CURRENT MONTH (August 2017)
Limited Liability Companies
Charging Order Receiver Could Not Exercise Control Over LLCs
By Tom Rutledge, Stoll Keenon Ogden PLLC
In a recent decision from Florida, McClendon v. Dakem & Associates, LLC, (Fla. 5th Dist. Ct. App. May 26, 2017), the court held that a receiver appointed pursuant to the charging order statute could not exercise managerial control over LLCs. Dakem was successful in receiving charging orders against McClendon’s interest in numerous LLCs, those charging orders in furtherance of judgments in favor of Dakem. In four instances, with respect to LLCs controlled by McClendon, the receiver was charged to exercise managerial control over the companies. McClendon challenged the receiver’s exercise of those rights, asserting they were outside the scope of the statute. The court agreed with that determination, writing:
[T]he charging order should only have divested [McClendon] of her economic opportunity to obtain profits and distributions from the LLC, charging only her membership interest, not her managerial rights. To the extent that the order appointing the receiver authorized the receiver to exercise managerial control over the LLCs, it exceeded the permissible scope and is reversed. In sum, the order granting the charging order and appointing a receiver is affirmed; however, the portions of the order permitting the receiver to be the financial officer of the LLC and exercise managerial control is reversed.
Securitization Trust Has Citizenship of the Trustee, and Not the Certificate Holders, for Purposes of Diversity Jurisdiction
By Tom Rutledge, Stoll Keenon Ogden PLLC
In a recent decision out of Texas, it was necessary that the court characterize a securitization trust as either a traditional trust or a business trust in order to determine whether diversity jurisdiction existed. In this instance, based on the characteristics of this particular trust, it was found to be a traditional trust. On that basis, it was afforded the citizenship of only its trustee. DHIHoldings, LP v. Mortgageit, Inc., (S.D. Texas July 21, 2017).
Assessing the terms of the trust, pursuant to which the trustee had legal title to the assets and managed same (sometimes through agents), as well as the provision that U.S. Bank could sue and be sued in its capacity as trustee, it was determined that it was the real party in interest under Navarro Savings Association v. Lee, 446 U.S. 458, 460-61 (1980). The court considered and rejected arguments to the contrary, such as the ability of the certificate holders to compel certain actions, including the removal of the trustee, finding they were not sufficient to remove the trust from classification as a traditional trust in contrast to a business trust. Therefore, diversity jurisdiction existed.
Delaware Embraces Blockchain Technology
By Michael K. Reilly, Potter Anderson Corroon LLP, and David B. DiDonato, Potter Anderson Corroon LLP
On August 1, 2017, Delaware adopted amendments to its corporate statute to enable Delaware corporations to utilize blockchain technology to create and administer corporate records, including a corporation’s stock ledger. Corporations can use blockchain technology to reduce the costs and delays inherently resulting from the involvement of intermediaries and to maintain a real-time, secure, traceable, and authenticated list of their stockholders of record. Blockchain technology also offers a solution for simplifying the complexities of the nominee system under which most shares in publicly traded companies are legally owned by a nominee called Cede & Co. (itself a nominee of The Depository Trust Company, or DTC), and investors only indirectly own shares through DTC’s institutional participants (i.e., in “street-name”). These complexities have resulted in mistakes in the execution of voting instructions and the loss of appraisal rights for street-name stockholders, as noted by Vice Chancellor Laster of the Delaware Court of Chancery in a speech delivered to the Council of Institutional Investors in September 2016. A CLE program “How the Technology Behind Distributed Ledgers Will Impact Corporate Law and M&A Practice,” was held in September during the Annual Meeting of the ABA’s Business Law Section.