Twin Cities Business Litigation Blog

The Unilateral Contract is still Relevant and Enforceable

Gavin Craig — Mon, 03 Dec 2012 11:44:41 -0600

This is an unusual case, especially where the party making the offer decides he doesn't want to pay after another person satisfied the requirement stated in the offer. The Contracts Professor blog brought this case to my attention.

What happens when you lose something valuable? You promise to pay something for the return. You see it all the time. If the item is very valuable, you offer a lot.

In the present case Mr. Leslie's laptop and an external hard drive were allegedly stolen while he was on a trip to Cologne. Leslie offered a $1,000,000 reward for the return of the laptop and the external hard drive via a YouTube Video. Armin Augstein claimed to have found the laptop and hard drive while walking his dog, and returned it to the police. When Augstein was notified of the reward, he made the claim.

Leslie offered two reasons for failing to pay. One, Augstein could have been the thief; and two, Leslie claimed that his obligation to pay was contingent upon his being able to recover some music tracks, which he was unable to do. Clearly there was no contingency in the offer for the reward.

According to the report, the jury deliberated for three hours before returning a verdict in Augstein's favor for $1,000,000.

The lesson is clear, if your going to offer a reward (a unilateral contract) be sure to clearly state any contingencies, and most of all, be prepared to pay the reward.

When Party A Agrees to Provide Work to Party B for no Money, but Instead For Exposure to Others That see the Work, can Party A Collect the Value of the Work When Party B is Bought by Party C.

Gavin Craig — Mon, 09 Apr 2012 09:00:00 -0600

This is the outline of a recent case in the US District Court, Southern District of New York, where writers and Bloggers provided work to the Huffington Post Blog (also "Huffpo"), with an agreement that they would not by paid, but instead their work would be attributed to them and available to anyone that read the Huffpo. The decision was the response to a motion to dismiss brought by the defendants.

The Plaintiffs apparently felt that their deal was with the original Huffington Post - not the new Huffpo what was purchased by AOL. There was no question but that the writers that contributed to the Huffpo without payment contributed to the tremendous success of the enterprise. However, it is hard to see how anyone benefited at the plaintiffs expense. As noted in the ContractProf Blog, the plaintiffs entered into the arrangement with no expectation of compensation, so they already received exactly what they bargained for. In other words, a deal is a deal. The plaintiffs offered their products in exchange for the defendants offer of exposure.

The court evaluated the claim for unjust enrichment and dismissed the case. This is an interesting case, not only because of the high profile name, but also because the claim would require the court to ignore the terms under which the submissions were made. There was no basis to believe that the plaintiffs expected compensation, and the plaintiff admit they did not. The bottom line is that for an unjust enrichment claim to succeed, the plaintiff must have an expectation of compensation, even if the exact terms of the compensation are not clear. But when there are clearly no expectations of compensation, there is no claim.

Lawyer Sanctioned for Bringing Frivolous Cases Against Mortgage Holders.

Gavin Craig — Fri, 06 Apr 2012 09:15:00 -0600

US District Court Judge Patrick J. Schiltz issued a sever sanction against an attorney for bring numerous frivolous acts against mortgage holders to prevent foreclosures. The law in Minnesota is clear that the holder of the mortgage can foreclose on the property, even if the mortgage holder does not hold the promissory note.

The attorney, William Butler, has been ordered to pay the court $50,000, plus pay the attorney fees for several mortgage companies that he has sued. According to sources for the story on the Minnesota Public Radio (MPR) web site, the total sanction could be well into six figures.

I look at this as a good sign for the legal profession. Lawyers need to be held accountable when they misuse the courts, by bring numerous claims that are clearly not grounded in well established law. This is different than bring a claim that is arguably meritorious, and ask the court to rule, maybe on issues for which there is no prior decision. But this case is very different. The article is good reading for all attorneys in every state.

Can one Party to a Contract to Divide Assets in a Divorce, Claim a Mutual Mistake to Avoid Obligations, When the Value of Some of the Assets used Allocate the Division Between the Parties Were Then Held by Bernard Madoff and the Account Reports were Frau

Gavin Craig — Wed, 04 Apr 2012 13:21:09 -0600

This case is based upon a divorce settlement agreement. It is an interesting case, just because one party - in this case the ex-husband - now discovers that the value of his share is worth considerable less than his ex-wife's share, because the value of some accounts (he claims) was really zero, and not what Madoff had represented. If they had divided the Madoff accounts evenly - there would be no a case (they both would lose the same amount). But they didn't.

The court rejected the claim of mutual mistake, but the facts are really amazing. How many other people have entered into agreements based at least in part on what they believed was the real value of an investment. There must be a number of parties in similar situations. None of those parties had any knowledge of the fraud (I am presuming), and they were all victims of the Madoff fraud.

According to the opinion, the Husband agreed to pay the wife $6,250,000, and there were a number of other agreements about dividing certain properties. The husband alleged that the intent was to equally divide the assets between them. Importantly, the agreement said nothing about an equal distribution, or any attempt to divide the assets equally.

As part of the agreement, the Husband took the Madoff accounts which were apparently in his name, and as a result, his portion of the division of the assets was reduced significantly when the Madoff fraud was discovered 2 1/2 years after the divorce. He brought the action against his wife for restoration of some of the amounts paid, using a theory of unjust enrichment and mutual mistake. The wife undoubtedly claimed that she made no mistake, and it was at best a unilateral mistake of her ex-husbands. These facts do not really fall under a mutual mistake analysis. And clearly the accounts had some value at the time of the divorce because the husband was able to withdraw some of the funds in the account to pay part of the divorce settlement. So at least at the time there didn't appear to be any problem.

The court didn't buy it. What would have happened if the contract had said that the intent was to divide the couples assets equally (or approximately equally)? If the contract had covered this contingency (and it is hard to imagine that the parties would have even thought to cover this subject) maybe there would be a remedy - but it would be a contractual remedy.

Thanks to ContractsProf Blog for reporting this case.

Does the Risk Of Frivolous Law Suits Justify Shifting the Risk of Paying the Other Parties Legal Fees?

Gavin Craig — Tue, 24 May 2011 15:24:55 -0600

The Wall Street Journal has an interesting article in today’s edition - May 24, 2011, by Ashby Jones, about the Texas Legislature and a bill that appears destine to pass, that requires the loser in some cases to pay the attorney fees of the other party. Apparently the proposed law would require the loser to pay when a case is "kicked out of court" at a motion to dismiss stage of the proceedings.

In a very simplistic analysis this seems to be a good idea. A more thoughtful analysis raises a lot of questions. First of all, some cases are dismissed on a motion to dismiss, but many times these cases are dismissed on procedural and pleading grounds, and not the merits of the case. Also, these dismissals are many times without prejudice to allow the plaintiff to refile a new case, to repair some defect in the pleading.

Secondly, Texas will undoubtedly see a great surge in filings of motions to dismiss. The courts will need to deal with a surge in these motions, since the defendant has little to lose in bring the motion (which in most cases will be a frivolous motion). When the Plaintiff wins the motion and the case is not dismissed, does the defendant need to pay the Plaintiff's attorney fees? I am confident that this is not the intent. If a plaintiff wins a judgment against a corporate defendant, will the corporate defendant be responsible to the Plaintiff's fees.

While I think there are times when a loser pays system is appropriate, and sometimes there are frivolous lawsuits filed, I would like to think there is a better way to determine when to make the loser pay. If a claimant has no legal or factual basis for a claim, then the Plaintiff should pay for the Defendants legal costs. Fortunately, most cases are not frivolous.

If Texas would enact a pure loser pays system, then we would be able to see how it works. Maybe enact it for a trial period. Make the system fair and equal for everyone. Sure, it should make people think twice before bring an action - something they should do anyway. However, I expect that corporate America would oppose this proposal.

I will predict that only a small minority of cases will be dismissed on a motion to dismiss. However, some cases will certainly be decided by a summary judgment motion, which is different than a motion to dismiss. A summary judgment is a decision on the merits, where there are no material facts in dispute.

Finally, people who have no money will not care if they are responsible for a defendant's legal fees, since they will likely be judgment proof.

I will be interested to see the law when it is enacted, and to watch to see how it plays out. Laws which try to shift an advantage to one side to the other, are usually doomed to fail. To make it fair the loser pays system should apply to everyone, both plaintiff and defendant.

Contract Language is Always the Issue. What did the Parties Agree to do or, in this Case, Waive?

Gavin Craig — Tue, 24 May 2011 12:42:04 -0600

The Koncise Drafter Blog has an interesting post concerning the interpretation of certain disclaimer contract language. The aggrieved party - a lessee, claimed fraud when the landlord failed to disclose that there was a bad odor in the premises where the lessee planned to operate a restaurant. Clearly this problem would have defeated the objective of using the space for a restaurant. To make things worse, the property manager knew about the problem, but had naturally failed to disclose this issue to the new lessee. (This sounds a lot like a Seinfeld episode.)

The lease language provided that:

14.18 Representations. Tenant acknowledges that neither Landlord nor Landlord’s agents, employees or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.

14.21 Entire Agreement. This lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no subsequent amendment or agreement shall be binding upon either party unless it is signed by each party. …

Not surprisingly, the lessee sued the landlord for fraud, among other things. The Landlord took the predictable position that the lessee had waived any claims for fraud.

The trial court found for the lessee, the Texas Court of Appeals reversed, and the Texas Supreme Court reversed the Court of Appeals. The question that the court was grappling with is whether the parties effectively disclaimed reliance on the representations by the lessor, thereby negating any claim of fraud. I am sure that when the lease was drafted that was likely the intent, this is very standard language (or some version of this language). The Blog correctly points out that when a drafter clearly states that the other party waives any claims for fraud, it is unlikely that the parties will sign the contract. So the language by necessity needs to be a little more subtle.

I think it is also the case when reviewing commercial lease contracts, most reviewers will probably skim the standard boilerplate language such as the term at issue in this case. After all, what owner wants to pay a lawyer to analyze and research language that is considered standard boilerplate language that has, in one form or another, been around for a long time.

In my career I've only once been presented with a lease for a client where the other party wanted my client to disclaim any claim for fraud. We did not agree to that language.

Another issue is whether the lessor had a duty to inform the lessee of the problem knowing that it would interfere with the lessee's intended use of the building. The lesson is clear, if you want the other party to waive any an all rights against your client, you had better say so.

Third Party Wins Case Against the USG as a Third Party Beneficiary.

Gavin Craig — Mon, 18 Apr 2011 08:59:33 -0600

It is very unusual for a third party to a contract to be able to enforce the terms of a contract. The first hurdle is that the parties must have specifically intended that the third party benefit from the contract. Usually claims of a third-party beneficiary are defeated at this point because there is no language in the contract to show specific intent to benefit the third party.

Claims against the Government are equally as difficult, if not more so. So the recent case of FloorPro Inc. v. United States is unusual. The facts of the case are simple enough. GM&W was awarded a government contract install new floor coatings in some warehouse bays. GM&W sub-contracted with FloorPro and the latter was to be paid about ninety percent of the contract price -- $37,500 out of $42,000. FloorPro completed the work but was not paid. FloorPro complained to the Government contracting officer.

The Government then made an agreement with the parties that provided that a joint check was to be issued to both FloorPro and GM&W. In consideration for the amendment GM&W released the government from any claims. So far so good for FloorPro.

However, the government being the government made a mistake and issued the check to GM&W, who presumable cashed it promptly and of course did not pay FloorPro. FloorPro brought an action against the Government claiming that it was aThird-Party Beneficiary of the contract modification.

The court agreed. The contract modification was specifically intended to benefit FloorPro. While it is unusual to find a successful third party claimant to contract funds, in this case the result is certainly fair and predictable. The parties clearly intended to benefit FloorPro. Since the the law is clear on when a 3rd party can succeed with a claim, and the facts clearly show that FloorPro was the intended beneficiary, why would the government fight the claim instead of negotiating a settlement. This was not a large claim, and the government made the mistake.

Thanks to the Contracts Prof Blog for reporting this unusual case.

Can I Make All My Employees Managers To Avoid Overtime Pay; and Other Myths. Two Ways to Make Long Term Bad Decisions.

Gavin Craig — Tue, 05 Apr 2011 07:54:57 -0600

The Minnesota Labor and Employment law Blog has an interesting article on another large company failing to pay it’s employees for overtime work as required by the law. The company in this instance was Levi Strauss and Company. The end result cost them well over a million dollars and of course their incurred attorney fees. Most of these cases are arguments over classifications – is an employee exempt, or not. Companies have been found to classify employees as managers, even though they don’t manage much, to avoid the overtime requirement.

Several years ago a contractor approached me and asked if he could make all of his employees independent contractors, thereby avoiding the requirement to pay the employers portion of social security. His competitors, he told me, were all doing it. This is another bad idea that will eventually subject a company, and owners, to significant costs and penalties.

Companies are sometimes operating under significant cost pressures, and they are looking for ways to reduce costs. However, ignoring the law is not the solution to a cost problem. While a company ignoring the law might gain a slight cost advantage in the short run, the cost in the end is bound to be much higher.

In the Levi Strauss case, since the employer failed to pay the required overtime (at least they agreed to make payment to the tune of over a million dollars,) the employer will also have a significant payment due the government for their portion of the social security payment.

While I have not seen this case yet, I am sure that there are companies that are treating employees as independent contractors and failing to pay the employees the required overtime wages, and the employer is also failing to pay the employers portion of the social security payments. These employers are just as likely to be caught by the government as by an unhappy employee or ex-employee.

Follow the law, and life is easier in the long run. When in doubt, ask an attorney to review the situation and provide advise. It’s far less expensive to get good legal advice than to defend these charges in court. Thanks to the Minnesota Labor and Employment Law Blog for their article on Levi Strauss.

Should I Put an Attorney Fee Clause in My Contracts?

Gavin Craig — Thu, 10 Feb 2011 10:05:07 -0600

When preparing contract documents for clients I am occasionally asked if we should include a clause to award attorney fees in case the other party breaches the agreement. When a client brings me a contract and wants to bring an action against the other side, that is one of the first things I look for. That provision change the analysis of the case.

In considering this issue, I think there are two things to remember:

First: A provision allowing only one party to recover attorney fees is not usually a good idea since some courts will read these as giving the prevailing party, whichever side this is, the award; and Secondly: Prevailing party attorney fee provisions are an incentive to sue, since the plaintiff always believes that they are right.

One way attorney fee agreements essentially provide that if “Joe,” brings an action to enforce this agreement, the other side must pay his attorney fees. If Joe wants to enforce the agreement because of some perceived breach of contract, he will assume that he will recover all of his attorney fees. So Joe wants to sue without regard to the cost, or in some cases without regard to the actual merits of the case.

California has a statutory scheme in contract actions that in many cases awards fees and costs to the prevailing party. You only need to read some of the cases to see the significant number of cases and appeals over who was the prevailing party and what the reasonable fees were.

I confess that at one time I thought the opposite was probably true, because of the additional risk an attorney fee provision brought to any action. However, on the positive side I believe that once an action is brought, the risk of attorney fees sometimes bring the parties together for a settlement.

Joe may or may not be able to recover his fees. Most courts will make a determination based on success in the action. Many courts will read the attorney fee provision as a prevailing party attorney fee provision. However, most cases settle, and I have yet to see a settlement that included an agreement to pay the other parties attorney fees. (I am sure it happens, but usually both parties cover their own fees.)

Some cases start out and the possibility of an award of attorney fees keeps a case from settling. If a substantial amount of money has been spent on attorney fees, will parties settle at a price that covers all of the contract damages only?

A provision that provides that each party is responsible for their own attorney fees and costs in the event of a dispute might very well be a better way to go. It is worth considering.

Can I Read my Employees E-mail, or Tap His Telephone?

Gavin Craig — Tue, 08 Feb 2011 09:08:12 -0600

This is a fairly common question, but it raises a lot of concerns. Each state has slightly different wire taping laws - by which I mean recording telephone conversations. TheWork Place Privacy Counsel Blog has a very interesting article concerning wiretapping and the Federal Wiretap Act. This act effects interception of telephone calls and e-mails.

The article covers the effect of diverting or intercepting e-mails, and what it means to intercept a communication. Employers beware. Employees beware!

After reading this article, how would you advise an employer that wanted to read all of their employees e-mails. One thing is that you would not want the act to be an interception of the e-mails.

When are the Terms of a Contract, Unenforceable? Another Arbitration Agreement Case.

Gavin Craig — Thu, 11 Nov 2010 09:56:40 -0600

As the commentator in the Contracts Professor noted, the Supreme Court hears a contract case about as often as the Cincinnati Bengals reach the Superbowl. So in an unusual case - the Supreme Court heard arguments in a case that challenged a provision in an arbitration clause in a consumer contract, that waived rights to any class action. California had previously found such waivers unconscionable.

The courts in California had invalidated the provision. Generally, the only time a court can invalidate an arbitration provision is when the basis for the invalidation would be equally applicable to any contract. In other words, if state law would invalidate a contract, then the same rule would apply to an arbitration agreement. You normally don't get to make special rules to invalidate arbitration agreements, although the court in the recent past has made a number or rulings that arguably leave that question open. The petitioner in this case argued that the states don't get to make special rules for arbitration agreements in order to invalidate them. Petitioner argues that, this is exactly what the court did: it applied a lesser standard than it would apply to any other contract. Respondent argued that this was a universal rule and state gets to decide what is unconscionable.

The oral argument is worth reading to just appreciate how the Supreme Court conducts oral arguments. It will be interesting to see the final opinion of the Court.

However, I wonder why the court took this case in the first place. Five justices must have agreed to hear the case, but why? Is the court going to go into the business of reviewing state decisions regarding the enforceability of arbitration agreement provisions? This seems unlikely. I'm just wondering.

Another take on this case comes from Class Action Countermeasures. I do like the question: (Paraphrased) Is the Supreme Court ging to Tell California what is or is not Unconscionable? In the end I think the answer will be, "No!"

When the Non-Compete Agreement May Not Work to Protect the Employer!

Gavin Craig — Mon, 27 Sep 2010 16:12:56 -0600

Rush Nigut has published an interesting comment on a recent case involving a non-compete agreement. Companies often ask new employees to enter into non-compete agreements to help the employer protect it's intellectual property. In the case at issue, the employee signed a non-solicitation agreement, stating that the employee could not solicit the customers of the employer. These types of agreements are very common.

The issue in the case was whether answering an employment ad and going to work for the customer constituted solicitation. The court said, "No," responding to an employment advertisement is not soliciting. In other words, the agreement did not prohibit customer initiated contacts with the former employee.

This is an odd case, since whatever damage was incurred by the former employer was limited to a single ex-customer. Also, if the customer was advertising to hire someone to do the work, you would assume that the ex-employer had already lost the customer. It was just a matter of time. So why spend the money to sue, which surely would not bring back the customer.

Non-compete agreements are tricky, and one year non-competes really don't do much to stop ex-employees, because by the time the ex-employer finds our about the breach, the year is usually almost over. The case described by Rush is an example (probably) of an employer cutting and pasting a non-compete agreement without consulting an attorney. I am guessing on this, but it seems logical that an attorney would also includ a provisdion restricting the right of the ex-employee to go to work for a customer an provide the same services that the Ex-employer was providing.

Lack of Knowledge Doesn't Save Claim from the Statute of Limitations.

Gavin Craig — Thu, 12 Aug 2010 08:24:12 -0600

In the interest of fairness, when an injured party doesn't know about the claim, should the statute of limitations bar the action? That is an interesting question and the answer, as in most legal questions, is that, "It depends."

In a recent case, a blogger allegedly defamed Arthur Alan Wolk, who brought an action in Federal Court. Wolk argued that the statute of limitations did not apply because he had no way of knowing about the defamation. He didn't discover the alleged defamation within the time required. As he argued, he couldn't pick up a newspaper and discover the alleged defamation. The statute of limitations for defamation is one year.

The court said that the statute barred the claim. Max Kennerly, in an interesting blog about the case, notes that you can find a lot on Google, and that is where the plaintiff found the reference. He just didn't look within the time required. Max notes that the effect of the rule is that everyone has constructive knowledge of everything on the internet. I'm not sure I would go that far, but it isn't hard to Google yourself.

Sometimes the statute of limitations doesn't start until the person injured has or should have knowledge. In other words, if a reasonable person would have discovered the claim by a certain date, then the statute starts to run at that time. Sometimes the statute runs regardless of knowledge, as in this case.

Bring claims based on some action in the distant past is a problem; witnesses are gone, records destroyed and memories are changed. So having a limitation of action is a good thing. You can't usually sit on your claim. Sometimes claims are never discovered until long after the statute has barred any action.

Is this fair? Maybe not of the claimant, but for the legal system it is probably the only fair thing to do. I think this is a case of the greater good, the efficient operation of a legal system, at the expense of some individuals with old claims.

The one thing I like about this case is that the court made the ruling at the motion stage of the proceedings. It is very frustrating to have a court deny a motion to dismiss based on the statute of limitations, have the trial, and then have the court rule that you proved your case but the claim is barred by the statute of limitations.

Families are Great! Now the Daughter Sues Dad for Breach of Contract - and Wins!

Gavin Craig — Wed, 07 Jul 2010 07:53:33 -0600

This is a really a great story. Sad for the family, but a great contracts story. The Connecticut Law Tribune reports the following story about a contract gone bad. Also see the report in the Contracts Professor.

This is the case of Dana Soderberg, who went to court to force her father to live up to his agreement to pay her tuition at Southern Connecticut State University.

The court agreed that the father had entered into a contract to make the payments. When Howard and Deborah Soderberg divorced, they agreed that Howard would pay all of the education costs of the children. Dana, a daughter, was smart enough to get a written agreement with her father since, as she knew, her father was not a person to follow through and actually pay for things as promised.

The article in the Tribune reads in part:

As part of the agreement, Dana would make an effort to apply for student loans and Howard Soderberg would pay off those loans. Co-signing the agreement was Howard's sister, Patricia.

Howard delivered on his word through March 24, 2007. But when it came time for Dana to begin her senior year at Southern Connecticut, Howard Soderberg refused to pay the bills. And so Dana got a $20,000 loan to pay for her last year of college, with her mother co-signing.

Dana graduated and sued her father.

The father argued that Dana breached their agreement by not making reasonable efforts to apply for student loans, by failing to attend classes full time and by not providing him with receipts for tuition and other school-related expenses.

Howard Soderberg also filed a counterclaim alleging that his daughter dropped courses and pocketed the refunds. He also said she spent money that was supposed to go toward textbooks on personal items.

Judge Trial Referee William L. Hadden Jr. issued a written opinion earlier this month, ruling that father and daughter had a legitimate contract, that Dana proved to be the more credible party in the lawsuit, and that the father had breached the agreement.

"The plaintiff has proven that she has performed all of her obligations as set forth …" wrote Hadden. "The defendants have failed to prove the claims set forth in their special defenses and in Howard's counterclaim."

Berman said damages totaled around $47,000, including the loan, interest, attorney fees and missed car insurance payments. Berman did not anticipate an appeal.

As I read this report I was wondering what the consideration was, since Dad already had the obligation to pay for the education costs. Perhaps it was the obligation to apply for student loans.

Even without a contract you clearly have what appears to be a good case of promissory estoppel.
The daughters instinct to get a written agreement with her father is probably unusual, but very smart in the circumstances. Good for her.

This a good lesson in all business arrangements. Write down your agreements. Most contracts are preformed without any problem. But when there is an issue, and the parties have written down their agreement, it is much easier to resolve than it is when the agreements are verbal. Once there is a dispute over a verbal agreement, the parties will disagree on what the agreement was, or even if there was an agreement. This case is a good lesson for all.

Gavin Craig

Phantom Debts and the Law!

Gavin Craig — Tue, 29 Jun 2010 08:22:34 -0600

Chris Serres of the Minneapolis Star Tribune wrote a very disturbing article in last Sundays paper, June 27, 2010. The Title was "Phantom Debts, Real Anguish." The article was reporting on a series of cases in Minnesota where a company would purchase supposed debts from credit card companies, and then sue the debtor without any proof of the claim in the first instance. (I couldn't find the article to link.)

One of the cases reported was against a defendant with an alleged Citibank credit card debt. The defendant said he has never had a Citibank card, and the only proof of the debt was a computer print line with his name an a series of numbers. Somehow, without any more the court awarded a judgment in the favor of the Plaintiff, Debt Equities LLC. Debt Equities had allegedly purchased the claim from Citibank.

The problem is that even in a default situation, the plaintiff needs to prove their right to a judgment. The article claims that in Minnesota, "the court system rubber-stamps most debt claims without scrutinizing them for accuracy. Proof is needed only if the debtor disputes a claim in writing." This is not consistent with my experience, but my experience is not in the individual debt collection business.

A colleague of mine, Sam Glover, is a lawyer who specializes in representing consumers against abusive debt collectors.Sam has also noted the problems with these abusive practices in his blog.

With respect to the Star Tribune article, I am assuming that they mean that a debtor needs to answer the complaint and defend the claim. Only a very small percentage of the defendants in this situation do this. This article is disturbing if the courts are in fact doing this. No matter what the situation, it is up to the plaintiff to be prepared to prove their case, whether in a default situation of not. Proof doesn't need to be extensive, but you at least need enough to prove the debt and the failure to pay.

I would think that the best defense to any complaint is to answer and deny the claim. Make the Plaintiff - especially one like Debt Equities, prove their case. If all they have is an incomplete computer printout, there are going to lose more times than not. If they have more and can prove the debt and their right to collect the debt, they should win.

Another disturbing note in the article is a mention that some of the debts are as much as 15 years old. In Minnesota, the statute of limitation on a contract claim is 6 years. There is much in this report that concerns me and should concern everyone. Especially since, as Serres reports, there are so many errors in the credit industry records.

Serres Report includes a number of stories of people that fight the claims, and win - and that is good. But it is expensive and there is no assurance of winning. The article also reports on abusive collection practices employed by Debt Equities and others to try to force people to pay. These collection operations need to be regulated, and controlled.

The one question I have is, why aren't the credit card companies liable to the defendants for selling alleged debts that are fictions. The article has some great examples of false and fraudulent affidavits. It seems to me that one way to control this problem is to file a claim against the credit card company for fraud. It is clearly fraud to sell a fictitious claim, and sign false affidavits to support the claim. This is just a thought.

Enforcing a Contract Against a Non-Party Again?

Gavin Craig — Wed, 16 Jun 2010 06:50:09 -0600

I remember when I was in law school, and the rights and obligations of a non-party to a contract was very limited. The ability of a non-party to enforce a contract was limited to receiving the right by assignment, or the theory of the third party beneficiary. Now, the Supreme Court in its wisdom has created a right for a party to a contract to enforce the contract against a non-party. Very strange.

In another inevitable arbitration case, Disputing reports that the fifth circuit has decided that a non-party to an arbitration agreement, in fact a party that would have no idea that an arbitration agreement even existed, could be compelled to arbitrate if the state law involved gave the non-party the right to enforce the award, if any.

The logic behind these cases eludes me. In the first case, most state arbitration laws do not anticipate the participation of non-parties. No one drafting the state laws was thinking in terms of enforcement of an arbitration agreement against a non-party. After all, how would any state have the authority to bind persons to contracts that they were not a party to. And that is the essence of this decision. Persons not a party to a contract are bound by the terms of the agreement.

I don't know where this trend will end, but it is interesting to watch. I am also not sure how the states (even Louisiana) can have a scheme to allow enforcement of an award by a non-party against a party to the arbitration agreement. Will the plaintiff need to agree to the arbitration agreement before any award could be enforced?

Basic contract law requires offer, acceptance and consideration. As far as the non-party goes, none of these are present.

The article doesn't say, but I would guess that the arbitration would necessarily occur in a place that is not remotely convenient to the plaintiff. Finally, if Louisiana has statute that allows the injured party to sue the insurer directly, why doesn't that law trump any theory about binding the non-signer to the arbitration agreement.

BP and the Business Judgment Rule!

Gavin Craig — Fri, 11 Jun 2010 08:41:27 -0600

I just read a very interesting Blog post by Judge Bainbridge about the Business Judgment Rule. As most attorneys know, the business judgment rule protects directors and officers when they make decisions based on their business judgment that some action or inaction will benefit the company, even though the results turn out to be much different. The judgment needs to be reasonable based on the information available.

As Judge Bainbridge points out, there are some significant nuances to the rule. But for the purpose of this post, I was wondering how the rule could be applied to the officers and directors of BP. As this tragedy continues, the pressure will mount for a resolution and some serious penalties for the people responsible.

If I was a shareholder of BP, I would be very upset. I would want to be sure that the directors and management of the firm are acting in my best interest.

With respect to BP management, and for this post, I will make two assumptions, both of which I think will turn out to be accurate. First, BP had procedures about what should happen when safety equipment fails; and second, BP failed to follow its own procedures.

I have worked for enough public companies to understand how a company will react when cash flow, costs or profits are at stake. So I will go with my two assumptions until shown otherwise. (I am disappointed that during the congressional hearings, no one seemed to ask BP some of the critical questions, such as: What were the procedures that apply when a safety cutoff valve is discovered to be inoperable? What should those on the site have done once the discovery was made? What was done instead (Nothing.) Why was nothing done if the procedures were in place? How often has BP ignored their own safety procedures in order to save time and money?)

Additionally, the questions should include: Did the person in charge of the drilling platform have the authority to disregard or ignore safety procedures? If not, did that person ignore the procedures? Was the person directed by someone else in BP to ignore the procedures and continue drilling? Who were these people? What is their current status with the company?

Now, back to the Business Judgment Rule. Many companies are very conscientious about safety and they are very good at following procedures to assure safety. Some are less so. What is BP's record?

Did the directors and officers of the company intentionally look the other way when a safety rule or procedure would stop drilling at a particular site? Did senior management instruct lower level managers to ignore safety issues? Did the Board or senior management fail to exercise proper oversight? (The failure to exercise proper oversight is a little different than the business judgment rule, but it probably gets the parties to the same result, since the business judgment rule is a defense, while failing to exercise proper oversight is the other side of the same coin.)

If the shareholders brought an action against the directors and the senior management for their failure to exercise proper oversight, or their active failure to follow their own safety procedures, it would be an interesting case. I doubt that the business judgment rule would ever apply to protect the directors and officers of a company from liability if they are found to have ignored reasonable safety requirements. Ignoring safety requirements (whether in procedures or otherwise) is probably per se not excusable under the business judgment rule. The risk of a bad result is to high. The question becomes, what should the directors and officers have reasonably known, and what action did they take based on that knowledge.

BP is a British Company, so I don't know how these issues would apply in the UK. However, they have extensive US operations and there are subject to action in the US.

This will be interesting to watch as the story unfolds. Meanwhile, many lives are disrupted and changed because of the destruction caused by the poor decisions made by BP and it's contractor. Many business are destroyed, and the impact damage to the environment could be permanent. This tragedy will be with us for months and years to come.

Corporations and LLC are not Perfect Shields Against Personal Liability!

Gavin Craig — Tue, 01 Jun 2010 14:34:43 -0600

Several years ago I represented a company with a claim against another construction corporation. The owner of the defendant told me that neither he nor his company could be held liable for anything. His contracts, he told me, clearly stated that the company was not responsible for anything, and since he operated as a corporation, he could not be held liable.

He was wrong about the contract, but he could have been correct about the corporate shield. However there are exceptions, and the assumption that a corporation always shields the principals is just not the case. There are several exceptions to this rule.

MarcWard posted an interesting Blog about this issue in his Iowa Limited Liability Company Blog. The case he describes could apply equally to the principals of a corporation and an LLC. The case, Allen v. Dackman, 2010 Md. LEXIS 82 (Md. Ct Appls. March 22, 2010) is illustrative of several statutes that impose liability on the principals. In the Allen case, Hard Assets, the company, purchase foreclosed property. It purchased some property sight unseen, and soon afterwords, discovered that there was a tenant living in the building. Hard Assets had the tenant removed. So far so good.

The tenant then sued Hard Assets and Dackman for alleged lead poisoning of her children. Dackman was a member of the LLC and the manager. At this point Hard Assets had only owned the building for several months. In fact, it was only seven months from the purchase to the eviction. So, the tenant sued Hard Assets and Dackman for damages. Unfortunately for Dackman, Statutes and ordinances can change the liability situation. Dackman was deemed to be the person that could effect the property, so he became personally liable for the damages under the Baltimore Housing Code. (See Ward's Blog for more detail.)

The point is, don't assume an LLC - or corporation provides the protection you want.

In Minnesota, a the principal of a franchisor can be held personally liable for damages relating to the breach of a franchise agreement. While this doesn't sound like a major problem, consider this: Under Minnesota Law, and the law in many states, it is very easy to inadvertently create a franchise agreement. Some license agreements are in fact franchise agreement, even though the parties do not intend that result.

In general, a franchise is very easy to create. The basic elements are:

A contract or agreement, either express or implied, whether oral or written, for a definite or indefinite period, between two or more persons:

a. by which a franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchiser's trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics (you use my name and send me a fee and we will both make money);

b. in which the franchiser and franchisee have a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise (We both make money and I will expand my business);

c. for which the franchisee pays, directly or indirectly, a franchise fee.

This is so easy it is not hard to see that parties could easily enter into a franchise agreement without ever knowing it. The point of this post is to show that there are some circumstances where the corporate or LLC shield does not provide protection to the principals. So beware!

Arbitration and the Supreme Court.

Gavin Craig — Mon, 03 May 2010 07:44:45 -0600

Once again the Supreme Court has ventured into arbitration agreement interpretation. The question is simple enough, when an arbitration agreement is silent on an issue (in this case the question is whether a class was included in the agreement to arbitrate,) is the Class included in the agreement because it isn't excluded, or out of the agreement because it isn't included.

There was no argument that the subject of a class was not included in the arbitration agreement. In this case the class had no knowledge of the arbitration agreement between the parties.

The Supremes said "No," the class is not included in the agreement. No arbitration by coercion. However there was a minority opinion that said, "Yes."

The procedural facts are interesting. The arbitrators ruled on the issue and decided that the class was included in the arbitration agreement. So why is the court overturning the decision of the arbitrators? If there is really binding arbitration under the Federal Arbitration Act, how can this be?

The court seems to be overturning the arbitrators decision when the whole purpose of arbitration is to give the arbitrators wide latitude to decide the case, and the decision of the arbitrator(s) is, when the parties agree, final and binding. Based on what I have read, the court was balancing whether parties that were not party to the agreement could be bound by an arbitration agreement, verses whether the arbitrators decision was final and binding. I think they made the wrong choice. If arbitrators decisions can be overturned by the courts, you lose the great value of arbitration. There are numerous cases where an arbitrator misapplied the law, and the court would not overturn the decision. So why now? Even if the arbitrators were wrong, why is the court overturning their decision?

Is the court opening the doors to more challenges to arbitrators decisions? I hope not, and it is hard to believe that the court intends this result. The ADR Professor Blog has a similar take of the case. See also the Contract Professor Blog for more information.

Gavin Craig

Priority in Mechanic's Liens, and the Courts.

Gavin Craig — Tue, 27 Apr 2010 08:07:34 -0600

Construction Law Today posted a story about a priority case. The facts of the case appear to favor the bank, but as always it is difficult to know exactly what happened. The case is LaSalle Bank v. Cypress Creek 1. Priority cases in mechanic's lien cases are not uncommon, but usually the facts are clear enough to ascertain who has the priority. The interesting cases occur when the bank has not filed it's interest before the contractors file the mechanic's liens. The race to file does not seem to be the issue here.

Construction Law Today has published two posts on the case so far. The first post describes how priority works (until this case that is.) The second post gives some more detail.

However, the courts decision is what makes this remarkable. The court essentially said both the bank and the contractor had priority. If this makes you scratch your head, your not alone. The parties are appealing.

I will be interested to see how this plays out.