Lawyer Sanctioned for Bringing Frivolous Cases Against Mortgage Holders.

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.

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.


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.

Is Blackmail Really a Contract?

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!

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. 


Stealing Customers and Failing to Pay Commissions Eventually Costs Carrier!

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!


The Worst Case for Corporations That Fail to Plan for the Future.

Many companies start out with a couple people joining together to create an enterprise, and dividing their interest 50/50. They incorporate and all is well until one leaves the business for whatever reason, and the other "partner" continues to run the business. The now passive owner, or his family, may have very different objectives from the active owner. Once one owner has a free hand to do what he or she wants, sometimes the business is not run for the benefit of the passive shareholder.

When business founders pass away, the second generation is many times not interested in the business, or sells their interest to others. In an interesting case decided last April, one party left the business and transferred his interest to his son. Eventually the family owned the 1/2 interest. meanwhile the active remaining 50% shareholder appears to have run the business for his own benefit and ignored the other shareholders. Much or what can go wrong is set forth in the Rosenfeld v. Luccaro case. When the Rosenfeld family became passive owners, and Luccaro stayed active and ran the business, ignoring the interests of the other 50% owners. When the Luccaro family started asking questions and wanted to see the books, they were denied.

Luccaro, the sole remaining original owner claimed the stock had been sold to him, and that the family of the deceased partner had no stock interest. All these claims were without any evidence to support them. Despite the courts orders, Luccaro refused to provided the books and records.

The Rosenfelds brought an action to dissolve the corporation because the parties were, "hopelessly deadlocked." Luccaro wasted 1 1/2 years presenting defenses with no support. In the end he lost.

The New York Business Divorce blog has some interesting thoughts on how the prevent this result. The most important is successor planning and written agreements. I constantly find clients with no written agreements, and now in a dispute with an equal owner. The lesson is clear, it you don't want to leave your family a mess, do some planning.

Fraud and the Attorney Victim!

The other day I received an email supposedly from a Dr. Jia Boa, in Canada, asking me to to take a case to recover $370,000 paid for equipment purchased, but never delivered.

I asked a few questions and received very vague answers. Then I received the exact same email request from someone identifying himself with a different name, except that the second request wanted me because I practiced in a different state (which I don't.) Both of the requesters were supposedly in Canada, which I doubt, but who knows.

I earlier reported on some attorneys who had been victimized by scams, but I wasn't sure this was a scam until the facts got funny and the second identical request came in from another email address. They even provided me with a web address of the company that had their money, and the company is in Oregon. I don't practice in Oregon.

One of the bad things is that even if one out of ten thousand emails gets an attorney to go along, it is a problem. This is another reason to be diligent. Attorneys beware. Know your client.



Sometimes There is Justice in the World. Coleman Pays Some of Franken's Legal Fees!

I noted the article in the TPM. Coleman's case was always very weak. He had no evidence to support his allegations, and his argument that the court should order the state to count ballots that were not legal under Minnesota law was a losing argument. Requiring Coleman (or his party) to pay some of Franken's legal fees is certainly just in this case.

More on Arbitration. Challenging an Arbitration Award.

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.

When Miss California Breaches her Contract - Why Not Declare Her in Breach? Money Trumps (No Pun Intended) Everything!

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.

Chinese Dry Wall Claims. How Does the Contractor Respond to Claims for Installing Products with Unknown Defects!

This is a very interesting case for the business and construction litigator. One of the things I really like about construction litigation is the fact that a single case can involve multiple ares of the law. Many cases are like law school exams, where the attorney must find all the issues.

Scott Wolfe at the Construction Law Monitor has posted a very interesting piece on the multiple areas of the law and multiple issues arising from claims for defective drywall installation. There is even a Chinese Drywall Blog that focuses exclusively on this issue.

Is there any argument that the builder who unknowingly installed defective drywall is off the hook? Innocence is not a normal defense to breach of contract or warranty claims. What about the suppliers? When the builders purchase goods for use in construction, the transaction is governed by the applicable states Uniform Commercial Code (Art. 2 Sales.)

The Uniform Commercial is not uniform in all aspects between the various states. But in general terms, Article 2, Sales, gives the buyer all the power to reject non-conforming goods when delivered. Clearly the drywall was not rejected because it was installed. But, once the buyer accepts the goods, or exercises control over the goods that is inconsistent with any interest of the seller, the goods will be deemed accepted. Once the goods are accepted, the seller is usually off the hook for any defects that could have been discovered with a normal inspection. But, again, there is an exception. If the defects are latent, (not readily discoverable in an inspection,) and the defect is material, the buyer can revoke the acceptance. I realize that I am greatly simplifying the code sections, but I am doing so on purpose to explain the broad structure of Article 2.

If the builder installed defective drywall, and did not now about the defect, what responsibility does the drywall supplier have to the builder? If I am representing the builder, I would immediately initiate a claim against the drywall supplier.

What about Insurance? What duty does the builder have to notify the owners of a potential hazard in their home or building? These are great questions. What are the possible remedies for the home owner? Are class actions the way to go? Some have been started. I suspect that class actions will be difficult because of the breadth and depth of the problem. There will be too many different fact situations to reasonably handle in a class action in many cases.

Another aspect of construction law is the fact that many times a builder - supplier contract will have an arbitration clause, yet there is no arbitration clause in the builders - owner contract, or vice versa.

This is problem that is worth watching. Many state courts are facing a fiscal crises, and they will be ill equipped to handle hundreds of dry wall cases. Don't be surprised to see some legislation proposed to deal with these problems.

Ultimately the injured party is the home or business owner that constructed a home or office. How the owners will be compensated - or receive relief - is going to be a challenge. Are homeowner insurance policy going to cover the damages? There are some real problems with this approach, including any pollution exclusion. Home owners need also be aware of any applicable statute of limitations. 

Will builders be willing to reconstruct buildings - which is what would be required in many cases. Will suppliers be willing to provide defect free drywall at no cost? Will the Chinese be willing to compensate the injured parties - or at least return the money to the original buyers?

This problem is just beginning.

Risk Analysis at AIG and Other Strange Corporate Behavior!

A local small and solo law firm networking group here in Minnesota has been discussing Risk Analysis. And then, out of the blue, we read the story that at AIG, the Risk Management Group was denied access to the workings of the the very Group that created the massive losses.

What is the purpose of risk analysis? It is to identify risk and recommend steps to take to avoid or minimize the risk. In other words, keep the risk manageable. But AIG created a Risk Assessment function, and then allow executives to deny or limit access by the very people assigned to assess the risk. Once again I wonder why the company does not go after the executives that prevented the risk assessment group to do its' work. You can't be surprised when the risk management executives are prevented from doing their job, and then massive losses occur.

There is only one real reason to deny access to a team or executive that will assess the risk to the company of any action. It is because the person or group wanting to move forward with the proposed action - the sale - or the business venture - is afraid someone will say, "No!" And why are they afraid of someone shining light on their activities? Because they make a lot of money so long as no one pulls the plug on the activity.

Additionally, and I can speak from experience, when the time for a decision is very short, the group pushing a course of action can mis-represent facts, when they know you will not have access or time to check their answers.

In another life, many years ago, I had some experience in the middle east. I was asked by a client to review a contract with a middle east government agency. I had two questions: Did you price in the taxes? And, how are you going to perform this work since this job requires management of a major foreign project and the company is not in that business?

I was assured that the taxes were priced in and that they were bringing on the people with the necessary experience. Neither of these responses was true, and the red ink started flowing almost immediately.

People who work on commissions based on sales (not profit or revenue - but sales) are very encouraged to get the deal approved, regardless of the risk. The risk is irrelevant. Lawyers and risk assessment functions get in the way.

The key to AIG is not to worry about the bonuses. Instead, the company should sue those responsible for taking on risk beyond their authority, and those that interfered with the normal functioning of the Risk Assessment executives. Those employees and ex-employees responsible should be held accountable for their actions in destroying the company.

AIG Proposes to Pay the Guilty Hundreds of Millions in Bonuses! CEO Claims he Has a Contractual Obligation to Pay!

I don’t have the benefit of reading the employment agreements of the people that bankrupt AIG, but it is hard to understand how they had the authority to bet the company.

Company’s many times make very bad decisions when they write compensation agreements. I’ve seen companies that allow the sales force to negotiate the prices of contracts for goods and services, and then pay the sales team a commission based upon the price negotiated, without regard to whether the company makes any money, or even losses money in the transaction. That is bad long term strategy.

Back to AIG. AIG agrees to pay bonuses. BUT, the employee has obligations also. Surely the employees have limits on their authority; surely AIG does not pay people to take actions beyond their authority; surely AIG did not give this small group the authority to bet the company! Or did it? I doubt it. Betting the company is a policy decision for the board of directors, not any employee.

I think the answer is simple.

First: AIG – you don’t pay people for taking risks with the company's money and assets that was beyond their authority. That is called a breach of contract. The fact that they made money for several years does not make it OK. If they made money by robbing banks would AIG pay the bonuses?

Second – Since they were likely acting beyond their authority and misusing company resources, AIG should also demand the return of all previous bonuses paid for their performance to the extent it was related to sub-prime mortgages, credit default swaps, underwriting toxic assets or misusing their authority as employees.

If the employees sue for their money – they need to show they were acting within company policy and guidelines, and within their authority. They should also receive a counterclaim for the return of all prior years bonuses.

AIG needs to talk to their attorneys! And, the employees that acted outside their authority should be fired.

Finally, if the employees in this part of the business had the authority to do what they did, then the managers, executives and the Board of Directors that allowed this transfer of power must be held accountable. Their compensation and bonuses must be withheld. they should be fired, and the company should look to them to recover there previous bonuses.

This is especially true for the Board of Directors. Ultimately the Board is responsible and they clearly were not meeting their obligations to the shareholders, nor exercising the judgment one would expect.

Who Gets the First Dollar? The Fight Between Creditors and Victims!

I’ve written about the Petters matter a couple times before, here and here.The latest report raises an interesting question. An investor group is challenging the appointment of a trustee that they say will favor victims instead of creditors. That's an interesting conflict. Who should have priority? If both parties are innocent, who has a priority. 

So, in the abstract the question is interesting. However, in this case the complaining creditor, The Richie Group, reportedly loaned the Petter’s Group money at interest rates of 80% on one loan and 362.1% on another. We should all have such a deal.

At those rates it would not take long to recover the amount of the principal, even though they probably didn't account for the payments as reducing the principal.

The only rational reason that a company would borrow money at rates that high is because they can’t get access to the normal capital markets. That normally means that the borrower is in financial trouble. That also means the lender knew these were high risk loans. So why would they get a priority? The Richie group had a choice whether or not to loan money to a company with a weak balance sheet.

The victims on the other hand were misled. I think the victims have a much better argument for a priority than the Richie Group, or any similarly situated lender.

Who knows how a Trustee will see it, or allocate what assets can be found.  I would guess that the facts of the Richie Group loan will influence the outcome; or I at least hope so.  Greed should not be rewarded. 

Minnesota Senate Race Goes On Forever.

I will confess that I am confused by the case of Ex-Senator Norm Coleman to try to challenge the election returns in Minnesota. The State already had a recount, and they looked at all of the votes that were questioned by the parties. The result of the recount, after the board reviewed all the challenged ballots, including the absentee ballots, was a victory for Al Franken by 225 votes. Coleman is now challenging that result. Coleman must somehow prove that the commission set up for the recount did it wrong, even though they followed the directions of the Minnesota Supreme Court through every step of the way.

The Coleman campaign is now preparing for what they call a very tedious proceeding. Apparently they want to the court to recount all the ballets again. Coleman's counsel will have to prove that there were irregularities and inconsistencies (that the state recount commission missed,) and these votes were for Coleman. Coleman is also threatening to bring a class action case on behalf of all of the voters whose absentee ballot was not counted because of an error by the voter.

Meanwhile the state is without there second senator. I think that the legislature needs to rethink the process of election challenges. In my view every proper vote needs to be counted, but it seems as though we already went through that step with the recount. I am not sure if the proposed instant runoff will solve the question of which ballots need to be counted. After all, the state law is clear about which absentee ballots must be rejected. (No signature, arrive late, etc.) Part of the problem was that many ballots were challenged, some on the most trivial grounds.

There is always the problem of ballots that were rejected or challenged because the intent of the voter was not clear. I don't think instant run off solves this problem. On the other hand, lengthy court challenges after the recount are not in the interest of the state or the people. At some point the state needs to have a process that the people believe is fair (and the recent recount procedure seemed very fair - it was even live on the web if the people wanted to watch,) and perhaps that should be the end of the matter. In other words, the process needs closure short of a lengthy litigation process.

Having said all of that, I think that the legislature should consider a procedure that declares that in the future, should there be a recount, the decision of the recount board shall be final, absent fraud. When the recount panel is directed by the state Supreme Court, the people should feel comfortable that the process was properly conducted and the results were the best that could be achieved.

The Government is Not The Only One to Deal In Big Numbers! Billion Dollar Contract Disputes!

The Contracts Professor reports on a case between Dow Chemical and the Government of Kuwait. Dow is suing for a mere $2.5 Billion. That is enough to keep a lot of lawyers working until the recession is over.

Forbes and the Times of London report on the case over what DOW calls a break-up fee. Kuwait reportedly drop out of the joint venture just as it was about to start operations.

The case is based upon a contract. The terms of a contract are essentially a question of law. Whether a party breached a contract is a question of fact. So, I would anticipate a summary judgment on any issues concerning the terms of the contract.

Another summary judgment issue may be whether Kuwait has sovereign immunity - always a tricky issue. If it does, (and the issue of sovereign immunity is probably determined by Kuwait) Kuwait probably doesn't care whether they breached the contract or not - since they would never pay.

Contracts with foreign governments are always risky.

The Long Arm Of The Law! You Can't Sue Me There! I'm Here! Continued!

State and US District Courts use a legal analysis to determine whether the state or District Court has jurisdiction over a defendant located in another state. In a real stretch of logic, Delaware Court held that a law firm, by sending a document to CT Corporation (CSC in Delaware) in Delaware for filing with the Delaware Secretary of State for a Delaware Corporation conducted business in the state of Delaware. The court concluded that the courts in Delaware had jurisdiction over the law firm. Did the out of state law firm intend to conduct business in Delaware? No!

Would the result be the same if the law firm had served CT Corporation in Ohio, for delivery to CSC in Delaware? Would that action constitute transacting business in Delaware?

The law firm's client was already subject to jurisdiction in the courts in Delaware by virtue of their status as a Delaware Corporation. Thanks to Ward of Ward on Iowa Limited Liability Companies for the Reference.

Compare this result to the courts findings in the Pope and Bellisio cases discussed below on November 11th. Once again the courts find a single transaction sufficient to establish jurisdiction. One interesting question is whether the law firm, acting as agent for the Delaware principal, was really doing business in Delaware. The court decided, "yes."


California's Prop. 8 and the Fight for Equality.

Several legal actions have been started in California challenging the legality of Prop. 8, recently enacted by the electorate. The argument is simple, and hard to refute. Can the majority enact law (change the state constitution) to discriminate against a minority group?

I guess the arguments in favor of Prop. 8 is that the majority can enact laws to discriminate, (not a very persuasive argument) or, that Prop. 8 changed the constitution to allow discrimination, so it is valid. I guess that another way to characterize the argument is: does the majority have the right to enact laws (or amend the constitution) to add exceptions to the equal protection clause. The other unpersuasive argument I have heard is that the majority has spoken and therefore the majority rules. You only need to look back in our country's history to see that this is neither a sound legal argument, nor good public policy.

The last argument I can think of is that this is not really discrimination against a minority, because the effected group is not a minority in the same sense as a race based minority. (Not a protected group.)

I am not aware of any case that provides that the electorate can do this, but this is going to be interesting no matter what. Several years ago when a federal judge ruled that including the term "under God" in the pledge of alliance when recited in a public schools was unconstitutional, I received a few e-mails from people asking me to sign a petition to the court asking the court to over rule the decision. (I have no idea why anyone thought I would send a petition to a court.) When I pointed out that any judge that gave any notice to a petition or any input from the electorate in deciding a case does not deserve to be a judge, the requests stopped.

It will be interesting to see how the California courts handle these cases. Eventually the California Supreme Court will have to decide the issues. In the long term I expect that the court or the electorate will overturn Prop. 8. While I have no talent to foresee the future, I think it is a safe bet that Prop. 8 will not be the law in California 5 years from now.

You Can't Sue Me There! I'm Here, Not There!

Jurisdiction is one of those areas of the law that is frequently litigated, not understood by the clients, and fun for the lawyers. What happens when Company A makes a one time sale of its products to a single buyer in Minnesota. When a dispute arises, does a Minnesota court have jurisdiction over the out- of-state seller?

We have two new cases decided by the US District Court in Minnesota, which arguably come to opposite conclusions. I want to point out that both of these decision are very well reasoned.

The first case is Pope v. GMBH. The case involves a single sale into Minnesota, a repair agreement that was performed in Germany, and an order for parts. That was it. The seller had no employees or sales offices in Minnesota, no repair facilities in the states, and all work and repairs were done elsewhere. The primary question before the court was: did the seller intentionally avail itself of the privilege of doing business in Minnesota; and, could the defendant reasonably anticipate being haled into Minnesota courts from these contacts with the state. The court went through the minimum contacts analysis, and determined that yes, the buyer had established the minimum contacts to afford Minnesota courts jurisdiction over a dispute relating to the sale.

The second case, Bellisio Foods v. Prodo Pak Corp, came to the opposite conclusion and found that the defendant had not established the minimum contacts. The facts of the Bellisio case are a little different. Again we have as single sale into Minnesota. Again there is a dispute. Apparently in the Bellisio case the seller entered into a contract without knowing where the equipment was to be delivered. In other words the court found that the buyer had never expressly advised the seller where the equipment was to be delivered, leaving the seller with the choice of breaching the contract or delivering into Minnesota. While it seems odd that a seller would contract for a sale without knowing where the products were to be delivered, that is exactly what happened. The court found that leaving the seller with the choice of breach or delivery into the state was not the same as a seller intentionally availing itself of the privilege of doing business in Minnesota.

Minnesota has been quite open to finding jurisdiction over out-of-state parties in the last decade. I find it doubtful that Bellisio's management even thought about the jurisdiction issue when they learned of the delivery site. The court did not mention any objections from Bellisio.

These are fun issues for lawyers, and no so good for clients because they are expensive to fight. What was the advantage to Minnesota law in the Bellisio case? Prodio was incorporated in Delaware and located in New Jersey. Is there a significant difference in the law or perhaps a statute of limitations?

In the Pope case it is more clear cut. No one wants to go to a foreign country to litigate a contract dispute. In addition to the costs, US companies are generally unfamiliar with the laws of foreign jurisdictions.

In any case these are two cases the raise interesting issues and both could have been decided a different way, depending on how you interpret the facts and apply some of the legal factors important to establishing jurisdiction.


Choice of Law, Jurisdiction and Fraud. A Bad Combination for the Out of State Victim.

For those of us that like to give advice - here is a great question from Emeritus Professor David Slawson of USC's Gould School of Law. This one is worth pondering. I will watch for your answers.

Lots of Money and Ambiguous Terms!

Who would have thought that the term "Cohabit," was ambiguous. That's what the New York Court of Appeals held. The argument was essentially - does a couple have to "do it" to be cohabiting, or is just living together sufficient.

The decision determines whether the ex-wife is entitled to $11,000 a month from her ex. Certainly enough to argue about. Ex-wife claims that the term "cohabit" means that the couple is sexually active, and since she is not, there is no cohabitation. The ex-husband argues that sex has nothing to do with the term in the contract that allows him to stop payments if his ex-wife cohabits with another person for 60 consecutive days.  The Contracts Professor has more.    

Not surprisingly there was a vigorous dissent. No contract is perfect and parties usually believe that they understand the terms when they contract. But watch out when there is a significant economic incentive to challenge a contract term, or find a way to avoid an obligation. What will attorneys in New York do now when drafting separation or divorce agreements? I'm sure attorneys will find a way around this; it is just more contract language to define what they really meant in the first place.  Continue if your are interested in the decision. 

Continue Reading...

Fraud, the FBI and the Economy.

You must wonder if the lack of investigative resources at the FBI has exacerbated the economic crises the country is in. Several newspapers reported that the FBI had requested more funding for agents to deal with economic crimes, but little additional funding was approved by the administration.  Apparently, even with the reduced number of investigators there are still important ongoing criminal investigations. The New York Times reports that out of 13,000 agents, only 15 are investigating mortgage fraud full time. If we accept the premise that the mortgage meltdown was a significant factor in the current economic problems, the FBI's allocation of resources appears to be short sighted.

The number of frauds and victims seem to be increasing, and this can only make things worse. I happened upon a report about two weeks ago that the number of people charged with fraud had made a dramatic jump. Unfortunately I don't have the source of the story, but today's reporting supports the unfortunate fact that we are all suffering from the frauds. The Tom Petter fraud makes the headlines because it is so large and effects so many people. Many crimes do not make the news, but are just as troubling because of the impact on the businesses that drive our economy.

I wonder why people think they are going to get away with defrauding people. Small frauds maybe, but large frauds are eventually going to get discovered. For another interesting take on the problem, see the following thoughts

Without an effective criminal justice system to catch and convict white collar criminals, our economy becomes corrupted. As we look around the world at the worst economies we usually see rampant corruption. The new president will need to address many things, and law enforcement needs to be a high priority.

Can the Federal Government Interfere with Lawful Contracts Between Private Parties? The Wachovia Story.

To recap this fascinating case, Citigroup offered to purchase a substantial portion of Wachovia Corp. for the equivalent of $1 per share. The Board of Director of Wachovia approved the sale and a letter agreement was signed.

Wells Fargo arrives on the scene and offers the equivalent of about $7 per share. Wachovia wants to accept the new deal, except that the agreement with Citigroup clearly states that they can't. Wachovia has an exclusive deal with Citigroup. Citigroup sues to enforce the agreement, Wachovia sues to have the restriction voided. Citigroup withdraws and instead sues Wachovia for damages estimated by Citigroup at $60 Billion. A tidy sum to say the least.

Meanwhile the Federal Government enacts the bailout plan and it is signed into law on October 3rd. Part of the new law has a provision that seems to interfere with Citigroup's rights under the contract.

Section §126(c) of the Congressional bailout package, the Emergency Economic Stabilization Act (EESA), basically voids or renders unenforceable any agreement that purports to restrict the sale of a lending institution where the Federal Deposit Insurance Corporation has stepped in to confront "systematic risk" in the mortgage market. Citigroup contends that the provision doesn't apply - Wachovia takes the position that it does. The New York Law Journal has an interesting write up on this case.

This case is a law professor's dream case. (Many of us still remember the Pennzoil-Texaco case involving similar contractual dealings without the overlay of the Federal interference with contracts.) The Contracts Prof Blog has some additional details and thoughts. 

Can the Federal Government Interfere with Lawful Contracts Between Private Parties?


Under what constitutional authority? And if so, under what circumstances?

If Wells Fargo's offer does not include any requirement for government support, does the provision in the law even apply?

Did the FDCI step in to confront "systematic risk" as it applies to Wachovia? It isn't clear to me that they did, but we will get an answer to this question in time.

Wachovia's is also taking the odd position that if they are forced to comply with the Citigroup contract - and apparently no one is arguing that it was not a contract - the Wachovia Board of Directors would be prevented from fulfilling their fiduciary responsibilities to shareholders.

How persuasive is this argument considering that the Board already approved the agreement with Citigroup in the first instance? Not very! Did anything prevent them from fulfilling their fiduciary responsibilities before they approved the Citigroup offer?

This case will not go away soon unless someone gets a summary judgment ruling that the EESA effectively voided any rights that Citigroup had to enforce the agreement.

Loser Pays - Perhaps Not Always the Best Solution! Then Again...

The California Attorney Fees Blog has a great write up on a case where there was fee shifting, and the court awarded the plaintiff her costs and attorney fees as the prevailing party. While not discussing the merits of the case, the courts were certainly busy resolving the fee dispute. The numbers are impressive - especially in relation to the original award.  Loser pays!  You need to wonder whether there should be limits.   

The Parties Agree to the Jurisdiction of any State or Federal court sitting in [Fill in Blank.] You Have to Love Standard Contract Language!

"Why?" is the question? I have been guilty of the same kind of drafting in a former life, but then it is unusual for the parties to fight over the court - the courts usually can sort this out. But not all is well when the parties have choices. When the parties have choices and they are in a dispute they will usually agree on nothing.

In the current dispute between Citigroup and Wells Fargo about who gets the spoils of Wachovia, the parties are fighting over which court should oversee the case. Meanwhile two courts are involved. Max Kennerly has an interesting post about this unusual situation. 

Contracts give some certainty to a deal, but they also restrict the parties ability to make other decision when they deem some change to be in their best interest. Wachovia had a deal with Citigroup. Part of the contract said that Wachovia could not consider offers from other buyers. Well, Wachovia now wants to consider a better offer from Wells Fargo. Citigroup sues in NY state court to ask the judge to order Wachovia to perform the contract (Specific Performance.) Meanwhile Wachovia asks the Federal court to release it from the contract provision preventing it from considering other offers.

Now the parties have slightly different but completely related matters going in both state and Federal court. Since the contract is governed by New York law and the primary question involves interpretation of the contract, it seems logical that the state courts would have the primary jurisdiction to apply New York law and rule on the contract.

Why Does Wachovia Want to be in the Federal Court?

I don't know the answer to this one. Clearly they think there is some advantage to the Federal Court system. However, the Federal Courts are going to apply New York law just like the New York state courts. Clearly the lawyers will do well in this dispute.

Meanwhile the Board of Directors of Wachovia must figure out how to avoid the inevitable lawsuits that will be filed against them if the shareholders see the company forced to continue with a less favorable deal. You can see the arguments now. "Why didn't you wait?" and, "What did you do to try to find other buyers?" Whatever the answers the shareholder will not be satisfied.

For another interesting take on this see Pennsylvania Fiduciary Blog.

If the court allows Wachovia to ignore part of the contract - what does that say about the enforceability of contracts in the state of New York?

Can A Will Be a Contract? Can you Breach a Will?

In the already interesting case of the now deceased Dr. Ivins, accused by the FBI of being the anthrax killer, it is now reported that Dr. Ivins left an unusual will.  In essence, the will provided gifts, subject to proof that his family disposed of his remains in accordance with his wishes.  If not, most of the assets go to Planned Parenthood.  

Is This a Contract? Or a Will?

According to a New York Times story, both following his instructions about disposing of his ashes and giving money to Planned Parenthood conflict with his wife's religious beliefs.  So she has a choice. This looks a lot like a unilateral contract.  If you will do X, I will pay you Y.  

Can the wife "breach the Will" and still take the money?  Apparently not!  Is the bequest unconscionable?  Doubtful!  What happens if the wife dissipates all the assets paying legal fees to try to clear her husband?

Which choice will the widow make?  I'm sure there will be more on this unusual story.