top 10 business law cases from the past year (2013)

“Top 10 Business Law Cases From the Past Year”

Business & Corporate Law Section Annual CLEMay 17, 2013

Wendy Gerwick Couture

Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. Nov. 7, 2012).


Section 15 of the LLC Agreement

Neither the Manager nor any other Member shall be entitled to cause the Company to . . . enter into any additional agreements with affiliates on terms and conditions which are less favorable to the Company than the terms and conditions of similar agreements which could then be entered into with arms-length third parties, without consent of a majority of the non-affiliated Members . . .


Section 15 of the LLC Agreement

Neither the Manager nor any other Member shall be entitled to cause the Company to . . . enter into any additional agreements with affiliates on terms and conditions which are less favorable to the Company than the terms and conditions of similar agreements which could then be entered into with arms-length third parties, without consent of a majority of the non-affiliated Members . . .

o No magic words are necessary

o Viewed functionally, this is the contractual equivalent of the entire fairness standard of conduct and judicial review


Chancellor Strine: “Thus, because the LLC Act provides for principles of equity to apply, because LLC managers are clearly fiduciaries, and because fiduciaries owe the fiduciary duties of loyalty and care, the LLC Act starts with the default that managers of LLCs owe enforceable fiduciary duties.”



Section 18-1101 (c) - To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.



Section 18-1101 (c) - To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

Section 1104 - In any case not provided for in this chapter, the rules of law and equity, including the law merchant, shall govern.


Chancellor Strine: “Thus, because the LLC Act provides for principles of equity to apply, because LLC managers are clearly fiduciaries, and because fiduciaries owe the fiduciary duties of loyalty and care, the LLC Act starts with the default that managers of LLCs owe enforceable fiduciary duties.”X

Mere Dictum“[I]t was improvident and unnecessary for the trial court to reach out and decide, sua sponte, the default fiduciary duty issue as a matter of statutory construction. . . . [T]hat court’s pronouncements must be regarded as dictum without any precedential value.”



LLC Act is Ambiguous“[T]he merits of the issue 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.”



Call to Action“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.”


RESPONSES

Vice Chancellor Laster:

“Until the Delaware Supreme Court speaks, the long line of Court of Chancery precedents and the Chancellor's dictum provide persuasive reasons to apply fiduciary duties by default to the manager of a Delaware LLC. As the managing member of Oculus, AK–Feel starts from a legal baseline of owing fiduciary duties.”

Feeley v. NHAOCG, LLC, 62 A.3d 649, 663 (Del. Ch. 2012).


RESPONSES

Vice Chancellor Laster:

“Until the Delaware Supreme Court speaks, the long line of Court of Chancery precedents and the Chancellor's dictum provide persuasive reasons to apply fiduciary duties by default to the manager of a Delaware LLC. As the managing member of Oculus, AK–Feel starts from a legal baseline of owing fiduciary duties.”

Feeley v. NHAOCG, LLC, 62 A.3d 649, 663 (Del. Ch. 2012).

Amendment Proposed by the Corporation Law Section of the Delaware State Bar Association:

Section 18-1104 would be amended to read:

In any case not provided for in the chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.

Paul v. Del. Coastal Anesthesia, LLC, No. 7084-VCG, 2012 WL 1934469 (Del. Ch. May 29, 2012) (unpublished).


LLC Operating Agreement

“A member can be terminated without cause at any time upon ninety (90) days written notice by . . . the Company acting by vote of seventy-five percent (75%) of the holders of the Company’s shares.”

LLC Operating Agreement

“A member can be terminated without cause at any time upon ninety (90) days written notice by . . . the Company acting by vote of seventy-five percent (75%) of the holders of the Company’s shares.”

ISSUE: Could the members act via written consent rather than at a

member meeting?


LLC Act 18-302“Unless otherwise provided in a limited liability company agreement, on any matter that is to be voted on, consented to or approved by members, the members may take such action without a meeting, without prior notice and without a vote if consented to, in writing or by electronic transmission, by members having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all members entitled to vote thereon were present and voted.”


LLC Act 18-302“Unless otherwise provided in a limited liability company agreement, on any matter that is to be voted on, consented to or approved by members, the members may take such action without a meeting, without prior notice and without a vote if consented to, in writing or by electronic transmission, by members having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all members entitled to vote thereon were present and voted.”

?


7.8. Notice of meetings must be given to each member “not less than seven (7) days before the date of the meeting.” The notice must state the “place, date, and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called.”


7.12. Members entitled to vote shall have voting power in proportion to their Membership Shares. At a meeting of Members at which a quorum is present, the affirmative vote of Members holding a majority of the Membership Shares and entitled to vote on the matter shall be the act of the Members, unless a greater number is required by the Act.

7.8. Notice of meetings must be given to each member “not less than seven (7) days before the date of the meeting.” The notice must state the “place, date, and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called.”


7.12. Members entitled to vote shall have voting power in proportion to their Membership Shares. At a meeting of Members at which a quorum is present, the affirmative vote of Members holding a majority of the Membership Shares and entitled to vote on the matter shall be the act of the Members, unless a greater number is required by the Act.

Operating Agreement does not “otherwise provide,” so as to preempt the statutory default allowing actions by written consent.

Ross Holding & Magmt Co. v. Advance Realty Group, LLC, No. 4113-VCN, 2013 WL 764688 (Del. Ch. March 7, 2013) (unpublished).

Ross Holding & Magmt Co. v. Advance Realty Group, LLC, No. 4113-VCN, 2013 WL 764688 (Del. Ch. March 7, 2013) (unpublished).

“Rayevich cannot avoid liability simply by pointing out that he had no discretion—as restricted by the ARG Operating Agreement—to vote as a board members. He is correct that Cocoziello controlled his vote, but fiduciary duties extend beyond voting. They may involve, for example:

• studying the proposed action,

• determining the appropriateness of the proposed action,

• setting forth a dissenting view to fellow board members, and

• in the proper circumstances, informing unit holders about the potential adverse affects of a proposed action.”

Gerber v. EPE Holdings, LLC, No. 3543-VCN, 2013 WL 209658 (Del. Ch. Jan. 18, 2013) (unpublished).


“EPE”Enterprise GP Holdings, L.P.

GENERAL PARTNEREPE Holdings, LLC




DFI GP

Teppco GP $1.1 billion in EPE limited

partnership units




DFI GP

Teppco GP $1.1 billion in EPE limited

partnership units

Common Ownership


DRULPA 17-1101(d) – “[T]he partner's or other person's duties may be expanded or restricted or eliminated by provisions in the partnership agreement; provided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing.”



LPA 7.9(c) – “Except as set forth in this Agreement, neither the General Partner nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited Partner . . .”



LPA 7.9(c) – “Except as set forth in this Agreement, neither the General Partner nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited Partner.”

Duties imposed by LPA

Implied covenant of good faith & fair

dealing


LPA 7.6(e) – Transactions involving the sale or purchase of partnership property must be “fair and reasonable” to EPE.



LPA 7.9(a) – “[W]henever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership or any Partner, on the other hand, any resolution or course of action by the General Partner or its Affiliates . . . shall not constitute a breach of this Agreement . . . or of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is . . . approved by Special Approval.”




Approval by a majority of the members of the Conflicts Committee.




Approval by a majority of the members of the Conflicts Committee.

Is there a “good faith” overlay on the

Special Approval?


LPA 7.9(b) – “Whenever the General Partner . . . takes any other action, or any of its Affiliates causes it to do so, in its capacity as the general partner of the Partnership . . . then, . . . the General Partner, or such Affiliates causing it to do so, shall . . . take such other action in good faith.”


Special Approval?




Special Approval?

Definition: “must believe that the determination or other action is in the best interests of the Partnership”

Subjective standard




Special Approval?


Subjective standard




Special Approval?


Implied contractual duty of good faith and fair dealing

Subjective standard




Special Approval?



• Discretion must be exercised reasonably

• Limited gap-filling tool that allows court to impose contractual terms to which parties would have agreed had they anticipated a situation that they failed to address

Subjective standard




Special Approval?



• Discretion must be exercised reasonably

• Limited gap-filling tool that allows court to impose contractual terms to which parties would have agreed had they anticipated a situation that they failed to address

Good faith requirement doesn’t impose an implied

condition of objectively fair value

DelJack, Inc. v. U.S. Bank Nat’l Ass’n, No. 1:11-CV-65, 2012 WL 4482049 (D. Idaho Sept. 26, 2012).


For Deposit Only/s/ DelJack, Inc.



I.C. 28-3-206(3)(c) – “A payor bank . . . that takes the instrument for immediate payment over the counter from a person other than a collecting bank converts the instrument unless the proceeds of the instrument are received by the indorser or applied consistently with the indorsement.”


I.C. 28-3-118(7) – “[A]n action (i) for conversion of an instrument . . . must be commenced within three (3) years after the cause of action accrues.”


“You may not start a legal action against us because of any problem unless (a) you have given us the above notice [within 30 days after receipt of account statements] and (b) the legal action begins within 1 year after we send or make your statement available to you.”

I.C. 28-3-118(7) – “[A]n action (i) for conversion of an instrument . . . must be commenced within three (3) years after the cause of action accrues.”


I.C. 28-1-302(a) – “Except as otherwise provided in subsection (b) of this section or elsewhere in the uniform commercial code, the effect of provisions of the uniform commercial code may be varied by agreement.”



I.C. 29-110(1) – “Every stipulation or condition in a contract . . . which limits the time within which he may thus enforce his rights, is void as it is against the public policy of Idaho.



I.C. 29-110(1) – “Every stipulation or condition in a contract . . . which limits the time within which he may thus enforce his rights, is void as it is against the public policy of Idaho.

“The Court will resolve the issue by relying on the more specific statute. Idaho Code 29-110 speaks specifically to the issue presented here—the ability to contractually shorten limitations period. Idaho Code 28-1-302 speaks more generally to the ability to modify ‘provisions of the uniform commercial code.’”



I.C. 28-3-206(3)(c) – “A payor bank . . . that takes the instrument for immediate payment over the counter from a person other than a collecting bank converts the instrument unless the proceeds of the instrument are received by the indorser or applied consistently with the indorsement.”


Actual Authority?• “can be created by written or

spoken words or other conduct of the principal which, reasonable interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account”




FACT ISSUE




FACT ISSUE

Apparent Authority?• “exists when the principal

voluntarily places an agent in such a position that a person of ordinary prudence, conversant with the business usages and the nature of a particular business, is justified in believing that the agent is acting pursuant to existing authority”




FACT ISSUE

Apparent Authority?• “exists when the principal

voluntarily places an agent in such a position that a person of ordinary prudence, conversant with the business usages and the nature of a particular business, is justified in believing that the agent is acting pursuant to existing authority”

NO TRIABLE ISSUE

MWI Veterinary Supply Co. v. Wotton, No. 1:12-CV-55, 896 F. Supp. 2d 905 (D. Idaho Sept. 14, 2012).


Asset Purchase Agreement

• 5-year non-compete, beginning on the day of closing – June 8, 2007 – and ending on June 8, 2012

Key Employee Employment Agreement

• 2-year non-compete, beginning on the date that employment ceased




Equitably extended for 1

year








• Banned engaging in “the business of veterinary orthopedic equipment design, manufacture . . . [or] selling”


year








year

• Phrase has an unambiguous meaning: “implements used on animals to correct or prevent injuries or disorders of their bones or associated structures like tendons and ligaments.” Therefore, under Idaho contract law, cannot consider trade usage.








year

• Phrase has an unambiguous meaning: “implements used on animals to correct or prevent injuries or disorders of their bones or associated structures like tendons and ligaments.” Therefore, under Idaho contract law, cannot consider trade usage.

• Even when considered together with the APA, does not predominantly involve the sale of goods. So, I.C. 28-2-202 does not allow trade usage to be used to interpret this contract.

St. Luke’s Magic Valley Reg’l Med. Ctr. v. Luciani, 293 P.3d 661 (Idaho 2013).


Magic Valley Regional

Medical Center

Attorney A represented it in litigation



Medical Center


St. Luke’s Magic Valley

Regional Medical Center

Effectively an asset & liability

transfer

Sale and Lease Agreement

“[I]t is the intent of the Parties that all property and interests of the Hospital whether real or personal, tangible or intangible, be leased, sold, assigned, licensed or transferred by [Twin Falls] County and the [Magic Valley] Subsidiaries, as applicable, to [St. Luke’s], . . . whether or not reflected on the Hospital’s Balance Sheet and whether known or unknown, contingent or otherwise.”



Medical Center





transfer

Attorney A

Asserted claim for legal malpractice



Medical Center





transfer

Attorney A

Asserted claim for legal malpractice

CERTIFIED QUESTION: Is a legal malpractice claim that is transferred to an assignee in a commercial transaction, along with other business assets and liabilities, assignable?


YES



YES


Generally, claims are assignable, but not legal malpractice claims for policy reasons.


YES


Policy reasons not implicated here.



YES



In Bishop v. Owens, 272 P.3d 1247 (Idaho 2012), the Court held that a legal malpractice claim sounding in tort does not survive the death of an injured party.



YES



In Bishop v. Owens, 272 P.3d 1247 (Idaho 2012), the Court held that, at common law, a legal malpractice claim sounding in tort does not survive the death of an injured party.

Survival and assignability are different.



YES





In MacLeod v. Stelle, 249 P. 254 (Idaho 1936), the Court held that actions of a personal nature are not assignable, but an injury that “lessens the estate of the injured party does survive and . . . is assignable.”



YES





In MacLeod v. Stelle, 249 P. 254 (Idaho 1936), the Court held that actions of a personal nature are not assignable, but an injury that “lessens the estate of the injured party does survive and . . . is assignable.”

The alleged malpractice substantially impacted the value of the assets acquired.


Mickelsen Construction, Inc. v. Horrocks, No. 38634-2011, 2013 WL 1276523 (Idaho March 29, 2013).


Accelerated Paving, Inc.

Mickelsen Construction

Owed $35K




Owed $35K

Ms. Horrocks

Agreed not to file materialmen’s lien

Gave check, payable for $35K, drawn on account of her business, Sunshine Secretarial




Owed $35K

Ms. Horrocks

Gave check, payable for $35K, drawn on account of her business, Sunshine Secretarial

Agreed not to file materialmen’s lien


I.C. 9-505(2) - In the following cases the agreement is invalid, unless the same or some note or memorandum thereof, be in writing and subscribed by the party charged, or by his agent. . . . : … A special promise to answer for the debt, default or miscarriage of another, except in the cases provided for in section 9-506, Idaho Code.


Sunshine Secretarial Services, Inc. Jan. 8, 2009

Pay to the order of ____Mickelsen Construction_______$34,980.00.

DRAWEE BANK

For Accel. Lesa D. Horrocks



Sunshine Secretarial Services, Inc. Jan. 8, 2009

Pay to the order of ____Mickelsen Construction_______$34,980.00.

DRAWEE BANK

For Accel. Lesa D. Horrocks

Court: “There is nothing on the check indicating that either Ms. Horrocks or Sunshine Secretarial agreed to guaranty any obligation of Accelerated Paving to Mickelsen Construction.”




I.C. 9-506(2) - A promise to answer for the obligation of another, in any of the following cases, is deemed an original obligation of the promisor, and need not be in writing: . . . Where the creditor parts with value, or enters into an obligation, in consideration of the obligations in respect to which the promise is made, in terms or under circumstances such as to render the party making the promise the principal debtor, and the person in whose behalf it is made, his surety.




Court: Overruling Reed v. Samuels, 249 P. 893 (1926), the value is not required to inure to the benefit of the promisor, as long as the promisee parts with value.

Court: Overruling Reed v. Samuels, 249 P. 893 (1926), the value is not required to inure to the benefit of the promisor, as long as the promisee parts with value.




Court: An agreement under I.C. 9-506(2) and a guaranty are mutually exclusive because a person cannot be both the principal debtor and the guarantor.

Phillips v. Blazier-Henry, No.38666, 2013 WL 1458641 (Idaho April 11, 2013).

Complaint for Foreclosure of Deed of Trust


Phillips & Chance

Blazier-Henry



Phillips & Chance

Blazier-Henry

Default JudgmentWrit of Execution, with $87K owing



Phillips & Chance

Blazier-Henry


Sheriff’s Sale – sold lot 20 acres for $1,000



Phillips & Chance

Blazier-Henry



No credit bid



Phillips & Chance

Blazier-Henry



No credit bid

District Court Set Aside the Sale: “[T]his Court concludes that the disparity between the value of the real property sold and the successful $1,000.00 price paid is so grossly inadequate as to shock the judicial conscience.”



Phillips & Chance

Blazier-Henry



No credit bid


Supreme Court reviewed for abuse of discretion.


Court: The “shock the conscience” standard doesn’t apply in Idaho.



Rather, the standard stated in Fed’l Land Bank of Spokane v. Curtis, 262 P. 877 (1927), applies in Idaho:

“As a general rule mere inadequacy of consideration is not sufficient ground for setting aside a sheriff’s sale, but it is uniformly held that

gross inadequacy of consideration,

coupled with very slight additional circumstance,

is sufficient.”



Rather, the standard stated in Fed’l Land Bank of Spokane v. Curtis, 262 P. 877 (1927), applies in Idaho:

“As a general rule mere inadequacy of consideration is not sufficient ground for setting aside a sheriff’s sale, but it is uniformly held that

gross inadequacy of consideration,

coupled with very slight additional circumstance,

is sufficient.”

“Chance offers no authority for the proposition that an attorney’s misunderstanding of the law constitutes a slight additional circumstance that, when paired with an inadequate purchase price, warrants setting a sheriff’s sale aside.”




Phillips & Chance

Blazier-Henry



No credit bid

Supreme Court reviewed for abuse of discretion.

Supreme Court: “The order setting aside the sheriff’s sale and the judgment are reversed.”

Insight LLC v. Gunter, No.38158, 2013 WL 1730149 (Idaho April 16, 2013).


6/19/06 – Summit executed IM (lender’s) mortgage



6/19/06 – Summit executed deed of trust in favor of Gunters (vendors)




6/20/06; 4:16 p.m. – deed from Gunters to Summit recorded





6/20/06; 4:17 p.m. – IM/Summit mortgage recorded






6/20/06; 4:18 p.m. – Gunter/Summit deed of trust recorded







I.C. 45-112 – A purchase money mortgage “has priority over all other liens created against the purchaser, subject to the operation of the recording laws.”








As a matter of first impression, the taking of additional security on the mortgage, beyond the land being purchased, did not destroy the purchase money status of the mortgage.


6/19/06 – Summit executed IM (lender’s) purchase money mortgage

6/19/06 – Summit executed purchase money deed of trust in favor of Gunters (vendors)





PMM

PMM

I.C. 55-812 – “Every conveyance of real property . . . is void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is first duly recorded.”








PMM

PMM

I.C. 55-812 – “Every conveyance of real property . . . is void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is first duly recorded.”

PRIOR CONVEYANCE







PMM

PMM

Court: “Since the Gunters’ deed of trust was a subsequent encumbrance, the only way it could take priority over the IM mortgage as the first encumbrance . . . is if the Gunters were the first to record. The Gunters were not the first to record. Therefore, their deed of trust is junior to the IM mortgage.”

PRIOR CONVEYANCE

Thank you!

Wendy Gerwick [email protected]

top 10 business law cases from the past year (2013)

Business

llc managers

llc statutedoesor

enforceable fiduciary

persons duties

auriga capital

gatz props

default fiduciary dutiesis

principles of equity