Law News and Tips
I got a call some time ago from a woman who was in tears. She was crying so hard I could barely understand her. When I finally got her to compose herself a little, the first thing I heard was “My daughter won’t let me sell my house.”
That, of course, raised a lot of questions in my mind, so I started asking my questions. It turns out that a bank teller (typically a source of batted five’s, by the way) had been talking to the mom. The mom and heard horror stories about probate, and the teller told her she could avoid probate by putting her daughter’s name on things.
I understand why she said that, but it was bad advice. A bank account is governed by federal law that says either joint owner can deposit or withdraw any or all of the money in the account.
That isn’t the case with any other joint property. In all other cases of jointly held assets, all joint owners must join in transactions affecting the joint property. So when the mother put her daughter’s name on the house, she gave up control.
Time passed, and the mother aged. Now she needed to go into a nursing home. To do that she needed to sell her house, and her daughter was saying no. It was her inheritance, so why would she want to jeopardize that. Mom would have to make do.
I don’t know how this situation got resolved. Did the daughter relent or did the mother have to stay in the house until she died? In any case, the moral of the story is that joint ownership can be a real problem.
In the case of Hibbs v. Berger (Mo. E.D. App. 2014), the court considered what duties were owed by an LLC manager to members. The case was brought by a 5% owner of the LLC. The LLC manufactured doors, windows, and the like, and it got caught up in the “Great Recession.” The principal member lent large amounts of money to the LLC to keep it afloat, but in the end, the Recession won the battle. The lending-member had taken a security interest in all of the LLC’s assets, and on default, he took those assets as repayment, sort of like a foreclosure. The minority owner got nothing. The minority owner then brought suit alleging that the lending-owner had breached its fiduciary duties to him, and as a result, he had lost all of his interests in the company.
The legal theories bantered about were pretty extensive, but what interests me in this case are several findings of the court as follows:
1.Members of an LLC and LLC managers (whether members or not) owe a fiduciary duty to the LLC itself. We tend to think of an LLC as an extension of the members, but it is actually a separate entity with rights.
2.LLC managers (whether members or not) owe a fiduciary duty to the members of the LLC. We all kind of knew that, but this may be the first case where a court actually stated this principal.
3.However, an LLC in its operating agreement can reduce the fiduciary duties owed by the manager to the LLC or members. This duty is not a common law duty but is one created by statute, and the statute allows the members to agree to cut it back.
4.A non-managing member of a manager-managed LLC does not owe anyone a fiduciary duty.
On June 30, 2014, the US Supreme Court issued its much-anticipated decision in the case of Burwell v. Hobby Lobby Stores, Inc. This case dealt with
the conflict between what is called the HHS Mandate of the Affordable Care Act (otherwise known as “Obama Care”), and a business owner’s constitutional
right to the Free Exercise of Religion “guaranteed” by the First Amendment.
The government had argued that the Free Exercise Clause did not apply to corporations, but only to individuals. Among other things, the Solicitor General argued that it did not apply to the way you conducted your business. In her dissent, Justice Ginsburg argued that allowing business to opt out of the HHS Mandate on the pretense of “sincerely held religious beliefs” would frustrate the “constitutional” protection of a woman’s right to “control their reproductive lives.” She argued that birth control, including abortion inducing chemicals and devices at issue in this case, advanced a “compelling governmental interest”, and that trumped a person’s right to the exercise of their religious faith through the corporate form of doing business. She felt the protecting religious liberty would just be too difficult for the courts to do on a case-by-case basis.
Gratefully, the majority (albeit slim) disagreed. They held that when a business owner elects to do business in a corporate form, they do not check their faith and religious practices at the door. They found that “Protecting the free – exercise rights of closely held corporations, protects the religious liberty of the humans who own and control them.”
The Supreme Court’s ruling basically held three things:
1.The Religious Freedom Restoration Act (that was passed by Congress after the disasterous Smith case in 1990) protects the rights of owners through for – profit corporation;
2.HHS’s contraceptive mandate substantially burdens the exercise of religion; and
3.assuming that guaranteeing cost – free access to the four challenged contraceptive methods is a compelling governmental interest, HHS failed to prove that the mandate is the least restrictive means of achieving its “compelling interest.”
So what does the Hobby Lobby decision mean for faithful Christian business owners? Justice Alito, who delivered the opinion of the Court specifically stated that this decision does not mean that corporations owned solely by individuals religiously opposed to abortifacient contraceptives are not subject to the Affordable Care Act. They are just exempt from the offending portion of the HHS Mandate.
The question is a little more complicated for Catholic business owners who may be religiously opposed to any contraceptives. That is a broader objection than what the court considered in Hobby Lobby which involved evangelical Christian owners. However, I believe the reasoning would be the same for Catholic business owners.
The issue, of course, may come down to proving the religious objection. In Hobby Lobby, Justice Alito extensively discussed the actions the company had taken to institutionalize its Christian beliefs and practices. Business owners may want to give some thought to adopting policies and practices consistent with their beliefs.
One of the other points that Justice Alito discussed in his opinion was the “accommodation” that the Department of Health and Human Services afforded to religious nonprofits. That “accommodation” provides that religious nonprofits do not have to directly provide contraceptive chemicals and devices under their plans. Rather, the insurance companies are required to independently provide those chemicals and devices.
It should be noted that the question of whether this “accommodation” is adequate was not before the court in the Hobby Lobby case. That issue will come before the court in its next term, which will end in June 2015. In that case, the religious nonprofits are pointing out that it is absurd to think that insurance companies will voluntarily, without compensation, provide contraceptive chemicals and devices. They argue that the insurance companies will in fact collect enough revenue to pay for these chemicals and devices, albeit indirectly. In addition, those organizations believe that even this “accommodation” involves them complicity in a grave moral error. We will have to stay tuned to see how the Court rules on that issue.