Consumer Agency Urges Court to Toss Suit Against It

The Consumer Financial Protection Bureau has struck back against a company challenging its constitutionality, arguing that plaintiffs “utterly fail to show that the Bureau’s authority is out of step with that exercised by other federal regulatory agencies.”


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“It Was My Twin Brother.” Really? You’re Going With That?


Fortunately for the clerk in this Little River, South Carolina store, this “armed” robber is not very good at robbery. As reported by

[33-year-old Joshua Page Edwards] walked into the store to allegedly shop for a gift, and perused the shop with the clerk before walking up to the counter and handing over a note.

Aren’t notes a bank robbery thing? Anyway …

That note told her “to be quite and give him the money,” an Horry County Police report states.

Edwards then presented an apparent handgun that the clerk immediately recognized as a toy.

Kind of makes you wonder what color plastic it was.

She told him she would not give him anything, so Edwards ran out of the store, saying it was all a joke.

Sorry bro. Can’t unring that bell.

Police reviewed video that matched up with the clerk’s story. They found Edwards nearby and charged him with armed robbery.

Yes, that’s armed robbery. What did Mr. Edwards say when they busted him?

He told police he didn’t do it, claiming he was in a bar the whole time, and perhaps his twin brother was to blame. Two notes saying he was conducting a robbery were found in his pockets.

Oh, and his twin brother also put those notes in his pocket. Doh! Here’s the source, including a mug shot.


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Will Lawyers Always Be Late Adopters?

Lawyers are known as notorious late adopters of technology. Is that a fair characterization? Of course it is. What makes lawyers so cautious about new technologies? Will lawyers always be late adopters? In this episode of The Kennedy-Mighell Report, Dennis Kennedy and Tom Mighell discuss some recent experiences that have reinforced the idea that lawyers are late adopters, the reasons people do and do not adopt new technologies, and practical ways for lawyers to think about moving to new technologies.


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First Circuit Finds that a Private Equity Fund Can Be Liable for the Pension Obligations of its Portfolio Company

In Sun Capital Partners III, L.P. et al. v. New England Teamsters & Trucking Industry Pension Fund, No. 12-2312, 2013 WL 3814985 (1st Cir. July 24, 2013), the First Circuit held that a private equity fund could be liable for its bankrupt portfolio company’s withdrawal liability imposed under Title IV of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) on the basis of the private equity fund constituting a “trade or business” under ERISA’s controlled group rules. By way of background, ERISA generally requires employers that withdraw from a union-sponsored pension plan (also known as a “multiemployer plan”) to pay their proportionate share of the plan’s funding obligations for vested but unfunded benefits accrued by the employer’s union employees at the time of the withdrawal. The withdrawal liability provisions under Title IV of ERISA are intended to protect remaining employers that participate in a multiemployer plan from being saddled with the underfunded pension liabilities attributable to the employees of employers that withdraw from the plan. Under ERISA’s controlled group rules, withdrawal liability imposed under Title IV of ERISA is shared jointly and severally among a contributing employer and each “trade or business” under common control with the contributing employer.

The Sun Capital Partners decision is notable because it represents the first decision at the Federal appellate court level to address the issue of whether a private equity fund (including its other commonly-owned portfolio companies) can be liable for the pension obligations of one of its insolvent portfolio companies on the basis of the private equity fund constituting a “trade or business”. As a threshold matter, in order for a controlled group to exist between a private equity fund and its portfolio company, two conditions must be satisfied: (i) the private equity fund must be a trade or business, and (ii) the private equity fund must be under “common control” with the portfolio company.[1] Historically, the prevailing viewpoint had been that private equity funds were not carrying on “trades or businesses”, and therefore, were not treated as members of the same controlled group with their portfolio companies, even though the common control prong was met. In Sun Capital Partners, by rejecting the private equity fund’s argument that it was not carrying on a “trade or business,” the First Circuit opened the door for ERISA pension underfunding liabilities of portfolio companies to reach the private equity funds that own them.

In fleshing out the trade or business issue, the Sun Capital Partners court found that the private equity fund actively participated in the management of its portfolio company (albeit through affiliated entities). The First Circuit points out that the private equity fund (i) received management and consulting fees through its affiliates and (ii) received a direct economic benefit in the form of offsets against the management fees that it would have otherwise paid to its general partner. The private equity fund’s partnership agreement was also a major factor in the court’s decision because it gave the private equity fund’s general partner the exclusive authority to act on behalf of the fund and it granted actual authority for the general partner to provide management services to portfolio companies. The First Circuit also rejected the argument that the “management” activities were carried out by the general partner and not carried out by the private equity fund itself. The First Circuit remanded the case to the district court for further proceedings, including the determination of whether a controlled group relationship existed between the private equity fund and its bankrupt portfolio company.

The take away from the Sun Capital Partners decision is that private equity funds and other pooled investment vehicles should carefully consider the financial impact of investments into potential portfolio companies that have funding obligations to pension plans that are subject to Title IV of ERISA. Moreover, there may be planning opportunities for structuring investments in such portfolio companies that would allow private equity funds to properly address ERISA’s controlled group rules.

Furthermore, companies with underfunded defined benefit plans should consider many different strategic options prior to filing for bankruptcy protection because filing for bankruptcy protection may not offer a successful method to avoid pension liability. Companies often file for bankruptcy protection to avoid significant pension liability. A debtor terminates a costly pension plan and the Pension Benefit Guaranty Corporation (the “PBGC”) becomes one of the largest unsecured creditors in the bankruptcy, bearing all of the costs of the terminated plan and often recovering pennies on the dollar in bankruptcy. Lawmakers seeking to recover or avoid substantial losses attributable to bankruptcy filings of companies with underfunded defined benefit plans have enacted laws intended to reduce the financial strain on PBGC’s pension insurance program, e.g., §4006(a)(7) of ERISA that provides for a special “termination premium” to PBGC in certain events, including certain distress terminations of a defined benefit plan. The Second Circuit in Oneida Ltd. v. PBGC, 562 F.3d 154 (2nd Cir. 2009), held that a reorganized debtor was liable for the special termination premiums under §4006(a)(7) of ERISA arising from termination in bankruptcy of a pension plan (where debtor’s executive testified that it would remain liable for pension liability post-emergence). We note that the Sun Capital Partners decision, together with Oneida, represent successful attempts by the government to chip away at the PBGC’s losses. Investors and lenders should be wary of the types of specific activities engaged in the Sun Capital Partners case that will now be relied on by bankruptcy courts in the First Circuit and reviewed by bankruptcy courts in all other circuits as the government pursues these claims with vigor in future cases.

For further information, please contact Martin Smith at (213) 617-5490, Michael Chan at (213) 617-5537, Jason Schendel at (650) 815-2621, Jung Yeon Son at (650) 815-2676 or Carren Shulman at (212) 634-3040.

[1] The “common control” prong of the analysis generally requires 80% or greater of common ownership, and can be triggered despite the appearance of lesser ownership due to complex attribution rules. As a simple example, if a private equity fund owns 80% or greater of a portfolio company, then the common control prong would be met. A full discussion of the common control prong is beyond the scope of this article.


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Facebook Posts Put the Kibosh on Injury Victim’s Lawsuit

A Georgia judge has tossed one of the largest loss of consortium awards in state history and — following Facebook postings that prompted questions about the extent of injuries and the viability of the plaintiffs’ marriage — the underlying verdict as well.


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The Legal Limits of Sports Violence

The infamous elbow jab of Metta World Peace, NFL “Bounty Hunters,” soccer riots, high school hockey brawls …where is the legal line drawn when it comes to violence in sports? Or is it just the nature of the game? Lawyer2Lawyer co-hosts and attorneys, Bob Ambrogi and Craig Williams turn to Attorney Eldon L. Ham, an adjunct professor at Chicago-Kent College of Law and Professor Matthew Mitten, Director of the National Sports Law Institute at Marquette University Law School, for their take on whether there should be legal implications when an athlete goes too far.


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Potential Challenges Associated With California’s Revised Uniform Limited Liability Company Act Scheduled to Take Effect on January 1, 2014

On September 21, 2012, S.B. 323, the California Revised Uniform Limited Liability Company Act (known as the RULLCA), was signed into law by Governor Jerry Brown and is scheduled to take effect on January 1, 2014. As described in more detail in the prior March 22, 2013 post California’s Revised Uniform Limited Liability Company Act, the RULLCA entirely replaces the Beverly-Killea Limited Liability Company Act and revises certain rules for formation and operation of Limited Liability Companies (LLCs) in the state of California. There is a possibility, however, that the RULLCA will be modified prior to January 1, 2014 and thus the law governing LLCs may still be subject to change and clarification prior to its effective date.

As it reads today, and if not clarified before its effective date, the RULLCA may cause confusion upon application. The RULLCA states in Section 17713.04(a) that, except as otherwise provided in the law, the RULLCA will apply not only to all domestic LLCs existing on or after January 1, 2014, but also to all foreign LLCs registered with the Secretary of State both prior to January 1, 2014 and on or after January 1, 2014. At the same time, Section 17708.01(a) provides that the law of the state or other jurisdiction under which a foreign LLC is formed governs “(1) [t]he organization of the limited liability company, its internal affairs, and the authority of its members and managers; [and] (2) [t]he liability of a member as member and a manager as manager for the debts, obligations, or other liabilities of the limited liability company.”

Thus a foreign LLC registered in California is subject to the RULLCA, unless a carve out exists such as the one provided in Section 17708.01(a) noted above. Without further clarification, however, it is not clear which aspects of a foreign LLC would remain subject to the laws of the state or other jurisdiction under which a foreign LLC is formed and which would be subject to the RULLCA. For example, Section 17708.01(a) provides that the law of the state under which a foreign LLC is formed governs the “internal affairs” of such foreign LLC. Confusion and arguments are almost certain to arise regarding what constitutes an “internal affair” of a foreign LLC. For example this could include, or not, contributions to capital, indemnification, dissolution of the LLC or admission to membership in the LLC, to name just a few.

Section 17713.04(b) states that the RULLCA applies only to contracts entered into on or after January 1, 2014 and to all actions taken by the managers or members of an LLC on or after that date. Prior law continues to apply to contracts entered into and actions taken before January 1, 2014. An Operating Agreement is a contract. An operating agreement entered into before January 1, 2014, as a contract, would seem to be unaffected by the RULLCA under Section 17713.04(b). But Section 17713.04(a) says the RULLCA applies to all LLCs existing on and after January 1, 2014. This raises the question of whether subsection (b) supersedes subsection (a) and whether a minor amendment to an operating agreement, which was in existence prior to January 1, 2014, would cause the operating agreement (contract) to be subject to the RULLCA after January 1, 2014.

In addition, while under prior law, unless otherwise stated in the articles of organization or written operating agreement, only certain limited actions such as an amendment to the articles of organization or operating agreement required the unanimous vote of all members, the RULLCA requires the consent of all members in a manager-managed LLC to do any of the following: (1) sell, lease, exchange, or otherwise dispose of all, or substantially all, of the limited liability company’s property, with or without the goodwill, outside the ordinary course of the limited liability company’s activities, (2) approve a merger or conversion under the RULLCA, (3) undertake any other act outside the ordinary course of the limited liability company’s activities, or (4) amend the operating agreement. This change pertaining to manager-managed LLCs is sure to cause confusion for members and managers trying to determine when consent of all members of a manager-managed LLC is required under the RULLCA and when it is not. Members and managers of an existing manager-managed LLC should review their operating agreement to ensure that managerial powers exercised in such LLC may continue under the RULLCA or if an amendment to the operating agreement is necessary.

Furthermore, the RULLCA makes clear that for manager-managed LLCs, the fiduciary duties of loyalty and care apply to managers, but not to members and addresses the extent to which the LLC operating agreement may define or alter aspects of fiduciary duty. While, section 17701.10(c)(4) provides that an operating agreement cannot eliminate the duty of loyalty, duty of care, or any other fiduciary duties, Section 17701.10(e) provides that the fiduciary duties of a manager to the LLC and to the members of the LLC may be modified in a written operating agreement with the informed consent of the members. The extent to which such fiduciary duties may be modified may, without further clarification, create a challenge once the RULLCA goes into effect. For example, although section 17701.10(c)(14) provides that the duty of loyalty cannot be eliminated by an operating agreement, an operating agreement may identify types or categories of activities that do not violate the duty of loyalty if not “manifestly unreasonable.” Similarly, section 17701.10(c)(15) provides that an operating agreement cannot “unreasonably” reduce the duty of care. What is meant by the qualifying terms “manifestly unreasonable” and “unreasonably” in these sections can significantly alter the extent to which fiduciary duties may be able to be modified by the operating agreement. Unfortunately, this is likely going to be an evolving concept pronounced by appellate court decisions rather than as a clearly articulated statute which provides uniform guidance. Note that the Delaware Limited Liability Company Act makes it clear that fiduciary duties may be expanded, restricted or even eliminated by provisions in the limited liability company agreement, provided that the implied contractual covenant of good faith and fair dealing cannot be eliminated.

These are just a few examples of potential challenges that may arise upon the application of the RULLCA. Although it is possible that some questions may still be answered by modifications to the RULLCA prior to its effective date on January 1, 2014, both existing and new LLCs as well foreign LLCs registered in California should be familiar with the new law and review their agreements and other documents to ensure compliance with its provisions.

For further information, please contact Robert G. Copeland at 858.720.7407 or Dina B. Segal at 858.720.7440.


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