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Business Law Section eNews

Current News and Events from the State Bar of California Business Law Section.

Here is your February eNews from the Business Law Section (“BLS”):

Message from Jim Hill, Chair of the Business Law Section: Exciting New Developments for the Future of the Business Law Section

The Business Law Section along with the other 15 Sections of the State Bar of California are about to enter a new realm in the coming year—to become a new standalone bar association entity complementary to what will become the surviving public agency State Bar of California.  While the final decision to separate the Sections and the public agency State Bar remains one for the State Legislature, the momentum is there and getting stronger every day.

The opportunity for a new beginning for the Sections comes as the State Bar, under the leadership of President Jim Fox, dedicates itself to reforming and restructuring the discipline systems and other core public protection functions that will remain with the public agency bar.  With active support from the Bar’s Board of Trustees and its executive team, the Sections have been studying structure and operational plans for the Sections in what will become their new independent business form.

Building on the work of past bar leaders who have championed a voluntary association to house the Sections and to support the important educational work done by hundreds of dedicated Section volunteers every year, work is now underway in the Legislature drafting the necessary enabling legislation to accomplish this goal.  The Sections still have much work to do in terms of transitioning to a new structure, but we have received strong pledges of support and resources from Bar President Jim Fox and the Bar’s Executive Director Elizabeth Parker and other bar staff dedicated to the Sections, to ensure that the Sections will thrive long into the future enjoying a special relationship with the public agency State Bar, with each of us dedicated to serving and protecting California lawyers and the public at large in our respective realms of responsibility and expertise. 

The first indication of support from the State Bar and its excellent staff is the announcement by the Bar’s Office of Education of a first of its kind All Sections Annual Meeting, or Convention of the State Bar Sections, which will be held on August 17, 18 and 19, 2017 at the San Diego Sheraton Hotel & Marina on San Diego Bay.  This annual meeting of the Sections will be separate and apart from the business meetings of the Bar’s Board of Trustees and its board committees later in September 2017. Planning is now underway for the All Sections annual meeting substantive CLE education programs, networking events, and keynote speakers, which will be announced shortly.

The Business Law Section and its 15 standing committees will be active participants at the All Sections Annual Meeting in August, collaborating with other Sections on education programs and sharing networking opportunities at breakfasts, lunches and receptions—to which all of you as BLS members are invited.  In the meantime, as you will read below in this edition of the BLS Enews, our standing committees and their members are hard at work presenting education programs, hosting events across the state for their members, producing legislative analysis and proposals, and simply doing the work of the Business Law Section for the betterment of all of California’s business lawyers.  Stay tuned for more good news as we move forward with the other Sections of the State Bar into a vibrant new voluntary bar association.

Save the Date! Non Profit Organizations Hosts Program on “Philanthrocapitalism” on March 16, 2017

Attorneys David Levitt of Adler & Colvin and Will Fitzpatrick, general counsel to the Omidyar Network and related high net worth families and foundations, will provide an overview of philanthropy structures used by large donors as an alternative to traditional private foundations. The structures include the use of LLCs and non-charitable tax-exempt entities.

The talk will review some of the pros and cons of using alternative structures in the context of corporate and tax law.  It will address political impacts, mission-related investing, and charitable oversight by the Attorney General.  (Note: MCLE credit is not offered by the State Bar, but is available through a participating law firm.)

Save the date for this important presentation: March 16, 2017 at 10:00 a.m.  Participants may join either in person at the State Bar of California, 180 Howard Street, San Francisco 94105 (room to be announced) or via teleconference using the following numbers:

Call-in number:  855-520-7605
Passcode: 7547908615#

If you plan on attending in person, please RSVP for building security purposes no later than Friday, March 10, 2017.

Consumer Financial Services Committee Draws Lessons from Wells Fargo Account Scandal

The Consumer Financial Services Committee hosts a Lunchtime Lecture Series program on the third Thursday of every month addressing topics of interest to consumer financial services attorneys.

On February 16, 2017, the Committee heard from Jeffrey Ehrlich, Deputy Enforcement Director at the Consumer Financial Protection Bureau (CFPB), regarding the CFPB’s action against Wells Fargo Bank, N.A. for opening depository accounts without customers’ knowledge or consent.  The action resulted in a consent decree and $100 million fine. 

Mr. Ehrlich explained that employee incentive programs are not inherently problematic, but should be carefully monitored to avoid practices that become unfair or abusive in practice even if not officially sanctioned.  Mr. Ehrlich concluded by identifying the warning signs that should alert counsel to potential problems.

The Consumer Financial Services Committee hosts a program on the third Thursday of every month addressing topics of interest to consumer financial services attorneys. 

Financial Institutions Committee Co-sponsors February Program on Challenges in the Financial Services Industry

On the morning of February 14, 2017, the Financial Institutions Committee, together with the San Francisco Bank Attorneys Association and the Financial Women of San Francisco, presented a program on "Challenges in the Financial Services Industry: Legal and Regulatory Developments and the Road Ahead."

The program was held at the Federal Reserve Bank in San Francisco, and featured a panel of in-house, law firm and regulatory agency attorneys and other financial service industry experts.  The event began with a continental breakfast and networking session.  The program was approved for 2.25 hours of MCLE credit.  Recent press stories that the new administration would like to change the Dodd Frank banking reform legislation made this program especially topical.

Legislature Day Is March 22, 2017

The Financial Institutions Committee and the Consumer Financial Services Committee of the Business Law Section are pleased to present Legislature Day in Sacramento on March 22, 2017.

Attendees will learn about new and pending legislation that may affect the financial services industry.  The program will begin promptly at 10:00am at the State Capitol Building, located at 10th and L Streets, Room 113, Sacramento, California.   The speakers will be members of the Assembly Banking and Finance Committee and the Senate Banking and Finance Committee, or their staffs, and Kevin Gould, Senior Vice President, Director of State Government Relations, for the California Bankers' Association. At about noon, the program will  move to The Esquire Grill for lunch, located at 1213 K Street, Sacramento, California.

The program is free, and if you would like to attend please RSVP to Suzanne Roomian--Suzanne.roomian@bryancave.com, (415) 675-3525 as soon as possible.  Early responses are necessary so the sponsors might plan for the lunch event.

BLS Attorney Spotlight: Teri Shugart

Teri Shugart is a business and tax attorney in San Carlos, California, and is the Chair of the Partnerships and LLCs Committee of the Business Law Section of the State Bar.

In addition to Teri's recent article on personal goodwill (link below), she is the author and updater of "Types of Business Entities and Impact on Business Succession," a chapter for CEB's Business Succession Planning book.  She was also the Editor of the Handbook for Incorporating a Business in California, a state bar publication now being updated.  Her most recent speaking engagements have been on taxes and foster children, gender and language, and RULLCA (revised LLC law).

In her free time, Teri is also the President Emeritus of San Mateo County's Foster Parent Association, as well as a county commissioner on the San Mateo County LGBTQ Committee. Teri is the mother of Carly, a preschool teacher in Palo Alto; Mitchell, a performing drag queen (as Laundra Tyme) in San Francisco; and Arely, a basketball playing fifth grader. She lives in San Carlos with Arely, husband Jim, and Bailey the dog.

Shugart recently published a scholarly article, “Yours, Mine, and Ours: a Proposal to Bring Certainty to the Use of Personal Goodwill in the Sale of Assets of a Corporation,” published by the Hastings Business Law Journal, Vol. 13, No. 1, page 89.  The article may be accessed here.

Health Law Committee April 5, 2017, Outreach Update

Members of the BLS Health Law Committee will meet with University of San Diego Law School students and faculty on April 5, 2017 to engage students in a forum discussion regarding health law areas to watch in 2017.

The event will be held at the USD School of Law from Noon to 2:00 p.m. Initially set for March 30, 2017, the date has been moved one week to accommodate speaker schedules. Speakers at this event will include

  • David Johnson of Crowell Moring LLP’s San Francisco office;
  • Emily Cook of McDermott, Will & Emery’s Los Angeles office; and
  • David Leatherberry of Gordon & Rees's San Diego office..

This inaugural event will be the first time the Health Law Committee has met with law students from the San Diego area.  It is part of the committee’s effort to reach out to California law schools to foster relationships between law students and the State Bar Association, as well as to promote health law as a practice.  The event will be open to students, faculty, and the general public, and co-hosted by the law school’s Health Law Society.

Consumer Financial Services Committee and Financial Institutions Committee Co-host Data Privacy in Financial Services Workshop

Data privacy is a growing concern to most attorneys, but consumer financial services providers face particular regulatory and logistical challenges. On January 26, 2017, the Consumer Financial Services and Financial Institutions Committees co-hosted a program to provide the tools that attorneys need to reduce risk.

At the program, David Zetoony of Bryan Cave LLP laid the groundwork with an analysis of the mix of federal and state statutes and regulations governing consumer financial data privacy.  Adam Gottlieb, counsel at TrueAccord Corp. a FinTech debt collection startup, and Joshua de Larios-Heiman,  counsel at Data Law, then addressed what counsel should consider while preparing a data privacy policy.  Lyndsey Torp of Snell & Wilmer and Joe Guzzetta of Severson & Werson discussed how counsel should respond in the event of a data breach, including what steps to take internally and when to alert regulators.

Selected Developments in Business Law — Secured Transactions in California Commercial Law Practice

Courtesy of CEB, BLS is bringing you selected legal developments in areas of California business law that are covered by CEB’s publications. This month’s feature is from the January 2017 update to Secured Transactions in California Commercial Law Practice. References are to the book’s section numbers. See CEB’s BLS Landing Page for special discounts for Business Law Section members. The most significant legal developments affecting secured transactions practice in California since the last update include developments in such important topic areas as assignments of receivables, licensees of general intangibles, surcharges of collateral in bankruptcy, preferences in bankruptcy, voidable transactions, default interest in bankruptcy, the absolute priority rule, bankruptcy preemption of the Federal Debt Collection Practices Act, PACA trusts, and more.

January 2017 Update

In Rushton v Standard Indus., Inc. (In re C.W. Mining Co.) (D Utah 2015) 531 BR 862, the court held that, regardless of whether an assignment of receivables was intended to be a sale or a loan, both types of interests are subject to Article 9 requirements. See §1.17.

In Expeditors Int'l, Inc. v Official Creditors Comm. of CFLC, Inc. (In re CFLC, Inc.) (9th Cir 1999) 166 F3d 1012 (decided before revised Division 9), the Ninth Circuit held that no security interest was created in favor of a freight forwarder when the freight forwarder repeatedly used a standard form containing the grant of a security interest in its dealings with the debtor, because the debtor never signed the forms and there was no discussion between the parties regarding the forwarder's interest in the debtor's goods. The court held that the freight forwarder had failed to prove the debtor's intent to create a security interest. See §2.5.

With respect to licensees of general intangibles and lessees of goods outside of the ordinary course of business, Com C §9317(c) and (d) provide similar protection to the protection that Com C §9317(b) and (d) provide for buyers outside of the ordinary course of business. Subject to the purchase money security interest attachment provisions set forth in Com C §9317(e), a lessee of goods takes free of a security interest or agricultural lien if the lessee gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien before it is perfected. Com C §9317(c). Similarly, a licensee of general intangibles takes free of a security interest if the licensee gives value without knowledge of the security interest and before the security interest is perfected. Com C §9317(d). See §4.72.

In Pacific Life Ins. Co. v Gordillo (ND Cal, Sept. 21, 2015, No. 14-cv-03713-WHO) 2015 US Dist Lexis 1260655, the court held that an assignment did not satisfy the requirements of Com C §9620 when it transferred property but did not provide that the transfer of collateral was in full satisfaction of the obligations it secured. (The Northern District of California followed the same legal analysis and made the same order in John Hancock Ins. Co. (U.S.A) v Goss (ND Cal, Sept. 21, 2015, No. 14-cv-04651-WHO) 2015 US Dist Lexis 126075.) See §5.62.

In connection with the General Motors bankruptcy, the Second Circuit held that enforcing the sale order against claims relating to an ignition switch defect when General Motors should have provided notice to claimants, other than publication notice, would violate due process. Elliott v GM LLC (In re Motors Liquidation Co.) (2d Cir, July 13, 2016, Nos. 15-2844-bk(L), 15-2847-bk(XAP), 15-2848-bk(XAP)) 2016 US App Lexis 12848. See §6.27.

Surcharges are generally authorized under one of two tests: (1) an objective test requiring that the debtor or trustee seeking to surcharge the collateral demonstrates reasonable and necessary expenses and a quantifiable benefit to the secured creditor, or (2) a subjective test under which the debtor or trustee shows that the secured creditor consented to the expenses or caused the expenses to be incurred. In re Tollenaar Holsteins (Bankr ED Cal 2015) 538 BR 830. See §6.57.

A party receives an economic benefit if it shares in the enjoyment or use of goods or services. Whether reasonably equivalent value was given should be analyzed from the perspective of whether and when value was given, and not the impact that the transfer had on the debtor's solvency. PSN Liquidating Trust v Itelsat Corp. (In re PSN USA, Inc.) (11th Cir 2015) 615 Fed Appx 925. See §6.73.

Neither the Bankruptcy Code nor the Uniform Voidable Transactions Act (UVTA) (CC §§34393439.14) defines insufficiency of capital. Case law indicates that the debtor must not be left with "unreasonably small capital" at the time of the alleged fraudulent transfer or voidable transaction. See Whyte v SemGroup Litig. Trust (In re SemCrude L.P.) (3d Cir, Jan. 25, 2016, No. 14-4356) 2016 US App Lexis 7690; Moody v Security Pac. Credit, Inc. (3d Cir 1992) 971 F2d 1056. See §6.75.

The Ninth Circuit has examined the definition of insider, including statutory and non-statutory insiders in the plan of reorganization context. US Bank, NA v Village at Lakeridge, LLC (In re Village at Lakeridge LLC) (9th Cir 2016) 814 F3d 993. See §6.83.

Generally, courts will look at whether the payments made by the debtor to a creditor during the preference period are consistent with the payments made by the debtor to that creditor during the historical period before the preference period. Unsecured Creditors Comm. of Sparrer Sausage Co. v Jason's Foods, Inc. (7th Cir, June 10, 2016, No. 15-2356) 2016 US App Lexis 10569. See §6.85.

In Jubber v SMC Elec. Prods. (In re C.W. Mining Co.) (10th Cir 2015) 798 F3d 983, the Tenth Circuit agreed with Ninth Circuit that a first-time transaction can qualify as an ordinary course of business transaction and that first-time debt must be ordinary in relation to past practices of debtor and creditor when dealing with other similarly situated parties. See §6.85.

In Wells Fargo Bank, N.A. v Beltway One Dev. Group, LLC (In re Beltway One Dev. Group, LLC) (BAP 9th Cir 2016) 547 BR 819, the Bankruptcy Appellate Panel for the Ninth Circuit found that although GE Capital Corp. v Future Media Prods. (9th Cir 2008) 547 F3d 956 was decided in a §363 sale context, it should also apply in a plan context in situations in which there was no cure of a default. The court also noted that the rule for default interest is subject to equitable considerations. In Hassen Imports Partnership v KWP Fin. VI (In re Hassen Imports Partnership) (BAP 9th Cir 2000) 256 BR 916, the court held that the default rate is not automatic and that courts should examine whether the default rate should compensate for the lender's actual loss. See §6.101.

In Village Green I, GP v Fannie Mae (In re Village Green I, GP) (6th Cir 2016) 811 F3d 816, the court held that payment of certain minor claims in full but in two installments over 60 days was impairment for purposes of 11 USC §1129(a)(10). See §6.107.

The circuit courts that have ruled on the issue, including the Ninth, Fourth, Fifth, Sixth, and Tenth Circuits, have all held that the absolute priority rule applies to individual Chapter 11 debtors. Zachary v California Bank & Trust (9th Cir 2016) 811 F3d 1191; Ice House Am., LLC v Cardin (6th Cir 2014) 751 F3d 734; In re Lively (5th Cir 2013) 717 F3d 406, 407; Dill Oil Co. v Stephens (In re Stephens) (10th Cir 2013) 704 F3d 1279; Maharaj v Stubbs & Perdue, P.A. (In re Maharaj) (4th Cir 2012) 681 F3d 558. See §6.109.

Courts have looked at the interaction between the Federal Debt Collection Practices Act (FDCPA) (15 USC §§1692–1692p) and the Bankruptcy Code and the question of whether the FDCPA is preempted by the Bankruptcy Code. Both the Ninth Circuit and the Second Circuit have held that the Bankruptcy Code precludes FDCPA claims during the pendency of a bankruptcy case. Simmons v Roundup Funding, LLC (2d Cir 2010) 622 F3d 93; Wallis v Wells Fargo Bank, N.A. (9th Cir 2002) 276 F3d 502. The Third, Seventh, and Eighth Circuits have ruled differently and have permitted FDCPA claims to be brought during the pendency of a bankruptcy case. Nelson v Midland Credit Mgmt. (8th Cir, July 11, 2016, No. 15-2984) 2016 US App Lexis 12683; Simon v FIA Card Servs., N.A. (3d Cir 2013) 732 F3d 259; Randolph v IMBS Inc. (7th Cir 2004) 368 F3d 726. The Second Circuit has held that there is no conflict between the FDCPA and the Bankruptcy Code. In Garfield v Ocwen Loan Servicing, LLC (2d Cir 2016) 811 F3d 86, the Second Circuit permitted the debt collector to seek to collect the debt but warned that the debt collector risked violating the Bankruptcy Code if it sought to collect discharged debt. The Eleventh Circuit has held that the filing of a proof of claim that covers a time-barred debt violates the FDCPA. Crawford v LVNV Funding, LLC (11th Cir 2014) 758 F3d 1254. The Eleventh Circuit has further held that the FDCPA and the Bankruptcy Code do not conflict with each other, but that the Bankruptcy Code is consistent with the FDCPA in that debt collectors may not file proofs of claim for time-barred claims. Johnson v Midland Funding LLC (11th Cir, May 24, 2016, Nos. 15-11240, 15-14116) 2016 US App Lexis 9478. For a discussion of bankruptcy in general, including the automatic stay and discharge of claims, see Chapter 6. Similarly, California's Rosenthal Fair Debt Collection Practices Act (CC §§17881788.33) has been held to be preempted by the Bankruptcy Code in connection with the filing of a proof of claim for a time-barred claim. Ganas v Wells Fargo Bank, N.A. (In re Ganas) (Bankr ED Cal 2014) 513 BR 394. See §7.72.

For a history of the reasons why the Perishable Agricultural Commodities Act of 1930 (PACA) (7 USC §§499a–499s) was enacted and a discussion of its requirements, see Spada Props. v Unified Grocers, Inc. (D Or 2015) 121 F Supp 3d 1070. See §8.41.

Heeren, LLC v Cherry Growers, Inc. (WD Mich, Dec. 23, 2015, No. 1:15-cv-47) 2015 US Dist Lexis 171068 includes a detailed explanation of PACA trusts in general and the reasons for the regulations distinguishing between pre- and post-default agreements. See §8.45A.

December 2016 Update

New Partnership Audit and Adjustment Rules

The Bipartisan Budget Act of 2015 (Pub L 114–74, 129 Stat 584) changed the way the Internal Revenue Service will conduct audits of partnerships and LLC tax returns.  The new rules are effective for tax years beginning on or after January 1, 2018, although drafters of operating agreements must consider the effect of the rules before that date because most LLCs formed recently will still be in existence in 2018.  The new rules apply to all partnerships and LLCs, except those that are qualified to elect out and affirmatively do so for a given year.  See IRC §6221(b).  Among other things, the new rules eliminate the requirement for a "tax matters partner," but substitute the requirement that the LLC designate a "partnership representative," who need not be an LLC member but must have a substantial presence in the United States.  The new rules are discussed at length and practical guidance is provided in §5.16A.  See also §5.22.
The long form of operating agreement in Chapter 9 has been modified to accommodate the new partnership audit and adjustment rules.  See §§9.4, 9.53–9.54A.
The short form of operating agreement and the single-member operating agreement in Chapter 10 have each been modified to provide for an election out of the new partnership audit and adjustment rules.  See §§10.27A, 10.90A.

AB 1722

Assembly Bill 1722 (chaptered July 22, 2016) amended Corp C §17707.01(b) to provide that dissolution will be triggered by the vote of 50 percent or more of the voting interests of the members or of a greater percentage of the members' voting interests if specified in the articles or operating agreement.  Corp C §17707.01(b).  The term "voting interest" is not defined in the California Revised Uniform Limited Liability Company Act (RULLCA).  The requirement of Corp C §17707.01(b) for a vote of "50 percent or more of the voting interests of the members" to cause a "voluntary" dissolution of an LLC was intended to be consistent with Corp C §1900(a), which provides that a California corporation may be dissolved voluntarily by "50 percent or more of the voting power" of its shareholders.  It was intended to enable LLCs having only two members with equal ownership interests to dissolve on the vote of one member and thereby avoid unnecessary and costly litigation if the members are deadlocked.  See Senate Judiciary Comm. Rept., AB 1722 (Wagner), Hearing Date: June 14, 2016, available at http://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201520160AB1722.  See §16.10.

Other Developments

Effective January 1, 2016, Corp C §17713.04 was amended to clarify that operating agreements of LLCs that were entered into prior to January 1, 2014, are governed by the Beverly-Killea Limited Liability Company Act (Beverly-Killea), and operating agreements of LLCs that were entered into on or after January 1, 2014, are governed by RULLCA.  See §1.9.

There have been attempts to avoid or mitigate the negative consequence of self-employment income with respect to partnerships.  One approach has been to create a limited liability company as a subsidiary of the partnership to carry on its business and employ its partners.  A single-member limited liability company, although a disregarded entity for income tax purposes, is treated as a corporation for employment tax purposes.  Thus, it has been believed that the partners could be employees of the limited liability company and could reduce their self-employment income, e.g., by participating in employee benefit plans.  To counter this approach, a recent temporary Treasury regulation, Temp Treas Reg §301.7701–2T, adopted May 4, 2016, provides that a disregarded entity owned by a partnership will remain disregarded (i.e., not treated as a corporation) with respect to the partners, and therefore the partners will not be treated as employees of the disregarded entity.  The date of application of the provision is the later of August 1, 2016, or the latest starting plan year following May 4, 2016.  See Temp Treas Reg §301.7701–2T(e)(8); TD 9766 (May 4, 2016), IRB 2016–21 (May 23, 2016).  See §§3.63B, 4.34, 5.85A.

One possible disadvantage of utilizing a Delaware LLC for a California-based new business is the application of §18-109 of the Delaware Limited Liability Company Act, which confers on the Delaware Chancery Court personal jurisdiction over persons who serve as managers of a Delaware LLC with respect to claims for breach of the persons' duty as managers involved in or relating to the business of the LLC.  Under this section, persons who serve as managers of a Delaware LLC are deemed to have impliedly consented to the Chancery Court's jurisdiction in such matters, wherever they may reside or the LLC may be doing business.  See §3.95A.

On June 9, 2016, the IRS issued final regulations that clarified the application of the bankruptcy exception and insolvency exception to single member LLCs that are disregarded entities and grantor trusts.  See 26 CFR §1.108–9.  The final regulations provide that to exclude cancellation of indebtedness (COD) income under the bankruptcy exception, the owner of the grantor trust or single member LLC must be under the jurisdiction of the bankruptcy court as a debtor in a bankruptcy case.  It is insufficient that only the grantor trust or single member LLC be under the jurisdiction of the bankruptcy court.  26 CFR §1.108–9(a)(2).  When the owner of a grantor trust or single member LLC is a multimember LLC, the member to whom the COD income is allocable must be a debtor and the Title 11 bankruptcy proceeding subject to the court's jurisdiction for the bankruptcy exception to apply to the member.  See 26 CFR §1.108–9(a)(2).  See §5.10A.

The California Secretary of State has issued a new Form LLC-1, Articles of Organization—Limited Liability Company (LLC).  Item 5 of the new form contains a preprinted purpose clause for a California LLC that may not be modified.  See §§7.14, 7.19.

On May 16, 2016, the rules for crowdfunding under the Securities Act of 1933 and the Securities Exchange Act of 1934 became effective.  Issued by the Securities and Exchange Commission (SEC), "Regulation Crowdfunding" implements the requirements of Title III of the Jumpstart Our Business Startups Act (JOBS Act) (Pub L 112–106, 126 Stat 306).  Crowdfunding is a method of raising a limited amount of capital by soliciting relatively small investments from a large pool of investors, using the Internet (or other electronic medium) and social media tools.  The crowdfunding exemption is codified in Securities Act §4(a)(6) (15 USC §77d(a)(6)).  On October 30, 2015, the SEC issued the final version of Regulation Crowdfunding, with an effective date after 180 days.  See SEC Release Nos. 33–9974, 34–76324 (Oct. 30, 2015), available at https://www.sec.gov/rules/final/2015/33-9974.pdf.  LLCs are generally less suitable than corporations for public offerings of equity securities to a large number of investors, including offerings under the crowdfunding exemption.  As a result, an LLC is unlikely to be the entity of choice for a crowdfunded offering.  See §12.34A.

In Kennedy v Kennedy (2015) 235 CA4th 1474, the court determined that Beverly-Killea governed whether the withdrawal of an involuntary dissolution had terminated the right to compel the sale of the interest of the member who had moved for dissolution under RULLCA.  See §12.1.

The California Secretary of State has issued new forms of Statement of Information (Secretary of State Form LLC-12) and Statement of No Change (Form LLC-12NC), which must be filed to update the records of the Secretary of State every 2 years.  The current Form LLC-12 no longer includes the option to check a box that there have been no changes, and the new Form LLC-12NC must instead be used for this purpose.  See §§13.3, 13.3D–13.3E.
There are new instructions for LLCs that need to obtain an employer identification number (EIN). An EIN may be obtained by filing IRS Form SS-4 (Application for Employer Identification Number) with the IRS online (only for applicants in the United States or U.S. possessions) at http://www.irs.gov/businesses, via facsimile, or by mail.  Only international applicants that have no place of business, office, or agency in the United States or U.S. possessions may apply by telephone.  The principal officer or manager must have a valid taxpayer identification number (i.e., a social security number, EIN, or individual taxpayer identification number) in order to use the online application.  Applications by mail require about 4 weeks to obtain the EIN.  Applications by facsimile will require about 4 business days. Applications submitted online can be obtained immediately. Instructions for filing are available online at the IRS website, https//www.irs.gov/pub/irs-pdf/iss4.pdf.  A copy of Form SS-4 is available online at the IRS website, http://www.irs.gov/pub/irs-pdf/fss4.pdf.  These documents are also available at any local IRS office.  See §13.10.

Courts have used the concept of "de facto" dissolution to protect creditors from being disadvantaged by a technical reading of the dissolution statutes.  De facto dissolution means a dissolution that has in fact occurred even though all of the statutory formalities of a dissolution have not been completed.  CB Richard Ellis, Inc. v Terra Nostra Consultants (2014) 230 CA4th 405, 413.  See §16.12A.

Corporations Code §2000(a) defines the purchase price for the moving parties' shares in terms slightly different from those used in Corp C §17707.03(c) for the purchase of LLC membership interests.  Corporations Code §2000(a) calls for an appraisal of "fair value," which "shall be determined on the basis of the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation."  In contrast, Corp C §17707.03(c) refers to the "fair market value" of the membership interest and omits any reference to the possibility of sale of the business as a going concern in a liquidation.  There are technical differences between the "fair value" and "fair market value" standards.  The terms originated in different contexts. "Fair Market Value" originated in the context of tax compliance, and the IRS has defined the term in Revenue Ruling 59–60.  "Fair Value" is the standard of valuation under the GAAP accounting rules promulgated by the Financial Accounting Standards Board (FASB).  However, it is hard to articulate a reason why these technical distinctions should dictate different approaches for corporations versus limited liability companies in a buy-out situation.  There is also no obvious policy reason why the omission in §17707.03(c) of specific language about valuations of going concerns should result in a different valuation methodology for an LLC than for a corporation.  See generally Barber, Are Valuation Discounts Appropriate in LLC Member Statutory Buyouts? 1 St B of Cal Bus L News 18 (2016).  See §16.20.

Agribusiness Committee Hosts 2017 Agricultural Issues Update

Employment, energy, endangered species and water were addressed by the legal staff of the California Farm Bureau Federation at its 2017 Issues Update on February 3, 2017. There were approximately 20 in attendance at the update, which began with Kari Fisher’s thorough review of updates on California’s Irrigated Lands Regulatory Programs. Her review included a discussion of the governing laws and regulations, in addition to the Boards which oversee the programs. She highlighted the new regulations and reporting requirements for growers currently underway.

Energy and utility matters affecting agricultural landowners and operators were covered by Karen Norene Mills, including large transmission line projects currently under review.  Impacts of changes considered and adopted by the California Public Utilities Commission to agricultural electric service were discussed, such as changing prices for energy due to the increasing levels of renewable energy on the electric grid and the continuing support for customer-owned solar generation.

Jack Rice presented updates about the regulatory and compliance deadlines required under California’s Sustainable Groundwater Management Act.  Several maps were used to illustrate the various basins and the different deadlines associated with them.  He also provided current information about the status of the Endangered Species Act, including the expanding list of species, the increasing impacts of the Act and new policy discussions being held related to the Act.  Habitat Exchanges were explained and examples provided about how they might be implemented.

Carl Borden’s presentation reviewed selected issues affecting agricultural employers.  He addressed the implementation of Senate Bill 3, which increased the minimum wage, and the 25 employee threshold. Also covered was Assembly Bill 1066, the Phase-In Overtime for Agricultural Workers Act of 2016, including the uncertainties associated with the application of some of the provisions of the legislation.

The update from Justin Fredrickson, Environmental Policy Analyst, addressed the Federal Flood Policy impacts on rural operations.

A roundtable discussion about agricultural-related issues seen by practitioners was led by Dale Stern and Stephen Meyer of Downey Brand.

BLS Offers Free MCLE Seminar Credits in Ethics

Now is the perfect time to join the Business Law Section (BLS) of the State Bar and take advantage of all the BLS membership benefits, including up to 6.0 hours of free Ethics MCLE self-study.

The State Bar has extended the MCLE compliance and reporting deadline for those with last names beginning with N-Z (Group 3) to March 1, 2017, so it is not too late to get those much needed credits if you join today.
Your Business Law Section membership will include:

  • Free MCLE Opportunities. Earn up to 6.0 hours of Ethics MCLE self-study;
  • Business Law News (BLN).  A quarterly journal providing articles about cutting edge legal issues affecting the practice of business law in California, including the highly-respected Annual Review of Law issue covering recent legal developments in 13 legal sub-specializations;
  • Receive eBulletins from up to 14 BLS Standing Committees, keeping members apprised about new legislation, case law, and administrative rulings;
  • Access to Lexology®, a weekly compilation of articles and news of interest to your practice area;
  • Receptions, seminars, meetings with California legislators, tours of businesses or facilities relevant to specific legal practices; and
  • MCLE Programs. The BLS offers virtually limitless opportunities for economically-priced continuing legal education resources, including specialty credits.

Your annual BLS membership fee is $95. The savings obtained from the free Ethics MCLE credits, alone, more than cover the cost of your BLS membership.  To sign up for the BLS, log in to your My State Bar Profile by following this link: https://members.calbar.ca.gov/login.aspx.  Once logged in, click on the “Sections” hyperlink and follow the prompts. We hope you will take advantage of the benefits that BLS membership has to offer.

CEB Offers Discounts to BLS Members

CEB is currently offering discounts to BLS Members, including 10% off the price of a wide selection of CEB print and OnLAW publications as well as savings on section dues. For more information on these and other CEB discounts, click HERE. 

Reach a State-Wide Audience by Publishing in the Business Law News

The Business Law News (BLN) is seeking articles of general interest to business law practitioners for its next publication.  With approximately 8,200 members, the BLS has a wide-ranging audience.  The BLN is not only circulated to BLS members in print every quarter, it is also available to BLS members on the internet at www.calbar.ca.gov.  Please submit your articles to the new editor-in-chief, Kenneth Minesinger (minesinger@gmail.com).  

A subscription to the BLN is one of the most significant membership benefits of the BLS.  Publishing in the BLN is a terrific opportunity both to influence the discourse in the areas in which you practice and to market yourself and your skill set. Now is your chance to participate! 

You can find the BLN’s submission guidelines HERE.  Finally, have you been interested in getting involved in the BLS but don’t know where to start?  BLN is now seeking enthusiastic section members to join its Editorial Board.  You can find more information about the BLN Editorial Board HERE and the application to join BLN HERE.

Keep Up With Current Legal Developments by Receiving eBulletins Specifically Tailored for Your Field

The 15 BLS Standing Committees publish eBulletins announcing developments in their respective areas of law and upcoming events open to BLS members. Click HERE to sign up to receive eBulletins from any BLS Standing Committee completely free of charge

Showcase Your Knowledge:  Follow the BLS on Social Media and Contribute to Discussions

We all know that social media can help drive new business.  Did you know that the BLS maintains a presence on LinkedIn,  Twitter, and Facebook where it posts regular updates about new cases, new regulations, key legislative developments, and news and events from the BLS’s Standing Committees?  What you may not know is that you can not only send items to the BLS to post or tweet, but also suggest items from your own social media pages for the BLS to re-post, re-tweet, or like.  Doing so expands the reach of what you have to say to everyone who likes or follows the BLS on its various social media platforms, and may result in the BLS following you!  Please submit your suggested items for consideration or direct any questions to BLS Social Media Coordinator, Dennis J. Wickham (wickham@scmv.com); BLS Vice-Chair of Member Services, Uzzi O. Raanan (uraanan@dgdk.com); or BLS Chair, James P. Hill (hill@sullivanhill.com), and join the ever expanding discussion!

Amplify Your Professional Reputation by Joining a Standing Committee

Standing Committees continue to accept applications to fill vacant seats.  Practitioners and other legal professionals who are members of the BLS and who have at least five years of experience are eligible to apply.  Membership on a committee affords unique opportunities to participate in the creation of law in your practice area, to get to know and be known by other practitioners, to work with the recognized leaders in your field, and to stay on the cutting edge of developments and practice techniques.  Membership is a rewarding experience that keeps one ahead of, and in touch with, business law developments.  Most committees meet once a month, often by phone.  A full list of the Standing Committee meeting dates for January are listed below.  A description of the required commitment and application process, along with a link to the application, can be found HERE.

Attend a Standing Committee Meeting and Participate in Your BLS

The BLS achieves its goals through the work of its 15 Standing Committees.  You are invited to attend the regular monthly meeting of any BLS Standing Committees (see below for meeting dates).  These monthly meetings provide attendees an excellent opportunity to chat with committee members and other lawyers with a similar expertise.  Some committees even offer free MCLE credit!  Please see the contact person listed below to RSVP or request more information. Follow us on Twitter @calbarbuslaw.  Use a Standing Committee’s hashtag to search for tweets by that committee in its designated field and to re-tweet.

Standing Committee Meeting Dates for March

For a list of upcoming meeting dates and contact persons, see Standing Committee Meetings HERE. 


Jennifer Duncan, Editor-in-Chief
Kristina Del Vecchio, Contributing Editor
Corey R. Weber, Contributing Editor
Dennis J. Wickham, Contributing Editor
Uzzi O. Raanan, BLS Vice Chair, Member Services
James P. Hill, BLS Chair

For contact information, see the Executive Committee Roster HERE

To join the BLS and receive membership benefits (including an opportunity to earn 6 FREE MCLE Ethics Credits) click HERE