The Law of Closely Held Corporations

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

Partnership Property & Continuation. Faegre & Benson, LLP v. R & R Investors (Minn. Ct. App. 2009)

October 9th, 2009

Faegre & 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:

  1. a Purchase Agreement for the sale of the apartments and related personal property;
  2. an amendment to the partnership agreement transferring the selling partners’ interests in the partnership; and
  3. an indemnity agreement under which the purchasers assumed, and indemnified sellers against the obligations of the partnership.

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

  • changes in partners dissolved the partnership,
  • the business was continued, but by a new partnership, and
  • the disputed claim was an undistributed asset of the earlier partnership.

Id. at 13-14.  The Minnesota Court of Appeals held that, under the Minnesota version of the UPA

we conclude that, absent agreement to the contrary, the partnership property of a dissolved partnership became the property of the partnership continuing the business without need for separate devise. We base our conclusion primarily on the former UPA’s treatment of partnership property and allowance for continuation of partnership businesses. Appellants’ reading of the former UPA would frustrate the purposes of these provisions.

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

Series LLCs and 1934 Act Broker-Dealers

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…. 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. 3.  For similar reasons, the use of series LLCs would be

problematic for purposes of a liquidation proceeding under the Securities Investor Protection Act….


Gary Rosin

The New Uniform Limited Cooperative Association Act

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

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

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

Guardianships and Durable Powers of Attorney. Russell v. Chase Investment Services Corp. (OK 2009)

September 22nd, 2009

In Russell v. Chase Investment Services Corp., 212 P.3d 1178, 2009 OK 22 (2009)(on certified question), the Oklahoma Supreme Court, held that, under Oklahoma law, the appointment of a guardian for the estate of a person does not terminate an earlier Durable Power of Attorney.

Section 1074.A of the Oklahoma version of the Uniform Durable Power of Attorney Act provided:

If, following execution of a durable power of attorney, a court of the principal’s domicile appoints a conservator, guardian of the estate, … the attorney-in-fact is accountable to the fiduciary as well as to the principal. The fiduciary has the same power to revoke or amend the power of attorney that the principal would have had if he were not disabled or incapacitated.

29 OK 22 at ¶12 (emphasis in original).  The last sentence of Oklahoma Section 1074(b) differs from the bracketed last sentence of Section 108(b) the Uniform Act.

[The power of attorney is not terminated and the agent’s authority continues unless limited, suspended, or terminated by the court.]

Unif. Durable Power of Att’y Act § 108(b) (emphasis added).

Gary Rosin

The Death of Big Law

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

Ethics and Family Limited Partnerships

September 22nd, 2009

Mary F. Radford (Georgia State) has a cautionary article about lawyers representing families and family limited partnerships, Ethical Challenges in Representing Families in Family Limited Partnerships, in 35 American College of Trust and Estate Counsel Journal 2 (2009) (SSRN)

Gary Rosin

Taxing Shared Economies of Scale

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