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

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!

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?

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!

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.

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

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

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!

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!

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!

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!

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.