Business Law Section eNews
Current News and Events from the State Bar of California Business Law Section.
Here is your January eNews from the Business Law Section (“BLS”):
Exclusive Interview with Elizabeth Rindskopf Parker, Executive Director of the State Bar of California
In an interview conducted by BLS eNews, Elizabeth Rindskopf Parker, the Executive Director of the State Bar of California, discusses her views on the impending separation of the voluntary Sections from the State Bar. The interview was conducted by Uzzi O. Raanan, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles, and Jennifer Duncan, General Counsel, ResortCom International, LLC.
On September 1, 2015, Elizabeth Rindskopf Parker became the Executive Director of the State Bar of California. Prior to this role, she served as Dean of the University of the Pacific McGeorge School of Law, General Counsel for the 26-campus University of Wisconsin System, the Central Intelligence Agency, and the National Security Agency, as well as a stint as Principal Deputy Legal Advisor to the U.S. State Department, among other high-level roles in government and the private sector. Ms. Parker holds undergraduate and law degrees from the University of Michigan.
Parker’s impressive prior experience, though, may not have fully prepared her for the challenges she now faces at the Bar. On October 6, 2015, Governor Jerry Brown signed into law SB 387, a previously-routine bill used to authorize the Bar to collect dues from its members. For the first time in the Bar’s history, the Legislature tacked on a provision to the bill decreeing that, as of April 1, 2016, the Bar, including its 16 voluntary Sections, would be subject to the Bagley-Keene Open Meeting Act.
Bagley-Keene (BK) requires prior public notice of meetings, limits in-person, telephone and written communications among Section and standing committee members, and obligates those who attend meetings by telephone to open their homes, offices, court chambers, and private hotel rooms to any member of the public who wishes to attend. Members who call in to meetings may only do so from ADA-compliant locations, resulting in further complications. As predicted, BK has greatly affected the work performed by the Sections, in many instances resulting in greatly-reduced productivity.
Partly as a result of BK, as well as disputes over fees the Bar charges the Sections, the application of new regulations governing Section programs and receptions, among other reasons, a groundswell has evolved among the Sections, with leadership from current and former BLS officers, to separate the Sections from the Bar.
The Council of State Bar Sections (CSBS), representing the 16 Bar Sections, and the Bar’s Board of Trustees are currently studying and debating whether the Sections should separate from the Bar and, if so, whether the new entity should be a government agency or private entity. While the ultimate decision will be made by the Legislature, subject to the Governor’s approval, decision makers will likely take into account the views expressed by the CSBS and Board of Trustees.
On the threshold of a decision on separation, on January 13, 2016, Parker graciously agreed to meet at her office with members of the Business Law Section’s eNews. Over a period of an hour-and-a-half, Parker discussed her views on separation and the Bar’s future post-separation. What follows is an account of this interview.
When asked what attracted her to her current Bar position, Parker stated that she had no idea what she was getting into when the call came in inviting her to interview. While she had relevant management experience, the State Bar is the largest unified bar in the world, involving an extremely diverse set of functions, with a unique set of political challenges. Some of the challenges only became clear after Parker joined the Bar. After discussing Parker’s initial experience at the Bar, the interview shifted to BK and separation.
BLS: Why, all of a sudden, did the Legislature impose Bagley-Keene on the State Bar?
Elizabeth Parker (EP): Openness at the Bar had been an issue for the Legislature for a long time, and the Center for Public Interest Law (CPIL) had been arguing about that for a number of years, while the State Bar’s Board of Trustees, I think, earlier had dragged its feet. It was going in a direction that almost was the equivalent, in terms of its meetings, of what BK requires. And the imposition of BK happened as a surprise because the CPIL, which was behind this, I think felt that BK should apply to the State Bar.
BLS: I wonder whether separation of the Sections would be something we are discussing were not it for BK?
EP: Well, I don’t know. At a recent meeting of the CSBS, they were talking about separation and what form the new entity should take. While BK was at the top of the list of concerns, it was interesting that there was some support for the Sections becoming a new governmental entity, which would likely be subject to at least some BK provisions. Which, to me, was quite a surprise.
BLS: To me it would seem strange if the Sections separated but remained subject to BK.
EP: Other reasons for the interest in separation include the indirect costs that the Bar assesses the Sections, which they don’t like, and certainly some don’t like me saying no to Casino Night, or to alcohol at Section functions, and to meetings at fancy hotels. The last one is also a big issue.
But back to BK, a number of commentators have noted that applying BK to the Sections, “may not make much sense!”
BLS: While BK may make sense when applied to a governmental entity, the Sections are not involved in any of the Bar’s governmental functions.
EP: Yes, but that fuels the argument that some want to make that you should not have a private association integrated into a governmental regulatory body.
BLS: That could be the issue.
EP: I think it is.
BLS: So are you in favor of separation?
EP: Well at this point I am. I think it is inevitable at this juncture.
BLS: Do you personally think it is a good idea?
EP: I have said this right from the beginning, you are going to gain and lose no matter what choice you make and clearly something is lost with separation. I had a very painful conversation with one Bar trustee yesterday who was just, you know, really lamenting the situation. But he’s not the only one. My husband’s a lawyer. He was a member of the Michigan bar. And he said to me, “You can’t separate the Bar. You have got to have that body of the professions supporting the good functioning of the legal system.”
On the other hand, if it is going to happen, and it will, it seems to me our focus now should be on how do we ensure the most successful possible separation so that, unlike what some would say, we don’t find the Sections diminished in their abilities to contribute, as some say the Conference of Delegates did when it lost about 80 percent in membership when it was spun off.
So, I think there are things that can be done that will keep the Sections, that associational component, vibrant, and we started our conversation by my sharing with you that there are other bar associations that are not unified—New York is not a unified bar. So I think we can work through this.
BLS: Do you have an opinion as whether the separated Sections should be a government agency versus a private entity?
EP: Well, I think the way I should answer that is to say I don’t think time is our friend. I think we need to move with dispatch to create clarity in the way we are going. Certainty, so that both Bar employees and volunteer members understand that yes there will be an associational organization and it is not going away. And the reason I don’t favor a governmental structure which I think would be quite a novel approach, and I believe that it may very well be problematic.
So, now I have tempered my view. Or at least from the way I must have sounded earlier on. Some must have thought I was just ready to throw the Sections out on the street, “get them out of here by January 1.” I think there has to be a transition period because we have to put some training wheels on the new section leadership to make sure they understand where they are going and how they are going to operate their new organization, and so on. So, there is going to have to be some sort of transition.
BLS: How long of a transition?
EP: I don’t know yet. I think it is certainly no more than a year. We are not talking about, I don’t think, having the Sections suddenly disappear from the Bar.
BLS: My understanding is that there is some traction currently with regard to a governmental agency. At least that is what I am hearing.
EP: Well, no one has accepted my assessment.
BLS: Which is?
EP: That it [the government agency option] is fraught. This is a very difficult thing to do. It is not to say you can’t do it, but whether you should do it is another issue. I think it is a very hard concept to make sure you have buy in from all the concerned parties. And I think it’s causing more delay than I would like to see. I think clarity of where we are going is what we need. Not to say that we have to have it happen instantly, but we need to know our direction.
BLS: Have you heard directly from the Legislature as to whether it favors a governmental agency vs. private entity?
EP: Well, we had a meeting with Senator Jackson on January 11. And she was thoughtful.
BLS: Did she express a view either way as to whether or not a governmental agency is possible?
EP: No, she kind of--- I think she did express some questions. But she said “alright, show me what it would look like.” But candidly, at the end of the day Senator Jackson has to approve this, the Assembly has to approve this, and then we have the Governor.
BLS: Have you had any communications with the Governor’s office?
EP: We are beginning to reach out. So I can only read the tea leaves there without the basis of a conversation. Didn’t he come out on Wednesday saying we are going to have a budget problem statewide?
He doesn’t tend to favor new organizations. If I had to bet, I would say I don’t think he would go with the idea of a new governmental entity, but I don’t know. So all of this then says that many parties are involved in the decision, and Senator Jackson made clear she doesn’t want a separate statute—she wants this to be in this year’s fee bill of which she is the author. So, this also concerns me. And maybe there is a way we can craft a government agency provision into the dues bill, but I worry that it might make passing the fee bill more difficult.
So now then the concern I have is that if you have this kind of provision in the fee bill, the Governor may say I am sorry, no. I will veto it. Then here we are again without a fee bill. And I don’t think anybody wants that. So, I guess I would express myself as not being a great supporter of the government agency option.
BLS: Reserves. If we separate, which sounds inevitable, whether it is a government or private entity, are you in favor of allowing the Sections to leave with their money reserves?
EP: Well, I think sure, yes. There has been some debate about, you know, the loss that the Bar would have of the indirect support provided by the Sections and that is true. But I think as long as we have an orderly separation we can probably handle that change in funding arrangements from both perspectives.
BLS: Would there be a cost to separation that the Sections would have to bear?
EP: I don’t know. I think we will have to think about that. There may be some cost associated with separation, but I don’t have a sense for how much.
BLS: The intellectual property has been somewhat of an issue for the Sections. Will they be allowed to keep this upon separation?
EP: I don’t think this is an issue.
BLS: What about dues collection [also known as dues check off]?
EP: I am just speaking for myself and State Bar President Jim Fox. We both feel strongly that it is imperative that we do everything we can to make the Sections successful. To us that means keeping you together, collecting dues for you, etc.
BLS: It sounds like you want to support the Sections, how do you see the relationship between the Bar and the Sections after separation?
EP: You know, that is a topic to be continued. We have talked about creating a special relationship, but some people have quickly interpreted that as meaning, perhaps by statute, that the Sections would be the preferred provider of MCLE. I don’t know whether that would be the best way or not.
BLS: What about the name?
EP: Oh, the name.
BLS: The Sections have suggested that they would love to have “State Bar” or “California State Bar” in their name post-separation.
EP: I have a feeling that the closest the Sections are going to get is the “California Bar Association.” There may be issues of confusion with retaining the Bar name, so we’ve given the Sections some ideas about names to consider.
BLS: So do you think we may have a California State Bar and a California Bar Association ?
EP: That could be. We would probably look at other states and see how they do it.
BLS: What would happen to Bar employees who currently work with the Sections, if the Sections become a private entity?
EP: The employees will have to decide, whether they want to stay with the State Bar or depart with the Sections. And yes, they will lose their government benefits if they decide to work for the Sections and it becomes a private entity. And some of them may say, “that is fine. We don’t care, we are at retirement age and we can move to a new private entity,” while others will say “no way.” And then we are committed to finding other roles for them at the Bar.
* The interview was conducted by Uzzi O. Raanan, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles, and Jennifer Duncan, General Counsel, ResortCom International, LLC.
Report on the Sections’ Journey to Find a New Home
By Robert Harris
Protecting and Enhancing the Mission
Although the Sections continue to receive excellent support from the Bar’s Office of Education, for which the Sections pay directly, indirect overhead costs have ballooned and will not decrease. The administrative costs of staying within the State Bar have escalated dramatically over recent years and would ultimately have resulted in the curtailment of services to Section members owing to the high cost of operating within a regulatory agency of State government. State law prohibits public funds from being used to subsidize the Sections, so alternative relief from the authority compelling an increase in expenses was not an option. Moving away from the growing requirements associated with being part of a regulatory agency of the State of California will permit, among other things, revenue to be freed that is currently spent on administrative overhead and improve educational programming and other member benefits.
The Sections are frankly being given little choice about leaving. By law, the State Bar had been required to report to the Legislature on a number of topics including separating the Sections from the State Bar. For a variety of reasons the Legislature did not pass a 2016 bill authorizing the State Bar to collect fees in 2017. The ongoing pressure for governance reforms being placed on the State Bar from various stakeholders has resulted in a number of policy changes that directly impact the Sections. These policy changes, together with the implementation of the open meeting laws under Bagley-Keene in 2016, have, all told, created an environment within the State Bar that does not allow for the Sections to survive, let alone, thrive.
The Latest News
On January 26, 2017, the State Bar’s Board of Trustees unanimously passed the following resolutions:
RESOLVED, that, in continuing consultation with the Supreme Court, the Board of Trustees authorize State Bar leadership to negotiate with the Legislature and Governor provisions in the 2017 Fee Bill, which will have as a central feature the separation of the Sections from the State Bar;
FURTHER RESOLVED, that State Bar leadership seek to include provisions in the 2017 Fee Bill that will ensure that the sixteen State Bar Sections are assisted to move into a free-standing unified entity; that a special relationship between the State Bar and the Sections be established, enabling collection of Sections’ membership dues and such other support as may be appropriate; that the Bar be authorized to explore the transfer of intellectual property and reserve funds held on behalf of the Sections and such other support as may be useful to a successful separation, while keeping in mind the obligation to maintain as a priority the licensing, regulatory and disciplinary responsibilities of the State Bar;
AND FURTHER RESOLVED, that the Board of Trustees instructs staff to prepare an analysis of the fiscal and personnel impact of separation of the Sections from the Bar, along with a transition plan, which prioritizes the licensing, regulation and discipline responsibilities of the State Bar and report back to the Board to action and adoption.
Possible Forms for New Entity
The Sections, through their governing body, the Council of State Bar Sections (the “CSBS”) has met frequently to provide the State Bar Board of Trustees with input as to the form of entity the Sections might prefer and what costs and benefits each entails.
Two possibilities exist: a government entity possibly in the form of a public corporation with status equal to that of the State Bar itself and subject to oversight by some other branch of government OR a Section 501(c)(6) non-profit entity that retains some special relationship with the State Bar. A delegation consisting of CSBS officers, members, advisors and Bar Staff (including Executive Director Elizabeth Parker) has met with members of the Senate Judiciary Committee (from which the 2018 dues bill originates) and its staff to discuss the possibility of a new State agency being created to house the Sections free of the restrictions that have hampered the Sections over the last year and whether the Executive branch of State government would exercise oversight over it now that it is clear that the other two branches cannot. Very shortly, the Sections will express their preference for a form of entity to the Bar’s Board of Trustees to be considered for consideration in the dues bill. Not long after that, the Bar’s own Board of Trustees and Legislature will make a final decision as to which form of entity will be part of the 2018 dues bill.
The BLS believes that there is no appetite in the Legislature or Executive Branch for a new government agency and that the Governor would, in any event, veto any bill calling for a new agency somehow exempt from open meeting laws and limits on conduct and expenditures that govern the rest of government. Members of the Board of Trustees have themselves expressed doubt that a government entity concept with these exemptions is a reasonable possibility. With other Sections, the BLS is moving forward with logistical, budgetary and structural planning of both the governmental and private entity options to ensure that the transition from the current structure is efficient and meets the needs of all Sections.
What to Expect in 2017
Your dues bills with check offs for the Sections have already been sent to you. BLS asks that you pay your fees and keep your Section’s check off as the Bar will continue to collect fees for voluntary Section activities for the foreseeable future.
The BLS will continue throughout 2017 provide you with its Business Law News, informative eBulletins, and great webinars. We are in the process of planning an Annual Meeting for Fall, 2017, and will continue the meetings and projects of BLS’s fifteen standing committees, until, in 2018, the BLS and other Sections move, as seamlessly as possible, into a new form of entity.
The BLS is excited about the upcoming changes and the opportunities they present. We are fully committed to using the Section’s resources—dues, other revenues and a wealth of volunteer talent—to provide you with first-rate programs, publications, and professional events. Enjoy the benefits of your membership!
Robert G. Harris (firstname.lastname@example.org) is the immediate past chair of the BLS and serves as its representative on the CSBS.
Consumer Financial Services Committee and Financial Institutions Committee Host Data Privacy Workshop
The Consumer Financial Services Committee and Financial Institutions Committees of the Business Law Section of the California State Bar joined forces to host a workshop on one of the most pressing issues facing the financial services industry: Data Privacy in Financial Services.
The event took place January 26, 2017, 10:00 a.m. to 12:45 p.m., at the Offices of Bryan Cave LLP at Three Embarcadero Center, 7th Floor, San Francisco, CA 94111, and brought together leading data privacy attorneys to explain what California financial services attorneys need to know about safeguarding confidential consumer data.
BLS Attorney Spotlight: Lauren Layne
Lauren D. Layne is now a Shareholder at Baker Manock & Jensen, PC in Fresno. Lauren chairs the firm's Reclamation and Water Law and Public Agency practice groups. Her law practice focuses on general water and environmental law, including CEQA and NEPA compliance, and includes various business transactional matters in the areas of flood control, water and irrigation districts, public agencies, agribusiness, and real estate.
As part of her practice, she also assists clients with land acquisitions and eminent domain proceedings. She serves as general counsel to various irrigation and water districts, flood control and storm water districts, and a number of newly formed Groundwater Sustainability Agencies. Lauren attended California Polytechnic State University, San Luis Obispo, where she majored in Soil Science, chaired the National Agricultural Ambassador Conference, and competed on the Livestock Judging Team. While attending University of the Pacific, McGeorge School of Law, Lauren competed on the Mock Trial team, was a student ambassador, a member of the McGeorge Women's Caucus, and served on a number of campus-wide committees. Lauren was also a judicial extern for the Honorable Ronald B. Robie at the California Court of Appeal, Third Appellate District, and served as a student member of the Anthony M. Kennedy, American Inn of Court.
Lauren is a native of Porterville and has an agricultural background that includes farming, growing citrus and olives, and raising sheep. She was very involved in both 4-H and FFA, and received her American FFA Degree. In 2011, she helped re-form the Fresno Chapter of the Cal Poly Alumni Association, and is currently serving her second term on the Cal Poly Alumni Association Board of Directors as the Regional Director for the Central Valley. Lauren is a past officer of the Central Valley Chapter of California Women for Agriculture and a member of the Fresno County Farm Bureau. She chairs the California State Bar Business Law Section’s Agribusiness Law Committee and the Fresno County Bar Association Ag Law Section. Lauren is also a member of the Fresno County Young Lawyers Association and the Fresno County Women Lawyers.
Franchise Law Committee’s Case Update: Victory for Franchisors: Pennsylvania Supreme Court Dismisses an Appeal Attempting to Hold Franchisor Liable for Franchisee’s Employee Workers’ Compensation Claim
The franchise business model, which traditionally seeks to separate the liability between franchisors and their franchisees’ employees, has been threatened under recent labor and employment lawsuits and decisions that seek to make the franchisor liable to franchisees’ employee claims. Although this significant issue in franchising and employment law is far from settled, this Pennsylvania Supreme Court decision is a victory for franchisors trying to protect themselves from vicarious liability in their respective franchise systems. Furthermore, this case is instructive for franchisors to ensure that their franchisees maintain workers’ compensation insurance, and other insurance, as required under most franchise agreements.
On December 16, 2016, in Saladworks, LLC v. Workers' Comp. Appeal Bd. (Gaudioso & Uninsured Emplrs. Guar. Fund), 2016 Pa. LEXIS 2817, the Pennsylvania Supreme Court dismissed an appeal of a ruling finding that a franchisor has no liability to the franchisee’s employees for claims under worker’s compensation laws. The Pennsylvania Supreme Court took up an appeal with potential far-reaching implications for franchisor liability in workers’ compensation cases by franchisee’s employees. However, only two weeks after hearing oral arguments, the Court dismissed the appeal as having been improvidently granted. The decision of the lower court, finding no joint-employment relationship with the franchisor, thus stands.
A Saladworks franchisee’s employee, Frank Gaudioso, slipped and injured both his knees in the restaurant in March 2011. Gaudioso petitioned for workers’ compensation benefits against a Saladworks franchisee, G21. However, G21 lacked worker’s compensation benefits at the time of the injury despite being required to maintain such insurance under the Saladworks’ Franchise Agreement. Gaudioso subsequently filed an additional claim with the Uninsured Employers Guaranty Fund (“UEGF”), who then filed a joinder petition against the franchisor, Saladworks, as an additional statutory employer of Gaudioso that was joint and severally liable. Saladworks moved to dismiss this claim on the grounds that it did not have a relationship with the employee at issue and only licensed its trademarks and system to G21 to operate a Saladworks franchise.
The Workers’ Compensation Decision
At the workers’ compensation hearing, the franchisor’s director of franchise administration defended the franchisor’s position by stating that the franchisor does not hire or fire franchisee employees, does not know the identity of franchisee employees, does not dictate employees’ schedules, and does not train day-to-day employees for their franchisees. In addition, the Saladworks’ Franchise Agreement clearly states that the franchisee is an independent contractor and has no authority to act as an agent for the franchisor. However, the franchisor did admit that it trained the franchisee, provided a confidential manual to run the franchise, approved advertising, and had the ability to terminate the franchisee if certain provisions of the Franchise Agreement were breached. The workers’ compensation judge granted Saladworks’ motion to strike the joinder petition because the judge did not see any at-will employment relationship based on the facts and did not know of any case that holds that a franchisor is an actual employer of a franchisee’s employee. The judge did, however, grant Gaudioso’s claim against G21.
The UEGF appealed the workers’ compensation denial of Saladworks’ joinder petition, and the Workers’ Compensation Appeal Board reversed the holding because Saladworks failed to ensure that G21 had workers’ compensation insurance as required in the Franchise Agreement which would have insulated the franchisor from Workers’ Compensation liability.
The Commonwealth Court Decision
Saladworks appealed the Workers’ Compensation Appeal Board decision to the Pennsylvania Commonwealth Court. Saladworks claimed that it was not statutorily liable under Section 302(a) of the Workers’ Compensation Act, which outlines liability for statutory employers that subcontract services that are a “regular or recurrent” part of the contractor’s business. Further, the franchisor claimed that the Workers’ Compensation Appeal Board erred when applying the Pennsylvania Supreme Court’s ruling in the 2012 Six L’s Packing v. Workers’ Compensation Appeal Board (Williamson) because the nature of Saladworks’ business is different than the traditional contractor-subcontractor relationship relied on in that case.
Saladworks explained that as a franchisor, its business intends to sell Saladworks franchises to potential franchisees and provide some services and assistance to its independent franchisees. However, the franchisor is not in the business of actually selling salads and other food products to customers, the specific business of the Saladworks franchisee. Thus, the work performed by G21, selling salads and foods under the Saladworks’ brand, was not a “regular or recurrent” part of Saladworks’ business model of selling its unique system to Saladworks franchises. The Commonwealth Court sided with Saladworks because Gaudioso was an employee of G21, not the franchisor, and because G21 lacked workers’ compensation insurance, and the UEGF was responsible for the costs of his claims.
Selected Developments in Business Law — Forming and Operating California Limited Liability Companies
Courtesy of CEB, we are 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 December 2016 update to Forming and Operating California Limited Liability Companies. 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 trade secrets practice in California since the last update include developments in such important practice areas as the new IRS partnership audit and adjustment rules, AB 1722, employment tax issues, jurisdiction of Delaware courts, new California Secretary of State forms, crowdfunding, LLC dissolutions, and more.
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.
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.
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.
February Equals Farm Bureau!
On February 3, 2017, the Agribusiness Law Committee will be Hosting its Annual California Farm Bureau Federation Ag Issues Update Meeting
The Agribusiness Law Committee of the California State Bar’s Business Law Section will kick off its 2017 Agriculture Tour series with the California Farm Bureau Federation’s Ag Issues Update Meeting, to be held in Sacramento on Friday, February 3, 2017 10 a.m.-3 p.m. The program is a unique opportunity for practitioners to hear the perspectives of Farm Bureau’s legal staff on recent judicial opinions, pending court cases and key legislative and regulatory developments affecting agribusiness throughout California. The no-cost meeting will include a buffet lunch. Three (3.0) units of general MCLE credit are offered by Downey Brand LLP. RSVP ended on Friday, January 27, 2017. Anticipated speakers and their topics include:
- Carl Borden – Labor and Employment Issues
- Kari Fisher – Water Quality Issues
- Justin Fredrickson – Floodplain Management Issues
- Karen Norene Mills – Utility and Energy Related Issues
- Jack Rice – Groundwater and ESA Issues
- Chris Scheuring – Surface Water Issues
Nonprofit Organizations Law Committee Announces Federal Trade Commission’s Compiling of Information on Charitable Giving in Preparation of March 2017 Conference in Washington D.C.
The Federal Trade Commission, the nation’s consumer protection agency, and the National Association of State Charities Officials, the association of state offices charged with overseeing charitable organizations and solicitations, will hold a conference exploring consumer protection issues and charitable solicitations on March 21, 2017, in Washington D.C. The conference is free and open to the public.
The event entitled “Give & Take: Consumers, Contributions, and Charity” will engage regulators, researchers, practitioners, charity watchdogs, donor advocates, and members of the nonprofit sector in conversations about how consumers evaluate and respond to various charitable solicitation practices, the regulatory and enforcement environment, and new charitable giving options. In order to facilitate the discussion at the conference, the FTC is seeking research or data related to consumers’ expectations regarding their donations, data measuring how often consumers are deceived by charitable solicitations and recommendations for effective donor education tools. The data or research may include original research, consumer surveys and academic papers. Of particular interest is research or data on new fundraising technologies and techniques and their impact on consumer giving and comment and research from legal scholars on the consumer protection challenges in the evolving fundraising environment.
Information on submitting a comment or research is located here. The deadline for submitting research papers is February 17, 2017, but the public comment period will remain open until May 1, 2017. All submitted materials will be available on the FTC’s event webpage
For more information about the Nonprofit Organizations Law Committee, please contact Chair Myron Steeves (email@example.com) or Committee Member Michael Wexler (firstname.lastname@example.org).
Corporations Law Committee Update
The Corporations Law Committee is actively engaged in a number of important matters.
The Corporations Law Committee recently circulated an e-Bulletin on an important Supreme Court decision on insider trading and is nearing completion of an update to the State Bar’s Securities Law Guide. The Committee is submitting an article on 2016 corporate law developments to the Business Law News (BLN) for its Annual Review of Recent Developments of Interest to California Business Lawyers. Also, the Committee is in the planning stages of an update to the State Bar’s Handbook for Incorporating a Business in California and is beginning work on an Affirmative Legislative Proposal (ALP).
Partnerships and LLCs Law Committee Update: Committee postpones February 3, 2017 Program
The PLLC Law Committee has postponed the program it originally scheduled for February 3, 2017. A new date will be announced soon.
The Partnerships and LLC’s Law Committee is working on a new Guide to Forming a Limited Liability Company. The last guide of this sort was published in 2006. If anybody outside of the PLLC Committee is interested in contributing to this update, please contact Teri Shugart at 650-508-8682 or email@example.com.
Health Law Committee Plans Spring Forum with USD
The Health Law Committee has begun reaching out to California law schools to foster relationships between law students and the State Bar Association, and to promote health law as a practice.
Tentatively set for March 30, 2017, members of the Health Law Committee will meet on the campus of the University of San Diego School of Law to engage students in a forum discussion regarding health law areas to watch in 2017, and to discuss entering the practice of health law. The event will be open to students, faculty, and the general public, and co-hosted by the law school’s Health Law Society.
Commercial Transactions Law Committee Plans Spring Webinars
The Commercial Transactions Law Committee (formerly known as the UCC Committee) is concerned with the documentation and enforcement of a wide range of commercial agreements, including those involving sales of goods, security interests and lien priorities in the full ranger personal property. Also within the Committee’s purview are the law of negotiable instruments such as promissory notes and documents of title and letters of credit. The purview of the Committee intersects with other areas of law including insolvency law and business litigation.
Members of the Commercial Transactions Law Committee can work in a variety of areas depending on their interests. The Committee monitors and comments on proposed legislation and may recommend new legislation. Its members speak at live events and webinars, write articles, and prepare resources for practitioners such as the Hidden Liens Report. Most recently, the Committee submitted an article appearing in the current Business Law News titled: “Describing the Collateral Subject to a ’Blanket’ Lien, or How to Knit a Big, Soft Warm Blanket.”
The Committee is planning two webinars to be presented in the spring of this year, titled “UCC-1 Financing Statements – Tips and Tricks” and “’Friendly Foreclosures’ under the UCC.” The Committee also wishes to co-sponsor a webinar with the Business Litigation Committee, to be titled “Lawsuits and Judgments as Collateral in California.” Additional information will be made available as arrangements for these events are finalized.
The Committee is seeking new members for several available slots and is hoping to garner an even wider range of practice experience in the group. Those interested in applying for CTC membership can go to the State Bar’s website or contact any of the Committee’s officers.
Consumer Financial Services and Business Litigation Committees Plan June Program at UCI
Mark your calendar! The Consumer Financial Services and Business Litigation Committees will host a joint program on June 20, 2017, from noon to 3:00 p.m. at the University of California, Irvine School of Law. The program will focus on litigating consumer financial services cases from the perspectives of the consumer, financial institution and bench. More details will be available next month.
FIC and CFSC Hold After-the-Holiday Party
On January 19, 2017, Lamb & Kawakami LLP hosted an LA area after-the-holiday holiday party for the Financial Institutions Committee and Consumer Financial Services Committee.
Mike Slattery, the Co-Vice Chair of FIC, works at that firm. Despite rainy weather, there was a good turnout and a good mix of in house bank lawyers, law firm lawyers who represent banks, and other professionals like appraisers and accountants who work with real estate lenders. The guests included several attorneys who had not before participated in FIC events.
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 (firstname.lastname@example.org).
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 (email@example.com); BLS Vice-Chair of Member Services, Uzzi O. Raanan (firstname.lastname@example.org); or BLS Chair, James P. Hill (email@example.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 February
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)