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

In an interesting case reported by the Contracts Professor, one law firm referred a client over to another law firm, and represented to the receiving firm that the clients guaranteed payment of $75,000 in legal fees. The fees were not paid and the receiving firm sued the client and the referring firm for the legal fees.

The case isDePetris & Bachrach v. Srour, 2010 NY Slip Op 01840. Upon a pre-answer motion by the Defendant law firm, the trial court dismissed many of the stated claims. The Appellate court reinstated the causes. The court wrote:

[T]he motion court erroneously dismissed the fourth and fifth causes of action which allege claims against defendants-respondents for breach of the implied warranty of authority and for tortious misrepresentation of authority and assurances of payment, respectively. These causes of action seek to hold defendants-respondents liable for their own action in misrepresenting that they had authority from the Nassers to enter into a contract in which the defendants, Jacques and Ezequiel Nasser would pay plaintiff law firm $75,000 ($37,500 each) of the legal fees incurred by plaintiff's client Srour.

At this point the court is making no determination about the facts, they are only reinstating claims because the claims state a cause of action under the law. In Minnesota, the pre-answer motion would be a Rule 12 motion, claiming that the plaintiff failed to state a cause of action upon which relief can be granted. In Minnesota this motion would likely fail.

It is not unusual for one firm to refer a client to another firm when the other firm can better serve the client's needs. It is also common for the referring firm to tell the receiving firm about the fee payment history: for example, the client has always pay promptly, or slowly or what ever the case may be. In this case it appears that the sending firm allegedly misrepresented that the client guarantee payment of the legal fees.

People, and law firms, rely on representations by other attorneys.

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The Minneapolis Star Tribune is reporting that in the 16 months since the Petters was arrested, the lawyers and accountants have billed $12,000,000. Not bad for a few months work.

Apparently Petters criminal defense costs were paid by insurance, (I didn't realize that insurance coverage would cover criminal defense!) and that bill was $3.3 million. The remaining money was spent for accounting and searches in attempts to locate the money stolen by Petters and his crew. According to the article, the money was also used for the defense costs of the officers and others that turned states evidence.

Of the $3.65 Billion Ponzi scheme run by Petters and others, I understand that most of the money is still unaccounted for, so this effort has not been a tremendous success. What has been recovered is used in part to pay for the lawyers and accountants. The bottom line is that the victims are paying for the cost to try to recover what assets can be found. The last I heard, is that Petters is not talking.
 

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

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

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

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

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The always entertaining Maxwell Kennerly has a post describing the results in two recent cases.In one, the jury clearly thought that the defendant was lying. In the second, the overreaching demand of the lawyer probably cost the plaintiff a lot of money.

Lawyers are charged with the duty to diligently pursue the interest of their clients. One thing a lawyer should never do is allow a client to lie. This is harder than you might think, since some clients have a tendency to shade the truth from the lawyer. In fact, they almost always bend the truth. Usually the lawyer will be able to work with the client and determine what really happened.

Many years ago I had a case where the client had a very consistent and compelling story about a business deal gone bad. The facts were fairly straight forward - I thought. When the trial started the client, to my surprise, testified to a completely different story. After a year and a half of one story - supported by other evidence - he completely changed his story when testifying at trial. Had he not changed his story I would never have known that his original tale was less than truthful.

Clients need to understand that not everything they did, or said, or wrote, will help their case. This is almost universally the case in any business litigation. Every case has problems. The challenge is to use the weak points in every case to show that your client is telling the truth - and should be believed.

Another problem for the lawyer is what to do with the client that has unrealistic expectations. The Plaintiff client believes (or hopes) that they are entitled to damages that are completely unsupported by the evidence. Arguing for excessive damages can have a real negative impact on the judge or jury listening to the case. Greed does not pay! Especially when the judge or jury perceives that the demand is not reasonably related to the actions.

The problem is that once in a while a jury awards a party clearly excessive damages. The award then becomes well publicized. (i.e. the McDonald coffee case.) These rare cases can change the expectations of a client. I recently tried a case - representing the defendant - where the plaintiff's claims were very questionable. The Plaintiff's counsel told me he wanted to throw the dice and try the case. His facts were weak, but the chance of succeeding was driving the plaintiff to try a case that otherwise would have settled.
 

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Over the years I have been involved in several business purchases and sales. None have been really large, but the lesson of the small purchase is readily applicable to the large purchase.

When I was acting in-house counsel for a company, another company was interesting is purchasing a division. The division had a good cash flow - but it also had some interesting legal issues and claims that I was working to resolve. This was to be an asset sale. The buyer dutifully reviewed all the financial data, looked at the representations and warranties and agreed to purchase the business. What I found interesting is that the buyer never asked for permission to talk to me, or any other attorney representing the seller to find out what kind of legal problems were common, or recurring, and what was out there that could eventually create a problem for the on-going business. Even though this was an asset purchase, the buyer might want to know what issues were being created by past practices, or the way the business was managed. In an asset sale you usually - but not always - continue on with the same employees. It seems prudent to ask what issues those employees are creating that result in the requirement for a lawyer to get involved. Sometimes claims happen for no good reason or in spite of good management. However, many times claims are caused by questionable decisions by some level of management.

Many businesses do not have lawyers on staff, and never consult with a lawyer, which is an issue by its' self. In that case there is no one to answers the critical questions. But many business have at least a lawyer that they consult on occasion, or retain to help solve problems. When a buyer only looks at financial performance, it is missing a big part of the picture.

When representing a purchaser, why not ask for permission to talk to the business lawyers to find out what issues and problems they see - especially those that have a potential to recur. It seems to me that it would be a good idea to discover that a manager had taken actions that resulted in a lawsuit - or some other claim. Then you can meet with the manager to get the story - after the lawyer has given the buyer his analysis of the issue or claim.

In house lawyers have a unique view of the company. If they have been there awhile they usually know how to get things done, and who is a good manager and who is not. They will see the problems, take calls from the field and get involved in many areas of a company in a problem solving capacity. The lawyer will know which managers will charge ahead without regard to the lawyers comments, cautions or suggestions. Then the lawyer needs to solve the problems created. While lawyers are not alway good business people, many times that are, and their thoughts can be very helpful to a buyer of a business. As a lawyer I would require a written waiver from the seller, and written directions setting forth those areas and issues I can discuss with the potential buyer.

I realize that this puts the lawyer in a tough position, but if I am representing the buyer, this is an interview I want have. If a Seller does not want to grant access and full disclosure by the lawyers as it relates to the selling business, that alone would raise a lot of questions for me. If you are the buyer - it's your money and you might want to understand what you are buying.
 

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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.

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 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.

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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. 

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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.

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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? 

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The Minnesota Lawyer Blog has a nice article on the JAGC officers assigned to the Minnesota Army National Guard's 34th Infantry Division, and they are on their way to Iraq.  The JAG Corps is a great way for lawyers to serve their country and continue their professional career. 

I was in the Army JAGC in the late 70’s, and I gained experience I could not have gotten anywhere else.  How many young attorneys are allowed to try felony cases, or tell senior officers that they can’t do what they want to do, the way they want, because their proposal violates Federal law. 

Younger attorneys have asked me several times whether I would recommend the JAGC, and my answer was an unqualified, “Yes!”  The Minnesota National Guard lawyers will have an experience that will forever shape their professional career.  They will be  exposed to issues they never thought about before, and be expected to give legal advice with little chance to research or prepare. Our thought and prayers go with them. 

 

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First the scam. I just ran into this post from Reid My Blog about the false use of a lawyer's name and web site to defraud people. I think all lawyers need to be aware of the scams out there that could impact their clients. While I don't have any great ideas about how to answer this threat, other than communicate with existing clients, the threat seems real.

Most of us occasionally receive an email from someone claiming to be looking for a lawyers with our unspecified qualifications. The e-mail is always from a foreign country, although which one is hard to know. As lawyers we can laugh at the weak attempt to steal money from us or our clients. This new scam seems to rely upon the victim checking to see that the attorney is in good standing, and relying upon that information to fall for the scam, without the knowledge of the attorney.

As always, we need to be aware and watch for any unusual activity.

Predictions for 2009

Keeping with the theme of crime and fraud, I am predicting that 2009 will bring new revelations about additional criminal complaints for major fraud schemes. I can't feel comfortable believing the Madoff and Petter are the only major financial criminals. The era of deregulation has had a fairly long run, and when no-one is looking, there are always people ready to take advantage. I predict, without any actual knowledge of any investigation, that there will be several more arrests for major frauds. Hopefully I am wrong, and the worst is over.

I am interested in what others think.

Finally: Happy New Year to All!

Gavin Craig

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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).

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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."

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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.
 

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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.
 

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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.

 

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I have been very busy answering complaints, drafting complaints and preparing discovery. It is sad when life gets in the way of Blogging. On the positive side, life is interesting and I am working with some very interesting legal and procedural issues. More later!
 

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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.
 

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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.
 

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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. 
 

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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.
 

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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.
 

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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.   
 

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"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?
 

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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.

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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.   

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