Ward on Iowa Limited Liability Company Law

The Unwritten Written Operating Agreement

There will be many opportunities to screw up when the new Iowa LLC Act takes effect on January 1, 2009.  While existing LLCs can wait until 2011 to worry about it, your 2008 forms may need sprucing up before you start drafting agreements for new LLCs. (I know readers of this blog write all their documents from a blank slate, but some lawyers are known to use versions of previous agreements when writing new ones -- this post is for them.) Here is one example.

Under current law operating agreements must be in writing (unless the articles permit otherwise) which implies that all amendments must be in writing.  The new Iowa LLC Act will allow operating agreements to be oral in all cases.  It will also, and this is the rub, allow written operating agreements to be amended orally unless the operating agreement limits amendments to those in writing.  There is also the possibility of an implied amendment based on conduct.

Now, it is common for most written agreements to provide that all amendments must be in writing signed by all parties.  But you better make sure beginning in 2009.  And what about your clients who wrote their own operating agreements?

-Marc Ward

Save the Dates!

Joe Kristan, noted accountant and blogger, and I will be conducting four seminars on the new Iowa LLC Act in December. 

Under the auspices of the National Business Institute (NBI) Joe and I will be holding two half-day seminars in Cedar Rapids on December 8 and two half-day seminars in Des Moines on December 9.

The new law takes effect on January 1, 2009.  We look forward to seeing you at one of the seminars.

-Marc Ward

Throwing a Hail Mary

While some people know of a Hail Mary in the religious sense, for those of you who are football fans, you know a Hail Mary is an attempt to throw a long pass down the field, in the few remaining seconds of a game, in a last-ditched effort to win the game and beat the reigning champions (anyone else thinking of Flutie right now?).  In a recent Montana case, a process server threw a Hail Mary of sorts when he served the summons and complaint to an officer manager. In Montana Professional Sports, LLC v. National Indoor Football League, LLC, 180 p. 3d 1142 (Mont. 2008), the process server attempted to serve the summons and complaint to the National Indoor Football League (NIFL) using the address on record at the secretary of state’s office.  A woman in the office claimed to be the office manager and told the process server she could deliver the papers to the intended recipients.  As it turns out, this office manager was not employed by the NIFL - she was employed by a company owned by the president of the NIFL.  The court found that the process server’s inadvertent Hail Mary gave adequate notice and thus constitutes proper service.

 

-Christine F. Halbrook

Another Example of the Changing Piercing Landscape

Courts, like water, move through the path of least resistance when trying to find a way to pierce the veil of an "evil doer."  In Anderson v. Stewart, 234 SW 3d 295 (Ark. 2006) the Arkansas Supreme Court concluded that simply failing to follow the record-keeping requirements of the state's Check Cashier's Act was enough.  Other events were cited, but this failure in bookkeeping was found to be enough.

-Marc Ward

Distressing Trend in Limited Liability Piercing Cases

There is a distressing trend in veil piercing cases.  Courts sometimes become so intent on finding a wrong-doer that they do not let the evidence or the pleadings stand in they way.  Here are two recent examples.

In McCarthy v. Wani Venture A.S., 251 SW 3d 573 (Tex. App. 2007) the Texas Court of Appeals, First District, found the individual defendant liable for the debts of an LLC even though, as the dissent points out, there was no evidence introduced at trial to pin the debt on her.

And in In re Burwell v. Burwell Family Limited Partnership and RHFP, LLC, 2008 Bankr. LEXIS 2097 (8th Cir. August 7, 2008), the court essentially performed a reverse piercing to snare the assets of a partnership and an LLC despite the lack of pleading such a claim.  As in McCarthy, the dissenting opinion is informative.

-Marc Ward

Series LLC Article

An excellent article about Series LLCs entitled "Series LLCs Let's Give the Frog a Little Love" written by Dominick T. Gattuso can be found in the July/August 2008 Business Law Today.

-Marc Ward

Small Bank Tax Equity Act

Legislation that would permit state chartered banks to operate as LLCs has been introduced in Congress by Senators Orrin Hatch and Blanche Lincoln.  Many state laws, including Iowa's, and FDIC regulations allow banks to operate as LLCs, but IRS regulations require such entities to be taxed as corporations.  The Small Bank Tax Equity Act would change that.

The American Bankers Association and the Independent Community Bankers support the bill.

-Marc Ward

Eighth Circuit: The Power to Redeem includes the Power to Remove

In an operating agreement the members authorized the redemption of all or part of their interest by the LLC.  The LLC could exercise this right by written approval of the holders of more than 65% of the distribution percentages and notice to the ousted member.  A separate section of the operating agreement required payment of the redemption price within 10 business days. 

Three LLCs were at issue.  The same three members owned each LLC.  Two of the members owned more than 65% of the distribution percentages of each LLC. The expelled member (and plaintiff) owned less than 35% of each LLC.

The redemption notice was signed by the managing member of the two majority members of the 3 LLCs.  The plaintiff was "removed from [the 3] companies" pursuant to the letter, but the redemption price was never paid.

The removed member brought suit claiming that it was still a member of the LLCs because the operating agreement authorized redemption, not removal.  Redemption was not properly approved, notice of redemption was not given, and the redemption price was not paid.  Urban Hotel Development Company, Inc.v. President Development Group, L.C., 2008 U.S. App. LEXIS 15982 (July 29, 2008).

The district court held that the plaintiff was properly removed from the LLC because the power to redeem included the power to remove.  The companies were liable for breach of contract, however, for failure to pay the redemption price.  The Eighth Circuit agreed.

-Marc Ward