Twin Cities Business Litigation Blog

Lawyers Beware! Be Careful What You Say When You Refer a Client to Another Law Firm!

Gavin Craig — Tue, 16 Mar 2010 07:00:00 -0600

In an interesting case reported by the Contracts Professor, one law firm referred a client over to another law firm, and represented to the receiving firm that the clients guaranteed payment of $75,000 in legal fees. The fees were not paid and the receiving firm sued the client and the referring firm for the legal fees.

The case isDePetris & Bachrach v. Srour, 2010 NY Slip Op 01840. Upon a pre-answer motion by the Defendant law firm, the trial court dismissed many of the stated claims. The Appellate court reinstated the causes. The court wrote:

[T]he motion court erroneously dismissed the fourth and fifth causes of action which allege claims against defendants-respondents for breach of the implied warranty of authority and for tortious misrepresentation of authority and assurances of payment, respectively. These causes of action seek to hold defendants-respondents liable for their own action in misrepresenting that they had authority from the Nassers to enter into a contract in which the defendants, Jacques and Ezequiel Nasser would pay plaintiff law firm $75,000 ($37,500 each) of the legal fees incurred by plaintiff's client Srour.

At this point the court is making no determination about the facts, they are only reinstating claims because the claims state a cause of action under the law. In Minnesota, the pre-answer motion would be a Rule 12 motion, claiming that the plaintiff failed to state a cause of action upon which relief can be granted. In Minnesota this motion would likely fail.

It is not unusual for one firm to refer a client to another firm when the other firm can better serve the client's needs. It is also common for the referring firm to tell the receiving firm about the fee payment history: for example, the client has always pay promptly, or slowly or what ever the case may be. In this case it appears that the sending firm allegedly misrepresented that the client guarantee payment of the legal fees.

People, and law firms, rely on representations by other attorneys.

Can You Unintentionally Contract Away Your Right to Good Faith and Fair Dealing?

Gavin Craig — Tue, 09 Mar 2010 10:48:11 -0600

Apparently you can. This is undoubtedly an example of all parties believing nothing will ever go wrong and that the parties will always work well together. The following matter was reported in the New York Times, and the case comes to us from California. Also see the Contracts Professor.

For Background, Clive Cussler is a noted fiction writer of adventures, usually involving sunken ships or buried trains, etc. Mr. Cussler entered into a contract with Crusader Entertainment, LLC., giving Crusader the option to produce a movie based on one of Cussler's novels. The dispute involved claims of breach of this contract.

Before the movie was even produced, both parties sued each other, each alleging the other breached their contract. This is not the way to begin a fruitful business relationship.

In summary, Crusader was suppose to begin production within 24 months of exercising the option. However, the film was delayed because the parties argued over the screen play. Reportedly, Cussler consider the screen play, "crap." Cussler insisted that he should write the screen play - Crusader refused to allow him to do so because the actors didn't like his screen play, and he was not a member of the writers guild.

The trial court found in favor of Crusader, and awarded damages of several million dollars based on a finding that Cussler breached the implied contract covenant of good faith and fair dealing.

However, the Court of Appeals found that as a mater of law, the implied covenant of good faith and fair dealing did not apply. The contract provided that Cussler had the right to review and approve the screen play. The Court of Appeals found that Cussler had the contractual right to:

"[R]eject proposed changes to the original Approved Screenplay, "for unreasonable reasons. . . or for no reason at all." (The report is not clear whether this language is in the contract, or it is the courts interpretation of Cussler's contractual rights.) It is hard to believe that Crusader would sign a contract with this specific language, since it invites the very problems they encountered with Cussler.

Crusade argues that the appellate court's interpretation of the contract made the contract illusory, and I think that to some extent that is a good argument. However, the court said that since the contract did not require Cussler to act reasonably, or in good faith, he had no obligation to do so.

The problem with this reasoning is that either there is an implied covenant of good faith and fair dealing, or there isn't. If there isn't, then the courts decision appears logical. If there is, the decision doesn't make sense. Why would parties need to specifically address in a contract an implied obligation that is already deemed part of the contract, unless the parties wanted to specifically exclude the covenant? And who would sign that agreement?

These are the type of cases that make you scratch you head and wonder what people were thinking?

Conflicts Cause Lawyers to Lose Legal Fees.

Gavin Craig — Thu, 25 Feb 2010 13:33:29 -0600

In a very unusual circumstance - I hope - the McGuire Woods law firm lost $12 million in fees for creating a conflict of interest.

The short version of the story is that the firm brought a class action against West Publishing, the parent Company of BAR/BRI, and Kaplan. BAR/BRI provided bar exam preparation services, and Kaplan provided LSAT preparation services. The two companies allegedly agreed that BAR/BRI would not provide LSAT exam services, and Kaplan would not enter the Bar Exam preparation business.

In 2007, the parties reached a settlement, whereby the Defendants would pay $49 million. However, it was discovered that 5 of the 7 named class representatives for the plaintiff class had entered into a separate agreement with the lawyers at the firm to receive a special incentive payment once any settlement or judgment was approved. Apparently the agreement was on a sliding scale and the more the case settled for the more the five would receive, up to $10,000.

Attorneys for other plaintiff's objected to the arrangement. The judge, US District Court Judge Real agreed with the objectors, and voided the incentive payments. He also denied attorney fees for the attorneys of the objecting plaintiffs. The case went to the 9th circuit, where the court approved the settlement but refused to approve the attorney fees of $12 million, and returned the case to the trial court to consider the impact of the conflict of interest.

When the case returned to Judge Real, he denied all attorney fees. He held in part:

5. Attorney's Fees

McGuireWoods, LLP (the law firm) entered into incentive agreements with five of the named plaintiffs, obligating the firm to seek payment for each of the five in amounts that hinged on the size of the settlement or a verdict secured on behalf of the Class. This arrangement was not disclosed to the Class, nor did McGuireWoods inform the Court of its existence during the class certification stage.

Upon learning of the agreements this Court found them to run afoul of the California Rules of Professional Conduct. Moreover, the agreements gave rise to a conflict of interest that tainted the McGuire Woods representation. That a fair settlement was ultimately reached does not bear upon the seriousness of the ethical violation. This is all according to, at least, the Ninth Circuit. Under California law in the absence of informed written consent, the simultaneous representation of clients with conflicting interest constitutes an automatic ethics violation that results in the forfeiture of attorneys’ fees. Image Technical Service, Inc. v. Eastman Kodak, 136 F.3d 1354 (9th Cir. 1998). Moreover, quantum meruit recovery is barred where an attorney has violated an ethical rule that proscribed the very conduct for which compensation was sought. Huskinson & Brown, LLP v. Wolfe, 32 Cal.4th 453 (2004).

Accordingly, McGuireWoods LLP Accordingly, McGuireWoods LLP is not entitled to any fees for its representation in this matter. However, because the forfeiture is predicated upon a theory that payment is not due for services not properly performed, McGuireWoods LLP may be reimbursed for the expenses it incurred during the course of its representation given that such expenses would be unaffected by any conflict.

The WSJ LawBlog finds this to be a strange result. I don't. The firm's lawyers should have known better. If they were going to do this it should have informed the class participants in the retainer. Disclosure and agreement solves most conflicts. The right to fees when there is a conflict does not depend on whether the result was a good one for the class, or the clients. Undisclosed conflicts disqualify the firm from receiving any fees for their work. This proposition is, I believe, the same in most states. It is a little hard to feel sorry for the firm, because they created their own problem and they should have known better.

The attorneys who objected, are now asking the court to approve placing the unpaid attorney fees into the amount to be paid to the plaintiff class. I am confident that the case is headed back to the 9th circuit. But the McGuire Woods law firm is not in a very good position on this one.

Negotiations to Contracts. What Happens When the Parties Agree to Increase the Price?

Gavin Craig — Wed, 17 Feb 2010 07:30:00 -0600

Contracts are funny things. They require an offer, acceptance and consideration. That seems simple enough, except that many people conducting business don't appreciate the necessary formalities. It is rare to see a valid claim of no consideration, but they arise every once in awhile. One client I had received a claim from a company in Texas, for a breach of contract. I looked at the written document and surprisingly, there was no consideration. I pointed out this problem to the Texas attorney, who proceeded to tell me that consideration wasn't required any more. He was wrong.

Marc Ward is reporting on a similar case. The parties agreed on a price for the sale of a franchise. Later the parties apparently amended the agreement to require the Defendant to pay more. Contract amendments require separate consideration, and there was none. When the defendant refused to pay the extra money, the Plaintiff sued. The defendant claimed there was no consideration for the amendment, and the court agreed. Presumably the defendant would be entitled to the return of any payment made in excess of the original purchase price.

One argument would be that the parties didn't really have a contract in the first instance, and the parties were still negotiating. I don't know if the parties argued this point, but sometimes it is hard to tell when the parties have an agreement (contract.)

Consideration doesn't need to be much - anything of value will do. The important thing to remember is that when negotiating or amending contracts, the parties need to exchange something of value. The values do not need to be equal, but they must be present - and preferably the consideration is recited in the agreement or amendment.

Gavin Craig

And Winners in The Petters Case Are: The Lawyers and The Accountants!

Gavin Craig — Mon, 08 Feb 2010 09:07:34 -0600

The Minneapolis Star Tribune is reporting that in the 16 months since the Petters was arrested, the lawyers and accountants have billed $12,000,000. Not bad for a few months work.

Apparently Petters criminal defense costs were paid by insurance, (I didn't realize that insurance coverage would cover criminal defense!) and that bill was $3.3 million. The remaining money was spent for accounting and searches in attempts to locate the money stolen by Petters and his crew. According to the article, the money was also used for the defense costs of the officers and others that turned states evidence.

Of the $3.65 Billion Ponzi scheme run by Petters and others, I understand that most of the money is still unaccounted for, so this effort has not been a tremendous success. What has been recovered is used in part to pay for the lawyers and accountants. The bottom line is that the victims are paying for the cost to try to recover what assets can be found. The last I heard, is that Petters is not talking.

Here is a Conflict Resolution Book I Will Read!

Gavin Craig — Mon, 01 Feb 2010 09:05:57 -0600

One of my favorite bloggers, Victoria Pynchon, is publishing a new book, Titled "A is for Assholes, The ABC's of Conflict resolution." Those of us that litigate cases understand the title - perfectly.

I haven't read it, but I read Victoria's blog, and I recommend this book if it is anything like her blog - and it is sure to be that. Watch for it!

Gavin Craig

The Supreme Court to Hear an Arbitration Case. Did the Ninth Circuit Get it Wrong?

Gavin Craig — Thu, 21 Jan 2010 07:15:00 -0600

The Supreme Court does not often hear an arbitration case. However, they have now elected to hear Jackson v. Rent-A-Center West. Cert was granted on January 15th.

The case involves a claim of race discrimination and retaliatory termination. The employee had signed a stand alone agreement with the employer agreeing to arbitrate any disputes, including any claim of discrimination. The trial court dismissed the case on a motion, finding that the arbitration agreement already provided that the arbitrator determined arbitrability.

The case was appealed to the Ninth Circuit, and the Court of Appeals reversed, finding that the issue of whether an arbitration contract is unconscionable is an issue for the court. The agreement specifically provided that the question of arbitrability is a question for the arbitrator. The Ninth Circuit said it wasn't. Case law would appear to support this argument absent a provision in the agreement to decide arbitrability, but in this case the agreement already specified a process.

The district court held that the question of whether the arbitration agreement was unconscionable was a question for the arbitrator, as provided in the agreement. Moreover, the District Court held that the Plaintiff had not demonstrated that the agreement was substantively unconscionable.

The plaintiff is arguing that the arbitration clause is invalid because it is unconscionable, and therefore the agreement to allow the arbitrator to determine the question of arbitrability is equally void. The Ninth Circuit accepted the argument and reversed, sending the case back to the district court. Now the US Supreme Court has taken up the case.

In this case, the plaintiff signed the agreement. He may not have read the agreement, but that does not make it unconscionable.

This is an odd case. If you accept the premise that the arbitration Agreement is a contract, and that the parties are bound by their contracts, the Ninth Circuit is wrong. The court is essentially re-writing the contract and deleting a provision. That is not right. Court are not suppose to rewrite contracts. But that is the effect of the Ninth Circuit ruling. Here is the decision.

Gavin Craig

What Happens If You Sign a Contract to Purchase a Condo, and Then Die? That's Easy - Your Estate Buys the Condo, or Loses the Deposit!

Gavin Craig — Tue, 19 Jan 2010 09:37:20 -0600

Even the dead must honor their contracts. In an unusual case, the Buyer signed an agreement to purchase a NYC Condo for $2,300,000. The agreement is approved. The Buyer dies before the closing, and the estate does not want the condo. But, the estate wants the $230,000 deposit returned.

The Contracts Professor noted the courts reasoning as thus:

The crux of this matter lies in contract paragraph 15.2, which expressly makes the contract binding on the parties' "heirs, personal and legal representatives and successors in interest." The inclusion of this provision indicates that the parties explicitly contemplated, and provided for, the possibility of either party's death before closing, by specifying that the death would not terminate the contract, but that the contract would survive, to be performed by the successors or heirs of the deceased party. This provision makes the contract binding on [the buyer's] estate.

While this is basic contract interpretation and reasoning, the estate would have been responsible in any case. Just because a party to a contract dies does not mean that their estate is not responsible for the contract entered into by the deceased. (Unless it was a personal services contract, which has separate rules for obvious reasons.) The general rule in New York and I will guess all other states, is:

"[w]here the proposed purchaser dies before the closing of title, his executor or administrator may pay the balance of the purchase price and take the deed in his own name holding it in trust for the heirs at law or devisees. It is the duty of the fiduciary for a deceased vendee to complete payments under a contract entered into by such vendee for the purchase of real property" (4-35 Warren's Weed New York Real Property §35.24 [2009] [footnote omitted]; see Di Scipio v. Sullivan, 30 AD3d 660 [2006])."

The court also rejected the arguments of impossibility and frustration of contract purpose. So the Seller gets to keep the deposit, and apparently was able to sell the property for $2,125,000. That is a nice extra profit for the seller. How to avoid this problem: add a contract clause that the death of a party voids the contract. It isn't hard to do.

Thanks to the Contract Prof Blog for this story.

Mediation is Not Just a Game. Proceed with Care.

Gavin Craig — Mon, 04 Jan 2010 07:00:00 -0600

Victoria Pynchon has an interesting post on her Commercial ADR Blog. It is a fact pattern that many attorneys will recognize. It is a very real scenario. However, I don't understand why experienced attorneys would resort to the game playing. Attorneys should avoid tit-for-tat responses. They are juvenile responses to serious negotiations, and accomplish nothing for your client.

I agree that you can usually tell in a negotiation (but not always) where the other party is headed after awhile. I always assumed that the other side could tell where I was headed. The mediator in the case study did not seem very effective, or the parties were not listening to the mediator. Mediators, in my experience, do not want to convey useless and counter-productive offers back and forth.

In a recent case, the offer we received was so out of line that it almost stopped the negotiations. We had no meaningful way to respond to the offer. There was no place to go even with a meaningful counteroffer. Even the mediator told me that he told the other side that the offer was a big mistake.

Unfortunately the absurdly high or low offers do nothing to move the parties toward a settlement, and they can defeat the very purpose of the negotiations. Although we finally got to a place we thought was fair, my experience was a good example of the initial offer (or counter offer) being in the stratosphere and almost killing the effort. Many times the very high initial demand offer will be followed with major downward moves. That is at least an admission by the claimant that the initial offer was not a real offer.

Sometimes what seems like a ridicules demand or counter offer is made in earnest. In other words, the parties are truly very far apart on their assessment of the case. I hope we will see more of these case studies on Victoria's site. They are fun to consider.

But, attorneys in serious negotiation or mediation should be cautious about starting in a place that is unrealistic. That does not mean starting with your bottom line, but it does mean that the parties will do themselves a big favor by realistically assessing the case, and the merits of both their position and the position of the other side. Starting outside of at least shouting distance from a realistic range can kill what would otherwise be a good result, and it really avoids the necessary hard bargaining. Trials can be a real crap shoot, depending on the court. Negotiate with care and with a purpose.

Gavin Craig

When Mandatory Arbitration Fails. A Court Does the Right Thing; It doesn't Second-Guess The Arbitrator!

Gavin Craig — Wed, 30 Dec 2009 06:40:00 -0600

In a very unusual case decided by the Court of Chancery in Delaware, the court upheld an arbitrators decision that he didn't have the authority to rule. If the arbitrator has no authority, then the parties would presumably resort to the court. However, by Delaware law, the case must be arbitrated so there is no access to the courts. Thanks to The Deware Business Litigation report for this story.

The case arose from an accident outside of the state of Delaware, but for which Delaware's no-fault law applied. The insurance company, after making payment, brought a subrogation arbitration claim against the insurer of the party at fault. The accident was in Maryland, and Maryland has no such requirement to arbitrate.

The arbitrator apparently found a gap in the law, which will need to be remedied. It is interesting that the court refused to review or overturn the arbitrators decision. The very purpose of arbitration is to make the decision binding and not subject to court review. Good for the court, for not substituting it's judgment for the arbitrator's. When courts second-guess arbitrators, it damages the entire arbitration process. Sometimes when courts do nothing, that is the right decision!

Petters and Ponzi Schemes!

Gavin Craig — Mon, 28 Dec 2009 15:53:06 -0600

When Tom Petters was convicted in US District court of multiple counts of fraud, I wondered why a supposedly smart person would resort to fraud. Bernie Madoff essential did the same thing. They paid the early investors with the money invested by later investors. Petters created phoney documents to show business activity that was a fiction, and was able to get other people to invest in his enterprise. Both Petters and Madoff became very wealthy, with other peoples money. Now they are both enjoying life at taxpayers expense.

What troubles me, besides the very fact that they would defraud innocent people, is that they were operating a scheme that could not succeed in the long run. Madoff's operation was surprisingly long lived, but wouldn't have lasted quite so long had the regulatory agencies done their jobs. But these schemes can not be successful in the long term. You can't keep bring in more money to pay off prior investors. Eventually you will run out of willing investors, and the truth will come out.

So, why would supposedly smart people do this? The only answer is that they were not smart enough to figure out that the fraud had a limited life, or they planned to leave the country. In the Petters case, Star Tribune reporters David Phelps and Aimee Blanchette had an interesting interview with the foreman of the Petters jury. In the end, Petters own e-mails were his undoing.

Since Petters contended that he was innocent, there was no revelation about the why, and what he would do once it became clear he was going to be caught. However, most of the money is still missing. Petters isn't talking, so perhaps he had plans but he was not able to leave before he was arrested. We probably will never know.

The Risk of Shareholder Liability! Wait a Minute - We are Only a Shareholder and We are Not Liable for the Deeds of the Corporation!

Gavin Craig — Mon, 14 Dec 2009 15:47:55 -0600

The concept of limitation of liability is one of the hallmarks of a corporation. By becoming a shareholder in a corporation, the shareholder is not personally liable for the corporate liability. There are some exceptions of course. There are always some exceptions. But in normal circumstances a shareholder need not be concerned when the corporation is sued, unless the corporate identity is merely a sham, and the corporate formalities are not followed. The classic example is when the shareholder uses the corporation as a piggy bank and ignores all the corporate requirements.

Marc Ward's Blog, Ward of Iowa Limited Liability Companies has an interesting post discussing a recent court decision in a US District Court in Georgia. The court held that a party that was a minority shareholder when the contract in dispute was executed, and who later became the sole shareholder of the corporation, was bound by a choice of law provision in a contract it did not sign and was not a party to. This is a very troubling case on several fronts. The court found that a supplier to a corporation could have liability because it was a shareholder at the time the contract was formed. This is not the law is almost every jurisdiction. Marc Ward provides some additional thoughts that are worth reading.

I think the thing that troubles me the most is that the court is in essence rewriting a contract, and this the court is not authorized to do! Do rulings like this discourage the formation of corporations, or other entities that provide a limitation of liability to the owners? How is the shareholder to protect its self? Shareholders should not need to buy insurance against liability for corporate obligations.

American Mock Trial Association Experience!

Gavin Craig — Mon, 07 Dec 2009 10:42:52 -0600

I had the honor of participating as a judge in the American Mock Trial Association competition this last weekend at Macalester College in St. Paul. MN. What a great experience to see these students put on a very difficult case. College students from around the country participate and present a mock trial complete with witnesses, exhibits and arguments. They all use a set problem that is difficult and challenging. I think these facts and witnesses would be difficult for practicing attorneys, because all of the witnesses had problems, and the case was circumstantial. If I said I was impressed with the performance of the "attorneys" and the "witnesses," that would be an understatement. These young people were very, very good.

They were so good it was very hard to score.

For you attorneys out there in cyberland, if you're asked to be a judge in a mock trial program, I strongly urge you to participate and donate the time for the experience. It is a very rewarding experience and very encouraging to see the college students perform so well.

Gavin

It's Hard to Beat the Bank! But There are Exceptions! The Customer Wins One!

Gavin Craig — Fri, 04 Dec 2009 08:59:34 -0600

In an interesting case, a couple sued a bank because someone obtained their passwords, got into their bank accounts, took money out of a line a credit and transferred the money to an overseas bank. The bank defended against the by claiming an agreement signed by the customers waived any (future) claims against the bank.

The customers alleged that the bank was negligent in failing to promptly implement security measures on their on-line access. Admittedly the bank was slow to implement the changes, but the bank claimed that it didn't matter since the customers had already waived any claims against the bank. The agreement stated to customers that it would “have no liability to you for any unauthorized payment or transfer made using your password that occurs before you have notified us of possible unauthorized use and we have had a reasonable opportunity to act on that notice.” The court viewed the case as a case where the written waiver didn't necessary exclude a claim for negligence.

Usually the court will narrowly construe waivers, and apply them to the facts. If the conduct complained about is not specifically included in the waiver, the waiver will not exclude the claim.

TheThreat Level Blog reported on this unusual case as follows (Excerpts):

Court Allows Woman to Sue Bank for Lax Security After $26,000 Stolen by Hacker
By Kim Zetter September 4, 2009

As initially reported by legal blogger, David Johnson, Marsha and Michael Shames-Yeakel sued Citizens Financial Bank in 2007 in the northern district of Illinois on several grounds, including a claim that the bank failed to provide state-of-the-art security measures to protect their account.

U.S. District Judge Rebecca Pallmeyer refused last week to grant a summary judgment in favor of Citizens Financial, stating in her ruling that “assuming that Citizens employed inadequate security measures, a reasonable finder of fact could conclude that the insufficient security caused Plaintiffs’ economic loss.”

The couple, who run a home-based bookkeeping, accounting and computer programming business, have been customers of Citizens Financial, which is based in Illinois, for 30 years. They maintained personal and business checking accounts with the bank as well as a $30,000 home equity line of credit, which was linked to the business checking account.

In February 2007, someone with a different IP address than the couple gained access to Marsha Shames-Yeakel’s online banking account using her user name and password and initiated an electronic transfer of $26,500 from the couple’s home equity line of credit to her business account. The money was then transferred through a bank in Hawaii to a bank in Austria.

The Austrian bank refused to return the money, and Citizens Financial insisted that the couple be liable for the funds and began billing them for it. When they refused to pay, the bank reported them as delinquent to the national credit reporting agencies and threatened to foreclose on their home.

The couple sued the bank, claiming violations of the Electronic Funds Transfer Act and the Fair Credit Reporting Act, claiming, among other things, that the bank reported them as delinquent to credit reporting agencies without telling the agencies that the debt in question was under dispute and was the result of a third-party theft. The couple wrote 19 letters disputing the debt, but began making monthly payments to the bank for the stolen funds in late 2007 following the bank’s foreclosure threats.

In addition to these claims, the plaintiffs also accused the bank of negligence under state law.

Judge Pallmeyer, however, was not convinced. She found court precedents showing that financial institutions have a common law duty to protect their customers’ confidential information against identity theft. Specifically, Indiana courts — where the Shames-Yeakels live — have held that a bank “has a duty not to disclose information concerning one of its customers unless it is to someone who has a legitimate public interest.” The judge therefore concluded in part that, “If this duty not to disclose customer information is to have any weight in the age of online banking, then banks must certainly employ sufficient security measures to protect their customers’ online accounts.”

This is a classic example of the tension between negligence causing a loss, and a contract excluding liability. For any business, the key is to have a clear agreement that covers the intended claim. For the individual, the key is to understand what you are agreeing to when you sign an agreement. One curious thing is that the opinion says that the Plaintiff had been doing business with that bank for 30 years, yet the bank treated them very poorly. That, was a bad business decision. I wonder how much future business they will lose because of their inability to resolve this problem with a long time customer.

Rights of the Minority Shareholders in Small Corporation! Can you Safely Fire a Minority Shareholder - Employee?

Gavin Craig — Tue, 01 Dec 2009 11:19:04 -0600

I found a very interesting blog post on the New York Business Divorce Blog, dealing with a problem common everywhere. What happens when a minority shareholder works for the enterprise, and is later fired?

This is a very common issue. For reasons real or imagined, the majority shareholders want the minority shareholder to leave. What now? The minority shareholder rarely has an employment agreement (or at least rarely has a written agreement.) And even if here is a written agreement, I've never seen one where the employee/minority shareholder had a right to keep the job regardless of performance.

When the minority shareholder is fired, there is a usual claim or breach of fiduciary duty and other contractual claims.

The NY Business Divorce Blog notes: The most common allegation of oppression by minority shareholders involves termination of employment by the controlling shareholders.

However, when the employee is an at-will employee, then he/she can be fired without creating a liability to the company absent a violation of any other agreement, such as a buy/sell agreement between shareholders.

It is common for shareholders in a small corporation to eventually have disagreements. Unfortunately, when a business is created there is sometimes little thought given to what happens if someone wants to leave, or the majority wants the minority shareholder to leave. Sometimes the shareholder don't even sign an agreement.

I commend you to the writeup on the NY Business Dissolution Blog concerning this subject. They discuss a case where the company is in litigation with the fired minority shareholder, and the company could not get the claim dismissed on a motion. In the case reported, the majority wanted to pay $125.00 rather than $8,335.00 per share to purchase the minority interest. This is just foolish.

Is Blackmail Really a Contract?

Gavin Craig — Tue, 17 Nov 2009 07:30:00 -0600

There is an interesting series of comments in theContract Prof Blog, and others, asking whether blackmail is just a form of contract. The odd thing is that blackmail certainly meeting the legal definition of contract, with an offer, acceptance and consideration. But then so would a contract for Murder, but that doesn't make it a contract.

But can the blackmailer sue for damages? The discussion was generated because of the Letterman case, where Letterman accused the alleged blackmailer of demanding money in exchange for withholding information about Letterman's affairs with staff members. While this is an interesting academic discussion, the fact that blackmail is a crime makes this a very different matter.

But the real question is whether there could be a contract, and I think the answer is yes, there could be. In fact, I understand that the defense is just that: there was a contract for a screenplay that disclosed these facts about Letterman. Would there be an enforceable contract if Letterman contracted to purchase all rights to the screenplay, and thereby prevent its publication? This later scenario sounds more like a contract. But it could also be blackmail.

I would think it would be hard to convict someone if there really was a screenplay with the embarrassing information in it. I don't know if there is, but it is still a fun academic exercise.

Who is a Party to a Contract? Sometimes the Participants are Surprised!

Gavin Craig — Thu, 05 Nov 2009 07:30:00 -0600

How often does an officer of a corporation sign a contract, listing the business as the contracting party, but neglect to indicate that the business is a corporation or an LLC? Then sign the contract?

Marc Ward in his Blog discusses a case of, who are the parties to the contract?

Marc writes:

In Builders Kitchen and Supply Co. v. Moyer, N0. 0-655/09-0194 (September 2, 2009) is a deceptively simple case. On the one hand it represents the folly of not having even run of the mill contracts reviewed by lawyers before they are signed. And on the other hand, it is a warning to lawyers that things aren't as simple as they appear.

Frank Moyer signed a contract with Builders Kitchen for the purchase and installation of some kitchen cabinets and countertops. The contract was just two pages long. On the first page there was a place for the name of the business and a little later a space to indicate the type of entity. Moyer filled in the name of his business, Crystal Creek Development, but neglected to indicate that it was a corporation. He signed the contract as "Frank Moyer, Pres." The second signature line, presumably for the guarantor, was left blank.

The question for the court was, is Frank Moyer a party to the contract? As a simply matter of agency law, the answer has to be “Yes.” The officer of the corporation is an agent, and the agent has the duty to disclose the existence and name of the principal. For a lawyer these are fun cases, but I have had numerous attorneys argue with me that filing articles of incorporation are all the notice that the agent (officer) needs to give. That position, by the way, is not the law.

In Minnesota there is a famous case where the same thing happened. Except that in the Minnesota case the defendants were lucky. They had paid for the goods with checks that clearly showed that the seller was selling to a corporation, and the court found that the checks were sufficient notice. See Paynesville v. Ever Ready Oil, 379 NW2d 186 (Minn. App. 1985)

Earlier in my career I had an opposing counsel argue that a person listed as a contracting party and who signed the contract was really not intended to be a party.

Most people, including especially small business owners, are very informal when signing contracts, and create real problems for the principal of any company. The lesson is clear. Have an attorney review the contracts. Marc is right: Pay me Now or Pay me Later.

I learned to Speak French Listening to my GPS. (Some off Topic Comments on Travel)

Gavin Craig — Wed, 04 Nov 2009 08:57:27 -0600

I recently returned from a trip to France, and we took our GPS to use with our rental car. The GPS worked very well in France, about 95% of the time. The few exceptions include the time the GPS directed us to what can only be described as a rocky wilderness fire road. The wilderness road eventually led to the place we were headed, but it was so narrow we couldn’t turn around. But the GPS was always correct in that it guided us to the places we intended to go. We inadvertently saw a part of France we never intended to see, but it was a pretty area.

Occasionally the GPS would lead us to a single lane road along side the highway where we should have been. Unfortunately you don’t always know you should ignore the GPS until it is to late. Especially in a foreign country.

On the positive side, the GPS guided us flawlessly through the Paris highways as we drove through the city on our way to Provence.

The GPS voice system would tell us to turn on a named street. The problem in France is that you can’t see street names very often, and of course the GPS could not pronounce the French names. (But I must confess that the GPS spoke French better than I do, which is very faint praise.) The GPS gave instructions in English or we would still be there and lost.

I learned one thing though. If you’re going to rent a car in a foreign country – use a GPS. It made life a lot easier, as well as more exciting on occasion.

Stealing Customers and Failing to Pay Commissions Eventually Costs Carrier!

Gavin Craig — Wed, 07 Oct 2009 10:13:19 -0600

In a recent case,All-Ways Logistics v. USA Truck Inc., the court found that USA had breached it's contract with All-Ways. This case is interesting on several levels, because it presents the court with a very common issue: When one party breaches part of an agreement, what is the effect when the other party continues to do business with the breaching party?

The defense of USA was simply this: All-Ways waive the breach of contract by USA! The facts are simple. All-Ways is a freight broker. USA contracted with All-Ways to find business for USA, and USA would pay them a 5% commission. All-Ways found some large customers for USA, and all went well for 2 years. After two years USA told All-Ways they would no longer pay commissions on a large customer, and they solicited the business themselves. All-Ways understandably objected, but continued to solicit business for USA from other customers. After a while, USA terminated the agreement completely.

All-Ways sued for breach of contract and unpaid commissions. All-Ways wanted the commissions for freight hauled during the term of the contract, even if USA solicited the customers directly. USA claimed that All-Ways waived the breach of contract. The jury found that USA had breached the contract and awarded damages of $2,966,880, plus the court awarded prejudgment interest of $583,000, attorney fees of $1,000,000, and costs of $18,000. USA appealed.

Part of the decision concerned the trial courts refusal to give specific jury instructions relating to waiver; the argument being that All-Ways continued to receive the benefits of the contract after USA breached the contract. The trial court refused to give the instructions to the jury. The trial court determined that the commission agreement was a severable agreement, so that the breach of one part is not a breach of the others. In other words, if USA refused to pay commissions on one shipment or from one shipper, All-Ways did not waive the breach by accepting commissions on other shipments.

The circumstances of the parties in this case are common. One party contracts with another, and at some point the party making payments finds another less expensive way to get the same result. Meanwhile, the 1st party is stuck. Do they walk away from a good contract because the other party stole a customer?

This case could have gone the other way, with the court finding that there was a waiver. In my opinion that would have been an unfair result, but it is not difficult to waive your rights under a contract. Any party can waive their rights. The answer is that parties to a contract in this situation need to carefully consider the consequences of their actions. There is no simple answer and each case stands on its own merits. In the present case, it cost USA a lot of money to steal the customers. So Buyers Beware!

Computer Fraud and Abuse Act Doesn't Prohibit Computer Fraud and Abuse!

Gavin Craig — Mon, 21 Sep 2009 09:18:57 -0600

In an interesting case out of the 9th Circuit, the court determined that employees (usually ex-employees) are not liable under the Computer Fraud and Abuse Act (CFAA) for damages for accessing the employer’s computer for unauthorized purposes (taking data for their own purposes,) when they were authorized access in the first instance. The typical facts are that an employee wishing to set up a competing business will download customer lists, and other information owned by the employer. Then a new business is started without the necessity of developing an original customer list, or other information deemed valuable by the departing employee.

The case,LVRC Holdings v. Brekka et al., eliminates a powerful weapon for the employer, at least in the 9th circuit. Damages have always been an issue under the act (CFAA), but the courts ruling that the act does not cover actions by employees that already have access to the computer files, is interesting. The court does not hold that if the ex-employee gained access to files that the employee was not authorized to view, there would be no violation. In this case the employee had full access. This case is about an employee with complete access, that took the information for his own purposes. The employer made no attempt to protect the data.

The holding would seem to require employers to carefully control employee's access to data, even though employees have the greatest need to use the data. I don't know if the congress will consider any changes to the statute; I doubt it, but employers have lost a good counter-claim when sued for wrongful termination. I don't think the intent of the statute was to protect employers from their own employees. Employers are fully capable of protecting themselves. The intent was to criminalize the theft of data by others.

Thanks toThreat Level, a Wired Blog, for the heads up.