Twin Cities Business Litigation Blog : Minneapolis Business Litigation Lawyer & Attorney : Gavin P. Craig Law Firm : St. Paul, Twin Cities, Minnesota MN

I always enjoy reading the blog posts of Max Kennerly. His latest post concerns the misconception of some people that if they create an LLC (or corporation) to conduct their personal business, they are somehow exempt from personal liability. If it were only this easy, everyone would do it and we wouldn't need insurance.

I want to expand on the ideas presented by Max. Creating a corporate or LLC does create a limitation of liability for the owners for contracts entered into in the name of the company. The owners are usually agents of the company, and can enter into contracts on behalf of the company. (But not always.) Unless there is some agreement limiting authority, officers of any LLC can enter into contracts for the company. Sometimes owners claim that one owner didn't have the authority, but that is an issue between them, not the party that relied on the contract.

This concept is very different than trying to pierce the corporate veil and impose liability on the owners. The first problem is that piercing the corporate veil (of limited liability) is hard to do. If you succeed, great, but the case is much more complicated. On the other hand, naming an owner as the agent of the corporation, for the owners wrongful acts is a perfectly legitimate claim. An agent is liable for their own wrongful actions, even if they act in the name of the company. I've also seen people try to create trusts to try to avoid liability. That doesn't work either.

What happens when an owner enters into a contract in the name of the company, and then causes the company to breach the contract. Is the owner personally liable? (I am distinguishing this from the case where the owners tortiously injures someone.) Can the owner be personally liable for causing the LLC or corporation to breach its' obligations? Yes! The agent is, remember, liable for its own tortious acts. An agent is a third party - not a party to the contract. So the wrongful interference with the corporations obligations under a contract is tortious interference with the contract. So the agent owner can be personally liable for contracts as well as running people over with the corporate car.

This does not mean that every corporate or LLC owner is liable for every breach of contract of any company. The concept is limited to actions by the owner/agent that interfere with the companies performance in such a way as to show tortious interference. Most breach of contract actions are based on problems other than tortious interference. But the risk remains for the owner/agent, when they act wrongfully they can be personally responsible for the damages.

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Several weeks ago I discussed the unfortunate situation where a judge accepted a large discount to the legal fees he owed for his divorce, and started referring cases to the lawyer that granted him the discount. A panel of the Minnesota Judicial Standards Board recommended that Judge Blakely be suspended for six months. I noted that it would be more appropriate to suspend him forever, since the actions of the attorney and the judge really fall within the scope of bribery as defined in Minnesota law. I also noted that the Lawyers Board should look at the lawyer.

I am encouraged to report that the full Judicial Standards Board is now recommending to the State Supreme Court that judge Blakely be removed from the bench. The Minnesota Supreme Court will have the final say, but I think that the recommendation is proper under the circumstances. For more detail see my earlier post and the MinnLawyer Blog.

For those that are interested, here is the Board's opinion.

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Just a note on an interesting post by the Contracts Prof Blog. Apparently Trump became a tenant in his own building. Signed his own lease, except as the tenant instead as the landlord. The lease is, not surprisingly, very favorable to the landlord. Trump's organization is behind on their rent. Now they are getting evicted.

The lesson is clear. When you draft a contract that is beneficial to you as a party, when circumstances change don't just automatically sign the same contract a take on the obligations of the other party without fully understanding the terms.

I have found that it is unusual for parties to read their contracts until after there is a problem. Sometimes the contract is not what they thought. Thanks to the Contracts Prof for the report!

Sometimes the contract will come back to bite you.

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There are generally only a limited number of ways to successfully challenge an arbitration award. One basis is a claim of fraud by the arbitrator. I've never seen a case where there was actual fraud on the part of the arbitrator, and this challenge is rarely used or successful, although they exist. Another is to challenge the demand for arbitration because one of the parties was not a party to the arbitration agreement. This challenge is weakening with recent rulings, where the courts found that persons intended to benefit from the contract are bound by the arbitration agreement even though they are not parties to the agreement. However, there are also ruling that a person must explicitly agree to the agreement to arbitrate.

I recently saw a case where an entirely new basis was used to overturn an arbitrators award. At least it was new to me. Violation of Public Policy. While this is a rare set of facts, and the result appears appropriate, the basis for overruling the arbitrator is certainly novel.The case involved the termination of a Nebraska state police officer that was found to be a member of a group affiliated with the Ku Klux Klan. The officer challenged his dismissal, and after a hearing, the arbitrator ordered the officer re-instated, finding the the state police did not have "just cause" to terminate the officer. The court disagreed, and overturned the arbitrators award on the grounds of public policy.

It is hard to argue that a police office belonging to the KKK, or any similar group, should be allowed to continue to function as a police officer.The court held that the public has a reasonable expectation that the laws are being enforced without discrimination. Just because a person has a constitutional right to belong to any group they want, this does not mean that the person has a right to be police officer. Belonging to a hate group, and performing the duties of a police officer are certainly inconsistent.

This is a good example of the court fashioning a defense against an arbitrator's award that did not exist previously, at least in Nebraska. I don't know if we will see more challenges to awards claiming a violation of public policy, but I will not be surprised if we do. This case is very unique and it is unlikely to be duplicated, but you never know.

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The recent stories about Miss California have also highlighted another option for the innocent (non-breaching) party to a contract. I am not talking about Carrie Prejean's statements on gay marriage. I am talking about demonstrated breaches of her contract with the Miss USA organization. The Contracts Prof has listed a few, and he wrote an article for the LA Times. 

Donald Trump owns the Miss USA pageant, and apparently the franchise is not getting a lot of publicity - until now. When a party breaches a contract, the other party has options. And continuing on (waiving the breach) is one option.

Carrie Prejean has created a lot of publicity for the pageant; and as they say, all publicity is good publicity. The interest in the pageant will undoubtedly increase because of the controversy. So why would Trump want to eliminate the one party that is effectively publicizing the pageant? He wouldn't. So absent something that makes Prejean's continued participation impossible, the parties will ignore the breach of contract and hope the publicity continues.

Not every breach is a breach.

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