27 (Del. 2006) and Stone v. Ritter, 911 A2d 362 (Del. 2006).

Lyondell concerns the sale of the company, at the time the third largest independent publicly traded chemical company in North America, to Basell AF, a private Luxembourg company.  Basell first made an overture to the Lyondell in April 2006; an overture that was rebuffed by the Lyondell CEO out of hand.  About a year later, in May 2007, Basell made a 13D filing with the SEC indicating its interest in acquiring Lyondell.

The Lyondell board immediately held a meeting to discuss the 13D filing and decided that although the company appeared to be "in play" to adopt a "wait and see" approach.  Two months went by with the Lyondell board doing nothing further regarding the company's potential sale.

On July 9, 2007 discussions between the two CEOs heated up resulting in an offer of $48 per share, no financing contingency, a $400 million break up fee and a requirement to sign a merger agreement by July 16.

On July 10 and 11 the Lyondell board met twice for no more than an hour each time to review the proposal, the possibility that others might be interested in buying the company, and to retain a financial advisor.

On July 12 the board met again to instruct the CEO to seek a higher price, a go-shop clause, and a reduction in the break-up fee.  These negotiations resulted in only the break-up fee being reduced to $385 million.

On July 16 the board met again, this time to review the financial advisor's opinion that the $48 per share offer was fair as well as its belief that no other entities would top this offer.  The board approved the merger and recommended it to the shareholders.

Because Lyondell's charter contained a section 102(b)(7) exculpatory provision protecting the directors from personal liability for breaches of the duty of care, the plaintiff alleged a breach of the duty of loyalty.  Since the board was found to be independent and not motivated by self-interest or ill will, the breach of the duty of loyalty claim was further narrowed to whether the directors failed to act in good faith.  The Chancery Court concluded they had.  The Supreme Court reversed.

Applying Walt Disney and Stone, the question, according to the Supreme Court, was whether the board's actions were an "intentional dereliction of duty, a conscious disregard for one's responsibilities" (quoting Walt Disney).  Under this standard the court could only impose liability if there is "a showing that the directors knew that they were not discharging their fiduciary obligations" (quoting Stone).

The Delaware Supreme Court also noted that the Chancery Court misapplied Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A2d 173 (Del. 1986).  It did this by applying the Revlon duties (maximize shareholder value) before the board had decided to sell the company or the sale had become inevitable.  Further, the Chancery Court wrongly concluded that Revlon imposed a set of requirements on a board that must be met during the sale process.  And third, the court had wrongly concluded that failure to meet the Revlon standard was the equivalent of "a knowing disregard of one's duties that constitutes bad faith."  (It is a breach of the duty of care.)

The Chancery Court had determinedthat the inaction of the Lyondell board between May and July was the key to the finding of a breach of the duty of loyalty.  The Supreme Court disagreed.  The Revlon duties to find the best price do not kick in when a company is "in play" but when a sale becomes inevitable.  In this case, the Revlon duties did not begin until July 10.  The Supreme Court noted that it was possible that the Revlon duties might not have been met since the board did not conduct an auction or a market check to get the best price, but these were due care considerations when the only legal issue was whether the board failed to act in good faith.

The Supreme Court found a "vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties."   It takes "an extreme set of facts" to make a claim of disloyalty stick.  In this case the failure of the directors to do all they should have done might be a breach of the duty of care, but they would have had to "knowingly and completely failed to undertake their responsibilities" in order to have breached their duty of loyalty.

This case is a very important explanation of Walt Disney and Stone (as well as In re Lear Corp Shareholder Litig., 2008 LEXIS 121).  It seems the Court realized it had not been clear enough or had left the impression in those earlier cases that the standard for finding a breach of the duty of loyalty for failure to act in good faith was not as high as it clearly is in Lyondell.

-Marc Ward

Default Language that Didn't Go Away

Both the Iowa Uniform Limited Partnership Act (Iowa Code Chapter 488) and the new LLC Act (Iowa Code Chapter 489) provide statutory default language that a partnership agreement or LLC operating agreement can only be amended by the unanimous consent of the partners or members.  The unanimity requirement can be overridden by the terms of the respective agreements.  Oh, really?

Not so held the In re: LJM2 Co-Investment, L.P. Limited Partners Litigation court.  The opinion of the Delaware Chancery Court can be found at 866 A. 2d 762 (2004).

The limited partners of LJM2 tried to weasel out of their obligation to heed a capital call by amending the limited partnership agreement to eliminate the obligation (after the general partner had properly made the call!).  They also canned the general partner, replacing it with a more friendly one.

A majority of the limited partners, but not all of the limited partners approved the amendments.  The limited partners relied on a provision of the agreement that authorized amendments "in any respect" upon the agreement of a majority of the limited partners.  However, this provision contained the proviso, and possible boilerplate term, that no amendment could change the percentage necessary for any consent unless the amendment was approved by the same percentage.  So what is the catch?

The Delaware RULPA contained a default provision that an obligation of a limited partner to make a contribution may be compromised only by the consent of all partners.  Iowa has a similar provision at Iowa Code Section 488.502.  The Delaware Court read this default provision into the partnership agreement notwithstanding the "in any respect" language.

This decision should be a concern for Iowa limited partnerships since the Delaware and Iowa RULPAs are very similar.  It is not an issue for Iowa LLCs because there is no similar provision regarding obligations to make agreed to capital contributions.

-Marc Ward

Court: Deferred Comp Plan Can Be Forfeited if Non-Compete Violated

In Lindsay vs. Cottingham & Butler Insurance Services, Inc., (Iowa Supreme Court, March 27, 2009), Lindsay had worked for C&B as an account executive from 1987 until 2001.  During in his employment, C&B provided Lindsay with a deferred compensation plan that was “in consideration of (his past) and future services.”  The plan provided for 120 months of deferred compensation, dependent upon Lindsay’s years of service.  The plan also contained a ten (10) year non-compete agreement which provided in part that he would be available to advise the company after his retirement from active service and must represent the company well to clients and the community.  It also stated that Lindsay was not to compete with the company during the retirement period in any manner in order to be eligible to receive deferred compensation benefits.  Although the plan provided that C&B’s Board could decide to suspend or terminate payments under the plan, the Board’s decision would be final.

 

            At the time Lindsay left C&B, he declined to take the deferred compensation payments immediately; he preferred to wait until he was 55 in order to avoid the early payment discount.  During the “exit” meeting, C&B representatives explained that they expected Lindsay to comply with the non-compete provisions of the deferred compensation plan.  Instead, after leaving C&B, Lindsay worked with another insurance sales agency and was advised by C&B that he could be in violation of the deferred compensation agreement.  Later, Lindsay went to yet another benefits and insurance brokerage firm which was in direct competition with C&B.  At that firm, Lindsay worked with two clients with whom he had contact with while he was with C&B. 

 

            The lower court found that Lindsay had violated the deferred compensation plan by soliciting and accepting C&B clients while with his new employer.  Lindsay argued that the non-compete provisions that were contained in the plan were unconscionable and unenforceable under Iowa law because it does not contain reasonable limits as to time and area.  Lindsay appealed to the Iowa Supreme Court.  The Court found that ERISA covered the plan and, therefore, federal law rather than state law determines whether the plan’s non-compete forfeiture provisions can be enforced. 

 

-Rebecca Dublinske

rdublinske@dickinsonlaw.com

8th Circuit Makes General Contractors their "Brother's Keeper"

On February 26, 2009, in Secretary of Labor v. Summit Contractors, Inc., 2009 U.S. App. LEXIS 3755, the United States Court of Appeals for the Eighth Circuit overturned the decision of the Occupational Safety and Health Review Commission (“OSHRC”) and held that a controlling employer can be cited for OSHA violations even when it did not create the hazard and none of its employees were even exposed to the hazard giving rise to the citation. 
 
Summit Contractors (Summit) was the general contractor for a construction project in Little Rock, Arkansas.  It subcontracted the entire project, and therefore had only 4 employees on the site:  a project superintendent and three assistant superintendents.  All Phase Construction (All Phase) was the subcontractor responsible for the exterior brick masonry work.  On two or three occasions Summit’s project superintendent observed All Phase employees operating without personal fall protection on scaffolds lacking guard rails.  The superintendent advised All Phase to correct the problems; however, when the All Phase employees moved the scaffold to another location, they would again work without fall protection and guardrails.  None of Summit’s employees were exposed to the hazard. 
 
An OSHA Compliance Safety and Health Officer observed All Phase employees working on scaffolds over ten feet above ground without fall protection or guardrails.  In addition to citing All Phase, the officer issued a citation to Summit, based on OSHA’s controlling employer citation policy.   That policy provides that OSHA may issue citations to general contractors at construction sites who have the ability to prevent or abate hazardous conditions created by subcontractors through the reasonable exercise of supervisory authority, regardless of whether the general contractor created the hazard or whether the general contractor’s own employees were exposed to the hazard.
 
The OSHRC had held that the multi-employer policy violated 29 C.F.R. §1910.12(a), which provides:
The standards prescribed in part 1926 of this chapter are adopted as occupational safety and health standards under section 6 of the Act and shall apply, according to the provisions thereof, to every employment and place of employment of every employee engaged in construction work.  Each employer shall protect the employment and places of employment of each of his employees engaged in construction work by complying with the appropriate standards prescribed in this paragraph.
 
The Eighth Circuit concluded that the plain language of the regulation does not preclude the Secretary of Labor’s controlling employer citation policy and therefore the Commission abused its discretion in determining that the controlling employer citation policy conflicted with § 1910.12(a). 
 
As the Eighth Circuit acknowledged, the controlling employer citation policy places an enormous responsibility on a general contractor to monitor all employees and all aspects of the worksite.   “Control” resulting to exposure to a citation under the policy can be established by contract, or by the exercise of control in practice.  Even in the absence of explicit contract provisions granting the right to control safety, or where the contract says the employer does not have such a right, an employer may still be found to be a controlling employer, based on a combination of contractual rights that give it broad responsibility at the site involving almost all aspects of the job.  Responsibilities of key significance in this analysis include the authority to resolve disputes between subcontractors and  set schedules and determine construction sequencing, because of the likelihood that these matters may affect safety. 
 
It is of small consolation that the standard OSHA will use to determine if the controlling employer exercised reasonable care to prevent and detect violations on the site is a lower one than that required of an employer with respect to protecting its own employees. How frequently and closely a controlling employer must inspect to meet its standard of reasonable care will depend upon the scale of the project, the nature and pace of the work, and how much the controlling employer knows about the safety history and practices of the employer it controls.  More frequent inspections are needed if the controlling employer knows that the other employer has a history of non-compliance, or, at the beginning of a project if the controlling employer has no knowledge of the other employer’s compliance history. 
 
Challenges to OSHA’s controlling employer citation policy can be expected to continue.  The two to one decision in Summit was a narrow one and it included a vigorous dissenting opinion.  The decision did not evaluate OSHA’s overall multi-employer citation policy and, although the issue was not raised by the parties, the Court suggested that OSHA may need to submit the policy to the informal rulemaking process for continued use in enforcement.  Nevertheless, at the present time, general contractors and construction managers must be vigilant in their supervision of the worksite to avoid liability for the safety infractions of other employers. 

-Joan Fletcher

jfletcher@dickinsonlaw.com

Iowa Court of Appeals: Business Judgment Rule Applies to LLCs

In Terminal Properties, Inc. v. Hampton Propane Terminal, L.C., 2009 Iowa App. LEXIS 231 (March 26, 2009) the Iowa Court of Appeals confirmed that the business judgment rule applies to Iowa limited liability companies formed under Iowa Code Chapter 490A (for LLCs formed under Iowa Code Chapter 489 the business judgment rule is codified).  You can read the case here.

I am not sure I agree with the court's reasoning that allowed it to avoid the issue of whether the managers of the LLC had conflicts of interest when they voted in favor of the actions that became the subject of the litigation.  The appearance of conflicts would have negated application of the BJR and led to a much more interesting and helpful opinion, albeit a more difficult one for the court.

-Marc Ward

Seventh Circuit Opinion has S Corporation Implications

Judge Posner takes on the IRS again in a case that goes to the heart of the meaning of "reasonable compensation."  In the case the IRS challenged the $20 million compensation of Menard's CEO,John Menard.  Over $17 million of this amount was the result of a bonus equal to 5% of the company's net income before taxes; a bonus plan that had been in place since 1973!  Menard's is presumably a C corporation (the opinion does not say) with Mr. Menard owning must of the stock (all of the voting stock and 56% of the non-voting stock).  In such a case, a corporation and its dominate shareholder can benefit from treating compensation as salary (deductible by the corporation) rather than dividends; especially in 1998, the year at issue and before the 2003 tax rate reduction of dividends to 15%.

The IRS challenge was successful at the tax court where the judge disallowed all but about $7 million of the salary (after comparisons to Home Depot and Lowe's CEO salaries).  Judge Posner and the 7th Circuit reversed on the grounds that the IRC Section 162(a)(1) test for "reasonable compensation" must be related to the performance of the CEO vis a vis the success of the corporation.  You can read the opinion here: http://tinyurl.com/dmrh9z

Now for the S corporation connection for which I thank Maryland tax guru, Stuart  Levine, without whom I probably would have missed it.  If CEO compensation in the form of salary must be related to the performance of the corporation, those who "play fast and loose with respect to S corps and FICA" (in the words of Levine) should be careful, because it implies that paying such CEOs a low salary to avoid FICA tax and instead reward them with dividends may run afoul of the concept of "reasonable compensation."

-Marc Ward

100th Post - Bonus Document

To celebrate my 100th post on this Blog, I've added another form for your reference.  Whether or not you use an operating agreement for a single member LLC you should have organizational minutes.  A sample is attached here.

-Marc Ward

If it Quacks like a Duck, it must be a Duck

It is typical of acquisition agreements to provide for an earn out clause that captures that part of the value of a company that cannot be readily ascertained at the time a deal is consummated.  A standard provision would call for a formula to determine future profits and then pay that amount or a portion thereof to the seller.

In Harker's Distribution, Inc. v. Reinhart FoodService, LLC, 2009 U.S. Dist. LEXIS 3623 (Jan. 20, 2009), the United States District Court for the Northern District of Iowa was called upon to determine if such a clause was an arbitration agreement under Illinois law.  Like most such earnout clauses the final calculation of the purchase price called for the buyer to submit its calculation of the Preliminary Intangible Value to the seller.  The seller had 30 days to raise any objections to the calculation.  The parties then had another 30 days to resolve the objections.  If that could not be done, then the matter of the objections was to be submitted to a national accounting firm for resolution.

Needless to say, a dispute arose over the calculation.  Before the end of the 30 day period to resolve the dispute Harker's file a declaratory action seeking the court to determine that there was a unilateral mistake over the calculation of customers used to determine the intangible value.  Reinhart countered that the matter should be arbitrated pursuant to the earn-out provisions of the asset purchase agreement.

Applying the principles of Fit Tech, Inc. v. Bally Total Fitness Holding Corp., 374 F. 3rd 1 (1st Cir. 2004), the District Court held that the "accountant remedy" was an arbitration clause under Illinois law (the law chosen by the parties to apply to the agreement) and the matter of the accounting issues only should be determined by application of the provision, and not the other legal issues related to a mutual or unilateral mistake and the effect such a mistake might have on the enforceability or rescission of the agreement.

The key is the Fit Tech analysis that a provision can be an arbitration clause, regardless of whether the word "arbitration" is used, if application of the provision serves the purpose of arbitration, provides for a final remedy, by an independent arbitrator, applying substantive standards, with an opportunity for both sides to present its case.

-Marc Ward

Another Eerie SMLLC Piercing Case

Fortunately, most piercing the veil cases include a member/shareholder who deserves to be punished.  As a matter of fact I think most piercing cases are decided based on how badly the court wants to nail the SOB.

Alan Kosinski operated a night club on Salisbury Beach in Massachusetts called "Boston Waves."  He used greatly exaggerated projections of profit and misrepresented the term of the night club lease as 20 years instead of two in order to con $75,000 out of poor Mr. Douglas.  Needless to say "Boston Waves" didn't do so well.  Troubles with keeping a liquor license and a disastrous non-appearance by Snoop Dogg (but a SWAT team showed up) did the club in.  Mr. Douglas sued in Bankruptcy court to hold Kosinski personally liable on his loan to Boston Waves, LLC.

Now it was evident that Kosinski could be seen as a con artist.  He ran some of the dubious real estate seminars where everybody is told they can make a fortune.  His financial projections were probably fantasy, although in his defense the club did not take off as anticipated and the term of the lease turned out to be irrelevant because the club folded within a single summer season.

Nevertheless, after citing the usual litany of factors a court will consider in deciding whether to pierce the veil of an LLC (including the rather frightening "insolvency at the time of the litigated transaction") the court held Kosinski personally liable for the debt to Douglas.

The court stated as reasons for piercing the veil "Kosinski's persuasive control of Boston Waves, the absence of corporate [sic] record, and thin capitalization or insolvency, as well as use of the limited liability company to promote fraud."  In re Alan D. Kosinski, 2009 Bankr. LEXIS 192 (US Bankr. Ct. Mass. 2/4/09).

Here is the rub.  There was no evidence presented in the opinion to suggest that there was an absence of business records or thin capitalization or insolvency.  It is not even clear that Kosinski was the only member of the LLC. The court's conclusion turned on, albeit, a rather dubious set of profit & loss statements and the misrepresentation of the term of the lease.  However, P&L statements don't reflect the capitalization of the company, particularly ones that are projections not a reflection of past or current performance.

This case seems to have been decided purely on the basis of the judge wanting to stick it to a perceived con man.  That is not to say the outcome is wrong, but the reasoning is shaky.

-Marc Ward

Expediency Kills

One of my three rules of life is the little things get you down (the other two will have to wait for another day).  Kwok v. Transnation Title Insurance Company (Los Angeles County Super. Ct. No. EC044350, filed 2/10/09) is a case on point.

The plaintiffs, a husband and wife, each owned a 50 percent interest in an LLC that in turn owned real property on which a house was constructed for investment purposes.  At the time of the purchase the the defendant issued a standard title insurance policy.  The LLC was the only insured.  The definition of "insured" included those who succeeded to the interest of the named insured "by operation of law."

A dispute arose with the owners of an adjacent property over access to an easement for sewer and drainage.  Construction was delayed, the real estate market tanked, and the plaintiffs decided to move into the residence constructed on the property and rent their existing home until the market improved.

On September 21, 2005, the LLC transferred the property to the plaintiffs as trustees of a revocable trust.  On December 15 of that year a certificate of dissolution was filed stating that the LLC had been dissolved.

Because the easement dispute could not be resolved the plaintiffs filed a claim with the title insurance company under the policy.  Defendant denied coverage on the grounds that the property had been transferred by a voluntary act to a separate legal entity and not by operation of law.  The letter of denial noted that plaintiffs had not purchased an additional endorsement covering transfers to a separate legal entity.  The trial court granted the title company's motion for summary judgment and the appellate court affirmed holding that the transfer was a voluntary act to a separate legal entity and not one arising by operation of law.

Had the property been transferred to the members qua members by virtue of the dissolution of the company it would have been a transfer by operation of law. The plaintiffs skipped a step.  They should have transferred their LLC interest to themselves as trustees of the revocable trust and then dissolved the LLC.  The property would have been distributed to the trust by operation of law and the title insurance would have remained available.

A similar Maryland case had the same result.  Gebhardt v. Family Inv., LLC v. Nations Title Ins. of N.Y., Inc., 132 Md. App. 457 (2000).

Watch out for the little things.

-Marc Ward

Be Careful What You Wish For!

In Fuiaxis v. 111 Huron Street, LLC, 2009 WL 203625 (N.Y. A.D. 2 Dept. 2009) the plaintiff got hoisted on the operating agreement.

Fuiaxis withdrew from an LLC and then brought an action against the LLC and the three remaining members for among other things judicial dissolution.  The LLC and the three defendants turned around and made a demand on the plaintiff for $10,000 to defend the litigation and to pay for fines imposed by the City of New York for boiler violations.

The demand was based on paragraph 17 of the operating agreement which permitted the LLC to make a capital call on the members and allowed the membership interest of a defaulting member to be purchased by the other members.  The court refused the plaintiff's request that the demand not be enforced because the New York LLC Act authorized such a demand.  Ouch!

My thanks to Professor Dan Kleinberger for bringing this case to my attention via the lnet-llc list serve.

-Marc Ward

Is it a Partnership or a Joint Venture?

The Idaho Supreme Court handed down a decision distinguishing a partnership from a joint venture.  In Costa v. Borges, 179 P.3d 316 (Idaho 2008) the court dealt with a dispute between two real estate developers who had an oral agreement to develop some property.  The Court followed the general rule that a partnership is formed to carry on a business generally and a joint venture has but a single business purpose.

The upshot of the holding is a joint venture cannot avail itself of the portion of the Revised Uniform Partnership Act that views a partnership to be an entity distinct from its partners and permits a partnership to continue after dissociation of a partner.  The Court also confusingly notes that RUPA should be applied to resolve the case, but then pointedly does not.

Iowa law is similarly confusing.

In Fitzhugh v. Thode, 265 N.W. 893 (Iowa 1936)  the Iowa Supreme Court, said  that "although courts in modern times do not treat a joint venture as identical with a partnership, it is so similar in its nature and in the contractual relationships created by such adventure that the rights as between themselves are governed practically by the same rules that govern partnerships. As some of the courts hold, while a partnership is ordinarily formed for the transaction of general business of a particular kind, a joint adventure, as a rule, relates to the single transaction, although it may comprehend a business to be continued for a period of years."

In Beck v. Rounds, 332 NW 2d 109 (1982)  the Iowa Court of  Appeals said "We also agree with the agency's finding that petitioners were engaged in a partnership and/or joint venture. The district court noted that petitioners had an agreement in which they pooled their money, their farm equipment, their labor and skill in the farming  operation, and that they agreed to divide the profits and share the losses....A joint venture is characterized as a business enterprise carried on for profit, and as a common undertaking in which the parties combine their property, money, efforts, skill or knowledge. A joint venture relates to a single transaction, whereas a partnership, having the above characteristics, relates to a continuing business [cite omitted].... The business relationship of Glenn and William Beck can be characterized as either a joint venture or a partnership...."

The obvious point is avoid oral agreements!

-Marc Ward

Florida Charging Order Decision Expected Soon

Readers under the age of 50 might remember when I wrote about FTC v. Olmstead, et al, 2008 US App LEXIS 11393 (May 29, 2008)  back on June 2, 2008.  This is the case to decide whether under Florida law the charging order provisions of the Florida LLC Act could deflect a creditor's attempt to get voting control of a single member LLC.  The charging order provision of the Florida act is identical to the charging order provisions under Iowa Code Chapter 490A, but much different than Chapter 489.

The Florida Supreme Court heard oral arguments on the case on January 8, 2009.  Here is a link to a summary of those arguments.  http://tinyurl.com/cylz7h

-Marc Ward

Errant Section of Chapter 489 to be Deleted

Section 489.407(2)(f) of the new Iowa LLC Act will be stricken from the law by the Legislature this session.  This section was added by the Iowa LLC Committee in an attempt to cover what was perceived to be a gap in the uniform law dealing with those events that required the unanimous consent of the members to undertake (unless, of course, the operating agreement provided otherwise).

We had added (f) as a new provision that read as follows "Approve a merger, conversion, or domestication under article 10."

Upon reflection it was concluded that Article 10 and 407(2)(d) adequately addressed this matter and we had forgotten to state the approval required in any event.  Our bad.

-Marc Ward