Bennett v. Lally, C.A. 9545-VCN (September 5, 2014) is a recent Court of Chancery case about actions that can result in a person’s being a fiduciary of another person without even knowing it. It’s very relevant to lawyers who give “informal advice” to people. This advice could create a lawyer-client relationship. I discuss this risk in the chapter on legal ethics in my Wolters Kluwer LLC book. You can read the opinion here.
People often form de facto partnerships and conduct businesses through them and then have disputes among themselves and no writing to resolve them. This is good business for lawyers but not for businesses. The attached post in the Delaware Business Litigation Report discusses the recent Delaware Court of Chancery Grunstein case, in which the Delaware Court of Chancery addresses this situation.
The Delaware Limited Liability Company Act is “everybody’s second choice” for LLCs with members from two or more different states, and it is the first choice for many sophisticated businesses. The Delaware Court of Chancery’s new decision in the Seaport Village case, summarized and cited in the attached post in the Delaware Business Litigation Report blog website, simply repeats the DLLC Act statutory rule that Delaware operating agreements may be valid even if the parties don’t sign them. If you form or ever will form Delaware LLCs, you should know this rule.
The case cited below is one of the large and rapidly growing number of cases concerning creditors’ LLC charging orders against member-debtors-in-default. The case is interesting because it spells out in detail the very limited nature of the legal rights of the holders of these charging orders. The holders are not members; they have no fiduciary rights; they have no discovery rights; etc., etc.
In re BOONE COUNTY UTILITIES, LLC, Debtor
Boone County Utilities, LLC, Plaintiff v. The Branham Corporation, Defendant.
Bankruptcy No. 03–16707–RLM–11. | Adversary No. 12–50128. | Filed Sept. 17, 2014.
THREE SHORT TAKES: (1) EXCLUSIVE NATURE OF FLORIDA CHARGING ORDER PRECLUDES GARNISHMENT; (2) TRICKY SIGNATURE BLOCK ON CONTRACT PERSONALLY OBLIGATES GEORGIA LLC’S MANAGER; (3) IDAHO CLARIFIES THAT VEIL-PIERCING CLAIMS ARE EQUITABLE
When you draft LLC operating agreements, you have to have in mind the lawsuits that might eventually arise under or relating to the LLC. In a recent post in his excellent “LLC Law Monitor” blog, Doug Batey presents a brief but wonderfully lucid and practical summary of three recent and important LLC cases.
In the attached post in his “Business Divorce” blog, Peter Mahler lists what he believes to be the seven hottest current issues in business divorce law. As you’ll see if you visit his blog, the first four of these issues are LLC issues. Those of us who draft LLC operating agreements should draft them so as to address these issues. If you draft LLC operating agreements (or plan to in the future), read Peter’s post!
Freedom of contract is, along with management structure flexibility and pick-your-partner and charging order protections, the major factor for most entity formation clients in choosing between LLCs and state-law business corporations as the entities they will use to conduct a new business. The attached blog post in the “Delaware Corporate and Commercial Litigation Blog” summarizes and provides a link to a recently published law journal article by two justices of the Delaware Court of Chancery that argues that the statutory freedom of contract available to the members of Delaware LLCs and other Delaware non-corporate entities should be restricted.
In Chapter 3 of my Wolters Kluwer LLC book, I discuss the concept of LLC freedom of contract in great detail. On the basis of that discussion, I have to confess, with all due respect, that I think that the justice’s article is dead wrong.
When a member of an LLC becomes bankrupt, the other members normally don’t want the trustee in bankruptcy to become a substituted member. They can prevent this result if they can prove in bankruptcy court that the LLC’s operating agreement is an executory contract and that the bankrupt member has material duties under this agreement that are as yet unperformed. A brief but good article about this critical issue in LLC bankruptcy law may be found in the September 2014 Real Estate Law Report, published by Thomson Reuters.
In CCA 201436049, dated May 20, 2014, the IRS Chief Counsel’s office ruled against two persons who claimed that they were limited partners of a state-law limited partnership taxable as a partnership and thus that they did not owe Self-Employment Tax on their shares of limited partnership income under IRC § 1402(a)(13). The ground for the ruling was that these persons provided substantial services as partners to the limited partnership and thus were not limited partners within the meaning of the above provision.
The CCA contains several useful citations of authority on the issue of partner liability for partnership income. Weirdly, it does not cite Prop. Reg. 1.402, even though the IRS has stated on a number of occasions that the Prop. Reg. is its basis for auditing partner SET issues. I still feel very confident that if you use the Prop. Reg. to protect your LLC clients from SET, your clients will be quite safe from adverse IRS audits. But the CCA is entirely consistent with the Prop. Reg. and can serve as additional authority for your client’s position in appropriate fact situations.
Chapter 31 of my Wolters Kluwer LLC formbook and practice manual contains a comprehensive discussion concerning the issue of the SET liability of LLC members.
In case you’ve been wondering: I was away on vacation from August 16 to August 30 and then had to handle a publishing deadline. Thus, since August 16, I’ve been unable to send any posts to this listserv. However, now I’m back and have met the above deadline, so I’ll be resuming these posts.
Any WealthCounsel or Business Counsel lawyers who are interested in developing a solid LLC practice should consider joining the ABA committee mentioned in the above subject line if they’re not already members of it. Among many other benefits, the committee publishes a very useful quarterly newsletter entitled “The LLC and Partnership Report.” Click here to view the first page of the current edition of that newsletter, together with pages listing the programs for the meeting of the committee at the ABA annual meeting in Chicago on September 11-12 meeting in Chicago and the PUE’s LLC institute in Alexandria, Virginia on October 16-17. These pages mention several hot current issues among LLC lawyers.