NBI - TOP 10 MISTAKES After the Love Is Gone - What Not To Do Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Theme: You are the Attorney for One or More Members Discuss What not to Do • Discuss Where to Look for Help • Discuss Ramifications of Actions •
Goals • Prepare you to advise Client • Show You Where / What to Look At to Guide Your Decision • Provide Some Strategy for Resolution / Solution Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Three Bottom Line Requirements for Operating Agreements: How Do you Get In How Do You Get Out How Do You Get Paid
First Question: What Are the Rules? Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Three General Sources of Solutions The Operating Agreement The Statutes General Corporate Law Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
The Operating Agreement • First - A Moment of Appreciation for Legal Zoom Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
The Operating Agreement • Source of relationship among the Members - what they agree to • Company Governance • Missouri and Kansas - whatever you want Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Operating Agreement • Best place to prepare for conflicts • Split up of business in the event of discord • Initial startup back out for any reason or no reason at all • Profits vs. Compensation Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
The Operating Agreement (k) “Operating agreement” means any agreement, whether referred to as an operating agreement, limited liability company agreement or otherwise, written, oral, or implied, of the member or members… … • Kansas Quirks - … An operating agreement is not subject to any statute of frauds, including K.S.A. 33-106, and amendments thereto. An operating agreement may provide rights to any person, including a person who is not a party to the operating agreement, to the extent set forth therein… Kan. Stat. Ann. § 17-7663 (West) Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
The Operating Agreement (13) “Operating agreement” , any valid agreement or agreements, written or oral, among all members, or written declaration by the sole member concerning the conduct of the business and affairs of the limited • Missouri liability company and the relative rights, duties and obligations of the Quirks members and managers, if any; Mo. Ann. Stat. § 347.015 (West) Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
What if there Were no Rules? Look for Other Sources of Rules Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Indemnity and Advancement 1. Plaintiff to Est. Membership 2. Defense of Action “is or was member officer employee…” • Kansas Mandatory Provisions Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Indemnity and Advancement Missouri: Must be part of the Operating Agreement Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Deadlock and Dissolution K.S.A. 17–76,117(b) allows for judicial dissolution of a limited-liability company when its business “is su ff ering or is threatened with irreparable injury” due to deadlock of the members. By including both the actual su ff ering of irreparable injury and the mere threat of that injury, the legislature has implicitly rejected Chambers' argument that a company can't be dissolved so long as it's still solvent. Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Constructive Fraud Constructive fraud or fraud by silence is premised on a party's obligation or duty to speak. Andres, 714 P .2d at 970; Ensminger v. Terminix Int'l Co., 102 F .3d. 1571, 1573 (10th Cir.1996) (interpreting Kansas law). “A suppression or concealment of the truth is not at all times such fraud or deceit as will be relieved against. It must be a suppression or concealment of facts which the party is under a legal or equitable obligation to communicate and in respect of which he could not be innocently silent.” DuShane v. Union Nat'l Bank, 576 P .2d 674, 678-79 (Kan.1978). “The question of what gives rise to a legal or equitable obligation to communicate is not always an easy question to resolve, but generally the duty must arise from a relationship existing between the parties when the suppression or concealment is alleged to have occurred.” Id. at 679. Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Fiduciary Duties • Operate the Company in the best interests of company and members • Directors and Managers - • Members as managers Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Types • Corporate Opportunities • Compensation • Financial Transparency Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Derivative Actions • By or on behalf of the company • Generalized injury to Company • Request to take proper action • Futility Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Direct Actions • Freeze out • Breach of Fiduciary duty to member • Breach of agreement - particularized injury to plaintiff Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Choice of Forum • Really More of a War Story Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Choice of Forum • Doing Business • Caused Injury • Federal vs. State • Forum Selection Clauses Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Capitol Contributions • Original vs. Additional - • Operating Agreement Provisions • Kansas - Oral Promises • Missouri - in writing Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Asset Protection LLC’s • Charging Order • Divorce Decree Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Examples • Family Business- • Family Farm- Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
ETHICS TRAPS Four Areas: 1. Representing the Startup 2. Conflicts During Operation 3. Taking Equity as a Fee 4. When to Refer Out 5. Fraudulent Transfers
Good News • Its an Open Book Exam • There are many fine articles • AG Opinions and Bar Association Formal and Informal Opinions Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Role of The Attorney LLC Formation • Who is the Client? • Attorney or Scrivener • Future Representation • Engagement Letter Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Duties to Third Parties “An attorney representing a corporation does not become the representative of its shareholders merely because the attorney's actions on behalf of the corporation also benefit the shareholders; the attorney owes no duty to the shareholders and no attorney-client relationship is present to sustain liability of the attorney to the shareholders.” 7 Am.Jur.2d, Attorneys at Law § 249, p. 269-70. Miller v. Staab , 113 P.3d 274 (Kan. Ct. App. 2005) Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Fiduciary Duty to Third Party K.S.A. 17–7673(b) provides that a LLC—similar to a corporation—is “a separate legal entity, the existence of which as a separate legal entity shall continue until cancellation of the limited liability company's articles of organization.” (Emphasis added.) Moreover, according to Kansas Rule of Professional Conduct 1.13(b)(2011 Kan. Ct. R. Annot. 513), an attorney retained by an organization “shall proceed as is reasonably necessary in the best interest of the organization. ” (Emphasis added.) In other words, “an attorney's duties to a limited liability company run only to the company itself and not to its members.” Penn, LLC v. Prosper Business Development Corp., No. 2:10–cv–993, 2011 WL 2118072, *15 (S.D.Ohio 2011) (unpublished opinion). See also Miller v. Staab, No. 91,931, 2005 WL 1429834, at *4, (Kan.App.), rev. denied 280 Kan. 983 (2005) (“[A]s a general legal principle, attorneys representing corporations owe no duty to third-party shareholders.”). Thus, because Barbieri's fiduciary duty as an attorney ran only to the LLC, we conclude that the district court did not err in dismissing White's individual claim. White ex rel. B.W. II, L.L.C. v. Barbieri, 284 P.3d 375 (Kan. Ct. App. 2012) Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Pizel Factors 1. Extent to Which the Transaction was intended to benefit the plaintiff 2. The Foreseeability of harm to 3d parties 3. Degree of certainty that plaintiff suffered injury 4. Closeness of connection between the attorney and injury 5. Policy of preventing future harm 6. Burden on the profession Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
Formation of the Attorney Client Relationship • When the Client Reasonable Believes You Are Their Attorney Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com
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