Lawyer Sanctioned for Bringing Frivolous Cases Against Mortgage Holders.

US District Court Judge Patrick J. Schiltz issued a sever sanction against an attorney for bring numerous frivolous acts against mortgage holders to prevent foreclosures. The law in Minnesota is clear that the holder of the mortgage can foreclose on the property, even if the mortgage holder does not hold the promissory note.

The attorney, William Butler, has been ordered to pay the court $50,000, plus pay the attorney fees for several mortgage companies that he has sued. According to sources for the story on the Minnesota Public Radio (MPR) web site, the total sanction could be well into six figures.

I look at this as a good sign for the legal profession. Lawyers need to be held accountable when they misuse the courts, by bring numerous claims that are clearly not grounded in well established law. This is different than bring a claim that is arguably meritorious, and ask the court to rule, maybe on issues for which there is no prior decision. But this case is very different. The article is good reading for all attorneys in every state.

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.

Contract Language is Always the Issue. What did the Parties Agree to do or, in this Case, Waive?

The Koncise Drafter Blog has an interesting post concerning the interpretation of certain disclaimer contract language. The aggrieved party - a lessee, claimed fraud when the landlord failed to disclose that there was a bad odor in the premises where the lessee planned to operate a restaurant. Clearly this problem would have defeated the objective of using the space for a restaurant. To make things worse, the property manager knew about the problem, but had naturally failed to disclose this issue to the new lessee. (This sounds a lot like a Seinfeld episode.)

The lease language provided that:

14.18 Representations. Tenant acknowledges that neither Landlord nor Landlord’s agents, employees or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.

14.21 Entire Agreement. This lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no subsequent amendment or agreement shall be binding upon either party unless it is signed by each party. …

Not surprisingly, the lessee sued the landlord for fraud, among other things. The Landlord took the predictable position that the lessee had waived any claims for fraud.

The trial court found for the lessee, the Texas Court of Appeals reversed, and the Texas Supreme Court reversed the Court of Appeals. The question that the court was grappling with is whether the parties effectively disclaimed reliance on the representations by the lessor, thereby negating any claim of fraud. I am sure that when the lease was drafted that was likely the intent, this is very standard language (or some version of this language). The Blog correctly points out that when a drafter clearly states that the other party waives any claims for fraud, it is unlikely that the parties will sign the contract. So the language by necessity needs to be a little more subtle.

I think it is also the case when reviewing commercial lease contracts, most reviewers will probably skim the standard boilerplate language such as the term at issue in this case. After all, what owner wants to pay a lawyer to analyze and research language that is considered standard boilerplate language that has, in one form or another, been around for a long time.

In my career I've only once been presented with a lease for a client where the other party wanted my client to disclaim any claim for fraud. We did not agree to that language.

Another issue is whether the lessor had a duty to inform the lessee of the problem knowing that it would interfere with the lessee's intended use of the building. The lesson is clear, if you want the other party to waive any an all rights against your client, you had better say so.

Can I Make All My Employees Managers To Avoid Overtime Pay; and Other Myths. Two Ways to Make Long Term Bad Decisions.

The Minnesota Labor and Employment law Blog has an interesting article on another large company failing to pay it’s employees for overtime work as required by the law. The company in this instance was Levi Strauss and Company. The end result cost them well over a million dollars and of course their incurred attorney fees. Most of these cases are arguments over classifications – is an employee exempt, or not. Companies have been found to classify employees as managers, even though they don’t manage much, to avoid the overtime requirement.

Several years ago a contractor approached me and asked if he could make all of his employees independent contractors, thereby avoiding the requirement to pay the employers portion of social security. His competitors, he told me, were all doing it. This is another bad idea that will eventually subject a company, and owners, to significant costs and penalties.

Companies are sometimes operating under significant cost pressures, and they are looking for ways to reduce costs. However, ignoring the law is not the solution to a cost problem. While a company ignoring the law might gain a slight cost advantage in the short run, the cost in the end is bound to be much higher.

In the Levi Strauss case, since the employer failed to pay the required overtime (at least they agreed to make payment to the tune of over a million dollars,) the employer will also have a significant payment due the government for their portion of the social security payment.

While I have not seen this case yet, I am sure that there are companies that are treating employees as independent contractors and failing to pay the employees the required overtime wages, and the employer is also failing to pay the employers portion of the social security payments. These employers are just as likely to be caught by the government as by an unhappy employee or ex-employee.

Follow the law, and life is easier in the long run. When in doubt, ask an attorney to review the situation and provide advise. It’s far less expensive to get good legal advice than to defend these charges in court. Thanks to the Minnesota Labor and Employment Law Blog for their article on Levi Strauss.

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.

Families are Great! Now the Daughter Sues Dad for Breach of Contract - and Wins!

This is a really a great story. Sad for the family, but a great contracts story. The Connecticut Law Tribune reports the following story about a contract gone bad. Also see the report in the Contracts Professor.

This is the case of Dana Soderberg, who went to court to force her father to live up to his agreement to pay her tuition at Southern Connecticut State University.

The court agreed that the father had entered into a contract to make the payments. When Howard and Deborah Soderberg divorced, they agreed that Howard would pay all of the education costs of the children.  Dana, a daughter, was smart enough to get a written agreement with her father since, as she knew, her father was not a person to follow through and actually pay for things as promised.

The article in the Tribune reads in part:

As part of the agreement, Dana would make an effort to apply for student loans and Howard Soderberg would pay off those loans. Co-signing the agreement was Howard's sister, Patricia.

Howard delivered on his word through March 24, 2007. But when it came time for Dana to begin her senior year at Southern Connecticut, Howard Soderberg refused to pay the bills. And so Dana got a $20,000 loan to pay for her last year of college, with her mother co-signing.

Dana graduated and sued her father.

The father argued that Dana breached their agreement by not making reasonable efforts to apply for student loans, by failing to attend classes full time and by not providing him with receipts for tuition and other school-related expenses.

Howard Soderberg also filed a counterclaim alleging that his daughter dropped courses and pocketed the refunds. He also said she spent money that was supposed to go toward textbooks on personal items.

Judge Trial Referee William L. Hadden Jr. issued a written opinion earlier this month, ruling that father and daughter had a legitimate contract, that Dana proved to be the more credible party in the lawsuit, and that the father had breached the agreement.

"The plaintiff has proven that she has performed all of her obligations as set forth …" wrote Hadden. "The defendants have failed to prove the claims set forth in their special defenses and in Howard's counterclaim."

Berman said damages totaled around $47,000, including the loan, interest, attorney fees and missed car insurance payments. Berman did not anticipate an appeal.

As I read this report I was wondering what the consideration was, since Dad already had the obligation to pay for the education costs. Perhaps it was the obligation to apply for student loans.

Even without a contract you clearly have what appears to be a good case of promissory estoppel.
The daughters instinct to get a written agreement with her father is probably unusual, but very smart in the circumstances. Good for her. 

This a good lesson in all business arrangements.  Write down your agreements.  Most contracts are preformed without any problem.  But when there is an issue, and the parties have written down their agreement, it is much easier to resolve than it is when the agreements are verbal.  Once there is a dispute over a verbal agreement, the parties will disagree on what the agreement was, or even if there was an agreement.  This case is a good lesson for all.  

Gavin Craig 



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.

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

Can You Unintentionally Contract Away Your Right to Good Faith and Fair Dealing?

Apparently you can. This is undoubtedly an example of all parties believing nothing will ever go wrong and that the parties will always work well together. The following matter was reported in the New York Times, and the case comes to us from California. Also see the Contracts Professor.

For Background, Clive Cussler is a noted fiction writer of adventures, usually involving sunken ships or buried trains, etc. Mr. Cussler entered into a contract with Crusader Entertainment, LLC., giving Crusader the option to produce a movie based on one of Cussler's novels. The dispute involved claims of breach of this contract.

Before the movie was even produced, both parties sued each other, each alleging the other breached their contract. This is not the way to begin a fruitful business relationship.

In summary, Crusader was suppose to begin production within 24 months of exercising the option. However, the film was delayed because the parties argued over the screen play. Reportedly, Cussler consider the screen play, "crap." Cussler insisted that he should write the screen play - Crusader refused to allow him to do so because the actors didn't like his screen play, and he was not a member of the writers guild.

The trial court found in favor of Crusader, and awarded damages of several million dollars based on a finding that Cussler breached the implied contract covenant of good faith and fair dealing.

However, the Court of Appeals found that as a mater of law, the implied covenant of good faith and fair dealing did not apply. The contract provided that Cussler had the right to review and approve the screen play. The Court of Appeals found that Cussler had the contractual right to:

"[R]eject proposed changes to the original Approved Screenplay, "for unreasonable reasons. . . or for no reason at all." (The report is not clear whether this language is in the contract, or it is the courts interpretation of Cussler's contractual rights.) It is hard to believe that Crusader would sign a contract with this specific language, since it invites the very problems they encountered with Cussler.

Crusade argues that the appellate court's interpretation of the contract made the contract illusory, and I think that to some extent that is a good argument. However, the court said that since the contract did not require Cussler to act reasonably, or in good faith, he had no obligation to do so.

The problem with this reasoning is that either there is an implied covenant of good faith and fair dealing, or there isn't. If there isn't, then the courts decision appears logical. If there is, the decision doesn't make sense. Why would parties need to specifically address in a contract an implied obligation that is already deemed part of the contract, unless the parties wanted to specifically exclude the covenant? And who would sign that agreement?

These are the type of cases that make you scratch you head and wonder what people were thinking?



Conflicts Cause Lawyers to Lose Legal Fees.

In a very unusual circumstance - I hope - the McGuire Woods law firm lost $12 million in fees for creating a conflict of interest.

The short version of the story is that the firm brought a class action against West Publishing, the parent Company of BAR/BRI, and Kaplan. BAR/BRI provided bar exam preparation services, and Kaplan provided LSAT preparation services. The two companies allegedly agreed that BAR/BRI would not provide LSAT exam services, and Kaplan would not enter the Bar Exam preparation business.

In 2007, the parties reached a settlement, whereby the Defendants would pay $49 million. However, it was discovered that 5 of the 7 named class representatives for the plaintiff class had entered into a separate agreement with the lawyers at the firm to receive a special incentive payment once any settlement or judgment was approved. Apparently the agreement was on a sliding scale and the more the case settled for the more the five would receive, up to $10,000.

Attorneys for other plaintiff's objected to the arrangement. The judge, US District Court Judge Real agreed with the objectors, and voided the incentive payments. He also denied attorney fees for the attorneys of the objecting plaintiffs. The case went to the 9th circuit, where the court approved the settlement but refused to approve the attorney fees of $12 million, and returned the case to the trial court to consider the impact of the conflict of interest.

When the case returned to Judge Real, he denied all attorney fees. He held in part:

5. Attorney's Fees

McGuireWoods, LLP (the law firm) entered into incentive agreements with five of the named plaintiffs, obligating the firm to seek payment for each of the five in amounts that hinged on the size of the settlement or a verdict secured on behalf of the Class. This arrangement was not disclosed to the Class, nor did McGuireWoods inform the Court of its existence during the class certification stage.

Upon learning of the agreements this Court found them to run afoul of the California Rules of Professional Conduct. Moreover, the agreements gave rise to a conflict of interest that tainted the McGuire Woods representation. That a fair settlement was ultimately reached does not bear upon the seriousness of the ethical violation. This is all according to, at least, the Ninth Circuit. Under California law in the absence of informed written consent, the simultaneous representation of clients with conflicting interest constitutes an automatic ethics violation that results in the forfeiture of attorneys’ fees. Image Technical Service, Inc. v. Eastman Kodak, 136 F.3d 1354 (9th Cir. 1998). Moreover, quantum meruit recovery is barred where an attorney has violated an ethical rule that proscribed the very conduct for which compensation was sought. Huskinson & Brown, LLP v. Wolfe, 32 Cal.4th 453 (2004).

Accordingly, McGuireWoods LLP Accordingly, McGuireWoods LLP is not entitled to any fees for its representation in this matter. However, because the forfeiture is predicated upon a theory that payment is not due for services not properly performed, McGuireWoods LLP may be reimbursed for the expenses it incurred during the course of its representation given that such expenses would be unaffected by any conflict.

The WSJ LawBlog finds this to be a strange result. I don't. The firm's lawyers should have known better. If they were going to do this it should have informed the class participants in the retainer. Disclosure and agreement solves most conflicts. The right to fees when there is a conflict does not depend on whether the result was a good one for the class, or the clients. Undisclosed conflicts disqualify the firm from receiving any fees for their work. This proposition is, I believe, the same in most states. It is a little hard to feel sorry for the firm, because they created their own problem and they should have known better.

The attorneys who objected, are now asking the court to approve placing the unpaid attorney fees into the amount to be paid to the plaintiff class. I am confident that the case is headed back to the 9th circuit. But the McGuire Woods law firm is not in a very good position on this one.

Here is a Conflict Resolution Book I Will Read!

One of my favorite bloggers, Victoria Pynchon, is publishing a new book, Titled "A is for Assholes, The ABC's of Conflict resolution." Those of us that litigate cases understand the title - perfectly.

I haven't read it, but I read Victoria's blog, and I recommend this book if it is anything like her blog - and it is sure to be that.  Watch for it!

Gavin Craig

The Supreme Court to Hear an Arbitration Case. Did the Ninth Circuit Get it Wrong?

The Supreme Court does not often hear an arbitration case. However, they have now elected to hear Jackson v. Rent-A-Center West. Cert was granted on January 15th.

The case involves a claim of race discrimination and retaliatory termination. The employee had signed a stand alone agreement with the employer agreeing to arbitrate any disputes, including any claim of discrimination. The trial court dismissed the case on a motion, finding that the arbitration agreement already provided that the arbitrator determined arbitrability.

The case was appealed to the Ninth Circuit, and the Court of Appeals reversed, finding that the issue of whether an arbitration contract is unconscionable is an issue for the court. The agreement specifically provided that the question of arbitrability is a question for the arbitrator. The Ninth Circuit said it wasn't. Case law would appear to support this argument absent a provision in the agreement to decide arbitrability, but in this case the agreement already specified a process.

The district court held that the question of whether the arbitration agreement was unconscionable was a question for the arbitrator, as provided in the agreement. Moreover, the District Court held that the Plaintiff had not demonstrated that the agreement was substantively unconscionable.

The plaintiff is arguing that the arbitration clause is invalid because it is unconscionable, and therefore the agreement to allow the arbitrator to determine the question of arbitrability is equally void. The Ninth Circuit accepted the argument and reversed, sending the case back to the district court. Now the US Supreme Court has taken up the case.

In this case, the plaintiff signed the agreement. He may not have read the agreement, but that does not make it unconscionable.

This is an odd case. If you accept the premise that the arbitration Agreement is a contract, and that the parties are bound by their contracts, the Ninth Circuit is wrong. The court is essentially re-writing the contract and deleting a provision. That is not right. Court are not suppose to rewrite contracts. But that is the effect of the Ninth Circuit ruling.  Here is the decision. 

Gavin Craig

Mediation is Not Just a Game. Proceed with Care.

Victoria Pynchon has an interesting post on her Commercial ADR Blog. It is a fact pattern that many attorneys will recognize. It is a very real scenario. However, I don't understand why experienced attorneys would resort to the game playing. Attorneys should avoid tit-for-tat responses. They are juvenile responses to serious negotiations, and accomplish nothing for your client.

I agree that you can usually tell in a negotiation (but not always) where the other party is headed after awhile. I always assumed that the other side could tell where I was headed. The mediator in the case study did not seem very effective, or the parties were not listening to the mediator. Mediators, in my experience, do not want to convey useless and counter-productive offers back and forth.

In a recent case, the offer we received was so out of line that it almost stopped the negotiations. We had no meaningful way to respond to the offer. There was no place to go even with a meaningful counteroffer. Even the mediator told me that he told the other side that the offer was a big mistake.

Unfortunately the absurdly high or low offers do nothing to move the parties toward a settlement, and they can defeat the very purpose of the negotiations. Although we finally got to a place we thought was fair, my experience was a good example of the initial offer (or counter offer) being in the stratosphere and almost killing the effort. Many times the very high initial demand offer will be followed with major downward moves. That is at least an admission by the claimant that the initial offer was not a real offer.

Sometimes what seems like a ridicules demand or counter offer is made in earnest. In other words, the parties are truly very far apart on their assessment of the case. I hope we will see more of these case studies on Victoria's site. They are fun to consider.

But, attorneys in serious negotiation or mediation should be cautious about starting in a place that is unrealistic. That does not mean starting with your bottom line, but it does mean that the parties will do themselves a big favor by realistically assessing the case, and the merits of both their position and the position of the other side. Starting outside of at least shouting distance from a realistic range can kill what would otherwise be a good result, and it really avoids the necessary hard bargaining. Trials can be a real crap shoot, depending on the court. Negotiate with care and with a purpose.

Gavin Craig

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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!

Petters and Ponzi Schemes!

When Tom Petters was convicted in US District court of multiple counts of fraud, I wondered why a supposedly smart person would resort to fraud. Bernie Madoff essential did the same thing. They paid the early investors with the money invested by later investors. Petters created phoney documents to show business activity that was a fiction, and was able to get other people to invest in his enterprise. Both Petters and Madoff became very wealthy, with other peoples money. Now they are both enjoying life at taxpayers expense.

What troubles me, besides the very fact that they would defraud innocent people, is that they were operating a scheme that could not succeed in the long run. Madoff's operation was surprisingly long lived, but wouldn't have lasted quite so long had the regulatory agencies done their jobs. But these schemes can not be successful in the long term. You can't keep bring in more money to pay off prior investors. Eventually you will run out of willing investors, and the truth will come out.

So, why would supposedly smart people do this? The only answer is that they were not smart enough to figure out that the fraud had a limited life, or they planned to leave the country. In the Petters case, Star Tribune reporters David Phelps and Aimee Blanchette had an interesting interview with the foreman of the Petters jury. In the end, Petters own e-mails were his undoing.

Since Petters contended that he was innocent, there was no revelation about the why, and what he would do once it became clear he was going to be caught. However, most of the money is still missing. Petters isn't talking, so perhaps he had plans but he was not able to leave before he was arrested. We probably will never know.

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.

Rights of the Minority Shareholders in Small Corporation! Can you Safely Fire a Minority Shareholder - Employee?

I found a very interesting blog post on the New York Business Divorce Blog, dealing with a problem common everywhere. What happens when a minority shareholder works for the enterprise, and is later fired?

This is a very common issue. For reasons real or imagined, the majority shareholders want the minority shareholder to leave. What now? The minority shareholder rarely has an employment agreement (or at least rarely has a written agreement.) And even if here is a written agreement, I've never seen one where the employee/minority shareholder had a right to keep the job regardless of performance.

When the minority shareholder is fired, there is a usual claim or breach of fiduciary duty and other contractual claims.

The NY Business Divorce Blog notes: The most common allegation of oppression by minority shareholders involves termination of employment by the controlling shareholders.

However, when the employee is an at-will employee, then he/she can be fired without creating a liability to the company absent a violation of any other agreement, such as a buy/sell agreement between shareholders.

It is common for shareholders in a small corporation to eventually have disagreements. Unfortunately, when a business is created there is sometimes little thought given to what happens if someone wants to leave, or the majority wants the minority shareholder to leave. Sometimes the shareholder don't even sign an agreement.

I commend you to the writeup on the NY Business Dissolution Blog concerning this subject. They discuss a case where the company is in litigation with the fired minority shareholder, and the company could not get the claim dismissed on a motion. In the case reported, the majority wanted to pay $125.00 rather than $8,335.00 per share to purchase the minority interest. This is just foolish.

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. 


Arbitration Award Reversed! What is Wrong With This Picture?

In a very unusual case, a California Court of Appeals overturned an arbitration award. Thanks to Victoria Pynchon for the heads up in her Settle It Now Blog. I haven't seen the case yet, but the report from Victoria is not encouraging. If courts are going to review Arbitration decisions, what good are arbitrations?

More later after I have reviewed the decision.

Is Business Litigation Just Another Method of Negotiating?

Clearly, parties can elect to negotiate through the litigation process. It happens everyday. But why would any reasonable person elect to use litigation as a negotiation method? Litigation is clearly much more expensive than just sitting across the table and negotiating. The reason parties are litigating is usually because they are already in a relationship. There is either a contract existing between the parties, or some other business relationship that makes one party feel that it has lost something of value by the actions of another party.

I think it is simplistic to just take the position that litigation is just another form of negotiation. I agree that it is, but it is also much more than that. There is an excellent post on the, "Settle It Now Negotiations Blog" that discusses this very point. In negotiations, each party can control the results. Each party can agree or not agree with any proposal. Each party can control whether there is an agreement or not. But once a case is filed in a court, the rules change: the parties lose control of the schedule, and to some extent the cost of the negotiations. If the parties fail to negotiate a settlement, they also lose control of the result.

I recommend the article in the Settle It Now Blog. The suggestion is an excellent one if the parties otherwise trust each other (which is unlikely) and have a desire to continue a business relationship. But, as the old saying goes, "It never hurts to ask!" Sometimes there are surprising results.

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

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

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

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

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

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

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?

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

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

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."

Lying in Court and Greed Don't Pay!

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.

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 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.


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.

Litigating for the Principle of the Matter - A Bad Beginning!

 Norm Coleman is now declaring that he will appeal to the Minnesota Supreme Court in his never-ending quest to retain his seat as Minnesota’s senator.  He lost – that much is clear.  The court has rejected his attorney’s arguments of some massive unfairness in the system: Minnesota has a very good election system that has worked well over the years.  Coleman has been arguing that it is somehow unfair that if one county accidentally allowed a vote by an ineligible voter, then not withstanding the law making these persons ineligible, all the counties must do the same.  That nutty argument, and his total lack of any creditable evidence to support many of his charges, makes his case a losing proposition. 

Kevin Duchschere from the Star Tribune has written a good piece about the Coleman election case.  Coleman is currently trying to convince the public that he is continuing this fight for some higher purpose.  In other words, it is the Principle that he is fighting for. 

Any attorney who has litigated a case has probably heard a client declare that it is not the money – it is the principle.  I think these are universally the worst clients.  When we tell a potential client that their case might be good – or not, but either way it is not economically a good decision, they don’t necessarily listen.  When that same client wants to bring the action anyway, (or defend instead of settling the matter) because it is the principle of the matter that counts most, this should be a real danger sign to the attorney.  These clients almost always eventually decide that it really is the money, and not the principle that matters most.

It is easy for Coleman to take this position because he is not paying for the legal fees.  If Coleman really believes that he is fighting for some high principle and he is right, (and I doubt both of these assertions) then he should be willing to fund the entire cost of the litigation.  If he is not prepared to do that, I don’t think his representations are creditable.  “Put your money where your mouth is.”

 It is always easy to fight on other people’s money. 

The same principle applies to litigation between emotional ex-business partners, or any other business litigation for that matter.  When the fight becomes over “principle,” it is usually time to suggest that the potential client find another lawyer.     


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. 


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.

FBI Tips to Avoid Becoming Victims of Internet Fraud! And More.

The Chicago Business Litigation Lawyer has published a couple articles about avoiding Internet Fraud. The tips come from the FBI, and are very telling. The advise is good, and should make us all more cautious. This list is worth a few minutes to read. It is almost impossible to recover funds stolen through internet fraud. The perpetrators are many times overseas, and you will not even be able to determine which country.

The old saying: If it sounds to good to be true, it isn't! Fraud takes on many forms and the victims range from the sophisticated to the not so sophisticated.

In these days of economic hardship for many people, I think there is a tendency of some people to believe what they perceive as a good deal or a way to make money. The people that invested with Bernard Madoff were very happy that their investments continued to do well while the rest of the market was not doing so well. Here is an interesting article about the lawyers and the litigation started as the investors pick at the bones of the carcass that was Madoff's financial castle. If everything is going well, why look too hard.

Tom Petters' investors believed what was put in front of them. It all sounded good. But it wasn't and in the end the investments were fictions. remember just because it is written down does not make the representations true.

The smartest people can be victims. But we don't have to be.

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.

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

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

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

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

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

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

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

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.   




No Good Deed Goes Unpunished - So Much For The Good Samaritan Law in California.

The California Supreme Court has greatly limited the use of the Good Samaritan Law immunity from liability when the Good Samaritan helps rescue an injured person - but does not render "medical" care.

The WSJ Law Blog, the California Supremes Blog, and the L. A. Times all report on the case.

"In a divided opinion, the court ruled that Lisa Torti — a young woman who in good faith pulled a co-worker from a crashed vehicle after a night of Halloween revelry in 2004 — isn’t immune from civil liability because the care she rendered wasn’t medical. Torti, according to the L. A. Times, allegedly worsened the injuries suffered by Alexandra Van Horn by yanking her “like a rag doll” from the wrecked car on Topanga Canyon Boulevard. Van Horn was rendered a paraplegic in the accident." WSJ Law Blog.

California's Health and Safety Code provides that “no person who in good faith, and not for compensation, renders emergency care at the scene of an emergency shall be liable for any civil damages resulting from any act or omission.” Please notice that the term "medical" is not in the statutory language.

Why is "medical" care suddenly a requirement for the Good Samaritan Law to shield the defendant? According to the L. A. Times there is no prior case law to support the requirement that the care provided be medical in nature (and how do you distinguish "medical" from "non-medical" in any case.)

I would hope that the court didn't decide the case the way they did because of the terrible injuries. The saying "bad facts make bad law" might be at work here. I can't think of very many court decisions where the court actually added words to a statute, and this is exactly what they seem to have done.

As a public policy issue it makes no sense to protect the good Samaritan for giving medical aid, but not for pulling a person from a burning car. I would hope that the California Legislature will fix this problem. At least three justices dissented from the majority opinion, so all is not lost.

Apparently in California the smart Good Samaritan will watch the victim burn up instead of attempting a rescue, and only apply first aid after the rescue has been accomplished, should here ever be one.

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.



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...

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.   

Complaint Dismissed! You're Not a Lawyer!

What to do about the non-lawyer representing the small corporation or the LLC? The corporation and the LLC are legally separate entities, and like any other person, must be represented in court by a licensed attorney. In Minnesota a non-lawyer can represent an LLC in Conciliation Court (small claims) and housing court. This makes sense as an exception to the rule.

In my experience there are two situations where non-lawyers try to represent clients.

The Threat from the non-lawyer! The pretend lawyer threatening action if the client doesn't do something - usually pay some money.

I once received a threatening call from a person representing herself as calling from the law department of a company trying collect a debt from a client. It became obvious during the conversation that this person was either 1. not an attorney, or 2. a very bad attorney. When I asked directly if she was an attorney she would not give me a straight answer. The woman was calling from Texas and I reported her to the Texas Bar Association for the unauthorized practice of law.

The Small Corporation or LLC Owner Representing the Company

The general rule is that the non lawyer can't represent a corporation or an LLC in court. Since the party to the proceedings is the company, the company can't be represented by other than a licensed attorney. So when the owner(s) try to represent the company, they immediately create a problem for themselves and their company. In a recent case the Kentucky Court of Appeals just dismissed the case when the case was initiated by a non-lawyer representing the corporation. The trial court judge told the plaintiff to get an attorney to continue - and it did. But the Court of Appeals said no! The filing of the complaint was the unauthorized practice of law and the complaint must be dismissed. So even getting a lawyer later did not save the company. This seems like an appropriate remedy.

The Kentucky case was an eviction action, and in some states a company is not required to have attorneys in these limited types of actions.

There is a lesson for all small businesses. Know the rules before you start a legal action. Talk to a lawyer!

Fraud! Material Misrepresentation! Lies! The Victim Loses? What is Going On?

Normally when a person is induced by material misrepresentation to enter into a contract, the deceived party has the ability to cancel (rescind) the agreement. In other words, if a person lies about material facts, the deceived person can escape the responsibility of performing. If a person selling a car represents that the car is new - when it has actually been in a crash and put back together, the "new" representation is material if the buyer relied on it in making the purchase decision.

But what if you are selling yourself? What if you lie on a resume? What if you claim to have graduated from Harvard with an MBA and in fact you only spent one year at a community college? If the employer hires you based on the fabricated resume, they can cancel the agreement to hire you - or can they?

Who has the burden of proof, or perhaps it should be called the burden of truth? Does the prospective employee have the burden of honesty, or is the responsibility of the employer to investigate the claims of achievements and glory in the resume? Can an employee be fired for puffing in a resume? Can the employer fire the employee and rescind the employment contract?

A recent NY case puts an odd twist on the normal rule. Josepha Fallarino made serious misrepresentations on his resume. (He lied.) National Medical Health Card, Inc. (“NMHC”), the employer didn't check the representations and hired Fallarino. NMHC wanted the employment agreement rescinded because Fallarino lied on his resume. Seems straight forward. "Not so fast!" the court said (I am paraphrasing.) NMHC had the ability to check out the truth or falsity of the resume - they didn't, so they can't rescind. Don't most defrauded people or companies have the ability to investigate at least some part of a representation? Or at least hire an investigator?

Apparently the courts of the state of NY are prepared to hold that if the defrauded party enters into a contract with the deceiver, the defrauded party will apparently need to show that they at least tried to ascertain the truth before they entered into the contract. In NY you can't trust anyone - and if you do - you do so at your own risk! This is a strange holding.

You need to wonder - how much investigation would be reasonable? An Internet search, or must the employer hire an investigator?

On the other side of the world - in Texas - the state Supremes held that if the contract between the parties stated that the parties did not rely upon the representations of the other party, that the defrauded party could not sue for fraud because they had already agreed that they had no right to rely on the fraudulent representations. So, you could conclude that doing business in New York or Texas can be hazardous to your pocketbook.

The basic lesson in Texas is that you need to read the contracts, and if a party wants a provision that says you can't rely on any representations, the obvious question is, "Why can't I rely? What representations are false?"

He Can do That! No He Can't! The Wonderful World of Agency!

I am one of those strange attorneys that thinks cases involving agency are interesting. An agent is a person (including a company) that acts for another. Simple, right! An officer is usually - not always - an agent for the company. What does it mean to be an agent? I am glad you asked.

                                                                   What is an Agent?

The agency is created by contract - written or verbal. The contract determines the scope of the agency. If an agent has the power to bind the principal to a specific contract to purchase, the agency could be limited to that one agreement. Or the agency could be open ended. The officer of an LLC at least has the appearance of having the authority to enter into any contract as agent for the LLC. Agency is one of the simplest legal principles; the principle is based on contract law, and yet there are numerous disputes every year.

                         But He Didn't Have the Authority! He was No Longer the Agent!

The Delaware Business Litigation Report blog discusses a recent case that has many of the issues relating to Agency. In this case, the Plaintiff contracted with a Virginia LLC to provide certain services. Burden was the general manager of the LLC. Two days before the LLC signed the contract (by Burton) with the Plaintiff, the LLC amended its Operating Agreement to remove Burton as the general manager. The reason for the change was not related to the contract with the Plaintiff. When the Plaintiff was not paid, it sued. The LLC's defense was that Burton did not have the authority to bind the LLC. In other words, the Burton was no long an agent for the LLC when he signed the contract!

                                                      Defense Problems!

The defense has a several serious problems with this defense. First, since Burton was dealing with the Plaintiff as the general manager, how would the Plaintiff know that Burton no longer had the authority to bind the LLC? Burton apparently never mentioned it. Moreover, Burton continued to act as though he were still the general manager.

An agent can act for a principal when the agent has express authority (Contract,) Implied authority (as an officer of the corporation or LLC, a partner, or by the actions of the principal,) or apparent authority (when the agent holds himself out as having the authority and the principal allows the representation.) I am summarizing and these points are a little more complicated that I have outlined.

In this case, Burton had the authority before the contract was signed, and Burton continued to hold himself out as having the authority, with the knowledge of the principal, even after the authority was removed. So Burton appeared to have the authority to bind the LLC to contracts as an agent with either express or apparent authority.

                                              What about the Ex-Agent?

One funny thing that the case does not mention is that the LLC, owned in part by Burton, is effectively arguing a position that Burton is personally liable as a principal to the contract. The case does not appear to address this point.

I discussed a similar legal point in an earlier post where I urged owners of corporations to disclose that the contracting entity is a corporation. Failure to disclose that you are an agent for a principal (the LLC or the Corporation,) or the failure to disclose that a prior agent can not longer bind the company can lead to unfortunate results.

                                            Verbal Contracts and Agency!

This leads me to my final point. Verbal contracts are perfectly valid, and enforceable so long as they do not violate the Statute of Frauds. A verbal contract with an agent would not violate the Statute of Frauds. However, the always interesting Rush Nigut's Blog has an interesting post on the verbal agreements - with the simple but good advise: Don't do it!

The Litigating Judicial Candidate!

We had some elections in Minnesota yesterday. I have previously posted about one Jill Clark who was running for a seat on the Minnesota Supreme Court. She filed an action and tried to get the sitting justice removed from the ballot, or in the alternative she wanted the court to direct that the "incumbent" designation be deleted from sitting justice's name. Ms. Clark lost all of her court challenges, and now she has come in third in the election. In Minnesota, the top two vote getters for judicial elections are placed on the ballot in November. Alas, Ms. Clark will not be one of them.


Can the Unicorn Settle the Case? Theory and Reality!

Continuing the Conversation about Mediation and Settlements!

I was glad to see the conversation continue about settlement and process and the view from the perspective of the client. I have my own view point and I find myself agreeing with points made by both Max Kennerly at Litigation and Trial, and Victoria Pynchon at Settle It Now Negotiation Blog.

Why Do Cases Take so Long to Settle?

Max tells an all to accurate tale of a case where everyone knows there is liability, but they play around (another word for discovery) for a year without ever resolving anything until the trial is near. After the year the parties settle in a range the attorneys on both sides could have predicted at the very beginning.

Do the Clients Know what is Going On? Whose Money is it Anyway?

So why do parties allow their attorneys to go through the "dance" and keep a case going? My first theory is that the clients (except perhaps insurance company clients) don't know what is going on. The plaintiff usually doesn't. In a business dispute parties spend vast sums of money on discovery, finding and reviewing thousands of documents. Yet in the end there are usually fewer than 10 documents that matter and usually (not always) these are found relatively early.

My second theory is that it is easy to allow inefficient and non-productive litigation to continue if your using OPM (Other Peoples Money.) It could be the shareholders money, the insurance companies money or anyone's money except the decision maker. When parties are using their own money - the dynamics can change once they receive their first billing. This is just simple economics: Will the cost of continuing exceed the cost of the possible benefit?

When there is litigation between a couple small businesses, their attention to the matter increases with the cost. When the parties have vastly different economic resources there is usually the problem with one party trying to force the other, smaller, party to settle at unfavorable terms. When I am in this situation, the larger client always hires a large, very expensive firm to handle the matter. The larger firm puts a herd of lawyers on it, researches the simplest issues of law, and files several motions to try to get the case to go away. Sometimes it works; usually it does not. The client should realize that this was a bad strategy when the cost of defending or prosecution a case approaches or exceeds the amount at issue.

Should the Parties Meet During Mediation?

Victoria likes the idea of getting people in the same room. I have earlier expressed my skepticism of this approach, not because I don't think it would be helpful, but because the client many times refuses to meet with the other side. In every case there is an element of emotion, and when your dealing with smaller businesses or disenfranchised shareholders, there is a lot of emotion. By the time you're ready to try to get the matter resolved, the parties do not want to see the other side! They hate each other!

Will All Cases Settle?

In a word "No!" And sometimes cases just need to be tried because the parties have such vastly different understandings of the facts of the value of the case.

More Recommendations!

When a party is defending a case because of "principle," everyone loses. These are bad cases for everyone. In the end "principle" usually gives way to reality of the cost of continuing.

The Unicorn Settlement.

Both Max and Victoria discuss what they call the Unicorn Settlement, where - using the definition presented by Max - the parties have a dispute, meet, discuss and settle the dispute without resorting to litigation. For most business and commercial disputes this sounds like a good deal. However, in the real world in which we live, people don't think this way, and people are usually quick to launch a lawsuit and then try to force a settlement than just try to settle. As an attorney, it is hard for me to take anyone seriously unless they actually file a case. We have all seen many threats to sue, but no real action. I think clients view the matter the same way. As the lady said, "Where's the beef."


If you know where a case should settle (a range) start talking with the other attorney. I do not subscribe to the theory that the first party to bring up the possibility of a settlement is somehow in a weaker position. There earlier you start the process the better for everyone - even if you don't settle. Sometimes it takes awhile after the initial discussions.

You can't force parties to meet if they don't want to meet. If they do, great; but if not, forcing the issues does not work.

I am a fan of mediation for one very simple reason. When Party agree to settle a matter, they make their own decisions. For better or worst, they control the result. Asking a third, uninterested person or jury to make a decision for the parties that could not make their own decision, does not always turn out for the best.



You must be kidding! Alice Continued (Jill Clark)

Minnesota Supreme Court issued its opinion to deny candidate Clark's motion to have a sitting Minnesota Supreme Court Judge removed from the ballot.  This is a continuation of an earlier post.

Taxpayers Get to Pay for Breach of Contract! Another Win For Big Oil!

Here is an interesting article about Big Oil winning one for the shareholders. But, not to worry, the taxpayers get to pay. I wonder if the dividends will get a needed boost. 

Arbitration - Another Contract - Another Chance to be Creative!

Arbitration is another form of Alternative Dispute Resolution (ADR.) Alternative means as an alternate to the judicial system. It can be faster and less expensive. It can also be more expensive and take longer. So be careful what you agree to, because once you've agreed you are probably stuck with it.

Arbitration is a trial without the rules of evidence, or the judge. I like arbitration when the parties can try their case before a person that has some knowledge of area of the law that governs the dispute. This is usually an advantage to all the parties, and many times much more economical. Today many of our judges are elected or appointed because they were successful prosecutors. Unfortunately, lawyers that are successful prosecutors don't necessary make good civil judges, or understand the basics of business or contract law.

So the trade off is that you have an opportunity to select an arbitrator that will hopefully understand the dispute, and you waive the right to appeal even if the arbitrator makes a serious mistake or ignores evidence. "Final and binding" means final and binding. Absent fraud, there is little the parties can do to overturn a decision of the arbitrator. The American Arbitration Association has excellent procedures and standard agreements to arbitrate. Although, I think that sometime they can be considered a little expensive if they do all the administrative work. (It all depends on the size of the matter to be arbitrated.)

However, the arbitrator's authority is limited by the arbitration agreement. (Please note that I did not say that the arbitrator's power is limited by the law, because as a practical matter the arbitrator can ignore the law and the decision is still final and binding.)

When drafting an arbitration agreement, the parties or the attorney can be creative if they want to be. I have drafted and negotiated arbitration agreements that: limited the amount of time each party would have to present their respective case; establish a range within which the arbitrator had to make an award; added or removed the applicability of the rules of evidence; limited the location of the hearings; limited the number of days that the arbitration could take place; and, otherwise contracted or expanded the remedies available.

What happens when a party signs an arbitration without understanding the ramifications of the decision. The Contracts Prof Blog reports on an interesting arbitration agreement signed by participants of a show called Judge Pirro. Apparently the parties agree to dismiss their respective claims or lawsuits and enter into final and binding arbitration before Jeaninne Pirro. The agreement signed by the participants is egregious in it's over reaching scope. Is such an agreement enforceable? Probably not to the extent the parties are required to waive non-waiverable rights in California. But otherwise, parties are generally free to contract for whatever terms they choose so long as the terms are not illegal. In the agreement in question, there is no governing law - the "Judge" is allowed to apply whatever law she wants - or no law at all. This is a very unusual agreement, but not necessarily unenforceable.

When the parties agree on final and binding arbitration, this agreement removes it from the court unless and until there is a dispute over the enforcement of the arbitration award, or one party tries to get the arbitration award overturned (which is very difficult to say the least.) Additionally, when one party has evidence that is not readily admissible in a court of law - arbitrators will usually at least listen to the evidence.

Most arbitrations, I would guess, occur as a result of pre-dispute arbitration agreements. When the parties contract for what ever their business purpose, they include an agreement to arbitrate any disputes. Frequently in the courts you will see decisions where one party or the other tries to either enforce an arbitration agreement, or defeat a demand to arbitrate. Arbitration is governed by the Uniform Arbitration Actas enacted in the states, and the courts have show a strong preference to enforce arbitration agreement.

Agreements to arbitrate should not be entered into blindly. Arbitration is a very good process in many cases, but tailor the agreement to meet the needs of the parties. You can even designate who will be the arbitrator.


You've Got to be Kidding: The Alice in Wonderland of Judicial Elections

 In Minnesota, when a judicial vacancy occurs, the Governor appoints a person to the position until the next election when a successor can be elected.  This happened in the Minnesota Supreme Court and the Governor appointed a well-qualified jurist, Lorie Gilda.  The position is now up for election.

 Usually the person appointed runs for the seat to which they were appointed.  Other candidates can and do file to run for these various judgeships.  In the upcoming election a local lawyer, Jill Clark, is also running for the seat currently occupied by Justice Gilda.  Clark has run for a judicial position before, and lost.

Clark apparently thinks that the best election strategy is to try to get the current justice disqualified.  So, as lawyers do, she sued.  Clark filed her case directly with the Minnesota Supreme Court and argued that Lorie Gilda is disqualified to run for the seat because she can’t succeed herself.  To be kind, this argument is at best a very tortured reading of the statute.  Next she argued that Lorie Gilda, the judge currently in the position, could not be designated as the “Incumbent.”  Not surprisingly, when the case was filed in the Minnesota Supreme Court, all of the sitting justices had conflicts, so a panel of retired Minnesota Supreme Court justices was appointed to hear the case and make a decision.   

 Also not surprisingly, Clark lost.  She then filed a motion to have Justice Gilda removed from the ballot pending her appeal to the United States Supreme Court.  This motion was quickly denied.   The Minnesota Lawyer Blog has an interesting series on the ongoing story. Clark has now apparently filed a motion with Justice Alito of the United State Supreme Court asking for an injunction to grant her the same relief that was already denied her by the Minnesota Supreme Court.

I think Clark does have one interesting point:  Sitting judges are a virtual lock for re-election, so the appointment of a judge to a judgeship effectively eliminates open judicial elections.  While this argument may have some merit, it is a question for the legislature, not the courts. 

The Minnesota Lawyer is following this story closely and has good updates.  I’m sure there will more to this story. 

It Doesn't Get Any Better Than This!

This why I love business litigation. Maxwell Kennerly provides a detailed report and analysis of a fascinating case involving movie distribution rights. (i.e. the case involves who gets the money.) The case arose from a series of contracts between various parties. Now the parties are litigating over what those agreements actually did. I am sure all of the parties had lawyers drafting and negotiating these agreements; and now lawyers get to fight in court over what the contracts mean. This case is a law professors dream. Take a look at Max's analysis, it is fun reading.

California Non-Competes - the beat goes on!

An update on my Non-Compete post from last week. The California Supreme Court decision in Edwards invalidated non-competes in the state. The litigation rush is on, and I suspect it is just starting. Paul Freehling has a great post at Trading Secrets that describes the action as it happens. I don't think the ink was dry on the decision before the lastest case was filed. 

This case is complicated a little by a separate case in a different jurisdiction (Texas.) The beat goes on!

Oops! The Contract Doesn't Mean What it Says?

The worst contracts I have ever seen were put together by parties without the aid of a lawyer. They can be poorly written, contain language that is based on unstated assumptions, and many times the contract doesn't even describe the agreement. However, even lawyers don't draft perfect documents.

To save money parties sometimes just get old contracts (probably from colleagues,) add a few things, and “cut and paste” or "copy and paste" from different documents those terms they like. Is it a surprise the contracts are not always consistent. Some contracts are literally jotted down on a napkin at a restaurant, or hand written when parties meet and decide to make a deal.

What happens when the parties decide that they are not the friends they once thought they were, and want to change the arrangement, but the contract does not appear to allow the change.Peter Mahler has reported on an interesting decision relating to problems with poorly thought out contract terms. A court in NY had to decide what to do when the parties enter into an agreement governing the operation of an LLC in the state. Arguably the agreement had inconsistent provisions. The court made an unusual decision that the express terms of the contract didn't count. This is the type of decision that reinforces my concern that many times litigation is a "crap shoot."

In the operating agreement in question all of the members agreed to vote for named members the as the LLC managers. Instead, the members voted to remove one of the member managers from that position. But, the agreement was silent about the rights of the members to remove managers. If you must vote for specified parties as managers, how can you vote to remove the same specified party? Yet another part of the agreement discussed the effects of the expulsion of the manager. As Mahler noted:

"In fact, Section 8 of the contract provided for election of a new manager by majority vote of the members should there be less than three managers due to "the death, retirement, resignation, or insanity of a manager."  (Note the omission of any forced removal.)"

So the parties litigated to rights and duties of the members of the LLC to remove the manager. A lesson for all of us is that if you are going to put together an agreement, make sure it is consistent. And, alway assume that there might be circumstances when the parties will disagree, and make provisions in the beginning for handling the disagreements.


Mediation - Good idea or Bad idea?

I confess that I am a big fan of the mediation process. Many times mediation represents the last chance the parties have to make their own decision, and resolve the case. A third party, unrelated to the case or the parties, helps the parties move toward a resolution.

Most Minnesota state courts require the parties in a civil case to participate in some sort of alternative dispute resolution (ADR) process. The "alternative" in ADR mean that the parties try to resolve their dispute (the case) without going through a full trial. The parties agree to one of a variety of ADR methods. While the most common ADR methods are Mediation and Arbitration, there exists many variations of these two basic methods. Mediation can best be described as assisted negotiations.

The bottom line for me is that it is far better for parties to make their own decisions than let a third party (judge, jury or arbitrator) who knows nothing about the parties, and cares nothing about the results, to make the decision for the parties. If the parties can not agree on their own, then mediation is a good alternative. For in the end, the parties get to make the decisions to settle or not to settle.

In a trial a client can have truth and justice on their side, and still end up with a bad result. That is the nature of litigation. You've got a 50-50 chance to win ("It's a crap shoot,") I tell clients. Max Kennerly has an excellent post on this subject.  But in life, when others are allowed to make important decisions for you, sometimes you don't like the result. Does this mean a party should settle every claim against them no matter what? NO! Some cases need to be tried, and the system needs to be trusted.

I think if attorneys were clear with their client's about the litigation process, even more cases would be settled. When a client is "right," and the facts support the client, it is sometimes difficult to negotiate a settlement where the client does not receive everything they think they are entitled to. But being "right" that does not make settlement to wrong business decision.  

Victoria Pynchon's excellent blog, Settle It Now has a very thoughtful article about opponents in a case meeting and negotiating eye-to-eye. In other words, the suggestion is that in a mediation the opposing parties should not be separated. In my experience it is not the lawyers that don't want to meet face to face; it is the clients. I am often asked, "I wont have to see the other side will I?" So, I agree with the thesis of the post, but clients do not alway see the wisdom of this approach.

I will discuss arbitration in a later post.

Can I Get My Attorney's Fees?

      “Can I get my attorney fees from the other side?” Most clients caught in a legal fight want to know the answer to this question as soon as they meet their lawyer. Everyone would like to recover their attorney fees from the other party. I am asked this question frequently, and in Minnesota and most jurisdictions, the answer is usually, “No.” There are only two exceptions: where there is a statute that provides for the recovery of attorney fees; or, the parties have a written contract that provides that the prevailing party (the winner) is entitled to recover their legal fees from the other side. This is the general rule in most states. Whether it should continue to be the rule is a good public policy question.

     Parties to written contracts usually have a choice to make if they want to add a contract provision for legal fees. If the fees are only recoverable by the prevailing party (the prevailing party is usually - but not always - easy to identify) each party must believe that: a) the parties will never have a dispute that requires lawyers to get involved, or b) they will prevail. Attorney fee provisions in contracts are fully enforceable, just like any other provision in a contract. The, “I didn’t read it,” defense is not going to be a winning argument in any action to enforce.

     Many form contracts provide that an out-of-state seller is entitled to recover their attorney fees, and by the way, you agree that they can sue you in some distant jurisdiction. People rarely read these form contracts before they sign them, and they are surprised when they get sued in New Jersey or Texas, or anyplace other than their home state, because the contract they signed said any action will be brought in the distant land. These out of state actions usually result in default judgments that include attorney fees.

     If the dispute is between parties that have no written contract, or no attorney fee provision, the only way to recover attorney fees is when there is a statute that allows the recovery of the fees. There are very few statutes that provide for shifting the burden of fees. (There are some very rare exceptions to this rule, but the general rule is as I stated it above.)

     If you want to have the right to recover attorney fees when the other party breaches your contract, put it in the contract. But the risk is that you might not win the case, if there is one, and you end up paying the other parties fees.

     Only a few states have laws that shift attorney fees. (Usually know as the "English Rule.") Around the world the US is one of the hold outs in instituting a fee shifting system. There is an interesting discussion of this topic here.

     One advantage to a fee shifting contract clause is that it usually encourages the parties to settle to avoid the risk of losing not only the case, but having to pay the other party’s lawyer fees. But, like many things in life, this is not always the case and some parties will continue a case hoping they will win both the case and also recover their fees.

     If you are going to enter into a contractual relationship with another party, and need to write a contract, consult a lawyer. Good examples of contracts where the parties might want to consider an attorney fee provision are home remodeling contracts, construction contracts, contracts for the purchase of a business, or agreements to form a partnership or create a business entity. All of these types of agreements should be in writing, and you might even want to consider a "loser pays" attorney fee provision.

     I always check the contracts of client to see if there is any fee shifting language. For both the plaintiff and the defendant, the "loser pays" attorney fees provision adds risk.

From The "Nice Try" Department: When is a Mistake not a Mistake?

Usually people enter into contracts because they want something, i.e. goods, services, money etc. What happens when the deal turns out to be unfair? In a recent case from California, the court found that the contract meant what it said. The facts are simple: Jean Simes purchased an annuity from United of Omaha Life Insurance Company and paid a single premium of $321,131. The annuity would pay her $3,000.00 per month for the rest of her life. Less than four months later Jean Simes discovered that she had overran cancer, and died a week later.

Apparently no one notified the defendant because payments continued for another 3 months. Needless to say, the heirs were upset, and they sued for the return of the premium. From the facts of the case it appears that the plaintiff’s filed a complaint alleging every conceivable basis to nullify the contract, asking for recession, alleging fraud, breach of contract, and mistake. From the facts of the case Jean Simes had no idea that she had cancer when she contracted for the annuity. In the end, after motions, the plaintiff’s were down to one argument: The deceased was mistaken because she didn’t know that she had cancer, and therefore the contract should be canceled and the premium returned.

In California, and I think most other states would reach the same conclusion, the court determined that Jean Simes assumed the risk that she would died before she would recover her premium, and the defendant took the risk that Simes would live a long life. That is the very nature of an annuity.

The court concluded that even though the deceased was unaware that she had cancer, that fact alone is not a reason to nullify the contract. She had received everything that she had bargained for: an annuity for the remainder of her life.

When an insurance company sells an annuity, isn’t it betting that the recipient will die sooner rather than later? The sooner the recipient dies the more money the insurance company makes in the end. This is the opposite of the life insurance policy where the insurer is betting that the insured will live a long life.

Despite arguments to the contrary, the failure to know your health condition is not a "mistake" that justifies rescinding a contract to pay a benefit for a lifetime.