Managing Your Business to the Law’s Demands: Even If a Text is Clear — Courts, Agencies Often Just Ignore It (Part II of II)

As I said in Part I, too many individual judges and bureaucrats indulge their own preconceived, subjective legal and regulatory views in ways that create bad surprises.

Your best protection?

The sound judgment of a lawyer who’s immersed in the views of those who call the legal and regulatory shots likely to impact your business.    

A couple of examples:

EXAMPLE #1

Where an idiosyncratic court ruling might expose your business entity to liabilities that you expected to be protected against:

Form your business entity — corporation, LLC, etc. — under the laws of a state whose court system handles the relevant issues frequently — and that values predictability in its rules.

Example: Delaware.

Anyone who’s consulted a lawyer about forming a business has heard this speech: If a creditor comes after you for business activities that you’ve conducted through your corporation or LLC — that creditor can reach only the corporation’s or the LLC’s assets — not assets that you own as an individual.

And it doesn’t matter if the corporation has one shareholder or 100 — or if the LLC has one member or 100.

But in Olmsted v. FTC the Florida Supreme Court shocked corporate law attorneys nationwide when it ruled that — under Florida’s LLC statute — the creditor of a single-member LLC could directly reach that single-member’s personal assets in the form of its ownership interest in the LLC.

The dissent in Olmsted v. FTC said (accurately, I believe): “This Court does not possess the authority to judicially rewrite those operative statutes through a speculative inference not reflected in the legislation.”

The “speculative inference” consisted in the majority of justices on the Court inferring that the legislature’s “intent” in passing Florida’s LLC statute had been expressed in statutes passed after Florida’s LLC statute had been enacted.

Two statutes that did not concern LLCs at all.  

Bad surprises like Olmsted v. FTC are why I usually advise clients to incorporate their corporations or form their LLCs (or their other kinds of entities) in Delaware.

First, there’s lots of case law on corporations, LLCs, and other kinds of business entities. Unlike most other states, Delaware’s court system has addressed many of the legal questions that might come up.

Second, Delaware’s Court of Chancery and Supreme Court are known for their business savvy. As the Florida Bar Journal put it in commenting on Olmsted v. FTC: “Florida will be at a disadvantage because other jurisdictions, like Delaware and New York, are known for having sound legislative and court systems that provide … a predictable business law environment.”

EXAMPLE #2

Where a regulatory agency on a mission or an opinionated bureaucrat can make your life (business) miserable if it wants:

Specific agencies exist to second guess reasonable management decisions conduct beneficent regulatory guidance for your own and society’s well-being.

Consult with attorneys who know how these agencies view your business and how they view their own work.

Two main ways to do this:

  1. Hire alumni of the relevant agency. See my post about the time I found an attorney in private practice who’d been an Assistant Chief Counsel of the Federal Aviation Administration to represent a client facing a sensitive issue on which that agency would rule.
  2. Pay attention to which lawyers proactively keep in touch with people in the relevant agency. As a lawyer representing businesses in transportation and logistics I made it a practice to visit Washington, D.C. at least annually for bar association and industry forums where I could talk with agency officials in a friendly setting. (Me representing a client where they are prosecuting a rule violation is not a “friendly setting” — and less likely to invite their candor.)

 

I invite your attention to Part I of this two-part series as well (“Despite our nation’s sacred aspiration to have a government “of laws, not men”, businesses often find themselves governed by the preconceived, subjective opinion of some judge or bureaucrat. Even when that preconceived, subjective opinion conflicts with the plain meaning of a statute’s or regulation’s actual words.”)