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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Phantom Debts and the Law!

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

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

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

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

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

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

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

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

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

Enforcing a Contract Against a Non-Party Again?

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

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

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

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

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

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

BP and the Business Judgment Rule!

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.
 

Arbitration and the Supreme Court.

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

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

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

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

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

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

Gavin Craig
 

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!

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.
 

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. 

 

Computer Fraud and Abuse Act Doesn't Prohibit Computer Fraud and Abuse!

In an interesting case out of the 9th Circuit, the court determined that employees (usually ex-employees) are not liable under the Computer Fraud and Abuse Act (CFAA) for damages for accessing the employer’s computer for unauthorized purposes (taking data for their own purposes,) when they were authorized access in the first instance. The typical facts are that an employee wishing to set up a competing business will download customer lists, and other information owned by the employer. Then a new business is started without the necessity of developing an original customer list, or other information deemed valuable by the departing employee.

The case,LVRC Holdings v. Brekka et al., eliminates a powerful weapon for the employer, at least in the 9th circuit. Damages have always been an issue under the act (CFAA), but the courts ruling that the act does not cover actions by employees that already have access to the computer files, is interesting. The court does not hold that if the ex-employee gained access to files that the employee was not authorized to view, there would be no violation. In this case the employee had full access. This case is about an employee with complete access, that took the information for his own purposes. The employer made no attempt to protect the data.

The holding would seem to require employers to carefully control employee's access to data, even though employees have the greatest need to use the data. I don't know if the congress will consider any changes to the statute; I doubt it, but employers have lost a good counter-claim when sued for wrongful termination. I don't think the intent of the statute was to protect employers from their own employees. Employers are fully capable of protecting themselves. The intent was to criminalize the theft of data by others.

Thanks toThreat Level, a Wired Blog, for the heads up.

Fun Contract Cases for Law Professors. How to Form a Contract!

I always enjoy reading the Contracts Professor Blog; probably since contracts is one of my favorite subjects.  Most business disputes involve, in some way, a contract.  And, most non-lawyers don't have a very good concept of what a contract is and what it takes to form a contract.

This week the Contracts Professor discusses a wonderful case that originated here in Minnesota.  Jeremy Telman bemoans the fact that Lefkowitz v. Great Minneapolis Surplus Store is no longer in the casebooks, and I understand why.  When I taught business law at a local university I used the case, and it demonstrates some very basic principles of contract formation.  What is an offer, and what constitutes an acceptance.   

Additionally, the case also holds that you can't refuse to perform a contract on the basis that you had secret qualifications for the acceptance.  (In this case the store took the position that you had to be a woman to accept.)  This is a good case to help understand how contracts are formed; the case is also unusual in that in involves an advertisement, which does not usually constitute an offer to sell. 

Madoff's Wife, Ruth, is now Sued for $44 Million!

In the almost never ending quest to squeeze blood out of a turnip, the Trustee has sued Madoff's wife in attempt to recover more assets. While I can understand the attempt, and she does have some money, I wonder how far they will get with the theory that she should have known that some of that vast wealth was obtained through fraud. Thanks to the WSJ Law Blog.

The Fed's have apparently already determined that Ruth could not be prosecuted, so the theory must be that even though she didn't have enough knowledge to support a criminal complaint, maybe a jury will give them something. The claim that she should have known that all that money could not have come from legitimate sources is, I think, weak. The first problem is that so many people on Wall Street were making so much money legitimately, or at least in ways that didn't violate criminal laws. What standard do you use to show that she should have known? It is not a situation where Bernie was the only one doing well. His success stood out, but people kept investing and they didn't suspect anything. So you must conclude that while he looked successful, he didn't didn't look so successful that most professionals were suspicious. Even though there were a few that raised flags of warnings, does this make Ruth liable?

I wish the Trustee well, and it would be nice if some more money or assets were recovered. But forcing Madoff's wife into bankruptcy will not solve the problem or make the creditors whole. Sure, she benefited greatly from the stolen money and it should be returned. Maybe she should be divested of the $2.5 million the Fed's allow her to keep. But the government has already seized all the assets they could find. So what is left for the Trustee?

FRANKEN WINS - IT IS UNANIMOUS! Now, at last, Minnesota can get a Senator!

The Minnesota Supreme Court unanimously ruled that Franken received the most votes and won the election to be the next Senator of Minnesota. The Governor has stated that he will sign the election certificate as decided by the court, so Franken should be seated. For those of us that have watched this case with some interest, there was not much merit to Coleman's case. Arguing to the court that they should direct counties to count ballots in direct violation of Minnesota law is a real non-starter. That argument, and the problem that they had no evidence to support their allegations made this case almost absurd.

Had this been a normal civil case, the plaintiff would have likely been thrown out on a summary judgment. Minnesota should be proud that the system worked - it was slow but it worked. The system for challenging election results needs to be revised to allow a speeder process, but Minnesota was a shining example of how fair elections are in this country. This example is especially important when compared with the travesty we saw in Iran where there were several million more votes than voters

How Does the Court Interpret an Ambiguous Contract? The Art of Figuring Out What the Parties Intended. (Since they don't agree!)

When a contract is ambiguous - and to some extent all contracts are ambiguous or at least inconsistent - how does a court resolve a dispute? Sometimes a contract expresses inconsistent obligations, or - and I think more commonly - the issue is what the parties intended by the use of a particular term. But the ambiguity only rarely results in litigation. So what happens when the parties can't agree on the terms of the contract?

The law of contracts covers just such a situation. Contract interpretation is a question of law. That means that the court (judge) decides what the terms of the contract mean. Whether or not a party breached a contract is a question of fact - and that is the province of the fact finder: the jury - or the judge if there is a bench trial.I recently posted on this blog a comment about a case where the issue was what the parties meant by the term, "cohabit." The term "cohabit" does not in and of itself usually lead to confusion; in this case one party argued that "cohabit" meant that the parties living in the same residence must have a sexual relationship before the cohabit provision would apply.

Adams Drafting has a very interesting article about the use of experts when contract terms are ambiguous. Clearly an expert can not testify as to what the parties intended. But, an expert can testify as to the meaning of certain words or phrases. An expert can not testify as to whether a contract is ambiguous, but can testify as to the technical meaning of the language.

I think that Adams is correct. Some language is not ambiguous on its face. yet the parties could have very different interpretations of the contract: i.e. "cohabit."

Supreme Court Finds Judicial Bias by 5 to 4 Vote! The Strange Case of Caperton v. A.T. Massey Coal Co., Inc.

In a very unusual case, the Supreme court held that due process requires a judge that received a substantial campaign contribution (in this case $3 million) from a litigant, to recuse himself. In the present case, the judge in question voted to overruled a significant $50 million judgment against his contributor.

The troubling thing is that the Supreme Court's decision was 5 to 4 vote. It seems fairly obvious that someone making a campaign contribution of that magnitude should not be a party to an action in front of the judge that received the contribution. It doesn't pass the smell test. The Minority had their own take on the facts.  However, the argument that we might see more challenges the judges hearing cases is hardly a good argument to allow Judge Benjamin to sit on this case. 

The facts of this case are fairly straight forward:

In October 1998, Hugh Caperton filed suit against A.T. Massey Coal Co., Inc. (Massey) for tortious interference, fraudulent misrepresentation, and fraudulent concealment. A state trial court in West Virginia rendered judgment against Massey and found it liable for $50 million in damages.

The Supreme Court of Appeals of West Virginia granted review. However, prior to hearing, Mr. Caperton motioned for Justice Brent Benjamin to recuse himself. He argued that since Massey's C.E.O. had donated $3 million to Justice Benjamin's campaign to win a seat on the Supreme Court of Appeals, Justice Benjamin's participation would present a "constitutionally unacceptable appearance of impropriety." The motion was denied.

The WV Supreme Court of Appeals , in a 3-2 decision with Justice Benjamin voting in the majority, reversed the trial court and ordered it to dismiss the case. The denied another motion asking that Justice Benjamin to recuse himself. Thanks to law.com and OYEZ for the statement of the facts.

Judge Sotomayor is reported to have stated in a speech that,"We would never condone private gifts to judges about to decide a case implicating the gift-givers' interests, [but] our system of election financing permits extensive private, including corporate, financing of candidates' campaigns, raising again and again the question what the difference is between contributions and bribes."

So why did the more conservative members of the high court have trouble with this decision? How can we have "Justice for All" when one party is making large contributions to the judge? As a simple matter of justice, the non-contributing party should not be at a disadvantage. Without the vote of Justice Benjamin, the trial court decision would have be upheld. The $3 million contribution was inexpensive compared to saving $50 million owed pursuant to the judgment.

 

When a Corporation or LLC Does Not Protect the Owner (Shareholder) From Personal Liability!

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.


 

The Judge to Lose His Robes! We will See! A Case About What a Judge Should Never Do!

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.

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.

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.

How to Waive a Contract Right! Without Even Trying!

A recent case from the 8th Circuit reinforces what happens when the parties conduct business without considering the contract. According to the court in Physical Distribution Services, Inc. v. R.R. Donnelley, Physical Distribution (PDS) entered into a contract with Parcel Shippers, a subsidiary of R. R. Donnelley & Sons in 2003. PDS was to provide drivers for Parcel Shippers. Parcel Shippers provided a draft contract to PDS. However, in the end no agreement was ever executed.

The draft contract had a term that provided that neither party could assign the agreement without the written consent of the other party. This is a fairly standard contract provision. Despite the lack of an executed agreement, PDS began supplying drivers to Parcel Shippers, and the payments for the services were made by Donnelley.

In October 2004, Donnelley sold Parcel Shippers to American Package Express. Parcel Shippers notified PDS. In November 2004, American Package began paying the PDS invoices. In February 2005, PDS began addressing the invoices to American Package.

You can guess what happened next. In January 2006, American Package stopped making payments, and in March, 2006 it filed for bankruptcy protection. PDS wanted to find someone to pay the $695,000 in unpaid invoices. PDS looks at the draft, unsigned contract, and finds the anti-assignment clause. So PDS sues Donnelley claiming that Donnelley had violated the contract, and therefore Donnelley owed PDS for the unpaid invoices.

This falls into the, "Nice try, but no cigar," department. The court ignored the question of whether the anti-assignment clause was even part of the contract. After all, the language was only in a draft contract that was never executed. Courts tend to find the simplest issue and use that to affirm or overturn a decision. In this case, the terms of the contract didn't matter. Even assuming that the Plaintiff was correct, and the anti-assignment clause was part of the verbal contract, it still loses. Why? Because the Plaintiff knew about the business sale to American Package, never objected, and continued to do business with the purchasing company. That is called a waiver.

In the law you can almost always waive your own rights. (There are some statutory exceptions, but they don't apply here.) In this case, the court impliedly said that even if the draft contract had been executed, the plaintiff's would lose because they waived their right to enforce the provision.

The lesson from this case is clear. Know what is in your contracts. Anti-Assignment clauses are a prudent provision to place into most contracts. Then, if there is a sale of a contracting party, it is prudent to at least consider whether you want to do business with the successor company. You can't fail to decide, continue to conduct business as usual with the new company, and later decide that you want to look to the old company for recovery.

Most businesses never even look at their contracts until there is problem. In the long term this is not a wise course of action. Just ask PDS.

Arbitration - Your Chance to be Creative!

Agreements to arbitrate disputes are either set forth in original agreements between parties, union agreements that bind parties, (from Employerslawyer) or after a dispute arises the parties elect to take their case to arbitration. In my experience it is hard to get litigating parties to agree about anything, so an agreement to arbitrate after the parties are already in litigation is less common.

The Employee Rights Post Blog posted an interesting article about whether a party is bound by an arbitration agreement in a related agreement never seen by one party. The answer was no! Both the Employers Lawyer and the Employee Rights blogs are worth reading.

Arbitration questions and issues cover much more than labor agreements.  But the decisions in the Employer/Employee area are helpful in understanding some of the arbitration issues.   

In my practice I see two major issues relation to arbitration. The first is that many form agreements contain arbitration provisions that neither party knows or cares about when they execute the agreements. The arbitration provision is just there, and the drafter either borrowed it from another contract years ago and never updated it, or the famous, "It's always been in the contract."

Sometimes these agreements create a hardship on one or both parties, or the language forces the parties (if one wants to arbitrate) into a process that is expensive, and ill suited to help resolve the case. One good thing about an arbitration provision is that the parties can mutually agree to ignore it. Nothing forces arbitration to happen, unless one party forces the issue by demanding arbitration or if necessary, bring a motion to compel.

Arbitration has a place in the civil justice system. Many cases are better suited to arbitration before a knowledgeable arbitrator, then litigation before a judge or jury that knows nothing about the area under dispute. Construction is an area where arbitration is common and there are a number of excellent arbitrators in most areas that have the experience to give a thoughtful decision.

When the parties agree that arbitration is a good way to finally resolve disputes, it is time to be creative. Other than the standard language submitting any and all disputes to final and binding arbitration, there are a number of issues that should be considered. For example:

1.  How many arbitrators. Unless the amount in dispute is significant I would avoid appointing more than one arbitrator. They are hard to schedule, and the cost more than triples.

2.  Place of arbitration. Some agreements are silent on place, some require a place that is very inconvenient for one of the parties. Neither is a good idea. Select a location that makes logical sense considering the parties and the subject of the arbitration.

3.  Who will be the arbitrator. The parties can select an arbitrator long before any dispute. It is usually harder to agree on an arbitrator after the parties are fighting.

4.  Time for arbitration. To avoid an unnecessarily protracted process, set some limits. If the dispute is under some agreed amount, require the arbitrator to complete the arbitration within a day (or some other time period) an divide the time available for each party to present its case. This is easier in lower dollar value cases, and the lower dollar cases are where this provision makes the most sense.

5.  Limitations on authority of the arbitrator. Arbitrators have a lot of authority - more than judges as far as fashioning remedies. What about the power to make awards that are equitable in nature? There was a very interesting case in Minnesota where a contractor did a very poor job building a structure. There were lots of problems with the construction. The arbitrators order the contractor to purchase the property from the plaintiff at a certain price. This award was upheld by the court. It was also a perfect remedy in this case.

6.  Do you want the arbitrator to have the power to order discovery? This is usually a cost issue.

When parties are going to draft an arbitration provision, they need to think through what they are trying to do. An arbitrator only has the power granted in the arbitration agreement. If you don't limit the arbitrators power, it is pretty much unlimited - absent as showing of fraud. So draft carefully.
 

Mediation is Contract Negotiation. All the Contract Rules Apply - Plus the Court gets Involved. Can a Mediator Excuse a Party?

 There are some recent blog posts about mediation, and those posts started me thinking about this common process.  One post discusses a mediator’s authority to excuse parties from participating.  This is a topic of great interest to any litigation attorney.  

I’ve had clients that were only in a case because their name was listed on property to which they no longer had an interest.  These clients were without any risk of a judgment against them, but a nominal party in the case notwithstanding.  I call the mediator and say, we don’t need to be here, my client does not need to incur the attorney fees, or the client does not have any interest in the outcome.  The mediator will almost always excuse the party because the party can’t affect the outcome or help move the process along.  In fact, a party like this can stall the process and prevent a settlement. 

However, the court has ordered the mediation.  Can the mediator excuse a party when the court has ordered mediation?  If the court cannot trust a mediator to make good judgments in the mediation process, then what good is the mediator?  Otherwise, the courts don’t need to supervise this closely.  After all, mediation is a contract negotiation, and it can get very complicated.  But in the end it is a contract like any other – with the added overlay of court involvement. 

Probably the only real difference is that once a mediated settlement is reached, and the parties dismiss their respective cases, usually with prejudice, the pressure of the original case is over.  However, the parties can still litigate a new cause of action – breach of the settlement agreement.

The courts decision in the Perry case is something that should be considered.  Does the fact that the mediator excused a party give another party with second thoughts about the settlement, a reason to challenge the settlement?  In most cases it should not – the parties can always waive their rights, so this practice should not interfere with an otherwise valid settlement.  The settlement agreement can also address this issue if necessary.

 

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, Bonuses, and Remedies. Where should the Government Look for the Money? What is the Solution?

I pointed out in my prior post on this subject, that the employees that ran AIG into the ground must have acted outside of their authority to assume, on behalf of AIG, risks that could (and did) bankrupt the company. Only the Board of Directors could have authorized this activity.

Anyone who has ever worked at the executive level of a large company knows how they work. Managers are charged with meeting their budgets and revenue projections. Management sometimes does not look too deeply into how that is accomplished, but they look carefully at the numbers.

This is not a universal problem, but the pressure from shareholders for short term gains sometimes leads to very poor decisions or lack of oversight. AIG Senior management and the Board of Directors have a serious problem. They failed to supervise a part of the business that was essentially betting the company in the quest for quick profits. So we have the perfect storm – to borrow a phrase. The employees were taking actions to bet the company on risky business transactions (presumably without authority); management either allowed this activity or intentionally looked the other way, or didn’t want to ask too many questions while the profits poured in; and/or the Board of Directors failed to ask the right questions or ignored the answers. When everyone is making money senior managers don’t usually rock the boat.

Years ago when I was a young corporate lawyer, a colleague gave me some good advice. He said, “You might see the train charging down the track, and you know that the bridge is out. But if you stand on the track and try to stop the train, you’ll just get run over and the train will still crash. Best to stand aside, watch the wreck, and help pick up the pieces.”

I can tell you from experience that it is virtually impossible to stop a company about to do something foolish when there is a motivated group pushing the action. The drivers of the action will go right around you and accelerate down the track.

I find it difficult to believe that the Board of Directors of AIG knowingly allowed employees to bet the financial health of the company on these transactions. But why didn’t they ask how these profits were being generated? Or did they, and the answer did not fully disclose the risks to the company. In either case the Board of Directors and the senior management at the time should be liable to the company for negligent supervision, and probably for intentionally taking actions outside of their authority. The management of the business unit needs to be held accountable for either violating corporate policy, or the Board members need to be held liable for allowing the high risk actions.

So, who is entitled to receive bonuses? The senior managers that failed to supervise? The employees that drove the train and crashed the company? The Board of Directors that allowed a business group to risk the company? None of these people deserve a bonus! So, what is the solution? All of these senior managers and Board member likely breached their duties to AIG, and the shareholders, and should be liable to the company for the damages caused.

AIG shouldn’t ask for the bonuses back from the guilty – they should demand the return! Additionally, AIG needs to look carefully at whether those people that were responsible, including the board members, should be held liable for the damage they have caused.

And now the AG is investigating.  It should get interesting very quickly. 

 

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.

Judicial Panel Recommends Suspension for Judge! Is that Enough?

I was in court on Wednesday and the Judge was reading a report issued by a panel of the state's Judicial Standard's Board. The judge in my case noted that he was reading about all things not to do when you are a judge. He was right.

Rochelle Olson from the Minneapolis Star Tribune wrote an interesting piece on the panel's recommendation. Timothy Blakey, a judge in Goodhue and Dakota Counties, Minnesota, sent business to his divorce lawyer - to whom he owed something in excess of $108,000 for unpaid fees.

The Lawyer likes the business, gives Blakely a $63,503 discount, and says she hopes he will continue to send her business. A panel of the Minnesota Judicial Standards Board reviewed the facts and recommended that Judge Blakely be suspended without pay for six months. Forever seems like a better recommendation.

What is not clear to me is, why the discount is not considered at least attempted bribery by the attorney, and accepting a bride by the judge. In Minnesota the applicable statute reads:

609.42 Bribery.

Subdivision 1. Acts constituting. Whoever does any of the following is guilty of bribery and may be sentenced to imprisonment for not more than ten years or to payment of a fine of not more than $20,000, or both:

(1) offers, gives, or promises to give, directly or indirectly, to any person who is a public officer or employee any benefit, reward or consideration to which the person is not legally entitled with intent thereby to influence the person's performance of the powers or duties as such officer or employee; or

(2) being a public officer or employee, requests, receives or agrees to receive, directly or indirectly, any such benefit, reward or consideration upon the understanding that it will have such an influence;

***

Subd. 2. Forfeiture of office. Any public officer who is convicted of violating or attempting to violate subdivision 1 shall forfeit the public officer's office and be forever disqualified from holding public office under the state.

Additionally, forgiveness of a debt is taxable income. The judge gained $63,503 in taxable
income because the debt was forgiven. That should be an impressive tax bill.

It is not uncommon in Minnesota, and I assume elsewhere, for judges to recommend certain mediators or a group of mediators to litigants. It is also common for judges to recommend firms to people that ask. This is not improper in itself.

What Blakely and his divorce attorney did is hopefully very rare. The matter now goes to the entire Judicial Standards Board for a final recommendation, and then on to the Minnesota Supreme Court - assuming the Board sustains the recommendation and agrees that discipline in warranted.

As an attorney that practices before many of the courts in the state, I think the recommendation is far too light. Would Judge Blakely recuse himself if the attorney was representing a party before his court?  Should he? 

Hopefully the board will reconsider the recommendation. If the public losses trust in the courts, we have lost the trust of a critical part of our government.  If litigants are worried about judicial corruption, we are in trouble as a society.

Judge Blakely needs to step down, and the Lawyer's Board needs to look at his lawyer.

Someone might also want to take a peek at the judge's tax return to be sure he paid his taxes on the new income.

Lawyer Falsify Cases to Support Their Position- a Bad Idea!

There is a very good comment on Max Kennerly’s Blog about the misuse (read “false representation”) of precedence when preparing briefs or arguing a motion or case.  This is a much more common problem than it should be.  I don’t know if it is because attorneys use old brief and don’t check the cites – so they carry forward errors, or they figure no one is going to check their citations, and listing cases to support your position looks good.  

I had a federal case at one time where the opposing party cited a US Supreme Court case to support her position.  The problem was that the case supported my position – and I was glad to have the citation – so the opposing motion completely misrepresented the courts decision.  Sometimes cases are cited that don’t have anything to do with the issues in the case at hand.  The case citation appears to be just filler – and again a false representation to the court. 

I now, when there is time and sometimes here is no time, check the citations on major arguments or issues.  They are often wrong and I will gladly point this out to the court.  I can’t imagine why some attorneys would think that using a false or misleading citation helps their client, but they clearly do or this would not happen.

The other thing I find is that attorneys use the phrase, “ The undisputed facts are…” and then proceed to list allegations or alleged facts that are clearly in dispute.  This is another drafting tactic that I find unprofessional and misleading to the court – and I then need to point out to the court that the opposing counsel is misrepresenting the case.  The practice of overstatement assumes that the opposing counsel and the court are not smart enough to see what the drafter is doing – and that is a very bad assumption.

The Impossible Case Continues; But Maybe There is Light at the end of the Tunnel.

The Minnesota US Senate election case is going on, and on, and on. But the three judges, who are admittedly in uncharted waters on this one, are forcing the parties to make arguments about which category of rejected votes should be counted. The judges provided a list of 19 reasons votes were rejected. The parties get to try to argue which ones can be counted.

Since this is like the Twilight Zone, Norm Coleman, the Republican, is arguing that the court should ignore the law and effectively legislate new rules to allow ballots to be counted in violation of the law. This position is contrary to every Republican position over the past several decades that judges must follow the law to the letter. (I've always thought that politicians that preached this line didn't understand either the law or how the courts work.) As an example, Coleman's team was arguing to the court several days ago that absentee ballots with forged signatures should be counted. This of course would violate Minnesota law.

Franken's team is arguing that the court must follow the law - this is a much sounder argument. The Minn.Post has an interesting story about the recount. It is fun to read that Coleman was telling identified voters in one county that their votes were wrongfully rejected - yet the reason they were rejected in the first place was because the Coleman team objected to including them.

Hopefully the court will make some decisions soon that improve the chances that a decision will be made soon.

I Can't Be Liable, I'm Incorporated! The law of Agency Revisited!

Business Owners who incorporate their business, or create a Limited Liability Company, usually have a misconception that they have immunity to liability. Company officers, agents for the company, are responsible for their own misdeeds.In a recent case the appellate court in New York State found the sole owner of the plaintiff corporation personally responsible for the failure of the company to comply with certain court orders, even though he was not a party to the action.

The court held: Although appellant Qasemi is not a party to the action, he is the sole owner and principal of plaintiff, and can be punished for plaintiff's disobedience of the order and judgment. While Qasemi was not personally served with these dispositions, it is undisputed that plaintiff was served and was aware of the mandates contained therein. It defies credulity that Qasemi himself was unaware of the orders ... Furthermore, since there were no issues of fact to be resolved at a hearing, it was proper for the court to make a finding of contempt without a hearing...

So much for limited liability. That concept of limited liability only goes so far. An officer is an agent of their company, and as such is not liable for contracts entered into on behalf of the company so long as the agent informs the other party of the agency and the identity of the principal. Failure to do so leaves the agent liable for the debt. In this case the court didn't hesitate to nail the agent because the agent caused the principal to violate the court's order.

This case is a good lesson for all.

Buy Insurance on the Life of Another! Good Business for all or a Scam?

The Minnesota legislature is looking into what has become a very big business. In summary, the life insurance companies want to ban the practice, whereby a policy holder/owner sells the right to collect the death benefit for a payment now. The practice is legal and even international in scope. Thanks to the Minneapolis Star tribune for the report. 

In essence, a person can purchase life insurance when elderly, make the initial deposit, and then sell the rights to collect on the policy. The policies then become assets that are bought and sold, bundled with other policies, and traded. The Insurance companies don't like them even though the insurance company gets exactly what it bargains for. The premiums. The insured gets what they bargained for, the policy on their life, and when sold they receive a payment for the buyer. The sellers receive a percentage of the death benefit for cash now instead of the estate or beneficiary receiving the payout when the insured dies.

The buyer pays the premiums until the insured dies. This of course means that the insured will not let a policy lapse after they can't afford it anymore. The insurance company keeps all the premiums it receives, and never has to pay on a lapsed policy. So, the number of large policies lapsing will be reduced: and the profits are reduced.

The insurance policy is a contract, and the policy owner should have the option to sell their right in a contract. It will be interesting to see what the legislature does with this issue, because the market is international, not just in Minnesota. I don't see how the state can regulate a market that they can't control. Also, people should be able to sell there contract rights: it is the American way.
 

The Beat Goes On! When Will Minnesota Have a New Senator?

Coleman's attorneys are clearly scraping the bottom of the barrel for votes. They are now apparently arguing the a person who was living in the jail of a county, that was not his home county should have his vote counted. I am not a fan of Norm Coleman, but I think that if the situation were reversed, I would want Franken to concede so the state would have it's two senators.

Coleman's team has already argued that two forged ballots should be counted. Altered evidence, and they were caught, and they want the prisoner vote.   In another developement Coleman might have picked up three votes in an unusual situation. 

Meanwhile, Franken is asking the Minnesota Supreme Court to order a temporary certification pending the outcome of the case, so that Minnesota will have a senator. If Franken was not leading I think this would be an easy call - No. But since he is leading, the argument makes sense. I am not sure that the law contemplates such a thing, and I am not aware of this happening before.Another view of the case is here.

Is the Franken case asking the court to make a poliyical decision?  I can't imagine that the legislature ever thought this would happen, so there is no clear direction for the court. 

And unfortunately it will go on for awhile.

Lawyers Continue to be Targets of Scams. What is the Answer?

Lawyers continue to be targets of scams. Lawyers beware!  But what is the lawyer suppose to do when Citibank confirms that the check was paid? But what is the lawyer suppose to do when Citibank confirms that the check was paid? Based on the reported facts, I can only guess that Citibank has a serious liability problem in this one.

The question is why would Citibank confirm that they paid the check when the check was counterfeit? Can't a lawyer reasonably rely on the representation of the bank? Does the lawyer need to hold onto the money for a month or more to see if it clears. What is the answer?

In this electronic age I have trouble believing that there is not a better way to confirm funds. The banks - or many of them - allow electronic depositing. Why can't the checks be electronically transmitted to the Federal Reserve and on the the banks for payment. Why does it take so long? 

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.
 

Minnesota Elections - Will the Real Senator Please Stand Up!

 Minnesota is about to get a senator elected, and now the question is whether the losing candidate will try to get the court to overturn the election. Franken is the favorite at this point since he leads by 224 or 225, depending on which report you read, and this lead will be almost impossible to overcome.

In a very unusual move the Minnesota Supreme Court asked that certain information be filed last Saturday (January 3rd) for a probable hearing - at some point. The issue is whether certain absentee ballots should be counted. The Supremes earlier ordered that all the absentee ballots identified by the candidates as wrongfully rejected (and they were wrongfully rejected and not counted) should be counted so long as both sides agreed.

This is a strange ruling because, while most of the the absentee ballots were counted pursuant to agreement between the two camps, some were not accepted by one party or the other. It is a mystery why the court put interested parties into the position of deciding which ballots can be counted. The other problem, as I understand it, is that some uncounted absentee ballots were never identified by either party prior to a deadline established by the court. Those ballots were never counted (although some were probably correctly rejected.)

Finally, there is the allegation of double counting. This allegation appears at this point to be based upon assumptions and wishful think instead of proof.

In Minnesota there are only four valid reasons to reject an absentee ballot: the voter is not registered, the ballot is late (past the deadline,) voter fails to sign the ballot, and the witness is not registered as a voter. Some of the ballots were rejected because a county official forgot to sign the ballot envelope when it was received, but that is not a valid reason to reject the vote.

Coleman is reportedly threatening to bring legal action if Franken is certified as the winner - which may happen as early as today. The Governor reportedly will not certify until all legal challenges are resolved, so this could drag out for awhile.

it would be nice if the losing candidate, after the recount and after certification by the election board, would concede - that would be a class act.  It isn't good for the election process to be fought out in the courts after the votes are counted.  Minnesota has a very good election process, and after the recount, the citizens can be confident that the party that won will be the next senator.   

UPDATE:  COLEMAN LOSES IN COURT.  

 

 

A Franchise! I Didn't Sell No Franchise! A Word to the Wise About Franchising.

One of the many things that the unwary businessperson can do on occasion is unintentionally create a franchise. The obvious reason is the failure to consult an attorney. Every state has its own franchise laws, and some are better than others depending upon whether you are representing the franchiser or the franchisee.

In general, a franchise is very easy to create, and thereby subject the creator to state franchise laws and regulations. The basic elements are:

1. 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.

Pretty easy. The owner makes a verbal agreement to allow someone to use his trade name for a fee would pretty much satisfy the requirements. Much of the franchise litigation is over the issue of whether the payments amounted to a fee. If they didn't - there is no franchise. But then, the problem is that the unintended franchiser must litigate whether the business arrangement was a franchise or not. So the unintended franchiser agrees to allow someone to use its trade name to conduct business, all for a small fee per transaction. Franchises are securities, and as such they must be registered.

In my experience, many business owners wanting to expand their businesses come up with plans that look a lot like a franchise. They have no idea that the proposed business arrangement might created a franchise or a security. If there is a franchise, most states carefully regulate the franchise and require filings and approvals. Franchise law is a world unto its self. The failure to comply with the relevant states franchise laws create serious potential liability for the unintentional franchiser.

Another great thing about a franchise is that, in many states, the franchisee is entitled to costs and attorney fees if the franchiser is in violation of the franchise agreement and the franchisee incurred real damages. This is especially interesting when the alleged franchise agreement is verbal.

Franchise laws are intended to protect the public. The smart business owner will talk to his or her counsel BEFORE entering into any agreement that allows others to use their trade name(s) or trade mark(s).

 

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."


 

You Can't Steal from Yourself? You Can't Steal From Your Partners?

How many partners believe that it is a crime to steal from the partnership? Almost all of them I would guess. In a very unusual case reported by The Unincorporated Business Professor Blog, a partner was charged with larceny of partnership property. The court reasoned, using Massachusetts law, that since a partner is the co-owner of the partnership property, the taking can't be larceny.

The reasoning in this ruling is logical, but also contrary to the normal and usual understanding of the character of property belonging to a partnership. The report specifies that Massachusetts uses the UPA and not the RUPA. The ruling doesn't mention what civil responsibility the bad partners might be subjected to, and at a minimum the bad partner violated his fiduciary duty to the other partners and the partnership.

Do partners normally believe that the "theft" of the assets from the partnership would be a crime? Or, do partners believe the opposite? Clearly this is another good reason to avoid partnerships, at least in Massachusetts. If you take this decision to a logical conclusion, joint ventures are a form of partnership. When two corporates combine for a joint venture, can one take all the joint venture property without criminal sanction? It would appear so.
 

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.

 

WHY DO CORPORATIONS HIRE MAJOR (EXPENSIVE) LAW FIRMS WHEN THEY NEED A LAWYER?

I spent as fair part of my career as an in-house corporate counsel for several large corporations. I don't regret that experience at all, and I watched as corporate executives made many (sometimes costly) errors in judgment despite counsel to do something different.

But when the need for outside counsel arose (usually to defend a lawsuit, but sometimes to get specialized advice about certain areas of the law) the business almost always hired a major law firm. Why? Larger law firms are expensive, and some have a tendency to load up cases with lawyers. (Assigning multiple lawyers to a case - thereby giving all the lawyers a case where they can charge their time. )

I once called a large (I wont mention the name) firm in Washington DC to ask if they had anyone in the firm that could handle a specialized international law question. I talked to a senior partner and he set up a telephone conference with some other senior people at the firm so I could ask them about their capabilities. We had a telephone conference that lasted about 45 minutes where I asked a number of questions.

We had not even made the decision about who to hire as counsel when, within a week, they sent me a bill for $3,500.00 for the telephone call. Their theory must have been that my company should pay for the time they took to convenience me that they could handle the matter I inquired about. I told them what they could do with their invoice, but the larger lesson is that large firms need to generate fees to stay alive. So they charge everything - regardless of how inappropriate it is. I probably don't even need to mention that we elected to give the work to another (smaller) firm.

Does the corporate client get more for their money? Do they get a better result that is worth the extra money? I truly doubt it. That is not to say that larger firms always overcharge or that teams of lawyers are never appropriate. There are some issues where, because of the complexity, there is a need to get several lawyers involved, or the resources of large firms are sometimes needed.

When I set up my practice I was able to handle both large and small cases. When necessary I teamed up with other lawyers. I enjoy cases where the opposing party hires a large law firm, because they generate lots of motions and bill for every minute. The opposing party sometimes gets real sticker shock when the first legal bills arrive. I try to wait until I am sure that the other party has received bills from the law firm before I will suggest settlement discussions.

The point of this post is not that all larger law firms are bad, but in my experience they are not a bargain for the corporate client either. I once saw a $6,000,000 problem resolved by another large DC firm and the legal bills were - yes, you guessed it - a little over $6,000,000.

I handle a lot of business and commercial disputes. Usually the client is a smaller firm or an individual. I think that I bill fairly for the work I do, and I don't need to feed a large overhead. Business owners should think about the cost of legal services and at least investigate other possibilities. My recommendation - interview different firms or lawyers and ask a lot of questions. It rarely pays to get the most expensive legal services when the matter does not justify the expense. It never hurts to ask a law firm how they bill and what can the client expect for the cost! And, it can be costly to react and not ask! It is also costly to assume that the larger the firm is better at handling the matter at hand. Big does not equate to better.
 

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.   
 

Citigroup Punts. Why?

TheWSJ and the WSJ Law Blog report that Citigroup picked up it's toys and decided to leave the game. According to the report there is an obscure provision in the bailout package, section 126(c), that says, in essence, that there shall be no liability against a third party for having acquired a target that otherwise was in an exclusivity agreement with someone else.  Would this provision protect Board Members from shareholder suits? 

In other words, there can be no liability for interfering with another's contract. Now I can understand a provision like that if it interfered with the Governments attempts to buy equity in a financial institution. But between private parties?

What a way to run the railroad: Contracts don't matter! This is a very odd public policy decision. I sure we will hear more about this matter at a later time. 

 

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?
 

Petters Troubles Increase: The Legal Actions Start.

It didn't take long for the lawsuits to get filed after allegations of fraud were leveled against Petters and some of his companies. At least two so far: in the Federal District Court, Southern District of New York, and in the District of Minnesota. While we have not seen the results of the investigations or what the agents found while searching the various properties, the affidavit describing the allegations and the basis for the requested search warrants are stunning in their magnitude.

The Affidavit in support of the search warrant is here. There are going to be a significant number of Defendants if there is evidence supporting the allegations in the affidavits. Don't be surprised to see charges of tax fraud added on to the list.

If the allegations are correct, you need to wonder if there is any real money is to satisfy the claims of the plaintiffs.

More to come.

UK Libel Laws Silenced! It's About Time! Now the Senate Needs to Act!

With all the hoopla over the bailout vote and the chaos in the financial markets, Point of Law and the NYT's reported that the US House of Representatives actually accomplished something important.  POL reports that the House passed legislation that would make libel judgments obtained in the UK unenforceable in the US courts. For years individuals have used the UK Libel laws to intimated reporters and authors by bring expensive actions in the UK and claiming libel. In the UK truth is apparently not a recognized defense to such actions, and the result is that Plaintiffs have been able to silence critics by intimidation and judgments even when the published reports are accurate and truthful.  

Now that the House has passed the legislation, the Senate needs to act quickly, and the President needs to sign the bill into law.  While this is not as urgent as a financial rescue package to save the economy, it is important.