January 25th, 2010
Even though law schools are starting to put greater emphasis on practice skills, such as drafting transactional documents, most law professors have little occasion to draft organizational documents for business entities. It came as a surprise when I was asked to note the relatively publication of Drafting Delaware LLC Agreements, by John M. Cunningham and Vernon R. Proctor (Aspen Law & Business 2009). The focus of the book is on guiding lawyers drafting LLC Agreements. According to Aspen,
On the basis of their ownership structure, management structure and federal tax structure, the book identifies 10 principal types of LLCs relevant in Delaware LLC formation practice, and in a compact disc, it provides a complete set of 29 forms specifically tailored for use in forming these LLCs. These forms include six for single-member LLCs owned by individuals; three for single-member LLCs owned by entities; 19 for multi-member LLCs, including LLCs with general partnership, limited partnership and corporate management structures; and a special form for Delaware series LLCs. The book also provides detailed guidelines for choosing among these forms for particular LLC formation clients.
The book seems comprehensive, with both checklists, and suggested signing memoranda–always good things.
Given the wide discretion in contracting with regard to fiduciary duties for Delaware LLCs, the May 2010 supplement will include a new chapter on fiduciary duties, and suggested drafting approaches and language. It is here that I would disagree with the authors, who suggest silence, and reliance on common-law principles, as a drafting tactic. § 14A.01[D]. The authors do note in the following subsection that Chief Justice Myron T. Steele of the Delaware Supreme Court is of the view that the Delaware LLC Act abolishes common-law fiduciary duties. In any event, the new chapter includes a broad discussion of, and forms for, key aspects of common-law fiduciary duties.
posted by Gary Rosin
Update: Check out Peter A. Mahler’s interview of John Cunningham (01/25/2010) on the New York Business divorce blog.
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October 26th, 2009
Parker Oil Co. v. Mico Petro & Heating Oil, LLC, 979 A.2d 854, 2009 PA Super 105 (Pa. Super. Ct. 2009) involves a routine breach of contract. For several years, a gasoline station had been buying gasoline on open account from a supplier. The station had been struggling, with earlier delays or irregularities in payment. Eventually, the station failed, and did not pay for its last batch of gasoline. Of course, the LLC that owned and operated the station had “shallow pockets” at best. The supplier sued the LLC’s sole member (Singh), alleging that he had participated in the conversion of the oil. The Court summarily rejected this argument:
¶ 9 The situation may well have been different if there was one large transaction and evidence that Singh knew the corporation (sic) could not pay for it. However, that is not the situation here. First, it is undisputed that Parker knew that Singh was operating through a corporation, and in fact had dealt with him for years, always in a corporate rather than individual relationship. Second, it is undisputed that Parker knew for a long time that Mico Petro was having financial difficulty, as many checks were drawn with insufficient funds but later made good. This is evidence of a corporation struggling to make it, and a supplier going along with this. When the corporation finally goes out of business, this does not turn a long-time contractual relationship into a tort. This is a classic situation where an individ-ual wishes to shield himself from personal liability and uses the classic corporate structure, and a supplier knows about both the corporate structure and the finan-cial difficulties of the corporation and chooses to take the risk. The decision by the trial court in this case could drastically undermine our business structure by allowing creditors to end-run the normal burden of piercing the corporate veil under the little used “participation” theory. The only participation here was that of a corporation trying to stay afloat and a creditor going along with it in the hope that ultimately it will get paid–incidentally making a profit for a number of years along the way.
¶ 10 We also note that in the current economic situation, this is something that is likely to happen more and more. While there is certainly evidence that Mico Petro owed a great deal of money to Parker, we cannot find any evidence that Singh accepted the oil planning not to pay for it. There is nothing more than a showing that finally the corporation came to the conclusion that it was not profitable and had to close.
979 A.2d at 857. The only surprise here is that the dissent bought-in to the participation argument, reasoning that “products were received and resold and … there is principal due….” Id. at 860.
posted by Gary Rosin
Tags: disregard, limited liability, piercing
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October 12th, 2009
Aspen has just published a treatise, The Law of Closely Held Corporations, by Contributing Editor Douglas Moll and his co-author, Robert Ragazzo (Houston).
Gary Rosin
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October 9th, 2009
In a letter dated Sept. 1, 2009, the SEC staff responded to a Financial Industry Regulatory Authority (FINRA) request for guidance on the application of the financial responsibility rules to broker-dealer using LLC series. In the view of the staff, the structure posed by FINRA would not be permitted.
The broker-dealer would be organized as an LLC with two series. The Master LLC would have no business operations. The LLC would have two Series: (i) a series for retail broker-dealer operations; and a series for institutional activities. Only the Master LLC would register as a broker-dealer. The specific question was the treatment of series assets and liabilities for purposes of (i) the net capital rule, (ii) the consumer protection rule, and (iii) financial reporting purposes. FINRA suggested a consolidated financial statements that included the assets and liabilities of the two operating series.
The SEC suggested the worst of all possible worlds when computing net capital:
…assets that are not available to all creditors would not be subject to the risks of the broker-dealer’s business and would be treated as non-allowable….
… liabilities, whether the liability of a Master LLC or a series, would be deducted from allowable assets….
Id.at 2. Moreover, consolidated financial statement would not be permitted because
a user of the financial statements would be unable to determine which of the series controlled specific assets or was obligated to satisfy specific liabilities.
Id. As to the consumer protection rules, a seireis LLC would also fall short:
… if the amount calculated for the special reserve account for customers included credits from one series and debits from another series the account could be underfunded. Therefore, a Series LLC that receives customer cash or securities would not be able to comply with the requirements of Rule 15c3-3.
Id.at 3. For similar reasons, the use of series LLCs would be
problematic for purposes of a liquidation proceeding under the Securities Investor Protection Act….
Id.
Gary Rosin
Tags: SEC broker-dealer rules, Series LLCs
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October 3rd, 2009
That question is the title of a recent article written by L. Andrew Immerman. See 11 No. 4 Bus. Entities 20. Immerman argues that there is a real danger with attributing reality to LLC “units” and using that term to define LLC ownership interests. The danger is possible unanticipated tax consequences and unfulfilled expectations of the parties as to what a business deal entailed. Use of the word “unit” leads practitioners and business people to consider LLC units to be like stock, which they may not be. An interest in an LLC is an undifferentiated mass, and references to “unit” may disguise this. LLC interests are split into transferable economic interests and non-transferable governance rights. They are not split in a way that corresponds to units. As a result, Immerman believes defining LLC ownership interests as “units” can be risky if members do not understand exactly what is being defined.
Donald Scotten
Posted in Federal Taxation, LLCs, Scholarship | No Comments »
September 28th, 2009
Contributing editor Thomas E. Geu (South Dakota) and co-author James B. Dean have a new article, The New Uniform Limited Cooperative Association Act: A Capital Idea For Principled Self-Help Value Added Firms, Community-Based Economic Development, And Low-Profit Joint Ventures, 44 Real Prop. Tr. & Est. L.J. 55 (2009).
Gary Rosin
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September 28th, 2009
In Curbing the License To Steal: A Discussion of English Law and Possible reforms for the Durable Power of Attorney, 44 Real Prop. Tr. & Est. L.J. 31(2009), Amy Jo Conroy compares durable powers of attorney under the Uniform Power of Attorney Act with lasting powers of attorney under England’s Mental Capacity Act (2005).
In the United States, the durable power of attorney is a commonly used instrument, but cases of financial exploitation are increasingly finding their way into the courts. Horror stories of exploitation litter the case reporters, and many more likely go unreported. While the durable power is a useful instrument, its use is too powerful to be left to the unfettered discretion of an agent.
* * *
States must take action to protect their vulnerable citizens. A first step is to require that all durable powers follow a statutory form. Second, all durable powers should be registered to be effective. A third step is to require notice to be given to family members, similar to notice requirements in a guardianship proceeding. Lastly, legislators must increase court or governmental oversight by providing automatic inquiry jurisdiction so that if abuse is suspected, the initiation of guardianship proceedings is not the only solution. These safeguards will reduce the simplicity of the durable power, but that is an acceptable sacrifice to better protect our country’s vulnerable senior citizens.
44 Real Prop. Tr. & Est. L.J. at 53.
Gary Rosin
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September 28th, 2009
Family limited partnerships (FLPs) have become a staple of estate-tax planning. Wendy C. Gerzog (Baltimore) has an article, Miller: Effective FLP Line Drawing, 124 Tax Notes 1273 (Sept. 21, 2009) (SSRN), that discusses a recent Tax Court opinion, Estate of Miller v. Commissioner, T.C. Memo. 2009-119. Among other things, the opinion in Miller discusses when FLPs will be considered to have a non-tax purpose.
Gary Rosin
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Partnership Property & Continuation. Faegre & Benson, LLP v. R & R Investors (Minn. Ct. App. 2009)
October 9th, 2009Faegre & Benson, LLP v. R & R Investors, No. A08-1899 (Minn. Ct. App. Sept. 29, 2009) involves the same issue as Putnam v. Shoaf, 620 S.W.2d 510 (Tenn. App. 1981): a dispute over a partnership claim against a third person after the sale of an interest in the partnership. Putnam involved an unknown claim, while R & R Investors involved claims against the federal government related to a pending lawsuit in which the trial court had found in favor of the government.
The partnership, R & R Investors, which owned and operated an apartment complex. Over the years, several groups of partners came and went. The “appellants” sold their interest in the business via several documents:
Slip Op., at 5-6. Unlike an earlier sale (id. at 4), no deeds or bills of sale seemed to have been used. It is clear that the Purchase Agreement for the purchase and sale of the property was the primary document. The Purchase Agreement provided that the purchase of the partnership was “[t]o facilitate the sale of this property”. Id. at 5.
In Putnam, the Court rejected a claim that, because an existing, but unknown, claim was not included in the list of property being sold, the selling partner retained ownership of it. The selling partners in R & R Investors took a different approach. The sellers argued that
Id. at 13-14. The Minnesota Court of Appeals held that, under the Minnesota version of the UPA
Id. at 15-16. Although the Court cited (Slip Op., at 16 n.6) only one portion of my article, The Entity-Aggregate Dispute: Conceptualism and Formalism in Partnership Law,42 Ark. L. Rev. 395 (1989), its reasoning largely parallels my discussion of the treatment of partnership property in a continuation (id. at 427-43).
Gary Rosin
Tags: continuation of business, dissolution, partnership property, RUPA, transfers of partnership interest, UPA
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