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

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.

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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.
 

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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.
 

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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!

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