Case 8: Tschetter v. Berven , 621 N.W.2d 372 (S. Dak. S. Ct. 2001). Marvie, Kim,
ID: 422013 • Letter: C
Question
Case 8: Tschetter v. Berven, 621 N.W.2d 372 (S. Dak. S. Ct. 2001).
Marvie, Kim, Clarence, and Goldie Tschetter purchased units in Huron Kitchen LLC, a limited liability company, which would construct and own a Country Kitchen restaurant in South Dakota. As members of an LLC, they had management powers in proportion to their contributions of capital and could elect the managers of the LLC and set the managers' responsibilities. As LLC members, the Tschetters agreed to hire Country Hospitality Corporation to do much of the operation of the LLC. The LLC Operating Agreement required that the day-to-day decisions were made by two managers who were required to be members of the LLC, and selected by the other members. Members could authorize loans on behalf of the company by agreement. The members had the right to receive profits and distributions when warranted. The members could authorize incidental expenses within an aggregate of $12,500. The members were empowered to make any other routine actions incidental to the day-to-day activity of the LLC. The members were allowed to select officers for the LLC. Marvie, acting for all the Tschetters, exercised substantial control over the affairs of the LLC. Clarence and Goldie acquiesced in relying on Marvie and Kim for information and action. The minutes kept by the LLC showed that Tschetters were informed and active in the LCC. Unfortunately, the restaurant failed, and the Tschetters sued the person who sold them the interests in the LLC on the grounds that the LLC interests were securities, and therefore, the seller owed duties to them.
TRUE OR FALSE WITH EXPLANATION
1. The LLC interests are deemed securities, because they met the requirement of the Howey investment contract test that their expectations of profits depended solely on the efforts of persons other than themselves.
2. Under the Howey test, the Tschetters membership interests in Huron Kitchen LLC fail the horizontal commonality test for qualifying as an investment.
3. Huron Kitchen LLC can elect annually to be taxed as a partnership or to be taxed as a corporation.
4. The Tschetters’ acquisition of units within Huron Kitchen LLC is governed by the 1933 Securities Act, because hiring Country Hospitality Corporation to operate the LLC provides vertical commonality sufficient to qualify the LLC membership as Howey investment contracts.
5. If the LLC interests are deemed to be equity securities, the Tschetters can rescind their agreement to purchase units in Huron Kitchen LLC, because the company failed to register those securities with the SEC before offering them to the Tschetters.
1. The LLC interests are deemed securities, because they met the requirement of the Howey investment contract test that their expectations of profits depended solely on the efforts of persons other than themselves.
2. Under the Howey test, the Tschetters membership interests in Huron Kitchen LLC fail the horizontal commonality test for qualifying as an investment.
3. Huron Kitchen LLC can elect annually to be taxed as a partnership or to be taxed as a corporation.
4. The Tschetters’ acquisition of units within Huron Kitchen LLC is governed by the 1933 Securities Act, because hiring Country Hospitality Corporation to operate the LLC provides vertical commonality sufficient to qualify the LLC membership as Howey investment contracts.
5. If the LLC interests are deemed to be equity securities, the Tschetters can rescind their agreement to purchase units in Huron Kitchen LLC, because the company failed to register those securities with the SEC before offering them to the Tschetters.
Explanation / Answer
1) False- because as per one of the clause of Howey Test, a transaction is an investment contract if any profit comes from the efforts of a promoter or third party. Hence the condition of expectations of profits depended solely on the efforts of persons other than they does not hold true.
2) False-because as per the Howeys Test a transaction is an investment contract if there is an investment of money
3) False-because as per the Organization does not have that right to choose the Tax Structure,
4) True-because as per the Howeys Test Profit that comes from the efforts of a promoter or third party is treated as an Investment
5) True- Failing to comply to the Securities Act as per the Securities and Exchange Commission (SEC)- the organization won't be able to hold/withhold the equity.
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