top 10 business cases from the past year

Idaho State BarBusiness & Corporate Section Annual Meeting

Civil Litigation in a Down Economy

Top 10 Business Cases From the Past Year

Wendy Gerwick CoutureMay 11, 2012

McCann v. McCann, No. 37547, 2012 WL 798581 (Idaho March 13, 2012).

CLOSE CORPORATION

TRUST, for benefit of

founder’s wife and sons’ mother

SON 1President &

CEO

SON 2

36.7%36.7%

26.6%


CLOSE CORPORATION

TRUST, for benefit of

founder’s wife and sons’ mother

SON 1President &

CEO

SON 2

36.7%36.7%

26.6%

Claim: Breach of Fiduciary Duty for “Squeeze Out” or “Freeze Out”


FIRST: Court characterizes claim as direct, rather than derivative.

KEY: harm to shareholder distinct from that suffered by other shareholders




SECOND: Court quotes and applies the fiduciary duty standard from Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 663 (Mass. 1976).




SECOND: Court quotes and applies the fiduciary duty standard from Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 663 (Mass. 1976).

Wilkes: Two-step test:(1) Can controlling group demonstrate a legitimate business purpose for

its action?(2) If so, can minority stockholder demonstrate that the same legitimate

objective could have been achieved through an alternative course of action less harmful to the minority’s interest?

The court must then “weigh the legitimate business purpose . . . against the practicability of a less harmful alternative.”

Trotter v. Bank of New York Mellon, No. 38022, 2012 WL 975493 (Idaho March 23, 2012).


XNon-Judicial Foreclosure


TROTTER•Maker of

Note• Grantor of Deed of Trust

TRUSTEE

MERSBeneficiary of Deed of Trust (as nominee of Lender)

COUNTRYWIDE HOME LOANS

Lender

Note

Deed of Trust


TROTTER•Maker of


TRUSTEE


Note

Deed of Trust

BANK OF NEW YORK

MELLONBeneficiary of Deed of

TrustCOUNTRYWIDE HOME LOANS

Lender

Records assignment of Deed of Trust


TROTTER•Maker of


TRUSTEE


Note

Deed of Trust

BANK OF NEW YORK



Lender


RECONTRUSTTrustee

Records appointment of

successor trustee


TROTTER•Maker of


TRUSTEE


Note

Deed of Trust

BANK OF NEW YORK



Lender


RECONTRUSTTrustee


successor trustee

Institutes Non-Judicial Foreclosure


TROTTER•Maker of


TRUSTEE


Note

Deed of Trust

BANK OF NEW YORK



Lender


RECONTRUSTTrustee


successor trustee

Institutes Non-Judicial Foreclosure

Assign Note?

Assign interest?

Authorize initiation?


“We hold that, pursuant to I.C. § 45-1505, a trustee may initiate nonjudicial foreclosure proceedings on a deed of trust without first proving ownership of the underlying note or demonstrating that the deed of trust beneficiary has requested or authorized the trustee to initiate those proceedings.”


Contra (predating Trotter):

Armacost v. HSBC Bank USA, No. 10-CV-274-EJL-LMB, 2011 WL 825151 (D. Idaho Feb. 9, 2011) (Larry M. Boyle, United States Magistrate Judge) (emphasis added).

“This Court does not believe, however, that the inquiry ends with Defendant's compliance with the Idaho non-judicial foreclosure statute. . . . One could not reasonably contend that compliance with a procedure gives substantive rights not otherwise possessed. The question remains whether Defendant's right or authority to foreclose on the Property remains.”

Idaho Development, LLC v. Teton View Golf Estates, LLC, 152 Idaho 401, 272 P.3d 373 (Dec. 12, 2011).

TETON VIEW GOLF ESTATES,

LLC

IDAHO DEVELOPMENT,

LLC

33.3%



LLC

IDAHO DEVELOPMENT,

LLC

33.3%$1,100,000

• promissory note • partially secured by deed of trust



LLC

IDAHO DEVELOPMENT,

LLC

33.3%

Loan or Capital

Contribution?


$1,100,000



LLC

IDAHO DEVELOPMENT,

LLC

33.3%

Subsequently recorded lienholders

Priority if Loan

Idaho Development, LLC

Loan or Capital

Contribution?


$1,100,000



LLC

IDAHO DEVELOPMENT,

LLC

33.3%


Priority if Loan


Loan or Capital

Contribution?

Priority if Capital

Contribution




$1,100,000


“DEBT RECHARACTERIZATION”• KEY: intent of the parties at the time of the transaction• Question of fact• Party seeking to recharacterize carries the burden of proof



DEBT• listed in corporate records as creditors

CAPITAL• not listed in corporate records as creditors



DEBT• listed in corporate records as creditors• documentation surrounding transaction refers to the advance as a loan• documentation calls for regular payments and interest

CAPITAL• not listed in corporate records as creditors



DEBT• listed in corporate records as creditors• documentation surrounding transaction refers to the advance as a loan• documentation calls for regular payments and interest

CAPITAL• not listed in corporate records as creditors• no capital outside of advance• portion of loan was unsecured

CML V, LLC v. Bax, 28 A.3d 1037 (Del. Sep. 2, 2011).

May the creditor of an insolvent LLC assert a

derivative claim on behalf of the LLC?

INSOLVENT DELAWARE

CORPORATION

Officers & Directors

Creditors

Assert Breach of Fiduciary Duty Claim Derivatively on Behalf of Corporation

N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007).

“Individual creditors of an insolvent corporation have the same incentive to pursue valid derivative claims on its behalf that shareholders have when the corporation is solvent.”


6 Del. C. § 18-1001 Right to bring action

A member or an assignee of a limited liability company interest may bring an action in the Court of Chancery in the right of a limited liability company to recover a judgment in its favor . . .

6 Del. C. § 18-1002 Proper plaintiff

In a derivative action, the plaintiff must be a member or an assignee of a limited liability company interest at the time of bringing the action and . . .






This section authorizes

members and assignees to

assert derivative claims.






This section authorizes

members and assignees to

assert derivative claims.

This section limits the plaintiffs in ALL derivative actions to members and

assignees.


“Ultimately, LLCs and corporations are different; investors can choose to invest in an LLC, which offers one bundle of rights, or in a corporation, which offers an entirely separate bundle of rights.”


“Ultimately, LLCs and corporations are different; investors can choose to invest in an LLC, which offers one bundle of rights, or in a corporation, which offers an entirely separate bundle of rights.”

“CML could have negotiated for a provision that would convert its interests to that of an ‘assignee’ in the event of insolvency. Or, it could have negotiated for a term that would give CML control of the LLC’s governing body in such an event. These are but two examples.”

Achaian, Inc. v. Leemon Family LLC, 25 A.3d 800 (Del. Ch. May 23, 2011).

Omniglow, LLC

Leeman Family, LLC Holland

Trust

Achaian, Inc.

50% 30%20%


Omniglow, LLC


Trust

Achaian, Inc.

50% 30%20%

Without Leeman’s consent, purported to transfer/assign entire interest


Omniglow, LLC


Trust

Achaian, Inc.

50% 30%20%

Did this assignment

include voting rights?

Without Leeman’s consent, purported to transfer/assign entire interest


Default: Voting rights not assigned.

6 Del. C. §17-702 – “The assignee of a member’s limited liability company interest shall have no right to participate in the management of the business and affairs of a limited liability company except as provided in a limited liability company agreement.”

BUT, the default can be altered in the LLC agreement.


7.1 Transfer of Interest. [A] Member may transfer all or any portion of its Interest in Omniglow to any Person at any time. . . .



Defined as “the entire ownership interest of the Member”




Permits free transfer of the

“entire” Interest, including that

Interest’s associated voting

rights.




7.2 Admission of New Members. No Person shall be admitted as a Member . . . without the written consent of the Member[s]. . . .




rights.







rights.

7.2 Admission of New Members. No Person shall be admitted as a Member . . . without the written consent of the Member[s]. . . .

Consent only required if the

transferee is not already a Member.


Omniglow, LLC

Leeman Family, LLC

Achaian, Inc.

50% 50%

Gerber v. Enter. Prods. Holdings, LLC, No. 5989-VCN, 2012 WL 34442 (Del. Ch. Jan. 6, 2012).

EPE, L.P.

Enterprise Products

GP (General Partner)

Limited Partners


“A limited partnership agreement may expand, restrict, or eliminate the duties (including fiduciary duties) that any person may owe to either the limited partnership or any other party to the limited partnership agreement, ‘provided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing.’”

Quoting 6 Del. C. § 17-1101.


Section 7.9(a) of the Limited Partnership Agreement:

“ … any resolution or course of action by [Enterprise Products GP] or its Affiliated in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach . . . of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest isi. approved by Special Approval,ii. approved by a majority of the Units . . .,iii. on terms no less favorable to [EPE] than those

generally being provided to or available from unrelated third parties, or

iv. fair and reasonable to [EPE] . . .

(emphasis added)






(emphasis added)

Approval by a majority of the members of the Audit and Conflicts Committee (composed of 3 or more independent directors)



Quoting 6 Del. C. § 17-1101.



Quoting 6 Del. C. § 17-1101.

“When a contract confers discretion on one party, the implied covenant requires that the discretion be used reasonably and in good faith. . . . Thus, Enterprise Products GP had a duty, under the implied covenant, to act in good faith if it took advantage of the Special Approval process.”






(emphasis added)

Duty to act in good faith in using the Special Approval process.





iv. fair and reasonable to [EPE] . . .(emphasis added)

Duty to act in good faith in using the Special Approval process.

Section 7.10(b) of the Limited Partnership Agreement:

“[Enterprise Products GP] may consult with legal counsel, . . . investment bankers and other consultants and advisors . . ., and any act taken . . . in reliance upon the opinion . . . as to matters that [Enterprise Products GP] reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done . . . in good faith . . .”(emphasis added)



Quoting 6 Del. C. § 17-1101. “A limited partnership agreement may not validly state that ‘the implied covenant is not part of this agreement,’ but if a limited partnership agreement simply has no gaps, then the implied covenant will never apply to that agreement.”

Momot v. Mastro, 652 F.3d 982 (9th Cir. June 22, 2011).

ARBITRATION CLAUSES

Are the merits of this dispute within the scope of

the arbitration clause?

Doubts resolved in favor of arbitration.


ARBITRATION CLAUSES


Who decides – the court or the arbitrators?




ARBITRATION CLAUSES


Left to the court unless parties clearly and

unmistakably provide otherwise.



Who decides – the court or the arbitrators?


In the following arbitration clause, the parties clearly and unmistakably agreed to arbitrate the question of arbitrability:

4. Resolution of Disputes.

(a) Arbitration. If a dispute arises out of or relates to this Agreement, the relationships that result from this Agreement, the breach of this Agreement or the validity or application of any of the provisions of this Section 4, and, if the dispute cannot be settled through negotiation, the dispute shall be resolved exclusively by binding arbitration.

(Emphasis added)

Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. July 22, 2011).

Exchange Act Rule 14a-11

(proxy access for shareholder-nominated candidates)


SEC has statutory duty to consider the effect of a new rule on “efficiency, competition, and capital formation.” 15 U.S.C. §§ 77b(b), 78c(f) & 80a-2(c).


SEC has statutory duty to consider the effect of a new rule on “efficiency, competition, and capital formation.” 15 U.S.C. §§ 77b(b), 78c(f) & 80a-2(c).

“Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.”


Dodd-Frank Act JOBS Act


Dodd-Frank Act JOBS Act

Congressional Testimony of Mary L. Schapiro, Chairman of the SEC

April 17, 2012

“[T]he SEC’s Chief Economist and General Counsel have jointly developed new guidance for conducting economic analysis, taking into account the recommendations made in the reports from the GAO and OIG as well as comments from others, including Members of Congress and the courts.”

RS-AND Fund, LP v. KMP SPE LLC, No. 4:11-CV-00175, 2012 WL 1288762 (D. Idaho April 16, 2012) (Winmill, J.).

Gibson v. Credit Suisse AG, 1:10-CV-001-EJL-REB, 2012 WL 1253007 (D. Idaho March 30, 2012) (Lodge, J.).

Developer’s lender did not owe fiduciary duty to purchasers of real property and homes in resort-style developments.

Investors selling part of their profit participation interest in a venture did not owe fiduciary duty to purchaser.

RS-AND Fund, LP v. KMP SPE LLC, No. 4:11-CV-00175, 2012 WL 1288762 (D. Idaho April 16, 2012) (Winmill, J.).

Gibson v. Credit Suisse AG, 1:10-CV-001-EJL-REB, 2012 WL 1253007 (D. Idaho March 30, 2012) (Lodge, J.).

Developer’s lender did not owe fiduciary duty to purchasers of real property and homes in resort-style developments.

“[T]he allegations only go to show, at best, that Credit Suisse acted as a lender to the developers in an arms-length lender-borrower relationship.”

Investors selling part of their profit participation interest in a venture did not owe fiduciary duty to purchaser.

“A bare allegation of control over consideration paid cannot supply the factual indicia required for a finding of a fiduciary duty between parties to a contract negotiated at arms-length, even if the transaction involves an ‘investment opportunity.’”

Thank you!

Wendy Gerwick Couture

[email protected]

top 10 business cases from the past year

Documents

idaho development

bank of new york mellon

trust mersinterest

hsbc bank usa

court quotes

contra predating trotter

springside nursing home

underlying note