NBI - TOP 10 MISTAKES After the Love Is Gone - What Not To Do - - PowerPoint PPT Presentation

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

Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com

Goals

• Prepare you to advise Client
• Show You Where / What to Look At to Guide Your Decision
• Provide Some Strategy for Resolution / Solution

Three Bottom Line Requirements for Operating Agreements:

How Do you Get In How Do You Get Out How Do You Get Paid

Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com

First Question:

What Are the Rules?

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Three General Sources of Solutions

The Operating Agreement The Statutes General Corporate Law

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The Operating Agreement

• First - A Moment of Appreciation for Legal Zoom

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The Operating Agreement

• Source of relationship among the Members - what

they agree to

• Company Governance
• Missouri and Kansas - whatever you want

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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

• Kansas Quirks -

(k) “Operating agreement” means any agreement, whether referred to as an operating agreement, limited liability company agreement

• r otherwise, written, oral, or implied, of the

member or members… … … 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)

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The Operating Agreement

• Missouri

Quirks

(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 liability company and the relative rights, duties and obligations of the members and managers, if any; 


• Mo. Ann. Stat. § 347.015 (West)

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What if there Were no Rules?

Look for Other Sources of Rules

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Indemnity and Advancement

• Kansas Mandatory

Provisions

• 1. Plaintiff to Est. Membership
• 2. Defense of Action “is or was

member officer employee…”

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Indemnity and Advancement

Missouri: Must be part of the Operating Agreement

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Deadlock and Dissolution

K.S.A. 17–76,117(b) allows for judicial dissolution of a limited-liability company when its business “is suffering or is threatened with irreparable injury” due to deadlock of the

• members. By including both the actual suffering of irreparable injury and the mere threat
• f 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

• r 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.


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Fiduciary Duties

• Operate the Company in the best interests of

company and members

• Directors and Managers -
• Members as managers

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Types

• Corporate Opportunities
• Compensation
• Financial Transparency

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Derivative Actions

• By or on behalf of the company
• Generalized injury to Company
• Request to take proper action
• Futility

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Direct Actions

• Freeze out
• Breach of Fiduciary duty to member
• Breach of agreement - particularized injury to

plaintiff

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Choice of Forum

• Really More of a War Story

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Choice of Forum

• Doing Business
• Caused Injury
• Federal vs. State
• Forum Selection Clauses

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Capitol Contributions

• Original vs. Additional -
• Operating Agreement Provisions
• Kansas - Oral Promises
• Missouri - in writing

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Asset Protection LLC’s

• Charging Order
• Divorce Decree

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Examples

• Family Business-
• Family Farm-

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

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Good News

• Its an Open Book Exam
• There are many fine articles
• AG Opinions and Bar Association Formal and

Informal Opinions

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Role of The Attorney LLC Formation

• Who is the Client?
• Attorney or Scrivener
• Future Representation
• Engagement Letter

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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)

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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

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Formation of the Attorney Client Relationship

• When the Client Reasonable Believes You Are

Their Attorney

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Three Scenarios

• Attorney For All - 1.7

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing.

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ABA Comments

• Costs, embarrassment, recrimination
• Risk of contentious negotiations
• Impartiality

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Three Scenarios

• Attorney for Just One -
• If a person reasonably believes?

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Three Scenarios

• The Scrivener

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Taking Equity Instead of a Fee

• 1. The investment and its terms must be fair and reasonable to the client; 

• 2. The terms of the investment must be fully disclosed in writing to the client in a manner that can be

reasonably understood by the client; 


• 3. The client must be advised in writing that the client may seek the advice of independent counsel of

the client’s choice and the client must be given a reasonable opportunity to do so; and 


• 4. The client gives informed consent in a signed writing to the essential terms of the investment and

the lawyer’s role in the investment transaction. 


ETHICS FOR BUSINESS LAWYERS REPRESENTING START-UP COMPANIES Therese Maynard Wake Forest Journal of Business and Intellectual Property, Vol. 11, No. 3 2010-11, 401, 409

Christopher Pickering The Pickering Law Firm cfp@pickeringlawfirm.com

Fair and Reasonable to Client

• Retrospectiscope
• ABA-[E]stablish a reasonable fee for her services based on the factors

enumerated under Rule 1.5(a) and then accept stock that at the time of the transaction is worth the reasonable fee. Of course, the stock should, if feasible, be valued at the amount per share that cash investors, knowledgeable about its value, have agreed to pay for their stock about the same time.19

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Fully Disclose in Writing

• 1. to explain so the client can understand the transaction, its terms, and its potential effects on the

lawyer client relationship; 


• 2. to describe the scope of the services to be performed for receipt of the stock, including whether the

lawyer may retain the stock if she is terminated before all the services are performed; 


• 3. to inform the client that, following receipt of the stock, matters could arise that would create a

conflict between the lawyer’s exercise of independent professional judgment and her desire to protect the value of her stock; and 


• 4. to advise the client that, as a consequence of such a conflict, she might have to withdraw as

counsel, or, at the very least, to recommend that another lawyer advise the client on the matter giving rise to the conflict. 


ETHICS FOR BUSINESS LAWYERS REPRESENTING START-UP COMPANIES Therese Maynard Wake Forest Journal of Business and Intellectual Property, Vol. 11, No. 3 2010-11, 401, 413

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Personal Interest Conflict

ABA Comments: The lawyer's own interests should not be permitted to have an adverse effect on representation of a client. For example, if the probity of a lawyer's own conduct in a transaction is in serious question, it may be difficult or impossible for the lawyer to give a client detached advice…. … …In addition, a lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed financial interest. See Rule 1.8 for specific Rules pertaining to a number of personal interest conflicts, including business transactions with clients. See also Rule 1.10 (personal interest conflicts under Rule 1.7 ordinarily are not imputed to other lawyers in a law firm).

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Referring the Case Out

Things Change-

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Possession of Attorney Client Information

• During Representation - Learned of Stuff one

Member can use against another

• Sidebar conversations
• Member disputes
• Illegal or dishonest conduct

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You No longer can represent differing interests

• 1.7
• 1.6 Confidential Information
• Transmitted by Constituent - protected
• Does not mean the constituent is client - only

that the organization’s attorney cannot reveal the information.

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Approached by one to sue the others

• 1.7(b)(3)

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Aggregate Settlement Issues

• Risk that Should Be Discussed at the Outset

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Fraudulent Transfers

• Lawyers Advice Cannot Be Used to Commit a Crime
• Crime Fraud Exception to Attorney Client Privilege 1.6(b)(2)
• Duty to inform organization

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Organization As A Client

RULE 1.13 ORGANIZATION AS CLIENT

• knows of act or failure to act
• violation of law or legal obligation to organization
• likely to result in substantial injury to organization

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Organization As Client

• refer to a higher authority in the organization
• may reveal information
• if fired or withdraws- can still inform highest authority of

termination or withdraws