Ohio Practical Business Law : Columbus Ohio Business Lawyer & Attorney : Teri Rasmussen : Plunkett Cooney Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

Although the whole Leno-Conan-NBC mess appears to have now been settled by the parties, it's well worth looking more closely at the contractual issues involved which influenced the terms of that settlement.  For a great overview of the legal issues involved, visit Conan the Contractarian at the ContractsProf Blog.  And of course, some legal issues remain unanswered.  I'd like to start by recognizing what seemed to me to be the most cogent legal analysis of the situation.  Then in the Part 2 which will be my next post, I have some of my own observations about what is truly an excellent example of what contract law really is and how it actually works in  "real life".

Which is probably why I want to start with a practical "Everyman" take on what the restr of us can take from the entire fiasco, then move on to a more academic and scholarly analysis, followed by a pragmatic application of those foundational principles, and finished with a chaser of  a business oriented "brass knuckles" approach to determining who had the "leverage" to make the rules of contract law really work for them.  So here goes..........      

The Leno Deal,,, Be Careful What You Wish For >>>> David Willis of the Texas Small Business Law blog takes a stab at some important lessons the rest of us can take from the gigantic contract mess now facing NBC.  His important points:

• The terms of the contracts with the hosts do not meet the terms of the contracts with the affiliates.  A company's contracts can be interdependent.  Change the terms of  one and it can also affect what happens in other contractual relationships.  In simple terms, NBC didn't really think about the influence of the affiliates when it moved Jay and is now paying the price.
• Firing an employee with a contract can be expensive.  "The lesson for business owners is be careful of what you contract for because contracts are binding obligations and they can limit the decisions you can make."  
• Take advantage of the opportunity to maximize or limit your damages. 

Contract Law Issues in the Conan-NBC Affair and Conan NBC Contract Issues II >>>> Lawrence Cunningham of Concurring Opinions provides an excellent detailed and quite scholarly analysis of the many contractual issues raised by the NBC-Conan-Jay circus.  His overall assessment of the situation describes the situation found in most breach of contract circumstances:

Ongoing discussions between NBC and Conan illustrates the notion of bargaining in the shadow of the law, working out arrangements in light of known or probable legal claims and cosequences.  Non-legal forces of course are at work.  Conan's legal position, still incrementaly weaker to me.... may play a role in his decision to communicate directly to the public.  But his public relations gambit may also be deftly designed for other reasons [such as disaffecting viewers from NBC by paiting himself as the "guy in the white hat".] 

In NBC Did Breach Conan's Contract - Here's Why, Rachael Sklar focuses more informally on the various legal arguments as to whether Conan was contractually entitled to have his show start at 11:35 PM, concluding that he was.  Her analysis brings in many of the most treasured contract principles such as reliance and "spirit of the agreement" and is quite interesting in its description of various "facts" supporting her conclusion.  However you think things should have turned out, this account is well worth reading.

In Conan/Leno Madness: Parsing the Legal Ramifications, Conan/Leno Madness: The Legal Case for Conan, and Conan/Leno Madness: The Legal Case for NBC, the THR, Esq blog (aka The Hollywood Reporter) examines the strength of NBC's argument that because Conan's contract didn't specify a time slot, moving Conan to 12:05 would not be a breach of his contract.  Fascinating stuff.  Interesting "brass knuckle" approach to determining who has the leverage to make contract law principles work for them.  

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And now, a cautionary tale about the importance of actually paying attention to what a promissory note and mortgage say.  In the recent case of National City Mortgage  Co., v, Richards. 182 Ohio App.3d 534, 2009-Ohio-2556 (10th App. Dist.), the Bank found out that failing to comply with the relatively simple provisions  in a note and mortgage concerning notice to be given a delinquent borrower was a costly mistake. 

REALLY COSTLY >>>>>> as in DISMISSAL of a FORECLOSURE

FACTS.  The facts here are numbingly similar to those in any number of other cases.  Ms. Richards, the borrower had a loan from the Bank secured by a mortgage on her property in Columbus - presumably her residence, although the decision doesn't really say.  Anyway, when Richards defaulted, the Bank apparently sent her a notice of default by certified mail only; no notice was sent by regular mail.  The certified mail receipt came back "unclaimed".

In December 2005, the Bank initiated a foreclosure action.  Richards, acting pro se, filed an answer in January 2006 indicating that she had made a payment of $3,329,70 consisting of the January payment, the past-due amount and other fees totaling, all as indicated by her December 2005 statement, and therefore was not in default.  The Bank responded by sending Richards a letter stating that, not counting the payments already made by Richards it would take payment of $6,838.09 -which included payment of attorneys' fees - to reinstate her loan.

Richards filed a second response to the foreclosure Complaint indicating she had sent additional funds exclusive of the attorney fees to the Bank to bring her account current and had sought a payment plan for the attorney fees.  The Bank then returned all of the payments sent by Richards since the commencement of the foreclosure.and sought summary judgment on its foreclosure complaint.  Several months later, while the case was still pending, the Bank [for some inexplicable reason as far as I can see] sent a "demand/acceleration letter" to the property address; the case doesn't say whether the letter was sent by regular or certified mail and it doesn't appear to have figured in the decision.

Richards alleged among other arguments that the Bank had failed to provide proper notice of default and opportunity for cure, thereby failing to satisfy a condition precedent to acceleration of the note and foreclosure of the mortgage securing the note.  The trial court eventually granted summary judgment in favor of the Bank.  The Court of Appeals REVERSED.... 

>>>>>>   Here's where everyone needs to pay attention!   >>>>>>

THE NOTICE PROVISIONS.  The promissory note had a relatively ordinary notice of default provision providing for a thirty day cure period:

If I am in default, the Note Holder may send me a written notice telling me that if I do not pay the overdue amount by a certain date, the Note Holder may require me to pay immediately the full amount of Principal which has not been paid and all the interest that i owe on that amount.  That date must be at least 30 days after the date on which the notice is mailed to me or delivered by other means,

In addition, both the promissory note and mortgage had explicit provisions requiring notice to be given by first class mail.  The note said:

[A]ny notice that must be given to me under this Note will be given by delivering it or mailing it by first class mail to me at the Property Address above or at a different address if i give the Note Holder a notice of my different address.  

Similarly, the mortgage provided:

All notices given by Borrower or Lender in connection with this Security Instrument must be in writing.  Any notice to Borrower in connection with this Security Instrument shall be deemed to have been given to Borrower when mailed by first class mail or when actually delivered to Borrower's notice address if sent by other means.

LESSON TO BE LEARNED >>>>  Most lenders have realized by now that in the current economic environment, courts are not exactly tending to be sympathetic to lenders failing to cross all their "t"s and dot ail their "i"s.  This is yet another reminder that ESPECIALLY  where it is easy to comply, it is most certainly in the lender's best interests to do so .... to the letter. 

It is easy enough to send a demand letter by both regular mail and certified mail; even if the certified mail comes back "unclaimed", the lender will get the benefit of the "mailbox' rule that the regular mail got through.  Fed. Natl. Mtge. Assn. v. Doyle, (Oct. 9, 1998), 6th Dist. No. L-98-1010, 1998 WL 700663. 

And if your documents say first class mail, then make sure it at least gets done that way.  By the same token, if your documents provide for a cure period, make sure your demand letter incorporates the time period provided.

IN SHORT, READ YOUR LOAN DOCUMENTS BEFORE YOU START THE FORECLOSURE AND DO WHAT THEY SAY.   

For those particularly "in" to this issue, the decision also provides several helpful drafting pointers about ways the Bank's attorneys could have put together a tighter better drafted Complaint that might have helped their cause somewhat with respect to certain procedural issues.

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Franklin County Common Pleas Court has finally joined the courts of other large Ohio counties, and more than a few smaller counties (including Delaware County),  by making pleadings FILED on or after December 1, 2006 available on-line in PDF form.  The key here is FILED, 

In new cases filed on or after December 1, 2009, ALL pleadings will be available on-line.  Incases already pending on December 1, 2009, pleadings already filed will not be available on-line, although dockets showing their filing will continue to be available just as they have been,  However, NEW  pleadings filed in these older case WILL BE available on-line as they are filed, 

Pleadings filed in Tenth Appellate District/Franklin  County Court of Appeals on or after December 1, 2009 will aso be available on-line according to news reports in Business First.  Judges of the juvenile, domestic, and probate divisions of Franklin County Common Pleas Court have elected not to make records in those cases available on-line - probably a good thing given the nature of those sorts of cases. There are also plans to go back and add pleadings already filed to those on-line. 

No additional software or passwords are necessary.  Nor is there any additional charge to view pleadings.  Once on the Franklin County Common Pleas Clerk of Court's website, cases may be searched just as they have been.  When the desired case is located and the docket sheet displayed, a PDF icon will appear to the right of those pleadings available on-line.  Click the icon to view the pleading which can then be downloaded and/or printed, 

Cuyahoga County (Cleveland), Hamilton County (Cincinnati), and Montgomery County (Dayton) have already had pleadings available on-line for quite a while.  In fact, Montgomery County intends to begin requiring electronic filing of pleadings in 2010; this may be available in Franklin County sometime in 2011. 

It's amazing how happy small things ike this can make me.   

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Ever think there's got to be a better way than wasting time wrangling with another party with which you're doing business when there's a dispute over the amount really owed?  I’ve warned before about the risks of accepting checks intended as FINAL payment on a disputed obligation on my Fun with “Payment in Full” Checks post.  Now a couple of Ohio appellate decisions illustrate the “right” and “wrong” way to go about using a “payment in full” check to resolve a dispute and/or bring finality to the transaction. 

Two situationa in particular are addressed:

• When a landlord makes deductions from a security deposit, sending the balance to the former tenant, it assumes the relationship is now over.  So what happens if the former tenant cashes the check sent by the landlord, but then sues the landlord for the balance of its security deposit?
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• A customer complains to its vendor/supplier about the quality of the goods shipped to it and believes it is entitled to some sort of discount as a result.  If the vendor/supplier does not agree, what can a customer do?

Whichever side of the table you’re on, it’s important to understand the practical side of the legal concept of “accord and satisfaction” and how it can affect the ability of the tenant to get the rest of the security deposit back or of the supplier to receive full payment after cashing a partial payment check from the customer.   

Tourville v.Terzuoli, 2009–Ohio-2743 (Montgomery Cty) illustrates an ineffective use of "accord and satisfaction".  After the tenant moved out, the landlord sent the tenant a check for a refund of a portion of the security deposit originally made by the tenant, together with an itemization of the deductions made from the security deposit.  The tenant immediately called the landlord to discuss the itemized deductions and then cashed the check.  A few weeks later, the tenant sued the landlord for a refund of the remainder of the security deposit withheld.   

The trial court held that the tenant was barred from recovering the rest of the security deposit by the doctrine of “accord and satisfaction” because they cashed the check for a lesser amount.  The Court of Appeals reversed and said the tenant should have been allowed to present evidence showing it was entitled to the balance of the security deposit.

The Court explained the “accord and satisfaction” concept this way:

First the defendant must show that the parties went through a process of offer and acceptance – an accord.  Second. the accord must have been carried out – a satisfaction.  Third, if there was an accord and satisfaction, it must have been supported by consideration.

The Court further explained that when a check cashing is involved, there must have been reasonable advance notice that the check was intended to be in full satisfaction of the outstanding debt.  Because “there was no evidence that the check was the product of a negotiation between [the landlord and the tenant] regarding the amount of the security deposit that should be refunded,” the Court held no accord and satisfaction occurred.  In other words, merely cashing a check for a lesser amount did not preclude the tenant from getting the full security deposit back.

By contrast, the case of Barmar Enterprises, L.L.C. v. Benco Industries, Inc., 2009–Ohio-366 (8^th App. Dist. Cuyahoga Cty) is an example of an effective use of the accord and satisfaction doctrine to prevent recovery of the larger amount.  Here, a steel brokerage delivered product to a distributor.  Because the distributor’s end users rejected shipments on the basis of poor quality, the distributor issued itself six debit memos against the steel brokerage’s invoices.  The distributor eventually sent the steel brokerage a reconciliation showing the debit memos accompanied with the following statement:

Enclosed please find our reconciliation of your account.  In a show of good faith we have drafted a check in the amount of $30,892.96 representing  full and final payment to [the steel brokerage of invoices totaling more than $100,000] thus clearing our account to a zero (0) balance.  Upon your acceptance, [the distributor] will release your 44,860 lbs of steel [product in the possession of the distributor]. *** Please sign and fax back your acceptance of this accord and satisfaction in order to conclude this matter immediately.

The steel brokerage signed the document, the distributor sent the steel brokerage the specified check, and the check was cashed.  Later the steel brokerage sued the distributor for the difference, alleging it sustained damages when it resold the rejected steel to a third party at a reduced cost.  The Court said no dice and barred the steel brokerage from any recovery.

What these two cases illustrate is that putting a little thought into handling a dispute over an obligation can pay off – literally.  Had the landlord accompanied the check for a partial refund of the security deposit with a statement indicating that it was intended as full and final payment of all amounts due from the landlord, it might have gotten the same result as the distributor did, i.e. by cashing the check when it had notice that it was intended to resolve the entire issue of the amount of the refund, the tenant would be barred from any further recovery of the amount withheld. 

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It's always the little things you tend to take for granted that you really should be the most thankful for having.  Until recently, I had NO IDEA of how thankful I should be for the way Ohio courts have embraced and incorporated technology.  In the last few weeks, however, I have had substantial exposure to the way things work court technologywise in...  well let's just say, an adjacent State.  I felt like I'd travelled back in time ten years or more and could hardly believe how inefficient it all seemed.   

Among the modern technology I sorta thought EVERYBODY had was internet access to case docket sheets showing pleadings filed in particular cases.  In fact, I sometimes groused because my local trial court's Clerk of Courts website -- unlike those in Cleveland and other areas of the state -- would ONLY allow me to see the name of the pleading and the date filed and might be a few days behind to boot.  All federal courts (with a password) and many trial and appellate courts in Ohio also allow you to download from their Clerk of Court websites -  immediately and for free  (or at least at nominal cost) -- copies of the actual pleadings filed.  And, in some Ohio courts I can even electronically file pleadings right from my computer.    

Well, no, apparently that's not so normal in at least some other States.  In this particular State bordering Ohio, some of the trial courts don't even have a website at all and one heckuva lot have NO internet access to docket sheets.  Is this a big deal?  Well it is if you're used to being able to answer your own questions quickly about service and what's been happening in a case with which you're not familiar, but now need to jump in as a pinch hitter. 

Suddenly, I'm back to the time where I'd have to write a note to my secretary giving her the case number and party info, getting her to call the court and perhaps beg for information and/or documents BEFORE we sent them a search or copy fee, and if not successful, waiting hours, days, or weeks for information I need as a lawyer before I can decide what should be done next.  And of course, if it's a few days or weeks later that the information finally comes in, now I have to refresh my memory about what the issue in the case was that made me ask for the information in the first place.  Obviously, the additional time and effort now saved with implementation of modern technology is substantial.  And it's only when that sort of access isn't available instantly that you truly appreciate the impact of technology on your practice of law.

Ohio has benefited from a substantial emphasis on the importance of courts implementing technology.  When the Ohio Supreme Court  first began surveying courts in 1989 about whether any technology was available and being used, less than two thirds of the courts even bothered to respond to the survey.  In 1993, Chief Justice Thomas J. Moyer created a program of direct technical assistance to trial and appellate courts in Ohio to support various initiatives and implementation programs. 

As the bi-annual survey of technology use in Ohio courts continued, there has been a 100% participation response rate since 1996. Since 2002, all Ohio Clerks of Court have automated records and approximately 85% (and I would add from personal experence all major population centers) have websites of their own allowing some sort of access to case dockets.

For more detailed information on the progress and scope of the implmentation and integration of technology in Ohio courts, take a look at some of the bi-annual surveys:

• Technology and the Courts-2008 Survey
• Technology and the Courts-2004 Survey
• Technology and the Courts-2002 Survey

There's also this interesting 2003 speech by the Chief Justice.

Technology has interjected itself slowly into the way I practice law and I haven't  always initially been happy about changes it brought (I was orginally very NOT excited about electronic case filing aka ECF when that first came out - don't know how I managed without it now).   But it seems to have worked out well in the end an I'm not going back. 

Now I realize this isn't like world peace or anything, but in my day to day work life it matters.  Personally, I have now sworn to never ever complain about my access to Ohio court records again.

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Are we there yet?  Anyone who has ever been involved in a transactional deal of any complexity has udoubtedly at least thought, if not uttered, this well worn phrase in frustration as yet another obstacle arises to the successful completion of the contemplated transaction.   

Even sophisticated clients are sometimes frustrated by how long it seems to take lawyers to "close" and complete a transaction.  Clients with less experience can become positively apoletic about the fact that it takes more than a week or so for the lawyers to declare the deal done and finished.  Frankly, as one of the lawyers at the center of these trabsactions, I too am occasionally surprised how long it can take in certain situations to successfully complete the transactions.

So why does it take so long, and perhaps more importantly, how can everyone in the deal know how close we are to being able to answer yes to the perennial question "are we there yet?  One of the best tools to understand both what's involved in getting a particular transaction completed AND, on a real time basis what's left to do is a CLOSING LIST.  Every transactional attorney uses some variation of a Closing List to keep track of which tasks and items have been completed, which are still in process, and which issues and tasks still need to be addressed. 

A Closing List for a loan transaction  (Click here and  here  and here for examples) necessarily differs somewhat from a Closing list for a purchase/sale of a business or other transaction (click here and here for examples), both share the same basic elements and utility.  When I do my Closing List, I always start by putting the contact information for all the parties and their attorneys and other important agents and representatives at the top of the first page.  This way I'm never searching for a phone number or e-mail at a crucial point in negotiations.  

The rest of the Closing List is generally in the format of a table.  My tables have visible grid  lines so I can easily see each discrete item or task.  I usually have five columns: 

• Item Number (for quick reference and efficient organization of various folders pertaining to the deal)
• Name of Item or Task (for obvious reasons)
• Responsibility (i.e. which party is primarily responsible for preparing the documentation or completing the task) 
• Status (entries in this column are constantly changing as progress occurs)
• Comment (for additional useful information such as actual or potential obstacles to be resolved, other contact people, etc,)  

Because every deal is different, most closing lists are organic instruments which begin with certain basic items and tasks common to that sort of particular transaction and then initally grow longer as the unique aspects of the deal at hand become fleshed out.  Like other transactional attorneys, building out the Closing List helps me organize what needs to be done and the order in which tasks and items should be attacked.

I usually wait to give clients a copy of the Closing List until I am fairly certain it is a reasonably complete reflection of what will be entailed to make the contemplated transaction a reality in a manner that properly protects my client.  After circulating the intial Closing List, I try to provide updated revised Closing Lists on a regular basis which show where progress has been made and where we may have run into a roadblock or detour that may delay completion of the transaction. 

My hope and intention is that sharing these updated Closing Lists will allow clients to have as close to the same understanding as I do about "where we are" as far as getting the deal done and why we're not there yet.   Thus, if your attorney gives you something of this nature, don't just put it aside and assume it has no purpose relevant to you.  It's your best guide to what's been done so far to bring the deal to fruition and what still remians to make it a reality.   

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 Tech is HOT.... and chances are, if you have a technology-based or tech-related business, you've already at least heard about the enchanting world of venture and angel capitaltists as a source of funds for your business.  Or perhaps you've even explored the possbility of various "grants" from government or private associations.  But what if you're a successful, but perhaps more ordinary, outfit needing additional capital to operate or to expand and prosper?  Where do you go in a time when  credit is tight even for the most profitable of businesses and banks just aren't that eager to take many risks?      

Lately I have been having writer's block with this blog - something which hasn't happened much since I started writing it a couple of years ago.  So it was especially welcome when a business owner at the Chamber of Commerce forum I recently attended asked precisely this question and helped me break through and focus again on issues of concern to businesses and their owners that I can help answer.    

Venture capitalists and so-called angel investors are enthralled with new technology embedded in what is sometimes called a "growth" business or, in the parlance of one speaker at the forum, a "sudden wealth vehicle".    So what if you have what is often known as a "lifestyle" service or manufacturing business focused on the proverbial tortoiselike more steady, but perhaps less astonishing, growth?  It doesn't exactly take rocket science to figure out that the iconic "friends and family" route may be the most viable alternative available to you.

Every one of us probably has a number of relatives or close friends who love us and only want us to be happy.  These are the people - the "friends and family" ("F&F") - we go to when our business really needs $$.  I've posted before about some of the risks of gving even a sliver of ownership to someone else.  However, If the company needs a cash infusion either to continue operating or to grow and traditional financing is not available, this may be the only practical alternative, 

Friends and family may often be willing to provide funds without any formal documentation or "due diligence".  But suppose both you and your benefactor would like to make the relationship a bit more businesslike.  What then?  There are several alternatives - here are a few ideas:

     1.     Promissory Note.  The easiest way to make a more formal record of money received from F&F is to use a promissory note.  It can have a specific payment schedule, be due after a period of time (say a year or two) or be a DEMAND note which allows the person lending the money to decide when they want to be paid back.  For tax purposes, it is important to have at least a minimum rate of interest if the money is from a relative.     

     2.  Stock with Call Option.  It is also possible to give F&F some "temporary" .ownership of the business until you pay back the money given to you.  If stock (or other ownership interest like an LLC Membership Interest) is given with a "call" option, it essentially sets a repurchase price that will need to be paid to regain complete ownership.  With a "call" option, the company gets to decide whether and when it has the ability to "buy out" these ownership interests.

     3.  Stock with Put Option.  Stock with a "put" option is similar to a "call" option except that it is the person holding the stock who gets to decide within certain specified parameters whether and when they want to be "bought out". 

     4.  Nonvoting Stock.  If your business is a C-corporation or a LLC, you could also give F&F nonvoting stock or membership interests.  With this alternative, F&F can get the economic benefits of ownership, but do not have the ability to control the business and financial affairs of the company.  Because S-corporations can only have one class of stock, this option is not available to businesses that have selected this choice of entity.  A similar result can be obtained, regardless of the choice of business entity, with respect to larger groups such as employees through use of a "phantom" or "mirror" stock plan.  Thia basically gives recipients a sort of "virtual" ownership interest  which can be tied to performance in their work for the company.  Use of a "voting trust" in which the voting rights connected with shares of stock are assigned to another party is yet another variation leading to a similar result. 

     5.   Convertible Debenture. These instruments are a sort of hybrid between a promissory note and ownership interests.  Those providing funds are given a promissory note for the amount of the money given.  Unlike an ordinary promissory note, under certain conditions, holders of the note can elect to "convert" their loan to an ownership interest in the company.   

These are just a few of the options available to any business seeking private financing.  A good business attorney can help determine which alternative best fits any particular company based on the founder's goals, the company's immediate objectives, and the situation faced by the business. 

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Mostly because I feel like it and this is MY blog, today's post has nothing more than a selection of links to stuff I found today (after working hours, of course) that sorta cheered me up and which I thought might amuse others as well.  

Lately I've been a bit grumpy and a tad more depressed than usual, perhaps in part due to my capitulation to the realization that we really are entering the long Winter months I despise so much.  And work has recently been both busier/wearing and less intrinsically fascinating  - a decidedly bad combination - so it's time for some attitude adjustment.  Come along for the ride!

• Washtenaw Jail Diary (Ann Arbor Chronicle) - what is it about being in jail which really brings out the brilliant writer in those who have such a gift?  This is an ongoing installment series about a Twitter feed of recollections by an individual jailed in the Wastenaw County Jail in Ann Arbor, MI that began in April 2009.  Well written.  And if you're feeling down. this will certainly make you feel infinitely better about your particular situation or circumstances while still bringing a smile to your face.   Hat tip to Above the Law
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• A Real-Life Big Brother Poster (Business Pundit) - as in George Orwell's 1984, not the CBS TV reality Series - supposedly appearing outside a London Tube station.  I just thought this was interesting.
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• New language for those Mutual Releases exchanged in settlements so clients will be protected if interplanetary travel ever takes off commercially   -  Read about it at Legal Blog Watch's Contracts:  Throughout the Universe, From the Beginning of Time post or in the original WSJ post "Lawyerese Goes Galactic as Contracts try to Master the Universe"  leave it to lawyers to add yet another phrase to several others that already cover whatever's remotely likely to happen.  Still I like seeing that creativity is still out there among the lawyer class and i suppose folks also laughed about reserving rights beyond the shores of Europe at one time.
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• Nagging by one's spouse bad enough to want to go back to jail or get a divorce?  Apparently in some cases, YES,according to this story in The Times On-Line (that's the London U.K. one)  

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Is the law and determinations in individual cases of corporate veil piercing an “unprincipled hodgepodge of seemingly ad hoc and unpredictable results”?  Often it may seem so.  Now, however, Political Science professor Christina Boyd and Law professor David Hoffman have teamed up to take a look at actual cases to learn how these sort of cases actually work in practice.  As someone who has always thought that theory and practice are equally important in understanding and applying legal concepts, I was thrilled and excited to come across this study which will be forthcoming in Northwestern Law Review in an article entitled Disputing Limited Liability.

The study involves investigation of six years of data of federal district court cases from 2000 to 2005 involving corporate veil piercing litigation.  It looks to actual results in these cases as measured by outcomes in motion practice during discovery, at summary judgment, during trial, and in post-trial practice to arrive  at “a set of observations which speak to the life of veil piercing law, rather than the gauzy rationalizations presented by judges’ written responses.” Boyd and Hoffman conclude

Plaintiffs do win far more often during litigation than popular accounts of the doctrine’s rare nature would have us expect, but their ultimate chance of obtaining relief on the merits is obscured by settlement. which disposes two of three veil piercing cases filed in federal court….  To owners of the smallest of businesses, the message coming from this data is unfortunately both clear and unsatisfying: neither reliance on legal formalities not pat expectations about the pro-business orientation of conservative judges will protect your firm from the need to dispute its veil in court.  

The abstract summarizes their discoveries:

Voluntary creditor causes of action promote veil piercing; LLCs are in very limited circumstances better insulated from veil piercing than corporations; undercapitalization is strongly associated with success while conclusory grounds like “facade” and “sham” are not; and defendants’ legal speculation is predictive of plaintiff failure.  Extra-legal factors play a more striking and counterintuitive role.  Plaintiffs suing companies with few employees are much more likely to win veil piercing motions, and obtain relief in cases, than companies employing many workers.  

Hoffman has also summarized key findings of the study in a series of blog posts on Concurring Opinions:

• The Content of Veil Piercing Complaints
• Who Gets Sued in Veil Piercing Cases?
• What Does Veil Piercing Success Mean Anyway?
• What Factors Correlate with Veil Piercing Success?

Among other interesting findings, Hoffman points out that while 78% of the cases “resulted in plaintiffs realizing some value from their veil piercing claims”, often through settlement, judicial determinations of veil piercing happened in only about 6% of the cases.

Now, from down here in the trenches, the findings and conclusions of this study mostly seem to match what I would have expected based on the case law and lawsuits I’ve seen in my own law practice.  In particular, the study supports my viewpoint that one of the reasons LLCs are better for closely held businesses is that it’s just harder to get in trouble than with corporations which require more record-keeping.  It also doesn’t surprise me much that if you can show undercapitalization, you’re likely to have a winner from a plaintiff’s standpoint.  Still it’s always interesting to see how these issues play out in general.   

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