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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

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Ethics and Ellipsis. Ly v. Jimmy Carter Commons, LLC (Ga. 2010)

Thursday, February 7th, 2013

Probably, every lawyer has used an ellipsis to show that a portion of the text was left out of a quotation. But what are the ethics of elision and inclusion?

Consider, if you will, the opinion in Ly v. Jimmy Carter Commons, LLC, 286 Ga. 831, 691 S.E.2d 852 (2010). A manager of an LLC (Byun) purported to borrow money on behalf of the LLC in connection with a real estate development. As part of the closing documents, the manager gave the lender a purported “Unanimous Consent of the Manager and Members” that authorized the manager to borrow the money, sign the promissory note, and the mortgage on the LLC’s land to secure payment of the note. As it turned out, one of the signatures was forged. When the LLC defaulted on the note, the LLC sued the lender to enjoin foreclosure, and to void the note and mortgage, on the grounds that the manager lacked the authority to borrow the money, or to sign the note and the mortgage. The trial court granted summary judgment in favor of the LLC. The Georgia Supreme Court reversed, holding that there was a question of fact.

What is interesting about the opinion is not the result; rather it is the reasoning of the opinion, and the way the opinion used the Georgia LLC statute.

* * * … there is still a genuine issue of material fact as to whether Appellants had knowledge that the unanimous consent documents were ineffective and did not give Byun the authority to act alone on behalf of Jimmy Carter Commons.

[T]he act of any manager [of a limited liability company] … binds the limited liability company, unless the manager so acting has, in fact, no authority to act for the limited liability company in the particular matter, and the person with whom he or she is dealing has knowledge of the fact that the manager has no such authority. (Emphasis supplied.)

OCGA § 14-11-301(b)(2). Thus, “[n]o act of a manager … in contravention of a restriction on authority shall bind the limited liability company to persons having knowledge of the restriction.” OCGA § 14-11-301(d).

Consequently, even if Byun acted beyond his authority as a manager of Jimmy Carter Commons, the limited liability company may still be bound by his actions if Appellants did not know that he lacked such authority. In its summary judgment order, the trial court did not cite, and Jimmy Carter Commons has not identified, undisputed evidence showing that Appellants knew that Choi’s signatures on the consent documents were forged. * * *

691 S.E.2d at 853.

Here is the complete text of Section 14-11-301:

§ 14-11-301. Powers, duties, and authority of members and managers

(a) Except as provided in subsection (b) of this Code section, every member is an agent of the limited liability company for the purpose of its business and affairs, and the act of any member, including, but not limited to, the execution in the name of the limited liability company of any instrument for apparently carrying on in the usual way the business and affairs of the limited liability company of which he or she is a member, binds the limited liability company, unless the member so acting has, in fact, no authority to act for the limited liability company in the particular matter, and the person with whom he or she is dealing has knowledge of the fact that the member has no such authority.

(b) If the articles of organization provide that management of the limited liability company is vested in a manager or managers:

(1) No member, acting solely in the capacity as a member, is an agent of the limited liability company; and

(2) Every manager is an agent of the limited liability company for the purpose of its business and affairs, and the act of any manager, including, but not limited to, the execution in the name of the limited liability company of any instrument for apparently carrying on in the usual way the business and affairs of the limited liability company of which he or she is a manager, binds the limited liability company, unless the manager so acting has, in fact, no authority to act for the limited liability company in the particular matter, and the person with whom he or she is dealing has knowledge of the fact that the manager has no such authority.

(c) An act of a manager or a member that is not apparently for the carrying on in the usual way the business or affairs of the limited liability company does not bind the limited liability company unless authorized in accordance with a written operating agreement at the time of the transaction or at any other time.

(d) No act of a manager or member in contravention of a restriction on authority shall bind the limited liability company to persons having knowledge of the restriction.

(emphasis added).

Any partnership lawyer will recognize subsections (a), (b)(2), and (d) as taken from section 9 of the Uniform Partnership Act, and adapted for member-managed and manager-managed LLCs. Any partnership lawyer will also recognize the centrality of the language omitted by the court, especially the portion in bold italics. As written, Section 14-11-301 conditions a manager’s power to bind the LLC by an unauthorized act to acts “apparently carrying on the the usual way the business and affairs of the LLC.” As subsection (c) makes clear, unauthorized acts that are not apparently carrying on in the usual way the business and affairs of the LLC do not bind the LLC. The result of the misquotation–the ellipsis–is a radical expansion of the apparent authority of LLC’s manager: not just usual acts, but any act, without regard to its nature.

This seems to me to be a particularly pernicious use of the ellipsis; one that changes the character of the quotation. Even non-lawyers recognize that intentionally omitting important information is unethical. Thanks to Seinfeld, we even have an expression that describes an elision made in bad faith: “yada, yada.”

The question here is whether the justices on the Court knew that a key part of the statute had been dropped out. One might attribute the misquotation to the not-uncommon phenomenon of unfamiliarity with agency principles, and unincorporated business entity law, or, instead, to an overcrowded docket. Still, it is hard to imagine that none of the justices read Section 14-11-301 closely, or that, on close reading, none noticed its limits on apparent authority.

That said, the result–overturning the summary judgment–is probably correct. Whether borrowing money is apparently carrying on in the usual way the LLC’s business is a question of fact that turns on the nature of the LLC’s business. Jimmy Carter Commons, LLC seems to have been a real estate development 0company. Such companies are more likely to be customary frequent borrowers than, say, a company selling advertising slots on a border radio station. See, Burns v. Gonzalez, 439 S.W.2d 128 (Tex Civ. App. 1969).

But, as I suggested in my earlier post, Conflating Tests for Agents and Servants, there is no such thing as a “harmless” misstatement of the law by a court. Given that the misstatement here is by the Georgia Supreme Court, only a later opinion of that court can put Georgia law back on the right course.

Gary Rosin

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Conflating Tests for Agents and Servants: Greater Houston Radiation Oncology, P.A. v. Sadler Clinic Association, P.A. (Tex. App. 2012)

Monday, January 28th, 2013

Courts are prone to use “agent” when they mean “servant.” Many opinions involving the application of respondeat superior use “agent,” instead of “servant.” That is a mistake, in that principals are generally not liable for the incidental torts of agents; rather masters are liable for the torts of servants committed in the scope of employment. Such opinions then define “agent” using the test for whether someone is a servant: does the putative master (often also improperly called the principal) have the right to control the conduct of the person or the details of the work?

At this point you might wonder what the problem is: regardless of nomenclature, the court applied the right test for potential respondeat superior liability. Even before the advent of databases of opinions that let you search cases for words, there were Words and Phrases, West head-notes, and the rote application of sentences taken from opinions.

The danger in such opinions is that a later court might use the wrong test for control in a case where the issue is whether a person was an agent. That was one of the issues confronted by the court in Greater Houston Radiation Oncology, P.A. v. Sadler Clinic Association, P.A., 384 S.W.3d 875 (Tex. App. 2012) (slip opinion). Greater Houston Radiation Oncology, P.A. (and its affiliates) agreed to the operate, maintain, and provide professional services for, a radiation oncology center on behalf of Sadler Clinic. The relationship between the two soon deteriorated in claims and counter-claims.

One of the claims was that Greater Houston Radiation Oncology (or one of its affiliates) had breached the fiduciary duties that it owed Sadler Clinic. The court held that no fiduciary duties were owed Sadler Clinic, because none of the Greater Houston Radiation Oncology companies was its agent:

To prove an agency relationship between parties, the party asserting the agency must prove the principal has the right to assign the agent’s task and the right to control the means and details by which the agent will accomplish its assigned task.

Slip Op., at 39 (emphasis added). The two cases relied on by the court, Hanna v. Vastar Res., Inc., 84 S.W.3d 372 (Tex.App. 2002) and O’Bryant v. Century 21 S. Cent. States, Inc., 899 S.W.2d 270 (Tex.App. 1995), were both respondeat superior cases in which the court had incorrectly used “agent,” rather than “servant.”

Greater Houston Radiation Oncology, P.A. v. Sadler Clinic Association, P.A. is similar to Green v. H & R Block, Inc., 355 Md. 488, 735 A.2d 1039 (1999). in Green, taxpayers who had used H & R Block tax preparation services, and who also taken out “Refund Anticipation Loans” arranged by H & R Block, sued H & R Block for breach of fiduciary duty. The trial court dismissed the taxpayers’ claims, on the ground that H & R Block was not their agent. The trial court reasoned that, among other things, the taxpayers did not control the details of H & R Block’s work. The Court of Appeals held that the trial court had improperly applied the test for the master-servant relationship, saying:

H & R Block misconstrues the level of control necessary for establishing a principal-agent relationship. The control a principal must exercise over an agent in order to evidence an agency relationship is not so comprehensive. A principal need not exercise physical control over the actions of its agent in order for an agency relationship to exist; rather, the agent must be subject to the principal’s control over the result or ultimate objectives of the agency relationship.

* * *

The level of control a principal must exercise over the agent becomes more clear when it is contrasted with the control exercised by the master in a master-servant relationship. * * *

* * *

[T]he level of control a principal exercises over an agent is less than the level of control a master has over a servant. Indeed, the level of control a master exercises over a servant is a key factor distinguishing the master-servant subset of the set of principal-agent relationships. In other words, all masters are principals and all servants are agents, but only when the level of control is sufficiently high does a principal become a master and an agent a servant. See Restatement (Second) of Agency § 2 cmt. a (1958) (“A master is a species of principal, and a servant is a species of agent.”). Thus, principals who are not masters exercise a much lesser degree of control over their agents than masters do over their servants.

In sum, the control a principal exercises over its agent is not defined rigidly to mean control over the minutia of the agent’s actions, such as the agent’s physical conduct, as is required for a master-servant relationship. The level of control may be very attenuated with respect to the details. However, the principal must have ultimate responsibility to control the end result of his or her agent’s actions; such control may be exercised by prescribing the agents’ obligations or duties before or after the agent acts, or both.

735 A.2d at 1050-52.

The same result should follow in Greater Houston Radiation Oncology, P.A. v. Sadler Clinic Association, P.A.: setting the task of the Greater Houston Radiation Oncology group of companies is enough control to satisfy the test for agency.

The history of the case shows that a petition for review was filed with the Texas Supreme Court. So, as they say in the NFL, pending further review…. The difference is that the case probably falls under that Court’s discretionary jurisdiction. And, as the history of the single business enterprise doctrine shows, the mere fact that bad law is circulating among the lower courts is not, by itself, a sufficient basis for the Supreme Court to intervene.

Of course, the Texas Supreme Court itself has sometimes been too casual in its use of “agent” and “servant.” See, Arvizu v. Estate of Puckett, 364 S.W.3d 273, 276-77 (Tex. 2012) (per curiam) (citing with approval opinions using “principal, “agent” and the right to control the details of the work in the context of respondeat superior cases).

Gary Rosin

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Gatz Properties, LLC. v. Auriga Capital Corp. (Del. 2012): Strine Affirmed on other Grounds and Chastised

Thursday, November 8th, 2012

Yesterday, the Delaware Supreme Court handed down its opinion in  Gatz Properties, LLC v. Auriga Capital Corp., C.A. No. 4390 (Del. Nov. 7, 2012). As expected form oral argument,  the Court affirmed Chancelllor Strine’s holding of earlier this year, but on other grounds.

In Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d  839 (Del. Ch. Ct. 2012) (slip opinion), Chancellor Strine held that a controlling owner of the manager of an LLC violated its duty of loyalty in connection with a  self-interested merger of the LLC. Chancellor Strine reasoned that, unless clearly eliminated by agreement, the managing and controlling persons of a Delaware LLC owe traditional “default fiduciary duties.”

The Delaware Supreme Court affirmed on the grounds that the LLC Agreement directly imposed a contractual duty of loyalty, and thus, entire fairness review.  Slip Op, at 12-20. The Court reserved the question of default fiduciary duties, but noted that

whether the LLC statute does—or does not— impose default fiduciary duties is one about which reasonable minds could differ. Indeed, reasonable minds arguably could conclude that the statute—which begins with the phrase, “[t]o the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties)”—is consciously ambiguous. That possibility suggests that the “organs of the Bar” (to use the trial court’s phrase) may be well advised to consider urging the General Assembly to resolve any statutory ambiguity on this issue.

Slip. Op., at 626-27.  The Court then criticized Chancellor Strine for addressing an issue that, in the view of the Court, was not properly before him:

We remind Delaware judges that the obligation to write judicial opinions on the issues presented is not a license to use those opinions as a platform from which to propagate their individual world views on issues not presented. A judge’s duty is to resolve the issues that the parties present in a clear and concise manner. To the extent Delaware judges wish to stray beyond those issues and, without making any definitive pronouncements, ruminate on what the proper direction of Delaware law should be, there are appropriate platforms, such as law review articles, the classroom, continuing legal education presentations, and keynote speeches.

Slip. Op., at 27 (emphasis added).

Gary Rosin

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More on Power to Bind by an Unauthorized Act

Friday, August 26th, 2011

In Sources of Apparent Authority, I discussed the apparent authority requires a holding out  (manifestation) by the principal; as a general rule apparent authority cannot be based only on the conduct of an agent.  That said, one of the traditional sources of apparent authority is appointing an agent to a position that, by custom, carries with it certain authority to act for the principal.  In most of the cases involving “power of position,” the principal does not communicate directly with the third person;  the only affirmative act by the principal is the appointment to the position.  That raises the question:  how is that apparent authority, as opposed to estoppel to deny agency power? That question leads to these further observations:

  • The traditional view is that an agent has implied authority to tell third persons the position to which the agent has been appointed.  A statement by the agent–a holding out–“I am the General Manager” (for example)–can be deemed to be a statement by the principal.  In Tutti Mangia Italian Grill v. Amer. Textile Maintenance Co., if the person who signed the contract as General Manager was, in fact, the General Manager (an additional fact), then the holding out by the GM was a holding out by the principal.
  • To the extent that you don’t buy the traditional view, then estoppel to deny agency power can apply.  The principal appoints the agent to a position with customary power.  The principal should reasonably foresee that the agent will tell his position to third persons, who will reasonably believe that the agent has the customary authority.  If the principal limited the agent’s authority, the principal’s failure to warn third parties of that limitation can form the basis of estoppel to deny agency power.
  • Where the agent is a general agent, apparent authority by position would also be inherent agency power (which Restatement Third of Agency rejects).

The point is that the Restatement categories tend to overlap.  Many states, such as California, tend to lump them all together into ostensible authority. 

As I tell my students, all these doctrines are just judges and professors trying to explain the circumstances in which power to bind by an unauthorized act arises.  But, as the Zen koan put its:  the finger that points at the moon is not the moon.

When Learned Hand was pointing at the moon, he probably didn’t intend to invent a new doctrine, inherent agency power.  Because he was the Revered Learned Hand, that’s what happened.  The Restatement Third would abolish the doctrine. Good luck with that.

posted by Gary Rosin

 

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Sources of Apparent Authority: Tutti Mangia Italian Grill v. Amer. Textile Maintenance Co. (Cal. Ct. App.)

Wednesday, August 24th, 2011

In Tutti Mangia Italian Grill v. Amer. Textile Maintenance Co., No. B227191 (Cal. Ct. App. 7/18/11), one of the issues was whether an agent who signed a contract containing an arbitration agreement was authorized to sign the contract.  The Court held that there was substantial evidence to support a finding of “ostensible” authority:

First, Christian signed the written agreement as the “General Manager” for TMIG, and a general manager generally has the authority to enter into agreements for the corporation. Second, the arbitrator found, based upon testimony at the arbitration hearing, that Christian “was in fact holding himself out as the General Manager and as one authorized to sign.” Accordingly, we affirm the trial court‟s finding that Christian was TMIG‟s ostensible agent, and thus, we conclude that there was a valid arbitration clause that required TMIG to arbitrate this matter.

Slip Op., at 12-13 (citations omitted) (emphasis added).

I know that “California’s a brand new game.” But apparent authority, and the other forms of power to bind by an unauthorized act, generally require some sort of conduct (or possibly negligence) on the part of the principal, and not just assertions by the agent alone.  It even says that in Section 2317 of the California Civil Code:

Ostensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess.

So, the the arbitrator, the trial court and the Court of Appeal (Second District, Division 4) all misapplied the law.

But the arbitrator also found some of the facts necessary for a ratification:

There was never any disavowal of said Agreement by [TMIG] who impliedly accepted the benefits of same by operating thereunder.

Slip Op. at 4-5.  The contract was for “the provision of restaurant linens,” id. at 2, so the restaurant presumably took delivery of, and used, the linens.  That’s probably the acceptance of benefits to which the restaurant was not entitled, except under the contract.  The ” no partial ratifications” rule would prevent accepting only part of the contract (the linens), but not the other part (the arbitration agreement). 

That said, the existence of an arbitration clause may be a material fact that might allow the restaurant to “avoid” its implied ratification, if it did not know of the clause.

posted by Gary Rosin

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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

Posted in Cases, Commentary, Partnerships, Scholarship | 1 Comment »

Doubling Down on Olmstead: Rossignol v. Rossignol (NY App. Div. 2011)

Monday, March 7th, 2011

In Court Decision Weds Business Divorce with Matrimonial Divorce, on New York Business Divorce Blog, Peter Mahler reports on Rossignol v. Rossignol, 2011 NY Slip Op 01560 (3d Dept Mar. 3, 2011).  In Rossignol, husband and wife were members of an LLC.  After wife filed for divorce, the court entered a restraining order against the husband preventing him from accessing funds in both their personal and the LLC’s banking accounts.  When husband then brought a separate action for involuntary dissolution of the LLC, the trial court dismissed the action because the proceeding for the divorce and the division of marital property involved the “same parties for the same cause of action.”  The appellate court affirmed, reasoning as follows:

Inasmuch as the husband and wife are the only owners of the LLC, and both are parties to the divorce action, we see no reason why any issues should be left for resolution after equitable distribution of the parties’ property. Given the availability of complete relief pursuant to Domestic Relations Law § 234 and our public policy of resolving equitable distribution within the context of a divorce action, we conclude that dismissal of the second action was within Supreme Court’s broad discretion….

Slip Op., at 3-4 (citations omitted).

Mahler is rightly concerned about the apparent disregard of the difference between the LLC and its members.  After the Florida Supreme Court’s opinion Olmstead v. FTC, expanding the rights of personal creditors of the single-member on an LLC (see Charging Orders and Two Kinds of Exclusivity), the Court in Rossignol at least opens the door to a similar result in marital dissolution actions where the spouses are the sole members of the LLC.

posted by Gary Rosin

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American Choppers: The Value of Craftsmanship

Friday, December 17th, 2010

The reality show American Choppers involves a custom motorcycle shop and the day-to-day tensions between the founder, and chief owner, and his employees, one of whom is his son.  As it turns out, the son is a 20% owner of the corporation that owns the shop.  After the father fired his son on the air, the network was upset.  To keep American Choppers on the air, father and son signed a letter agreement giving the father

an option to purchase all of [the son’s] shares in [the corporation] for fair market value as determined by a procedure to be agreed to by the parties as soon as practicable.

Within a few months, the father attempted to exercise the option.  In its recent opinion in  Teutul v. Teutul, 2010 NY Slip Op 09248 (2d Dept Dec. 14, 2010) (emphasis added), the court rejected the reasoning of the trial court that fair market value was sufficiently definite in the context of a closely held corporation, threw out the agreement as an agreement to agree.  Peter Mahler’s New York Business Divorce blog has excellent discussions of both the trial court and appellate opinions.

Given the timing of the letter agreement, you would think that they hired a lawyer to advise them. Perhaps a transactional lawyer.  Or even a lawyer who specialized in representing the owners of small businesses, and who presumably would be familiar with issues related to buy-sell agreements.  Perhaps they did all of that.  Perhaps the quoted language was as close as father and son could get to reaching an agreement, and they were told that they really did not have an agreement.  Perhaps not. 

In any event, the case illustrates that craftsmanship is as important in drafting agreements among owners of small businesses as it is in manufacturing custom motorcycles.

Gary Rosin

Posted in Cases, Commentary, Corporations, Owner Agreements | No Comments »

Creditors and SMLLCs. Olmstead v. FTC (Fla. 2010)

Friday, June 25th, 2010

In Olmstead v. FTC, SC01-109 (Fla. June 24, 2010), the Supreme Court of Florida ruling that a charging order is not the exclusive remedy available to creditors of a member of an LLC.  In part, the Court relied on differences between the statutory language of the charging order remedy in Florida’s partnership and limited partnership statutes, both of which expressly make charging orders a creditor’s exclusive remedy, and the LLC provision, which does not. Slip Op., at 11-13.

More significant is the Court’s analysis of the assignment and charging order portions of the Florida LLC Act.  The dissent argues that the majority treats the charging order as applying only to single-member LLCs.  Id.at 15-35.  To be sure, the majority opinion is not amodel of clarity. On first read, the Court seems to suggest a difference between the assignment and charging portions of the LLC statute, so that the general creditors’ remedy has a broader reach than the charging order–“all right, title, and interest in the debtor‘s single-member LLC,”  rather than only “rights to profits and distributions.”  Id. at 3-4.

Ultimately, the Court finds no difference in the assignment and charging order provisions.  In the view of the court, while an assignee does not generally does not become a member, except upon the consent “of the remaining members,” id. at 5-7, in the case of a single-member LLC:

The limitation on assignee rights … has no application to the transfer of rights in a single-member LLC. In such an entity, the set of “all members other than the member assigning the interest” is empty. Accordingly, an assignee of the membership interest of the sole member in a single-member LLC becomes a member—and takes the full right, title, and interest of the transferor— without the consent of anyone other than the transferor.

Id. at 9.  To this extent, the majority views the statute as treating all assignments of the entire LLC iunterest of a SMLLCs differently than it treats a similar assignment by one member in a multi-member LLC.  That said, the court views the charging order in the same manner: 

[stating that] a “judgment creditor has only the rights of an assignee of [an LLC] interest” simply acknowledges that a judgment creditor cannot defeat the rights of nondebtor members of an LLC to withhold consent to the transfer of management rights. The provision does not, however, support an interpretation which gives a judgment creditor of the sole owner of an LLC less extensive rights than the rights that are freely assignable by the judgment debtor.

Id. at 10 (emphasis added).

Even though the majority continually phrases the issue as the exclusivity of the charging order in the context of an SMLLC, it views a charging order as having the same effect as an assignment, which is what would happen under the general creditors’ remedy.  The majority then turns to the differing approaches to exclusivity among the charging order provisions of the vrious UBE statutes.

To a certain extent, the problem is further confused by the fact that the LLC charging order follows the “rights of an assignee” approach of the Revised Uniform Limited Partnership Act, rather than the lien approach of the Revised Uniform Partnership Act.  The former seems inherently less nuanced and flexible than the latter.

There has been extensive discussion of this on LNET-LLC, under the thread Olmstead Case Decided.  Prof. Larry Ribstein also discusses Olmstead on Truth on the Market.

Hat tip to Carter Bishop.

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