Ethos and Conscience—A Rejoinder

In “Wanted: An Ethos of Personal Responsibility,” Professor Kleinberger sought to prompt debate about the moral preconceptions of the legal profession. Professor Morawetz responded in his essay, “Layers and Conscience.” This article responds, commenting on Morawetz’s arguments that (1) excessive pessimism about lawyer morality is unfounded and counterproductive; (2) the public’s antipathy toward lawyers is inevitable given the role lawyers play in our society; (3) codes of ethics can and do have an uplifting influence on the morals of lawyers; and (4) law schools can and do train moral judgment

A Myth Deconstructed: “The Emperor’s New Clothes” on the Low-Profit Limited Liability Company

This article carefully debunks each major tenet of the L3C “movement” and reveals the legal and practical realities under “the Emperor’s New Clothes.” Using foundation funds to offer market-rate returns to “tranched” investors is, at best, a complicated device; not appropriate for “branding” and simplistic appeals to social conscience. When a foundation contemplates making a program-related investment, the matter requires careful, individualized, professional assessment, not reliance on a branded template. In this context, the L#C is but a snare and a delusion

The Plight of the Bare Naked Assignee

A new and separate opportunity for oppression exists because LLC law purports to (1) recognize a species of persons holding legal rights vis-á-vis the LLC (assignees) while (2) denying those persons any remedies whatsoever in connection with those rights. This article addresses the conceptual mechanics, history, and ultimate instability of that denial. The article also considers a note of irony­—namely, that the plight of the bare naked assignee derives from a construct, the organization as aggregate, that LLC law has in all other respects emphatically transcended. To understand the plight of the assignee of an LLC interest, one must first understand a bit of partnership law and history. Part II provides that necessary foundation, acknowledging that assignee vulnerability is a built-in aspect of partnership law. Part III examines how partnership law and even the original Uniform Limited Liability Company Act (ULLCA) limited that vulnerability, at least theoretically, and how the notion of a partnership with a perpetual term eliminated even that theoretical limit. Part IV describes and characterizes the state of affairs for assignees under LLC law, explains the countervailing practical concerns ( freeze the deal versus oppression unlimited ), and shows how the drafters of the newest uniform LLC Act (Re-ULLCA) chose to punt to other law. Part V provides two different conceptual approaches for use by other law. One approach assumes that under LLC law a member\u27s assignment of rights constitutes an assignment of contractual rights under the operating agreement. The other approach assumes that the assignment is merely a transfer of property rights vis-á-vis the LLC. In its own way, each approach could equip courts with sufficient authority in extreme and sufficiently harsh circumstances ... to expropriation. Part VI provides an account of an unreported trial court decision, in which the judge fashioned a remedial approach worth considering and concludes with the author\u27s suggestion for further refining that approach

ABA Business Law Section, on behalf of its committees on LLCs and Nonprofit Organizations, opposes legislation for low profit limited liability companies (L3Cs)

This document comprises a letter and attachment “submitted by the ABA Business Law Section on behalf of its Committee on Limited Liability Companies, Partnerships, and Unincorporated Entities and its Committee on Nonprofit Organizations … and states our views on … a bill ‘relating to limited liability companies [and] providing for the creation and operation of low-profit limited liability companies.’” The letter and attachment “have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and should not be construed as representing the policy of the ABA.” Supported by detailed analysis of both tax and LLC law, the letter makes the following major points: The L3C is no better than any other business form for receiving program related investments from private foundations. L3C legislation implies otherwise and we believe is therefore misleading. Using a program related investment as part of the type of tranched financing promoted by L3C advocates portends serious risk of improper “private benefit” – i.e., using charitable assets to the benefit of private interests such as for-profit investors. “Private benefit” transactions are improper for a private foundation and imperil a foundation’s tax-exempt status. A private foundation cannot remain qualified as a tax-exempt charitable entity if the foundation has transgressed the private benefit doctrine. In addition: enacting L3C legislation inadvertently but dangerously signals that state law can streamline and simplify compliance with federal tax law requirements and that program related investments can be accomplished simply, quickly, and almost “off the rack;” it is inappropriate and unnecessary to use state entity law to provide a new and potentially misleading “brand” to mark private business ventures as socially beneficial; the L3C legislation contains a technical flaw that renders the legislation self-defeating in most instances; and current LLC law already permits the type of ventures contemplated by the L3C legislation

No Longer Peas in a Pod: More Implications of the Divorce of Minnesota Corporate and LLC Law

Twenty-five years ago, when an MSBA task force drafted Minnesota’s first limited liability company(LLC) statute, the drafters copied chapter 302A, the corporate statute, to the maximum extent possible. Labels were changed—e.g., member instead of shareholder; board of governors instead of board of directors— and substance was modified to the extent necessary to comply with the then-applicable tax classification regulations. But otherwise, the task was an exercise in replication. The approach was far out of the mainstream. Almost everywhere else LLC statutes were being derived from partnership law. The task force’s rationale for going rogue was straightforward. At the time, most business lawyers—even the most experienced ones—had no grasp of the law of general and limited partnerships. Using the corporate model eliminated a huge and widespread learning curve. As an added benefit, case law arising from the corporate statute would inform the law of Minnesota LLCs (and perhaps eventually, vice versa). It seemed like a good idea at the time. It was a good idea at the time. But eventually the state bar committee on LLCs decided that it was time to return to the herd. Again, the rationale was straightforward. Minnesota’s almost unique approach meant that any LLC deal involving participants outside Minnesota would likely have to use the very abstruse Delaware statute. Accordingly, the new Minnesota LLC statute, Chapter 322C, follows the partnership paradigm and is derived from the Uniform Limited Liability Company Act (2006) (Last Amended 2013). This change in approach has many consequences. The rest of this brief article illustrates the consequences of Minnesota LLCs having left the pod that was 302A-322B

Seven Points to Explain Why the Law Ought Not Allow the Elimination of Fiduciary Duty Within Closely Held Businesses: Cardozo Is Dead; We Have Killed Him.

Prepared as part of the author\u27s work as co-reporter for the Revised Uniform Limited Liability Company Act, this essay argues against legislation that empowers private agreements to eliminate fiduciary duty within a business organization. The essay considers: (i) the venerable role of fiduciary duty within business organizations and the limited predictive powers of those urging radical reform; (ii) the absence of prescience in contract drafters; (iii) the strict construction function of fiduciary law; (iv) the inevitable and inappropriate pressure that elimination would put on the obligation of good faith and fair dealing; (v) the differences in remedy available for fiduciary claims as distinguished from contract claims; (vi) the difference between drafting law for Delaware and drafting a uniform act; and (vii) reasons that public corporation law is different from LLC law and why Delaware law should not dominate the latter context

Series of Unincorporated Business Entities: the Mobius Strip and Klein Bottle of Business Entity Law

Back in the day – say, 1990 – limited liability companies (LLCs) were the cutting edge of business entity law. Today, LLCs dominate entity formation, and the cutting edge has moved further out – to the notion of a “series,” a quasi-separate, quasi-person existing within an LLC. Business lawyers are generally familiar with series of stocks and bonds, but those series have nothing to do with the LLC series discussed in this article. To avoid confusion, this article refers to protected series, which, as we will see, are the Mobius strips or Klein bottles of entity law