Archive for the ‘Scholarship’ Category

Manesh on Dictum & Default Duties

Tuesday, March 12th, 2013


Mohsen Manesh (Oreg.) has a working paper with the alliterative title Damning Dictum: The Default Duty Debate in Delaware” (February 21, 2013)(SSRN). The paper reacts to the Delaware Supreme Court’s opinion in Gatz Properties, LLC. v. Auriga Capital Corp., C.A. 4390 (Del. Nov. 7, 2012)(per curiam), aff’g on other grounds, Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 839 (Del. Ch. 2012) (slip opinion). As discussed in Gatz Properties, LLC. v. Auriga Capital Corp. (Del. 2012): Strine Affirmed on other Grounds and Chastised, in his opinion below, Chancellor Strine had outlined the basis for applying default fiduciary duties to persons managing Delaware LLCs, and the Delaware Supreme Court rebuked him for doing so.

Prof. Manesh criticizes the Delaware Supreme Court’s opinion in Gatz Properties, LLC on several grounds. Two of the most important are:

  • The Court needlessly unsettled expectations that default fiduciary duties apply, except where modified or eliminated by agreement.
  • Not only have both the Delaware Chancery and Supreme courts long used dicta to guide the development of the law, that practice is central to the pre-eminence of those courts, and of Delaware generally, in the law of business organizations.

Gary Rosin

When You’re Alone, You’re Alone: Hillman and Weidner on Partners without Partners

Friday, August 19th, 2011

In a partnership at will, unless the partners otherwise agree, the voluntary withdrawal of a partner (a much nicer word than “dissociation”) automatically causes dissolution of the partnership.  RUPA § 801(1).  For partnerships for a definite term or particular undertaking, after the voluntary withdrawal of a partner only results in dissolution of the partnership by the express will of at least half of the remaining partners.  RUPA § 801(2)(i). If the withdrawal of a partner does not result in dissolution of the partnership, the partnership must purchase the interest of the withdrawn partner.  RUPA §§ 603(a), 701(a).

But what if the partnership had only two partners?  does the remaining partner have the right to buyout the other partner? Robert Hillman (Cal-Davis) and Donald Weidner address this question in an article forthcoming in The Fordham Journal of Corporate and Financial Law, Partners without Partners:  The Legal Status of Single Person Partnerships (SSRN, draft dated Aug. 1, 2011).  Prof. Hillman is of the view that, under RUPA § 101(6),  the partnership dissolves by operation of law:

The core of RUPA’s definition is that a partnership is “an association of two or more persons to carry on as co-owners a business for profit.” If one partner leaves, the predicate association of two or more persons no longer exists, which means a partnership is constituted only for the limited purpose of winding up the business. In other words, the partnership that existed prior to the dissociation is no more.

Id. at 3 (footnotes omitted).  Dean Weidner, who was the Reporter for the RUPA, disagrees:

I obviously think you are asking the definition of partnership to do too much by effectively operating as a special dissolution rule whenever partnerships no longer meet the language of the definition. RUPA contains three separate articles on partnership breakups, defining when and how liquidations versus buyouts are to take place. To attach to the definition substantive breakup consequences would create yet another set of dissolution rules and certainly was not considered in the drafting of the RUPA.

* * *

RUPA’s breakup provisions are much more detailed than the UPA on how a departing partner is to be cashed out. * * *

* * * Section 801, by its terms, lists the “only” events that cause dissolution and winding up, and a departure from a term partnership is not on the list. Both Sections 603(a) and 801, therefore, require a buyout in this situation.

Id. at 6-7 (footnotes omitted).

In a recent opinion, the Third Division of the Fourth District of the California Court of Appeals reasoned that, by definition, a partnership requires at least two partners, and ruled that the withdrawal of one partner in a two-partner partnership automatically caused dissolution.  Corrales v. Corrales, G043598 (Cal. Ct. App. Aug. 10, 2011).

In many ways, this conundrum is a self-inflicted wound, in that it is an artifact of the RUPA generally embracing the “entity” concept.  Under the UPA, the withdrawal of a partner automatically dissolved the partnership, and usually gave each partner the right to liquidation.  But, in a partnership for a term or undertaking, UPA § 38(2)(a) gave the other partners the right to continue the business, either alone, or with others.

In any event, the problem of the partner-less partner under the RUPA illustrates how the entity approach can be a snare; you begin to believe that all partnership-related problems can be solved by the ritual invocation of the entity.  Even the RUPA retains aggregate elements, such as liability of the partners. Partnerships and sole proprietorships are the only business forms that can be formed without filing with the state.  The difference between the two has always been the partnerships were aggregates; it takes at least two to partner.  As Bruce Springsteen sang in When You’re Alone:

When you’re alone you’re alone
When you’re alone you ain’t nothing but alone

Hat tip:  Eric C. Chaffee (Dayton), Jay Adkisson.

Gary Rosin

The Joint Venture Fable

Monday, June 28th, 2010

Robert Flannigan (Saskatchewan) has an interesting article,  The Joint Venture Fable, 50 Am. J. Legal Hist. 200 (2010)(SSRN).  The article is a survey of, and a commentary on, the development of the concept that “joint ventures” are distinct from partnerships:

It recurrently is assumed that a joint venture is a distinct legal form. That is not a valid assumption. The joint venture claim materialised only aberrantly in the nineteenth century. A remedial distinction within partnership law led to, or was the springboard for, the assertion that the “joint venture” had a legal identity different from every other form of commercial association. That claim was confronted and rejected by most judges and commentators. Others were opposed to equating the joint venture with the partnership, or were hesitant to do so, insisting (or worrying) that there were basic differences. That thin wedge of dissent and hesitation allowed the claim to persist. It did not, however, prosper. Additional arguments offered in justification were easily repelled. Today there remains a stale deadlock between the majority and minority views. The minority claim now appears to be that the joint venture has a legal character that, while largely defined by the law of partnership, differs in certain substantive respects and therefore exists as a distinct form of association. The claim, however, remains fabulous. It is a fabrication or concoction that rightlyhas failed to secure the imprimatur of uniform judicial approbation. There is no historical basis for a distinct law of joint venture.

Id. at 200.

Posted by Gary Rosin

The New Uniform Limited Cooperative Association Act

Monday, 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

Comparative Durable Powers of Attorney

Monday, 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

Effective FLP Line Drawing

Monday, 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

The Death of Big Law

Tuesday, September 22nd, 2009

Larry E. Ribstein (Illinois) has posted a working paper on SSRN, The Death of Big Law, in he argues that “the basic business model of the large U.S. law firm is failing and needs fundamental restructuring.”  Ribstein suggests possible changes to law-firm structure and ethics rules governing lawyers. 

The first change that he suggests is that law firms “must own a core of durable, firm-specific property”.  By that, Ribstein means firm ownership of professional goodwill (client relationships), and non-competition agreements to protect it.  No more portable practices.  To quote from “Sixteen Tons,” popularized by Tennesee Ernie Ford, but written by Merle Travis:

Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store

Gary Rosin

Taxing Shared Economies of Scale

Tuesday, September 22nd, 2009

Modesty probably prevents him from posting this himself, but Contributing Editor Bradley T. Borden (Washburn) has an article, Taxing Shared Economies of Scale,forthcoming in the Baylor Law Review (Vol. 61) (SSRN). 

The IRS and courts have concluded that sharing economies of scale satisfies the joint-profit-motive test and that arrangements with a joint-profit motive are tax partnerships. Relying on technical analysis and economic theory, this Article argues, however, that if parties integrate resources without integrating all relevant parts of the production process, they often should not come within the definition of tax partnership.

Gary Rosin

On Joint Ventures

Tuesday, September 22nd, 2009

Robert Flannigan (Saskatchewan), has an article, The Legal Status of the Joint Venture, 46 Alberta L. Rev. 713 (2009) (SSRN), that criticizes the use of the term “joint ventures” in opinions (elegantly referred to as the “judicial lexicon”) and the mistaken impression by courts that a joint venture is a”a distinct legal form”.

Gary Rosin

“Check the Box” as Diagnostic

Tuesday, September 22nd, 2009

Heather M. Field (UC-Hastings) argues in Checking in on “Check-the-Box,” 42 Loy. L.A. L. Rev. 451 (2009) that

… the check-the-box election … lacks a coherent set of limitations….  …the policy weaknesses … of the check-the-box regulations stem fundamentally from the existence of a multi-regime system for taxing businesses.

It’s not just the “multi-regime system.”  Partnership taxation is built on an extreme aggregate view of partnerships that was not true in 1954 (or before) and still isn’t true.  Even under the UPA’s tenancy-in-partnership, partners have no meaning individual rights in, or access to, partnership property.  Partnership property is dedicated to partnership purposes; all an individual partner has is the right to distributions (if, as and when approved by the partners).  RUPA-based partnership statutes now vest title to partnership property in the entity, and not the partners. 

It’s hard to ensure economic substance in partnership allocations when the partnership tax regime itself has no economic substance.  Well, apart from the tax regime itself.

Now, if I were the Tax Czar, I’d  like to see

  1. an entity-level income tax on all multi-owner businesses, with deductions of distributions to owners, and
  2. an income tax on distributions to owners, except for, in a liquidating distribution, the amount of the original investment.

That level would the field, both as between entities, and as between debt and equity. 

Hat-tip to Paul Caron (Tax Prof blog).

Gary Rosin