Sachin Sachdeva and Amit M. Sachveda have an article, The Indian LLP Law: Some Concerns for Lawyers and CAS, 92 SEBI & Corporate Law, No. 6 (2009) (SSRN), that discusses the LLP act enacted in India in December 2008.
Gary Rosin
Indian LLP law
August 19th, 2009Comparative Limited Liability for Law Firms
August 19th, 2009Susan Saab Fortney (Texas Tech) has a new article, Tales of Two Regimes for Regulating Limited Liability Law Firms in the U.S. and Australia: Client Protection and Risk Management Lessons, 11 Legal Ethics 230 (2009) (SSRN), that compares US and Australian regimes for law firm limited liability. She criticizes US for not adequately addressing firm management systems to ensure ethical conduct.
Gary Rosin
Limited Import of UB blog
August 17th, 2009In case you’ve noticed, yes the archive is bigger. I just imported posts from our predecessor blog, Unicorprorated Business Law Prof, from December 2008 to July 2009. I’m seeing if I can get the older ones, too.
Gary Rosin
Lawyer Duties to Third-Parties. Moore v. Weinberg (SC 2009)
August 15th, 2009In Moore v. Weinberg, Opinion No. 26702 (SC August 12, 2009), a lawyer was representing a plaintiff in a law suit in which $100,000 had been deposited in escrow with the clerk of the court. The lawyer’s client borrowed money from Lender, and gave Lender a security interest in the client’s interest in the escrowed funds. The lawyer had drafted the documents for the loan and lien. When the lawsuit settled, and the lawyer received the funds in escrow, the lawyer apparently forgot about the lien, and paid the money to the client.
Lender sued lawyer for negligence and conversion, and the trial court granted summary judgement in favor of the lawyer. On the negligence claim, the Supreme Court reasoned that the lawyer had assumed the role of an escrow agent:
[Lawyer] contends that allowing a cause of action against an attorney under these circumstances will intrude upon the attorney/client relationship and greatly hinder an attorney’s ability to represent his client. In our view, [this] argument misses the mark. [Lawyer] acted as the escrow agent and owed a fiduciary duty to [Lender] by virtue of this role. Therefore, it makes no difference that [Lawyer] was [the client’s] lawyer and represented him in other matters. Under the facts of this case, the duty arises from an attorney’s role as an escrow agent and is independent of an attorney’s status as a lawyer and distinct from duties that arise out of the attorney/client relationship.
* * * … [Lawyer] essentially admitted that he was negligent in failing to disburse the funds in accordance with the agreement by testifying that he simply overlooked the terms of the agreement.
I would agree with the Court if the lawyer had assumed the role of escrow agent. According to the opinion, the funds were in the registry of the Court–the county clerk was the escrow agent. It seems to me that the lawyer never assumed the role of escrow agent. If that’s the case, it’s hard to see how the lawyer owed fiduciary duties to Lender. Still, the opinion only reversed the summary judgment; there is no finding by the fact-finder that the lawyer acted as escrow agent. There’s still time to get this issue right.
Apart from the negligence claim, there was also a conversion claim. As to that, the Court found that there a material issue was a material question of fact on the issue of whether the lawyer had knowing converted the funds by [paying them to the client.
Hat tip Legal Profession Blog.
Gary Rosin
Sole Proprietorships as Entities?
August 13th, 2009In a recently published article, Unconscious Classism: Entity Equality for Sole Proprietors,11 U. Pa. J. Const. L. 215 (2009), Mitchell F. Crusto (Loyola) argues that sole proprietorships are discriminated against in that they are not afforded entity treatment. To remedy this, he proposes a Uniform Sole Proprietorship Act (USPA) modelled on the UPA and the RUPA. Id. at 268 app B.
Crusto’s USPA largely follows the structure of the UPA. For example, he would not follow RUPA sections 203 and 502 and make the sole proprietorship the owner of property. Rather, under Section 16(a),
“A sole proprietor is the sole owner of specific sole proprietorship property holding as an “owner in sole proprietorship.”
USPA § 16(a).
USPA section 16 differs from UPA section 25 in two major respects. First, there is no requirement that the sole proprietor can use firm property only for firm purposes. Second, the sole proprietor’s rights in specific property of the sole proprietorship are assignable, USPA § 16(b), but can be attached or executed against only for claims against the sole proprietorship, USPA § 16(c).
I assume the rationale is that the sole proprietor’s consent may be presumed. Yet, in USPA Section 5 tracks UPA Section 9 in limiting the apparent authority of a sole proprietor to acts “apparently carrying on in the usual way the business of the sole proprietorship”. USAP § 5(1) & 5(2). Oddly, though, the USPA would give the sole proprietor authority to take the extraordinary acts listed in UPA Section 9(3). USPA § 5(3).
More importantly, strict asset segregation is the hallmark of the modern view of an “entity.” Without that there is little chance of limited liability for firm obligations. Although Crusto at times argues for that, id.at 262, USPA Section 9 makes the sole proprietor fully liable for firm obligations. In Crusto’s view, granting general entity status is “an essential first step toward a limited liability sole proprietorship statute (“LLSP”). Id. at 263. But not without strict asset segregation.
Unfinished Business & Law Firms
August 12th, 2009As noted earlier, In re Brobeck, Phleger & Harrison, LLP (Greenspan v. Orrick, Herrington & Sutcliffe LLP), __ B.R. __, 2009 WL 2045344 (Bankr. N.D. Cal. July 2, 2009), involves the concept of unfinished business. That concept grows out of UPA Section 34(1)(a), which provides that, after dissolution, partners have the power to bind the partnership “[b]y any act appropriate for . . . completing transactions unfinished at dissolution.”
In a law firm, the primary unfinished business would include the representation of clients in matters already begun, but not yet completed. We often associate law-firm unfinished business with contingent-fee litigation, but even matters billed on an hourly basis could have substantial remaining work–consider a major acquisition or commercial litigation, for example. Unfinished business in no different from unbilled hourly matters or unpaid receivable; all must be finished, billed and collected for the benefit of the old firm.
The Brobeck waiver of the firm’s interest in unfinished business amounted to a distribution in kind of that business. It is well-settled that partners may agree to distributions in kind, rather than liquidations by sale and distributions of cash. As noted by the Brobeck court, completing unfinished business of a law firm “can be protracted”. Slip Op. at *8. Given that, the court concluded that
an agreement that immediately disposes of unfinished business and minimizes the disruptive impact of a dissolution is appropriate, and the court will not fault them for complying with this aspect of California law.
Id.
The problem was that the Brobeck firm was not only insolvent, but also an LLP; its partners were not liable for the obligations that the firm could not cover. There is a very real difference between the interests of the firm and those of its partners. In that context, partner consent should not be sufficient to avoid a breach of the duty of loyalty to the partnership. Yet the court treated the duty to account as operating only as among the partners.
The court gestured towards the principle that agreements solely among partners cannot override the rights of creditors. Slip. Op.at *10. That said, the court incorrectly viewed the insolvency of the partnership as relating only to the general creditors’ remedy of the fraudulent transfer laws. The duty to act for the benefit of the partnership cannot allow partners to strip assets from an insolvent firm. any assertion otherwise is “manifestly unreasonable.”
Gary Rosin
Law-Firm Dissolutions & Fiduciary Duties. In re Brobeck, Pheleger & Harrison, LLP (Bankr. N. D. Cal 2009)
August 12th, 2009Prior to filing bankruptcy, in order to facilitate an orderly liquidation and movement of attorneys to other firms, the law firm of Brobeck, Phleger & Harrison, LLP (“Brobeck”) amended its partnership agreement to include a waiver of the rights of the firm and its partners to any “unfinished business” of the firm, as that term is defined in Jewel v. Boxer.
In In re Brobeck, Phleger & Harrison, LLP (Greenspan v. Orrick, Herrington & Sutcliffe LLP), __ B.R. __, 2009 WL 2045344 (Bankr. N.D. Cal. July 2, 2009), the bankruptcy court held that the provision was valid as a matter of California partnership law but was a fraudulent transfer because it was a transfer of interests in Brobeck’s property that was made while Brobeck was insolvent and without the receipt by Brobeck of any value in return.
In Jewel v. Boxer, 156 Cal.App.3d 171, 203 Cal.Rptr. 13 (1984), a California court of appeals held that, in the absence of an agreement otherwise, when a partnership dissolves, the partners have a duty to account to the dissolved firm and their former partners for profits earned on the dissolved firm’s unfinished business after deducting for overhead and reasonable compensation. The Jewel case involved contingency fee matters, but later cases made clear that the rule also applies to hourly rate matters. Many Brobeck partners were familiar with the Jewel duty to account because a law firm had recently sued Brobeck for an accounting of profits earned on unfinished business completed by former partners of that firm who went to Brobeck. As the dissolution of Brobeck loomed, the Brobeck policy committee thus recommended that the partnership agreement be amended to include a provision waiving Jewel claims that Brobeck would have against its former partners or their new firms except for two specified matters. The amendment received the requisite approval of the partners, and Brobeck proceeded to dissolve. After Brobeck entered involuntary bankruptcy, the trustee asserted various claims against the Brobeck partners and several firms who had hired Brobeck partners. The trustee settled with most of the partners and the two firms to which most Brobeck partners moved, but certain Jewel claims were not settled, and the trustee asserted these claims against two firms and ten former Brobeck partners who moved to those firms.
The court first analyzed whether the Jewel waiver was valid under California partnership law. The court concluded that the partners were not only free to adopt such a provision, but were, in fact, encouraged by the case law in this area to adopt an agreement as to how to handle unfinished business in a way that immediately disposes of unfinished business and minimizes the disruptive impact of the dissolution. The court rejected the trustee’s arguments that the waiver ran afoul of the RUPA provision permitting modification of the duty of loyalty by identifying “specific types or categories of activities that do not violate the duty of loyalty” so long as the modification is not “manifestly unreasonable.” The trustee argued that the provision was not specific enough because it did not refer to the partners’ duty of loyalty, but the court stated that specific reference to the duty of loyalty, while “it may be a prudent exercise,” is not required for a valid modification of the duty under RUPA. The court also rejected the trustee’s argument that the provision was “manifestly unreasonable.” The court stated that it was left to rely on its common sense in the absence of case law defining the term, and the court concluded that the Jewel waiver was not “manifestly unreasonable.” The court reasoned that the waiver did not eliminate the duty of loyalty, but merely modified the duty to account, which is just one of the three duties of loyalty set forth in RUPA. The court stated that Brobeck’s insolvency at the time of adoption of the waiver did not affect its validity under RUPA because RUPA does not govern the relationship of the partnership or its partners to third parties, such as creditors.
While the court determined that the Jewel waiver was lawful and valid under RUPA, the court ultimately determined that the waiver was avoidable as a fraudulent transfer. The court held that profits from unfinished business amounted to property of Brobeck and that the waiver effected a transfer of that property to the partners. Although the court concluded that the trustee failed to meet his summary judgment burden with respect to actual intent to hinder, delay, or defraud a creditor, the court concluded that the trustee was entitled to summary judgment that the Jewel waiver was a constructively fraudulent transfer. The parties did not dispute that Brobeck was insolvent when the waiver was approved, and the court concluded that there was no evidence that Brobeck received anything of value in exchange for the waiver. Thus, the waiver was avoidable as a fraudulent transfer, and the partners, as initial transferees, and their new firms, as immediate transferees, were liable to the extent of profits received on Brobeck’s unfinished business.
Elizabeth Miller
Unincorporated Business Law Lives!
August 11th, 2009Unincorporated Business Entities Law is the successor to the Unicorporated Business Law Prof blog on the Law Professor Blogs Network. During the transition, we hope to be able to move the archives, so that they will not be lost when our predecessor goes dark.
Gary Rosin
Deductibility of LLC Tax Losses. Garnett v. Commissioner (Tax Ct. 2009)
July 10th, 2009Over on Tax Prof, Paul Caron notes the recent opinion in Garnett v. Commissioner, 132 T.C. No. 19 (June 30, 2009), that allows LLC members to apply its losses to offset other income.
posted by Gary Rosin
LLC Not Bound by Agreement Signed by Manager. Credit Suisse Securities (USA) LLC v. West Coast Opportunity Fund LLC (Del Ch. 2009)
August 21st, 2009The facts in Credit Suisse Securities (USA) LLC v. West Coast Opportunity Fund, LLC, C.A. No. 4380-VCN (Del. Ch. Ct. July 30, 2009) are fascinating, though complicated.
In February, 2009, Credit Suisse sued, claiming, among other things, that the lock-up agreement did not prevent its sale of the pledged shares to meet the margin call. Vice Chancellor Noble held that the Holding LLC was not bound by the lock- up agreement, and granted judgment on the pleadings on that claim.
Id.at 8-9 (footnotes omitted) (emphasis added). It does not appear that Credit Suisse claimed that Evans acted on behalf of Holding LLC. Because Evans was not designated as the ‘Chief Executive Officer’ of Holding LLC, the addition of that language does not show an intent to act on behalf of the LLC. Still, given that the Chancellor was dismissing on the pleadings, it seems odd for him to refer to the lack of evidence that Evans was acting on behalf of Holding LLC. I’m a transactional sort, but I thought that evidence came after the pleadings.
As to the argument that the “directly or indirectly” language of the lock-up agreement was broad enough to include the Holding LLC’s shares, Chancellor Noble responded
Slip Op., at 9. Earlier, in a footnote, the Chancellor had noted that there were no allegations sufficient to make out a claim for disregard of the corporate fiction. Id. at 9 n.23.
Hat-tip Francis G.X. Pileggi.
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