Friday, July 5, 2013

More on LLC's Personhood

A couple of recent cases, issued within a week of each other, touched on the subject of entity's personhood, seemingly from two opposite sides of the problem.

In SB Liberty, LLC v. Isla Verde Assoc., Case No. D061261, an LLC (SB Liberty, the plaintiff) was a member of a homeowners association (Isla Verde, the defendant). LLC members dedicated LLC's attorney to attend the HOA Board of Directors' meetings on LLC's behalf. HOA did not let LLC's attorney to attend the meetings. LLC sued, lost, appealed, and lost again.

The LLC put forth two arguments: (1) that the HOA is a "quasi-govermental entity" and preventing an LLC's attorney to attend those meetings violates LLC's fundamental rights ("association, speech, and member rights"); and (2) that the LLC, as an HOA member, is entitled to attend meetings open for HOA members, and it can do it by sending there their attorney, since the LLC is not a natural person.

The HOA explained that it denied member's attorney presence because (a) the attorney was without his client [!], himself was not a member of the LLC, and had no interest in the subject real property; and (b) because the HOA's attorney was not present, so the LLC attorney would violate a rule of professional conduct by contacting the HOA (a represented party) directly.

According to the appellate court's account, the trial court picked the argument that the HOA was right in denying access to an attorney, who was not a member of the LLC, to the HOA members-only meetings. [At least we are not talking yet about entity's fundamental rights to speech and association] The appellate court agreed, citing the Common Interest Development Open Meeting Act, Cal. Civil Code section 1363.05, and the Beverly-Killea Limited Liability Company Act (Corp. Code, § 17150), narrowly determining what "member" is and that the member's legal representative is not a member enough. The court concluded that the business and affairs of a limited liability company shall be managed by the LLC's members or managers, but the LLC's attorney was neither, "and SB Liberty's members and/or manager cannot delegate such management authority to him."

Compare this with a widely deployed rule that an LLC may not represent itself in court, except by and through an attorney. M.Bender's guide gives citations for all levels of court, except the small-claim. [1-5 MB Practice Guide: CA Pretrial Civil Procedure 5.14[8]]. According to the court in SB LIberty, the same entity will have to deploy two opposite protocols of appearance, one for HOA meetings (mandatory presence of an entity's member or manager), and another for court proceedings (mandatory presence of an entity's attorney). So much for the rule that "a corporation shall have all of the powers of a natural person in carrying out its business activities." Cal. Corp. Code § 207.

I just recently covered a case, when even a non-existent entity was found capable to produce verifications via an attorney-agent [link]. If SB Liberty's LLC members and managers would quit or cease to exist--who would be able to come to the meetings?

The decision in SB Liberty did not touch on the subject of LLC's attorney professional responsibility, when/if he would appear at the HOA's meetings and come into direct contact with the represented party. But in the contemporaneous case, Havasu Lakeshore Investments v. Terry L. Fleming, Sr., Case No. G047244, the Rules came under direct focus.

In this case, an attorney had represented an LLC, its managing member (itself a partnership), and a non-member manager, all of them against two minor LLC members. Question was raised, under the Rule 3-310, whether attorney's representation in such disposition of parties created a violation of his duty of loyalty. It certainly would, if the logic from SB Liberty be followed here (i.e. that an LLC is not an entirely self-standing person, but a composition of its members and managers).

Luckily for the SB Liberty attorney, the court there did not follow up on the violation of the Rules argument. Luckily for the attorney in Havasu, the appellate court disagreed with the trial court's judgment, by applying the Rule 3-600(E), which allows an attorney to represent both the entity and its members, so long as there are no adverse, conflicting interests.

For the court to even analyze a potential violation, it had to recognize the interests of LLC as an entity, separate from the interests of its members. Then the court was able to decide, whether those interests are in conflict, and at what level (three levels were observed: hypothetical, potential, and actual). The issue of a potential conflict boiled down to the fact that the attorney, while representing the LLC and its management, is putting himself in adverse to the LLC's minority shareholders. The court found no issue with that, citing a case where even in an action against a majority shareholder attorney's representation was not in violation.

Since Edward Coke’s Case of Sutton's Hospital, 5 Rep. 303; 10 Rep. 32b (1612), we take it as an established rule that a corporation has no soul. The court in Havasu adheres to it. The court in SB Liberty wants to see at least some soul in it. I went to catch a webpage with this case to get a quote for the post and found out that the sentence ends with: "neither can they appear in person, but by Attorney."

More litigation posts

No comments:

Post a Comment