Post your answers to questions 18-3, 19-7, 20-3, 21-6 at the end of each chapter in the text.
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CASE 18.3
Venture Sales, LLC v. Perkins
Supreme Court of Mississippi, 86 So.3d 910 (2012).
BUNLOP
mer
TANSSI
BACKGROUND AND FACTS Walter Perkins, Gary Fordham, and David Thompson formed
Venture Sales, LLC, to develop a subdivision in Petal, Mississippi. All three members contributed land and
funds to Venture Sales, resulting in total holdings of 466 acres of land and about $158,000 in cash.
Perkins was an assistant coach for the Cleveland Browns, so he trusted Fordham and Thompson to
develop the property. Over a decade later, however, Fordham and Thompson still had not done anything
with the property, although they had developed at least two other subdivisions in the area. Fordham and
Thompson said that they did not know when they could develop the property and that they had been
unable to get the additional $8 million they needed to proceed. Fordham and Thompson suggested
selling the property, but Perkins did not agree with the proposed listing price of $3.5 million. Perkins then
sought a judicial dissolution of Venture Sales in Mississippi state court. The trial court ordered the company
dissolved. Fordham, Thompson, and Venture Sales appealed.
IN THE LANGUAGE OF THE COURT
WALLER, Chief Justice, for the Court.
****
*** [Under the Mississippi Code, an LLC may be dissolved if it is not reasonably practicable to
carry on the business in conformity with the certificate of formation or the limited liability com-
pany agreement ***
While no definitive, widely accepted test or standard exists for determining "reasonable
practicability," it is clear that when a limited liability company is not meeting the economic purpose
for which it was established, dissolution is appropriate. In making this determination, we must first
look to the company's operating agreement to determine the purpose for which the company was
formed. (Emphasis added.]
Venture Sales' operating agreement states that the company's
purpose is "to initially
acquire, develop and sale (sic) commercial and residential properties near Petal, Forrest County,
Mississippi." At trial, Fordham admitted that the company was formed for the purpose of
acquiring and developing property. Yet, more than ten years after Venture Sales was formed
with Perkins as a member, the property remains completely undeveloped. Fordham and
Thompson
have offered a number of reasons why development has been delayed to this
point. [Emphasis in original.]
Despite [the] alleged hindrances, Fordham and Thompson have, during this ten-year period,
successfully formed two other LLCs and have developed at least two other subdivisions with
around 200 houses, collectively, within twenty-five miles of the subject property. More impor-
tantly, though, Fordham and Thompson presented no evidence that Venture Sales would be
able to develop the land as intended within the foreseeable future. When asked by the trial
court when Venture Sales might be able to begin developing as it had planned, Fordham could
not say. Fordham and Thompson admitted that it would take around $8 lion to "kick off"
construction of the subdivision as planned, and the [trial court found that Venture Sales was
currently unable to get additional bank loans or other funding needed to begin development.
****
Fordham and Thompson claim that Perkins has blocked Venture Sales from taking advantage
of certain "business opportunities," such as selling the property at a reduced price of $3.5 mil-
lion ***. However, these "business opportunities" were merely ideas from Fordham about how
to make use of the property. *** As discussed above, they presented no evidence that Venture
Sales could develop the property, which is the purpose for which the company was formed.
CASE 18.3 CONTINUES
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424
UNIT FOUR The Business Environment
CASE 18.3 CONTINUED
DECISION AND REMEDY The Mississippi Supreme Court held that Venture Sales could be judicially
dissolved. It therefore affirmed the decision of the trial court
THE LEGAL ENVIRONMENT DIMENSION Would dissolution be appropriate if the parties
had formed a partnership rather than an LLC? Explain your answer.
MANAGERIAL IMPLICATIONS To avoid the type of dispute in which the members of Venture
Sales became embroiled, the managers of an LLC or other business organization should take care to act on
the firm's economic purpose" within a reasonable time. To ensure that they will be able to do so, the manag-
ers should draw up plans and determine the full cost of the project. They should also ascertain how the needed
funds will be obtained. Ifbank loans or other funding will not be available, as occurred in this case, the LLC
should require a higher level of contributions from its members to ensure that there will be sufficient funds to
complete the project successfully.
tional accountancy and professional services firms,
are organized as LLPs, including Ernst & Young, LLP,
and PricewaterhouseCoopers, LLP.
Winding Up
When an LLC is dissolved, any members who did not
wrongfully dissociate may participate in the winding
up process. To wind up the business, members must
collect, liquidate, and distribute the LLC's assets.
Members may preserve the assets for a reasonable
time to optimize their return, and they continue to
have the authority to perform reasonable acts in con-
junction with winding up. In other words, the LLC
will be bound by the reasonable acts of its members
during the winding up process.
Once all of the LLC's assets have been sold, the pro-
ceeds are distributed to pay off debts to creditors first
(including debts owed to members who are creditors
of the LLC). The members' capital contributions are
returned next, and any remaining amounts are then
distributed to members in equal shares or according
to their operating agreement.
Formation of an LLP
LLPs must be formed in compliance with state stat-
utes, which may include provisions of the Uniform
Partnership Act (UPA). The appropriate form must be
filed with a central state agency, usually the secretary
of state's office, and the business's name must include
either "Limited Liability Partnership" or "LLP" [UPA
1001, 1002]. An LLP must file an annual report with
the state to remain qualified as an LLP in that state
LUPA 1003)
In most states, it is relatively easy to convert a tra-
ditional partnership into an LLP because the firm's
basic organizational structure remains the same.
Additionally, all of the statutory and common law
rules governing partnerships still apply (apart from
those modified by the LLP statute). Normally, LLP
Statutes are simply amendments to a state's already
existing partnership law.
SECTION 4
LIMITED LIABILITY
PARTNERSHIPS
The limited liability partnership (LLP) is a
hybrid form of business designed mostly for profes-
sionals who normally do business as partners in a
partnership. Almost all of the states have enacted LLP
statutes.
The major advantage of the LLP is that it allows a
partnership to continue as a pass-through entity for
tax purposes but limits the personal liability of the
nartners The LP is especially attractive for profes.
Liability in an LLP
An LLP allows professionals, such as attorneys and
accountants, to avoid personal liability for the mal-
practice of other partners. A partner in an LLP is
still liable for her or his own wrongful acts, such as
negligence, however. Also liable is the partner who
supervised the individual who committed a wrongful
act. (This generally is true for all types of partners and
partnerships, not just LLP.)
Example 18.6 five lawvers onerate a law firm as
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2011 WL 340094 (1ex.App-sun ArL 2011)) (see
page 454.)
. For a sample answer to Problem 19-6, go to Appendix F at the
end of this text.
19-7. Piercing the Corporate Veil. In 1997, Leon Greenblatt,
Andrew Jahelka, and Richard Nichols incorporated Loop
Corp. with only $1,000 of capital. Three years later, Banco
Panamericano, Inc., which was run entirely by Greenblatt
and owned by a Greenblatt family trust, extended a large
line of credit to Loop. Loop's subsidiaries then participated
in the credit, giving $3 million to Loop while acquir-
ing a security interest in Loop itself. Loop then opened
an account with Wachovia Securities, LLC, to buy stock
shares using credit provided by Wachovia. When the stock
values plummeted, Loop owed Wachovia $1.89 million.
Loop also defaulted on its loan from Banco, but Banco
agreed to lend Loop millions of dollars more. Rather
than repay Wachovia with the influx of funds, Loop gave
the funds to closely related entities and "compensated"
Nichols and Jahelka without issuing any W-2 forms (forms
reporting compensation to the Internal Revenue Service).
The evidence also showed that Loop made loans to other
related entities and shared office space, equipment, and
telephone and fax numbers with related entities. Loop
also moved employees among related entities, failed to file
its tax returns on time (or sometimes at all), and failed to
follow its own bylaws. In a lawsuit brought by Wachovia,
can the court hold Greenblatt, Jahelka, and Nichols per-
sonally liable by piercing the corporate veil? Why or why
not? [Wachovia Securities, LLC v. Banco Panamericano, Inc.,
674 F.3d 743 (9th Cir. 2012) (See page 441.)
19-8. Duty of Loyalty. Kids International Corp. produced
children's wear for Wal-mart and other retailers. Gila
Dweck was a kids director and its chief executive offi-
cer. Because she felt that she was not paid enough for
the company's success, she started Success Apparel to
compete with Kids. Success operated out of Kids' prem-
ises, used its employees, borrowed on its credit, took
advantage of its business opportunities, and capital-
ized on its customer relationships. As an "administra-
tive fee," Dweck paid Kids 1 percent of Success's total
Mike Lyons incorporated Lyons Concrete, Inc., in
Montana, but did not file its first annual report, so
the state involuntarily dissolved the firm in 1996.
Unaware of the dissolution, Lyons continued to do
business as Lyons Concrete. In 2003, he signed a written con-
tract with William Weimar to form and pour a certain amount
of concrete on Weimar's property in Lake County for $19,810.
Weimar was in a rush to complete the entire project, and he
and Lyons orally agreed to additional work on a time-and-
materials basis. When scheduling conflicts arose, Weimar had
his own employees set some of the forms, which proved defi-
cient. Weimar also directed Lyons to pour concrete in the rain,
which undercut its quality. In mid-project, Lyons submitted an
invoice for $14,389, which Weimar paid. After the work was
complete, Lyons sent Weimar an invoice for $25,731, but he
refused to pay, claiming that the $14,389 covered everything.
To recover the unpaid amount, Lyons filed a mechanic's lien as
"Mike Lyons d/b/a Lyons Concrete, Inc." against Weimar's
property. Weimar filed a suit in a Montana state court to strike
the lien, and Lyons filed a counterclaim to reassert it. Weimar
v. Lyons, 338 Mont. 242, 164 P.3d 922 (2007) (See
page 439.)
(a) Before the trial, Weimar asked for a change of venue
on the ground that a sign on the courthouse lawn
advertised "Lyons Concrete." How might the sign
affect a trial on the parties' dispute? Should the court
grant this request? Why or why not?
(b) Weimar asked the court to dismiss the counter-
claim on the ground that the state had dissolved
Lyons Concrete in 1996. Lyons immediately filed
new articles of incorporation for "Lyons Concrete,
Inc." Under what doctrine might the court rule
that Weimar could not deny the existence of Lyons
Concrete? What ethical values underlie this doctrine?
Should the court make this ruling? Explain.
(c) At the trial, Weimar argued, in part, that there was
no "fixed price" contract between the parties and
that even if there were, the poor quality of the work,
which required repairs, amounted to a breach, excus-
ing Weimar's further performance. Should the court
rule in Weimar's favor on this basis? Why or why not?
Legal Reasoning Group Activity
19-10. Shareholders' Duties. Milena Weintraub and Larry
Griffith were shareholders in Grand Casino, Inc., which
operated a casino in South Dakota. Griffith owned
51 percent of the stock and Weintraub 49 percent.
Weintraub managed the casino, which Griffith typically
visited once a week. At the end of 2012, an account-
ing audit showed that the cash on hand was less than
the amount posted in the casino's books. Later, more
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LITUSE
CASE ANALYSIS
Case 20.3 Auer v. Paliath
Court of Appeals of Ohio, Second District, 2013-Ohio- 391,986 N.E.2d 1052 (2013).
****
IN THE LANGUAGE
real estate broker to do or to deal with
OF THE COURT
any acts or transactions set out or
FROELICH, J. (Judge]
comprehended by the definition of a
real estate broker, for compensation
Torri Auer ſa California resident] or otherwise."
brought suit [in an Ohio state court) Under R.C. Section 4735.21, no
against real estate salesperson Jamie real estate salesperson may collect
Paliath, real estate broker Keller any money in connection with any
Williams Home Town Realty, and real estate transaction, except as in
others based on alleged fraud by the name of and with the consent of
Paliath in the sale of several rental the licensed real estate broker under
properties (in Dayton, Ohio) to Auer whom the salesperson is licensed.
*** . After a jury trial ***, Paliath
was found liable to Torri Auer in the *** A real estate broker will be held
amount of $135,200 for fraud in the vicariously liable for intentional torts
inducement of Auer's purchases of the committed by salesmen acting within the
properties. *** The jury also awarded scope of their authority. Vicarious liabil-
$135,200 to Auer from Home Town ity is appropriate because a real estate
Realty, based on the broker's vicarious salesman has no independent status or
liability for Paliath's actions in con- right to conclude a sale and can only
nection with Auer's purchases of the function through the broker with whom
properties.
he is associated. A salesman is required
Home Town Realty appeals from to be under the supervision of a licensed
the trial court's judgment.
broker in all of his activities related to
real estate transactions. [Emphasis
*** Under (Ohio Revised Code added.]
(R.C.) Section 4735.01] the term "real
estate broker" includes "any person, *** When a real estate salesper-
partnership, association, limited son acts in the name of a real estate
liability company, limited liability broker in connection with the type of
partnership, or corporation *** who real estate transaction for which he or
for another *** and who for a fee, she was hired and the broker collects
commission, or other valuable consid- a commission for the transaction, the
eration" engages in various activi- salesperson's actions in connection
ties regarding real estate, including with that real estate transaction are
selling, purchasing, leasing, renting, within the scope of the salesperson's
listing, auctioning, buying, manag- employment, as a matter of law.
ing, and advertising real estate. A real In this case, Paliath contracted
estate salesperson generally means with Home Town Realty as a real
"any person associated with a licensed estate salesperson to assist clients with
the purchase and sale of real estate.
Paliath advised and assisted Auer in
the purchase of the *** properties,
and her fraudulent conduct involved
misrepresentations regarding those
properties.
Reviewing the properties sepa-
rately, the evidence at trial established
that Home Town Realty was listed as
the real estate broker on the purchase
contract, the agency disclosure state-
ment, and the settlement statement
for the Belton Street sale. Home Town
Realty received a commission check
of $180 from the title company that
conducted the closing. Based on this
evidence, it was established, as a mat-
ter of law, that Paliath acted within
the scope of her employment as a real
estate salesperson with Home Town
Realty in relation to Auer's purchase
of the Belton property.
Similarly, Paliath's actions with
respect to the 1111-1115 Richmond
Avenue properties were taken as a real
estate salesperson assisting Auer with
the purchase of the properties. Home
Town was listed as a broker on the pur-
chase contract, the agency disclosure
statement, and the settlement state-
ment for 1111 Richmond Avenue, and
it received a commission of $2,400 fol-
lowing the closing. *** The evidence
thus demonstrated, as a matter of law,
that Paliath was acting in the scope of
her employment regarding the sale of
1111 Richmond Avenue.
****
*** The trial court's judgment will
be affirmed.
Purchase answer to see full
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