Posted on August 7, 2008 by Teri Rasmussen

Business Courts - Coming to an Ohio Court Near You (Maybe)

If you wait long enough, all things old become new again. For a brief four year period over 150 years ago, Ohio had a statutory “commercial court” in which business oriented disputes were resolved. Now a new four-year pilot program will try the idea out again.

New Age of Business Courts

Ohio is among many jurisdictions experimenting with the concept of specialized courts for “business” disputes. One of the driving forces behind this trend seems to be the impression/assumption that having such a specialized court is instrumental in attracting and retaining businesses to a state.  This article about New Hampshire's recent jump on to the business court bandwagon gives you the flavor of this sentiment. 

The 200-year-old Delaware Court of Chancery is of course the grand-daddy of them all. However, Chicago, Manhattan, and North Carolina have had such courts for more than a decade and Rhode Island, Massachusetts, Las Vegas, Reno, Atlanta, Boston, and Pittsburgh have also instituted business courts in some form. Most recently Maine and South Carolina have implemented programs. Colorado and Michigan are currently giving serious consideration to the possibility.  For more information, visit the following:

Lee Applebaum has penned a very informative article published in the March/April 2008 issue of the American Bar Association’s Business Law Today magazine entitled “The ‘New’ Business Courts: Responding to Modern Business and Commercial Disputes” which provides an excellent overview of the new trend towards specialized business courts. As Lee explains, the new “business” courts tend to have jurisdiction extending beyond the traditional equity jurisdiction exercised by the Delaware Court of Chancery. In addition to the variety of procedural approaches various jurisdictions have taken in establishing “business” courts and/or “commercial dockets”, the scope of cases accepted differs from one court to another.  

  • The same issue also has a number of other articles focusing on business/commercial and other specialized courts, both in the U.S. and elsewhere in the world.

Ohio's New  "Business" Courts 

About a year ago, Ohio Chief Justice Thomas Moyer appointed a Task Force to study the best method for establishing commercial litigation dockets in Ohio’s trial courts.  The Ohio Supreme Court has now approved a pilot program permitting Common Pleas Courts in five counties to voluntarily institute business courts pursuant to new temporary rules 1.01 to 1.11 of the Rules of Superintendence of the Courts. Carolyn Kobus, a law clerk at my law firm this summer, prepared an excellent summary of these rules.

Business First (which continues to persist in  requiring paid access to its archives) gave this update as to Ohio generally and Hamilton County in particular.  Hamilton County has already moved forward with the plan and Franklin County is currently considering how to implement business courts. The Ohio Supreme Court's Temp. Sup R. 1.03 sets out the sorts of cases that will be accepted; they are:

  1. formation, governance, dissolution, or liquidation of a business entity
  2. rights or obligations between or among the owners, shareholders, partners, or members of a business entity, or rights and obligations between or among any of them and the entity
  3. Trade secret, non-disclosure, non-compete, or employment agreements involving a business entity and an owner, sole proprietor, shareholder, partner, or member thereof
  4. rights, obligations, liability, or indemnity of an officer, director, manager, trustee, partner, or member of a business entity owed to or from the business entity
  5. Disputes between or among two or more business entities or individuals as to their business or investment activities relating to contracts, transactions, or relationships between or among them, including without limitation the following:
    • Transactions governed by the uniform commercial code, except for consumer product liability claims
    • purchase, sale, lease, or license of, or a security interest in, or the infringement or misappropriation of, patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property;
    • purchase or sale of a business entity or the assets of a business entity;
    • sale of goods or services by a business entity to a business entity
    • Non-consumer bank or brokerage accounts, including loan, deposit, cash management, and investment accounts
    • Surety bonds and suretyship or guarantee obligations of individuals given in connection with business transactions;
    • purchase, sale, lease, or license of, or a security interest in, commercial property, whether tangible, intangible personal, or real property
    • Franchise or dealer relationships
    • Business related torts
    • Cases under antitrust laws;
    •  Cases relating to securities, or relating to or arising under federal or state securities laws
    • Commercial insurance contracts, including coverage disputes.

There is also a specific list of cases which the “business” court will not hear; these are:

  • Personal injury, survivor, or wrongful death matters
  • Consumer claims against business entities or insurers of business entities, including product liability and personal injury cases, and cases arising under federal or state consumer protection laws;
  • occupational health or safety, wages or hours, workers’ compensation, or unemployment compensation
  • occupational health or safety, wages or hours, workers’ compensation, or unemployment compensation
  • Matters in eminent domain;
  • Employment law cases
  • Cases in which a labor organization is a party
  • Cases in which a governmental entity is a party
  • Discrimination cases based upon the United States constitution, the Ohio constitution, or the applicable statutes, rules, regulations, or ordinances of the United States, the state, or a political subdivision of the state;
  •  Administrative agency, tax, zoning, and other appeals;
  •  Petition actions in the nature of a change of name of an  individual, mental health act, guardianship, or government election matters
  •  Individual residential real estate disputes, including foreclosure actions, or non-commercial landlord-tenant disputes
  • domestic relations, juvenile, or probate division of the court
  • jurisdiction of a municipal court, county court, mayor’s court, small claims division of a municipal court or county court, or any matter required by statute or other law to be heard in some other court or division of a court
  • Any criminal matter, other than criminal contempt in connection with a matter pending on the commercial docket of the court

Will Ohio's Business Courts Work?

One weakness I see in the pilot program is the assignment procedure for getting the case to a “commercial docket judge.” It relies upon the attorneys involved in the case to file appropriate motions to have the case transferred, and if they fail to do so, by the judge presiding over the case. To me it seems like it would have been a whole lot easier to have the case designated as a “commercial” case when filed and routed directly to the appropriate judge from there. In Franklin County, cases such as foreclosure, professional tort, and other particular sorts of cases are already separately designated by specific letter abbreviations included in the case number they are given. 

In addition, while the temporary rule requires a ruling on the transfer motion with two days, as well as decisions on other motions within 60 days, I’m a bit skeptical as to how often that will actually happen in reality.  

On balance, however, I support the concept of “business” courts. Throughout most of my career much of my litigation experience has occurred in federal bankruptcy court. I have always appreciated the fact that you could proceed to deal with the particular issue involved rather than having to begin each time by educating the judge as to the entire philosophical and structural framework of applicable law.  

In addition, over time, as a “regular” down at bankruptcy court, attorneys come to understand the likely range of results emanating from particular recurring fact patterns. This allows attorney to offer better counsel and advice to clients as to the relative merits of settling or pushing forward with the case. That in turn promotes judicial economy as more cases are resolved by the parties now that they have greater certainty as to possible outcomes.

I hope that the Franklin County Common Pleas judges agree to participate in the pilot program.

UPDATE: The Daily Reporter, the daily legal newspaper in Columbus, reports that Franklin County judges will join Hamilton County in a pilot commercial docket program.  Cuyahoga County, where Cleveland is located, is also expected to approve participation in the pilot program.  The pilot program is supposed to be implemented by early 2009 and would remain in effect through July1, 2012.

UPDATE: The University of Maryland School of Law Journal of Business and Technology's website has an up to date  summary of  Recent Developments in State Business and Technology Courts which briefly explains the status in more than twenty states and also has some interesting recent news briefs.  (Hat tip to Rush Nigut of Rush on Business for this link.)

UPDATE:  The Cuyahoga Common Pleas Court is now on board for the pilot program.  Check out this informative Q & A on business courts appearing in The Cleveland Plain Dealer. 

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Posted on June 11, 2008 by Teri Rasmussen

My Favorite Ohio-Based Law Blogs

Now that I've been doing this law blog thing for about eight months, I've had a chance to get acquainted with my neighbors in the blogosphere.  There are of course my subject matter compatriots all across the country that I've enjoyed coming to know through their blogs (Chris Moander of the relatively new Wisconsin Business Law and Litigation blog and Rush Nigut of Rush on Business from Iowa (the home in my youth) especially come to mind).  But today I wanted to focus on my geographically proximate neighbors practicing law in Ohio while writing their blogs.  

Like anyone else I have my favorites.  I don't claim to be any arbiter of quality or worth so the following is really nothing more than what I've found I've liked the most so far. 

Perhaps my own personal favorite Ohio-based blog is The Briefcase which has been published by solo practitioner Russ Bensing for quite a while.   It promises to provide "commentary and analysis of Ohio law" and it certainly delivers.  Russ gives brief summaries and case updates of Ohio civil and criminal cases decided by the various Court of Appeals and the Ohio Supreme Court with a bit more criminal than civil cases.  While this is of course useful, his regular "Friday Roundup" feature focusing on the more entertaining legal cases out there is a must-read for me every week.  In addition, even the case updates and summaries are given with a definite bit of "attitude" that makes them much more interesting than the usual dry case summary.  And his "About" section is particularly well done.  Russ's stuff is not often the sort of thing I tend to link to (which may say more about me than him), but I certainly appreciate his contributions.

My other "substantive" favorite  Ohio-based blog is the Ohio Employer's Law Blog published by Jon Hyman of Kohrman, Jackson & Krantz  for more than a year.  Its tagline is  "Practical employment law information for businesses in Ohio and beyond."  What I like about this blog is Jon's well written, informative, and useful (even "practical") posts about important issues in the labor and employment law areas.  I also think Jon's analysis of the legal issues he covers is clear and seems right on point.  In addition, I like his regular "What I'm Rreading" series which features several quick links to other interesting posts around the blogosphere.  I don't practice in this area so I appreciate having such excellent resource available to keep me up to date about pertinent legal developments. 

Ohio Employer's Law Blog is one of two Ohio-based blogs focusing on employment and labor issues.  The other is Porter, Wright, Morris & Arthur's Employer Law Report which says it will be "Reporting on recent legal developments and trends affecting employers".  It has been published sporadically over the last couple of years, but now seems to be adding new worthwhile posts more frequently. 

The D&O Diary published by Kevin M. LaCroix of Oakbridge Insurance Services, an insurance intermediary focused exclusively on management liability issues, focuses on perhaps the most complex issues of any Ohio-based law blog.  It is intended to be "A Periodic Journal Containing Items of Interest from the World of Directors and Officers Liability, with Occasional Commentary".  I haven't had much chance to become fully acquainted with this blog yet, but hope to so in the near future.

When it comes to coverage of both substantive and professional developments of interest to Ohio lawyers, I like the Cleveland Law Library Weblog the best.  It explains that "our goal is to inform local attorneys of major legal developments important to their practice".    I often find ideas for posts by reading this blog and appreciate the links usually provided.  The Cincinnati Law Library Blog  and the Moritz Legal Information Blog which provides "Legal Information and Research Resources Brought to You by The Michael E. Moritz Law Library at The Ohio State University" also provide these sort of services.

One of the newest Ohio-based law blogs is the Ohio Real Estate Blog published by the attorneys of the Real Estate Practice Group of Kohrman, Jackson & Krantz which started up only a couple of months ago in April.  In same real estate practice area is the Build on This! blog published by the attorneys of the Real Estate and Construction Practice Group of Buckingham, Doolittle & Burroughs, LLP which offers "Current news, information, and events affecting the real estate, construction and land use industry and its professionals".

Another recent addition to the blogosphere is the Reasonable Doubts blog published by Jeffrey Davis.  It started in March 2008 and, as its name would suggest, focuses on crminal law.  In addition, the Ohio Family Law Blog, published by Robert Mues of Holzfaster, Cecil, McKnight & Mues, LPA, began in December 2007 and tries to provide "Family Law and Divorce Information for Ohio Families Seeking Solutions".

Interestingly, there are TWO Ohio based law blogs called Sixth Circuit Blog.  One seems to focus on criminal law and offers "Case summaries and commentaries by federal defenders of the Sixth Circuit".  The other, published more sporadically by Eric Zagrans, focuses primarily on civil law and is "Devoted to Appellate Law and Practice Within the Sixth Circuit and Its Constituent States"

Rounding out the roster of Ohio-based law blogs (at least those I'm aware of) are the following with which I am less familar, in part because they relate to areas of law with which I have less experience in my day to day practice:

While there are several newer Ohio based law blogs, there are also many that have been published for two or three years or even longer.  There are also some earlier Ohio-based blogs that are no longer publishing.  In addition, there are several "business" blogs based in Ohio that touch on legal issues from time to time, but that's a subject for another day.

I hope I haven't forgotten anyone, but if I have, just add a comment with your URL and then we'll know about you too. 

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Posted on June 4, 2008 by Teri Rasmussen

Piercing the Corporate Veil Ohio Supreme Court Oral Argument

From the comfort and convenience of my office computer this morning, I watched the oral argument before the Ohio Supreme Court in Dombroski v. Wellpoint, Case No. 2007-2162.  In this case. the Court was asked to answer the question "when may a tort plaintiff pierce the corporate veil to pursue recovery from a "parent" corporation".  The Court allowed both sides substantially more than the allotted 15 minutes each, asking both attorneys numerous questions. 

  • As an aside I want to mention how wonderful it is to be able to see Ohio Supreme Court oral argument without the hassles of parking and transportation. The Ohio Supreme Court has been doing this since early 2004. but this was my first experience utilizing the option. Not only did I save the time coming and going (in pouring rain today I might add), I tuned in a little early and was able to work on other matters right up to the minute oral argument began. The picture is clear and shows close-ups of the attorneys and Justices as they speak. The sound quality is terrific. In many respects, this was actually better than going in person.  You can still see the oral argument by going to the video archives.
  • I have a case coming up shortly before the Ohio Supreme Court which does involve the corporate veil piercing issue. So I suppose I'm just a little more interested than I otherwise would be, even though at the moment we're only up on a preliminary procedural issue. (If I don't win on that, we'll be back on the corporate veil piercing issue later.)

Suzanne Richards of Vorys, Sater, Seymore & Pease argued on behalf of the defendant-appellant "parent" company shareholder against which plaintiff-appellee Dombroski seeks recovery.  Robert Palmer appeared on behalf of Ms. Dombroski.  Both attorneys were extremely well prepared.  Although the Ohio Council of Retail Merchants, Ohio Chamber of Commerce,  the Ohio Chapter of the National Federation of Independent Business, and the Ohio Farm Bureau Federation jointly submitted an amici curaie brief in support of the defendant parent company, they did not participate in the oral argument.

Factual and Procedural Background.  In a nutshell, the most salient facts are that Ms. Dombroski was denied insurance coverage for a procedure deemed "experimental".    Ms. Dombroski had a health insurance policy issued by defendant Community Insurance Company ("CIC") which utilized Anthem  UM Services, Inc. ("AUMS") to administer its policies and process claims.  Still another company, Anthem Insurance Companies, Inc.  ("AICI") defined the scope of the coverages under CIC policies.  CIC, AUMS, and AICI were all subsidiaries of  defendant Wellpoint, Inc. ("Wellpoint").  Coverage was apparently denied as a result of a blanket policy by defendant AICI.  Dombroski sued everyone for bad faith denial of her claim.  Counsel for Ms. Dombroski conceded that undercapitalization was not an issue.

AICI and Wellpoint filed motions to dismiss each of them as a party defendant on the grounds that the contract was with CIC and not with them and there was no grounds for bypassing the corporate entities.  The trial court agreed, but the Seventh Appellate District Court of Appeals reversed, holding that the second prong of the Belvedere test could be satisfied through the showing of an "unjust" or "inequitable" act even if it did not rise to level of fraud or illegality  On appeal, the proper interpretation of Belvedere for determining when it is appropriate to pierce the corporate veil was certified because of a conflict among the Courts of Appeal.

Oral Argument Synopsis.  All of this is a very long introduction to the oral argument itself.  Counsel for Wellpoint emphasized that the second prong of  Belvedere required the parent company/shareholder to have "perpetrated a second wrong" by deliberately destroying the ability of the defendant subsidiary to satisfy any judgment against it.  Counsel for Ms. Dombroski emphasized that "piercing the corporate veil" is an "equitable argument" and that insurance bad faith claims are "fairness torts".  He also emphasized thhat Wellpoint set corporate policy for the subsidiaries.  Several of the Justices seemed to have difficulty understanding the complete corporate structure and a couple asked if perhaps the case was not yet ripe for determination.

Justice Pfeifer suggested that perhaps the Court didn't think all that carefully about  the test formulated in Belvedere because the veil piercing was a relatively small part of that case and that the whole test should be re-evaluated.  Later in the oral argument, he posed the question of what would happen if and when the plaintiff tried to depose the nonparty parent regarding the establishment of the policy leading to the denial of coverage.

Chief Justice Moyer suggested that, although the question certified was the proper interpretation of Belvedere, the case could actually be decided on much narrower grounds.  He posited that if a medical insurance company sets up a subsidiary with the purpose of hindering recovery by plaintiffs, that would be "illegal" and easily fall within all interpretations of Belvedere's second prong.  Justice Lanzinger later asked a similar question.

Justice Stratton seemed to think (and I tend to agree) that Dombroski should have an adequate direct claim against CIC and consequently no veil piercing argument was necessary.  Justice O'Connor was concerned that focusing on whether an "unjust" or "inequitable" act might "open the floodgates" for litigation in this area; she indicated that she felt that there had to be "some level of dishonesty"  before recovery could be had.      

My Thoughts.  I tend to agree that more must be proven than just that there was an "unjust" or "inequitable" act perpetrated on the plaintiff to justify piercing the corporate value.  Otherwise the three prong test of Belvedere is really collapsed into a single inquiry.  I also think that sometimes the world is not fair and people who really don't deserve it suffer misfortune; I don't think that someone else should be held responsible for this occurrence in every case.

At the same time, I am not altogether sure that the more stringent test really helps the defendant "parent" company in this particular instance.  It does seem to me that the multiplicity of subsidiaries may well have been set up to thwart policyholders seeking to challenge denial of coverage.  To the extent that is true, I think the parent company may have abused the underlying  conceptual policies of limited liability and should be denied the benefits of that legal doctrine as a consequence.

I am also concerned, however, as to what effect a more "flexible" standard for determining when piercing the corporate veil is permissible would have on closely held companies with a limited number of individuals as equity owners.  Here, especially, something more sinister than suffering by the plaintiff ought to be required.  If that is all that is necessary, then every complaint should include a count seeking the piercing of the corporate veil.  Almost by definition, if there is any actionable claim at all, it is because something "unjust" or "inequitable" happened to the plaintiff.

Perhaps the answer is to introduce further confusion by bifurcating the standards for piercing the corporate veil, having one applicable only to closely held entities, or at least to imposing personal liability against individuals, while the other is applicable only to more sophisticated transactions.

Oh yeah - how do I want it to come out to help my case?  I like the Belvedere standard just as it is, thank you, and wouldn't mind if you made it even more restrictive.

For more on the piercing the corporate veil concept and Belvedere, read my previous post on Piercing the Corporate Veil- What It Means and How to Avoid It. 

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Posted on June 1, 2008 by Teri Rasmussen

New Standards for "Piercing the Corporate Veil" Cases?

Everyone hates insurance companies, especially when they deny individual policyholders coverage for medical treatment.  But does that mean that corporate formalities should be ignored to permit the unfortunate policyholder to bring an action against the parent company of the subsidiary denying coverage on the grounds of a bad faith breach of the insurance policy contract?  Is it enough if the Court finds that "unjust" or "inequitable" acts have occurred even if they don't rise to the level of fraud or illegal action?  On its face, that is what the Ohio Supreme Court is called upon to decide in Dombroski v. Wellpoint, Inc., et al., Case No. 2007-2162 when  it hears oral argument in the case on Wednesday (June 4, 9 AM, third case on the docket) this week.    

Interpreting Belvedere.  However, the Ohio Supreme Court has taken the opprtunity to resolve a conflict among Ohio Courts of Appeal concerning what is required to"pierce the corporate veil" and impose liability upon a corporation's shareholders or upon the parent company of a corporate subsidiary.  In a January 23, 2008 Entry, the Court ordered the parties to brief the following:

Does the second prong of Belvedere Condominium Unit Owners' Assn. v. R.E. Rourke Cos.. Inc. (1993), 67 Ohio St.3d 274, which states that the corporate veil can be pierced when control of the corporation "was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity" also allow the corporate veil to be pierced in cases where control was exercised to commit unjust or inequitable acts that do not rise to the level of fraud or an illegal act?

The Ohio Supreme Court's Communications Office has prepared a concise summary of the factual and procedural background of the Dombroski case, as well as the specific insurance-related issue presented.  You can see and hear the oral argument from the comfort of your own computer, either live or in the archives as early as close of business on the day of oral argument, through the use of streaming video technology. 

By consulting the Supreme Court's on-line docket, you can also review or download the briefs filed in the case, including an amicus curiae brief filed jointly in support of the appellant-defendant parent company by the Ohio Council of Retail Merchants, Ohio Chamber of Commerce,  the Ohio Chapter of the National Federation of Independent Business, and the Ohio Farm Bureau Federation.  The defendant-appellant's brief has a rather extensive survey of caselaw in Ohio and elsewhere addressing the proper standard for "piercing the corporate veil." 

Deciding What It Takes to "Pierce the Corporate Veil".  The Belvedere decision established a three prong test to be met before a corporate form may be disregarded and shareholders held personally liable for the misdeeds of a corporation, namely:

  • Control over the corporation by those to be held liable so complete that the corporation had no separate mind, will or existence of its own.
  • Control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity.
  • Injury or unjust loss resulted to the person seeking to disregard the corporate entity from such control and wrong.   

Some courts, including the Seventh Appellate District Court of Appeals below in the Dombroski case (173 Ohio App.3d 508, 2007-Ohio-5054, 879 N.E.2d 225), have broadly interpreted Belvedere to include situations in which the corporate form was abused to the detriment of the plaintiff, but no illegal act or intent to defraud could be shown.  These cases include:

  • Wiencek v. Atcole Co., Inc. (3d Dist. 1996), 109 Ohio App.3d 240, 671 N.E.2d 1339
  • State v. Tri-State Group, Inc. 2004-Ohio-4441 (7th App. Dist.)
  • Stypula v. Chandler,  2003-Ohio-6413 (11th App. Dist.)
  • Sanderson Farms v, Gasbarro, 2004-Ohio-1460 (10th App. Dist.)
  • Dalicandro v. Morrison Rd. Dev. Co., Inc., 2001 Ohio App. LEXIS 1765 (10th  App. Dist.)
  • Robert A. Saurber Gen. Contractor v. McAndrews 2004-Ohio-6927 (12th App. Dist.)
 Other cases have held such an interpretation to be too expansive:
  • Collum v. Perlman, 1999 Ohio App. LEXIS 1938 (6th App. Dist.)
  • Widlar v. Young, 2006-Ohio-868 (6th App. Dist.) 
  • Nursing Home Group Rehab. Serv., LLC v. Suncrest Health Care, Inc., 162 Ohio App3d 577, 2005-Ohio-3945
  • Siva v. 1138 LLC, 2007-Ohio-4677 (10th App. Dist.)

What Should the Standard Be?  Many of the cases involving "piercing the corporate veil" focus on smaller privately held corporations in which the individuals constituting the shareholders have not adequately capitalized the business enterprise, commingled corporate and personal funds, or otherwise ignored corporate formalities.  In these cases, it is fairly easy to reach the conclusion that the corporate form should be disregarded.

The Domboroski case presents a more difficult situation.  As explained in plaintiff Dombroski's brief:

The facts in Dombroski present the challenge of how the doctrine of piercing the corporate veil is to be applied in the realtiy of today's insurance organizations, which frequently includes a parent corporation that does business through many subsidiaries.... Multi-state insurers, such as WellPoint or "nthem", which run its insurance business through affiliates while utilizing an integrated and centralized web of policies and procedures seek to return to the "good old days" when they were free to refuse or pay claims - for good reasons, for bad reasons, for no reason at all - safe in the knowledge that regardless of the unjust resulta their decisions bring to their insured....

However, I agree with the appellant parent company and amici curiae that encouraging the expansive view of "piercing the corporate veil" advocated by plaintiff Dombroski is likely to result in shareholders, particularly in closely held companies, being added as defendants virtually anytime the company itself is sued.  As the amici curiae  brief puts it:

If the opinion below is upheld by this Court, shareholders of Ohio corporations would face being haled into court and held personally liable whenever a tort claim is asserted against the corporation, or the corporation is alleged to have violated a regulatory statute, or the corporation is portrayed as having engaged in conduct that is characterized by the plaintiff as "unjust or inequitable."  Such a result would have devastating consequences for the concept of limited shareholder liability and for the ability of small business owners to use the corporate form as a successful engine for economic growth, jpb creation, and social progress.   

The defendant-appellant parent company's brief makes the further point that:

Because it jettisons the most salient factor of proper veil-piercing analysis - that the shareholders must misuse the corporate form to perpetrate a fraud or an illegal act - the appellate court's interpretation will make veil piercing more common. That result, in turn, would make it less likely that entrepreneurs will form corporations and that investors, large and small, will invest in those corporations as they conduct business activities and help the economy to grow.

My concern here is that the desire to rein in insurance companies, and what some might perceive as their arrogance, will result in "bad law" being established in this area.  While it might seem attractive under the facts of this case to be less insistent upon requiring a demonstration of fraudulent or illegal intent, the result will certainly give both large and small businesses pause.  If the focus of the "piercing of the corporate veil" analysis shifts from the actions and motivations of the company's owners to the nature of the plaintiff's loss, the utility of the corporate form will become much less for businesses.  Ohio's business climate will be viewed even less favorably.

It will be interesting to see how this case unfolds.   

For more on the piercing the corporate veil concept and Belvedere, read my previous post on Piercing the Corporate Veil- What It Means and How to Avoid It. 

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Posted on May 22, 2008 by Teri Rasmussen

The "Hows" and "Whens" of Getting an Attorney Involved in Collecting Delinquent Accounts

Your business supplies a service or product to a customer and then bills the customer.  One month goes by, then two, and you hear nothing from the customer - no payment, no complaint, no explanation.  By the third month, you are probably becoming rather irritated at the very least and depending on how things are going financially, may be getting a bit concerned.  Or perhaps you've called the customer only to receive a series of excuses and promises that payment will soon be forthcoming.  What do you do?

Chris Moander of the Wisconsin Business Law and Litigation blog has been making a series of posts about how and when to make the decision to go to court to collect these sort of delinquent accounts.  My favorite, with the attention-getting title of "Would lower legal bills motivate you to organize your files?", explains what sort of information and records are helpful to your attorney when you turn the account over ro him or her for collection.  

What to Give Your Attorney.  I agree with everything on Chris' list and with his general point that the more organized information you can give your attorney about a delinquent account, the more quickly -- and inexpensively -- things can move forward.  While all of the items mentioned by Chris are certainly helpful, here's my list of what I find especially useful when I am asked to file a lawsuit against a customer who hasn't paid as agreed:

  • Basic contact information (i.e.name, address, phone) of customer
  • Credit application, purchase order, or contract documenting the purchase
  • Invoice
  • Ledger or account history for at least the last 3-4 months
  • Copy of any checks previously sent by the customer (or information about the bank used by the customer)
  • Any correspondence (including e-mails) exchanged (i.e. sent to, or received from) the customer relevant to the outstanding debt
  • Any pertinent information about general nature or length of the relationship with the customer, i.e. was it generally good before this or has this customer always been difficult, is this a huge part of your revenues

With this information, I can get a fairly good idea of what the best approach might be and have what I need to file a lawsuit.  Getting it on the front end saves both time and money.

Why Collect?  Chris also addresses the question "Why collect?", and in another post entitled "Time to call Mr. Wolf", provides some guidelines concerning when it might be time to turn the matter over to your lawyer.  Again I agree wholeheartedly with Chris, but let me add some additional thoughts.  As far as the "why", that much seems rather self-evident.  Unfortunately, the world is not a perfect place and not everyone voluntarily does what they should.  If you're not willing to force the issue of payment when appropriate from time to time, it won't be long before you find you're not making any money and may have to go out of business altogether.

Deciding When to Pursue Legal Action.  Knowing "when" to pursue payment through legal channels and "when" it might be helpful to turn the matter over to your attorney is more complicated.  As Chris suggests, if any of the following are true, it probably is time to "go legal":

  • The account is 90 days past due, and in some cases, even sooner.  If you wait too long to pursue legal action, events and circumstances may have occurred in the interim which make the legal option less effective
  • Suddenly there's a "problem" with the product or service sold or the customer now has some other dispute with you and the customer wants some or all of their money back.  Of course in many cases, it makes good business sense to just go along with the customer and give a discount.  However, make sure you are doing that in appropriate cases.
  • You've endured a series of excuses and broken promises that payment is right around the corner.

There are also times when it probably doesn't make sense to play the "legal" card:

  • If there really was a problem or defect in the service or product, even if it wasn't near as big a deal as the customer is now making it
  • The amount at stake is relatively small (or relatively small in comparison to the complexity of the situation resulting in nonpayment - read, lots of legal fees to sort through the facts and counter-allegations)  
  • You have very important noneconomic reasons for wanting to avoid a dispute - perhaps it's your wife's brother's business
  • Someone in your company engaged in some sort of objectionable behavior or made what could be characterized as misleading statements to the customer about any aspect of the business relationship between you (e.g. one of your sales people said somethingto the customer about waiting for the customer to get back on their feet before pressing for payment)
  • There's virtually no chance the customer has any money or assets available to pay any judgment obtained

Thus knowing "when" it's time to pursue legal action is a case by case decision.  Often the choice will not be clear-cut. 

Once you've made the decision to pursue legal action, if the debt is small, you may still be able to handle it without the intervention of a lawyer if you really want to do so.  In Columbus where I live and practice law, and elsewhere throughout Ohio (and probably in other states as well), there are "Small Claims Courts".  In Ohio, these courts only have jurisdiction to hear matters involving $3,000 or less.  In addition, while it is possible for an officer or employee of the company to handle the case on behalf of the company without an attorney, he or she may only present documents such as invoices and testify only about facts of his or her own personal knowledge; no questioning or cross-examination of the customer's witnesses is permitted.  The Small Claims Division of the Franklin County, Ohio Municipal Court has prepared a very useful synopsis of how this court works.

If you decide to consult an attorney, that does not necessarily mean there has to be a lawsuit.  Often a letter from your attorney can prompt a response from the customer and it will be possible to work out a payment plan or other resolution of the matter.  An attorney can also help you make the determination whether pursuing collection makes sense in a particular case.

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Posted on April 13, 2008 by Teri Rasmussen

What You Don't Know About Legal Requirements for E-Mail Marketing CAN(-SPAM) Hurt You

So you've decided to "get with it" and enter the 21st century in your marketing and business development efforts?  You're really going to do it - harnessing the power and magic of the internet and e-mail marketing!  GREAT!  But did you know that there are some legal pitfalls waiting to trip you up if you fail to do it correctly?

And failing to do it right CAN cost you - BIG TIME!  Recently, at the request of the Federal Trade Commission (FTC), a federal judge in Chicago, Illinois ordered Sili Neutraceuticals, LLC and Brian McDaid to pay more than $2.5 MILLION for making false advertising claims and sending illegal e-mail messages in violation of the FTC  Act and the CAN-SPAM Act.  Why?  Well, according to the FTC  Press Release, among other reasons, the commercial e-mail messages being sent

  • had misleading subject headings
  • failed to provide clear and conspicuous notice of the opportunity to decline receiving any further e-mails from the sender
  • failed to provide  a functioning return e-mail address
  • failed to include the sender's valid physical postal address 

Nor is this simply an isolated incident or a problem only for inexperienced or small businesses.  FTC also recently settled with Cyperheat, Inc. regarding the behavior of its downstream affiliates, imposing significant monitoring responsibilities on Cybernet, Inc.  For a summary of the responsibilities being imposed and suggestions on how to avoid trouble, visit "Affiliates: What is a Company's Responsibility?" post on Laura Adkins'  Word to the Wise blog.

What CAN-SPAM Is All About.  So what, exactly, is this CAN-SPAM Act and how can you make sure you don't accidentally run afoul of its requirements, exposing yourself to unwanted possible liability and interference with the operation of your business?

  • The CAN-SPAM Act is  the Controlling the Assault of Non-Solicited Pornography  And Marketing Act of 2003.  Its purpose is to authorize the FTC to enforce the first national standards for sending commercial e-mail, and to limit the bulk sending of e-mail.

Scope of CAN-SPAM Act.  The CAN-SPAM Act differentiates between "commercial" and "transactional" messages.  Thus, messages that are primarily invoicing or related to account information are not subject to CAN-SPAM.  You can even include some advertising content as long as it occupies a non-prominent postion.  (Some may wonder if it's even worth the effort to do this, especially since including any advertising arguably exposes you to at least some risk of liability.)  Rule of Thumb - if you're sending exactly the same message to lots of customers or clients (or potential customers or clients), CAN-SPAM probably applies. 

Religous or political messages are exempt.  Also, at least to some extent, messages to existing customers or others who have affirmatively inquired about your goods or services may also be exempt.

The Bottom Line: What You Really Want to Know.  If you're like most business owners, all you really want to know is what - exactly - you have to do to be safe.  Obviously, to be sure you have properly complied, you should consult legal counsel to advise you about your particular situation.  However, here is some very GENERAL guidance:

  • Unsubscribe Compliance.  Recipients of your e-mail  MUST  have an effective option to unsubscribe and you must comply within 10 days (or if at all possible, sooner).  You should also keep a list of folks whose "unsubscribe" requests you have honored so you can demonstrate compliance if necessary.  In addition, once someone has unsubscribed, you can't legally sell or transfer that person's e-mail address or other information. 
  • Content.  Be SURE to accurately reflect yourself as sender and don't get too cute with the subject lines; accurate and proper descriptions are essential.  In addition, you MUST include your physical postal address within the body of the e-mail.  (It's probably not a bad idea to also include the main phone number for your business.)  While providing a link to your company website might satisfy the address requirements, why take the chance?  Finally, if your company is involved in the distribution, production, or other connection, with or of "adult content", you MUST so label it. 
  • Sending Behavior.  Don't send messages with false headers, through open relays, or which contain a harvested e-mail addresses.

Other Points to Keep in Mind.  If you promise refunds to dissatisfied curtomers, make certain you deliver.  Identify your e-mail, or otherwise make sure it can be identified, as an advertisement.  Remember that even seemingly innocuous correspondence such as notifications of "seminars", "open houses", or "receptions" can still fall within the orbit of CAN-SPAM.   

What Can Happen If You Mess Up.  Each violation (and every single e-mail sent can be considered a separate violation) is subject to fines of up to $11,000.00 (so if you sent the same e-mail to 10 people, that could potentially be a $110,000 fine).  Additional penalties, including criminal prosecution and imprisonment, are also a possibility under certain conditions.  So you kinda want not to mess up on this.

BOTTOM LINE (Practical Legal Counsel): It's just not that hard to make sure you're doing it right so why take the risk?  If you pay attention and make the effort, you can virtually eliminate this potential liability.  If you don't, it really could be the end of your business.  And, of course, good legal counsel can help make sure you're addressing this concern effectively.   

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Posted on April 9, 2008 by Teri Rasmussen

C.V. Perry Receivership Update - Part II: Bankruptcy Law Influence

The ongoing C.V. Perry receivership case reflects an interesting choice of state law insolvency procedures over federal bankruptcy proceedings. And yet, no doubt in part due to the sparseness of developed case law and statutory authority when it comes to Ohio receivership law, much has been borrowed from federal bankruptcy law.

As a Columbus bankruptcy attorney who often represents creditors, I find the C.V. Perry case quite interesting because the procedures and law that will be established during the course of this case are likely to have an impact for some years to come. If nothing else, Franklin County at least will have a roadmap for others contemplating receivership to follow.

A few months ago I wrote about how the C.V. Perry receivership was representative on what I saw as a mini-trend in choosing state court receivership over federal bankruptcy and some reasons that might be happening. In my last post, I provided more detailed information about the C.V. Perry receivership itself. In this post, I want to discuss some more of the events in the case and how the influence of federal bankruptcy law can be seen.

Proof of Claim Procedure. Although Ohio Rev. Code 1701.89(A) does refer to the "presentation and proof of all claims and demands against the corporation", the actual process to be followed is left rather vague. Moreover, there is no analogous provision in Chapter 1705 of the Ohio Revised Code applicable to limited liability companies. Under federal bankruptcy law, requiring creditors to make a written "proof of claim" is a key component to the administration of any bankruptcy case and Bankruptcy Rule 3002 and Bankruptcy Rule 3003 sets out exactly how and when this should be done.

Injunctive Relief in Form of a "Stay". Count VII of the Complaint seeks unspecified injunctive relief. However, the Amended Order goes further and in language very similar to section 362 of the Bankruptcy Code, provides:

IT IS FURTHER ORDERED that all creditors, claimants, bodies politic, parties in interest, and all sheriffs, marshalls, and other officers, and their respective attorneys, servants, agents, and employees, and all other persons, firms and corporations be, and they hereby are, jointly and severally, enjoined and stayed from commencing or continuing any action at law or suit or proceeding in equity to foreclose any lien or enforce any claim against any of the Movants or their respective property, or against Martin Management, as receiver and liquidating trustee, in any court. All such entities are further stayed from executing or issuing or causing the execution or issuance out of any Court of any writ, process, summons, attachment, subpoena, replevin, execution, or other process for the purpose of impounding or taking possession of or interfering with, or enforcing any claim or lien upon any property owned by or in possession of Martin Management, as receiver and liquidating trustee, and from doing any act or thing whatsoever to interfere with Martin Management, as receiver and liquidating trustee, in the discharge of its duties in this proceeding with the exclusive jurisdiction of this Court over Movants' properties and said receiver and liquidating trustee. This Order shall be in full force and effect as of the date of its journalization with the Clerk of Court.

Creditors have also responded in a fashion similar to what they would do in a bankruptcy proceeding. One even entitled its pleading "Motion for Relief from Stay".

My point here is that ordinarily in cases in which injunctive relief is granted outside bankruptcy, the procedure is somewhat different than what seems to be happening in this case. Typically an interim temporary restraining order is first imposed for a limited period of time followed, generally after some kind of hearing or by agreement of the parties, by a preliminary injunction. Parties wanting the injunction removed usually ask that it be dissolved, not that the "stay" be lifted. Here, there is no indication that any hearing was ever held prior to the issuance of this Order.

What makes the issuance and continuance of that portion of the order appointing the receiver/liquidating trustee particularly interesting is that, as some creditors have pointed out, statutory authority doesn't really support such a blanket imposition of a stay. While Ohio Rev. Code 1701.89(A)(2) does allow the imposition of a "stay of the prosecution of any proceeding against the corporation or involving any of its property", Ohio Rev. Code 1705.45(B)(2) specifically states that "dissolution of a limited liability company does not... prevent the commencement of a proceeding by or against the company in its name..."

"Administrative Priority". One especially interesting concept borrowed from bankruptcy practice is the recognition of "administrative priorty" for certain claims. An intial Borrowing Order entered in late December authorizes the Receiver/Liquidating Trustee to borrow funds or purchase materials up to an aggregate amount of $5 million. It also provides that those extending credit in this way "shall be entitled to administrative priority distribution" for those amounts.

More recently in February, the Receiver/Liquidating Trustee filed a Motion for Authorization to Establish Fund for Administrative Fees, Costs and Operating Expenses which essentially seeks to surcharge creditors with liens on real estate to pay fees for the Receiver/Liquidating Trustee and his counsel, as well as other administrative expenses. Creditors have opposed this latest motion and some have pointed out that in a Chapter 7 bankruptcy proceeding, attorneys' fees and other administrative priority claims are only paid out of the disposition of unencumbered assets.

The concept of "administrative priority" is a bankruptcy one spelled out in section 503 of the Bankruptcy Code. There is no comparable provision in the Ohio Revised Code. Here again, the sparseness of statutory authority and relative staleness of caselaw (most cases cited by any party are more than 50 years old and some date back before 1900) has led to importation of bankruptcy concepts into a state law insolvency proceeding.

The paucity of recent or extensive authority concerning receiverships in Ohio law has been both the advantage and drawback of choosing receivership over the more clearly delineated Chapter 7 bankruptcy proceeding. At the conclusion of the C.V. Perry case, that will no longer be true. As the case proceeds, it will be interesting to see the extent to which bankruptcy concepts and procedures are imported.

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Posted on April 6, 2008 by Teri Rasmussen

C.V. Perry Receivership Update - Part I: Case Specifics

In connection with the downfall of the C.V. Perry homebuilder entities, I have previously posted on the increasing use of receivership in place of bankruptcy. It's been a few months since then and perhaps time for an update, as well as some commentary.

This is the first of a two-part series concerning events in the case itself and some reflections on what it all means. In this post, I want to provide some more detailed information about the case, some of its players, and the context in which it is happening. In Part II, I will explore the influence of federal bankruptcy law in the case.

Parties. First, more info on the basics. The C.V. Perry receivership actually involves multiple related entities, consisting of limited liability companies in which C.V. Perry & Co. was the sole member. In addition to C.V. Perry & Co., the receivership case also includes the judicial administration and winding up of the following entities (collectively, along with C.V. Perry & Co., I'll refer to as "Perry Entities"):

  • C.V. Perry Builders, LLC
  • C.V. Builders II, LLC
  • Manors at Homestead, LLC
  • Pointe at Blacklick, LLC
  • Manors at CrossCreeks, LLC
  • C.V. Land II, LLC
  • Arlington Remodeling, LLC

Martin Management Services, Inc., through its principal Reg Martin is the court appointed "Receiver and Liquidating Trustee" (more on what this means below) and is represented by the law firm of Strip, Hoppers, Leithart, McGrath & Terlecky Co., LPA. Judge John F. Bender is presiding.

Following Case Progress. Anyone wanting to follow this case closely can visit the Franklin County Clerk of Court's website and enter Case No. 07MS-11-454 (you don't actually have to enter the "11" as that is simply a notation indicating the case was filed in November) to see the docket showing the pleadings which have been filed. To see copies of pleadings, you can make a personal visit to the Franklin County Clerk of Courts and view them on computer terminals provided there.

Original Complaint. According to the Perry Entities' receivership Complaint, filed November 7, 2007, the impetus for seeking appointment of a receiver/liquidating trustee resulted from such problems as (1) numerous cognovit judgments having been taken against the Perry Entities by The Home Savings and Loan Company of Youngstown; (2) dozens of mechanics' liens filed against Perry Entities; and (3) numerous other lawsuits filed against the Perry Entities. The Complaint for Judicial Administration of Winding Up of Affairs of Voluntarily Dissolved Corporation and Limited Liability Companies has eight counts which are:

  • Appointment of Receiver for C.V. Perry; R.C. 1701.89(A)(8)
  • Appointment of Liquidating Trustee for the Limited Liability Companies; R.C. 1705.44
  • Establishment of Proof of Claims Procedure; R.C. 1701.89(A)(1), 1705.45 and 1705.46
  • Settlement or Determination of Claims; R.C. 1701.89(A)(3), 1705.45 and 1705.46
  • Determination of Rights of Holders of Shares; 1701.89(A)(4), 1705.45 and 1705.46
  • Presentation and Filing of Receiver's and Liquidations Trustee's Account; R.C. 1701.89(A)(5) and 1705.44
  • Injuctive Relief; R.C. 1701.89(A)(9) and 1705.44
  • Allowance and Payment of Compensation to Receiver, Liquidating Trustee, Attorneys, Accountants, and other Persons; R.C. 1701.89(A)(10) and 1705.44

Order Appointing Receiver and Liquidating Trustee. An initial Order appointing the receiver/liquidating trustee was entered the same day as the Complaint was filed, but an Amended Order Appointing Receiver and Liquidating Trustee was entered on December 5, 2007. The Amended Order granted the relief sought in the Complaint and required the newly appointed Receiver and Liquidating Trustee to post a bond of $100.00 with the Franklin County Clerk of Court.

So why the appointment as Receiver and Liquidating Trustee? Simply put, what statutory authority Ohio has concerning the liquidation and winding up of the affairs of business entities are slightly different with respect to corporations and limited liability companies. Ohio Rev. Code 1701.89, applying to corporations, references appointment of a receiver. Ohio Rev. Code 1705.44, the analogous statute for LLCs, refers to a "liquidating trustee".

Local Rule 93. In addition to these statutes, Franklin County Court of Pleas Common Pleas Court Local Rule 93 (courts elsewhere in Ohio will have their own rules which may differ in important respects from this rule) will govern procedures and events in this case. Among other provisions, Local Rule 93 requires the filing of an initial inventory and appraisal of the assets of the entity placed in receivership by the court appointed receiver within two months of his or her appointment, together with receipts and disbursements received and made to that point. It also restricts a receiver's fees to no more than $75 an hour and caps fees for counsel for a receiver at $150,000 (which may seem like a lot, but in this case may pose a problem for the receiver's counsel).

Events. What's happened so far has mainly been authorization to sell certain properties, establishment of a "proof of claim" procedure, and a fair amount of sparring about "administrative priority". I'll talk about the latter two of these in my next post.

So that's the lay of the land. In Part II, I will focus on the influence of federal bankruptcy law on these receivership proceedings.

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Posted on March 9, 2008 by Teri Rasmussen

Overview of the Litigation Process in Ohio

No matter how careful you are, if you have a business, at some point or other you may find yourself drawn into the legal system.  As Michael Hamblin of the Michigan Business Lawyer Blog points out, it is important to understand how the process works to avoid (or at least minimize) unrealistic expectations and/or frustration.  to help make sense of the way litigation works, Mike has written a series of posts, beginning with an overview of the process, explaining the various aspects typically found in a case once a Complaint has been filed.

Although there are some differences from one court to another, Mike's summary is generally applicable to courts in Ohio as well.  I have added some additional comments from my perspective as an Ohio business lawyer.  Click here for a diagram showing the structure of the Ohio judicial system.

Mike divides the process chronologically into five parts, namely

Initial Pleadings.  All litigation starts with the filing of a Complaint.  The person or business initiating legal action is called the "plaintiff".  Mike explains the need at this point for both sides to decide whether they would prefer to have a trial in front of a jury or before a judge.  As in Michigan, the person or business against whom the Complaint is filed - known as the "defendant" - must assert "affirmative defenses" in an "Answer" which would contradict and defeat what the Complaint claims occurred.  In state court in Ohio, defendants have 28 days, a week longer than in Michigan, to respond to the Complaint by filing their Answer or certain other pleadings in appropriate cases.

In Ohio, cases seeking more than $15,000 must be filed in the Court of Common Pleas.  if the plaintiff is seeking less than this, the case may be filed in the appropriate  Municipal Court pursuant to Ohio Rev. Code 1901.17 or in the case of very small cases under $3,000 in Small Claims Court (or in some areas of the State, "Mayor's Court"), if the plaintiff so chooses.  Cases filed in Small Claims Court can be transferred to Municipal Court at the request of the defendat.  If the defendant has a countervailing claims against the plaintiff (which is known as a "counterclaim") which is greater than the amount allowed in Muicipal Court, Small Claims Court, or Mayor's Court, the entire case is transferred to the Court of Common Pleas.  For information about Small claims Court in Franklin County, Ohio, click here.  For links to many of the trial and appellate courts in Ohio, click here.

"Discovery".  Mike also explains the next phase typically referred to as "discovery" and describes the different sorts of activites this entails.  Basically, "discovery" is about asking questions, either orally or in writing, about the claims the other side is maing.  it is also the means by which each side is required to provide the other with copies of documents that "back up" their story.  As Mike points out, this can be an extremely time consuming (sometimes months) and often quite expensive aspect of the litigation process.

UPDATE: Chris Moander (Hi Chris, welcome to the blogosophere!) of the still fairly new Wisconsin Business Law and Litigation blog posted a terrific four-part series about "Fun with Discovery: How Discovery Works in Wisconsin".  While there may be some subtle differences between Wisconsin and Ohio law, what Chris has written is largely applicable to cases in Ohio as well.  For anyone caught up in the discovery process and wondering what the point of it all is, this is "must" reading.

Summary Judgment.  Once discovery is complete, or a party has opted to forgo all or a portion of discovery, either the plaintiff or the defendant may decide to seek "summary judgment" on some or all of their claims.  If summary judgment is granted, the case is over and there is no trial.  This is possible if, given the "benefit of the doubt:, there is no "genuine" dispute of "material" (i.e. important) facts and one party is entitled to judgment as a matter of law.  If there is a lot of disagreement about the relevant facts, it is unlikely that summary judgment wil be granted to either side.  

Trial.  A trial can be held in front of a judge, or if requested at the time the defendant's initial pleadings, before a jury.  Somtimes "trial briefs" - which are generally not brief - are filed which outline the applicable law each side thinks should be applied to the issues in the case.  Depending upon the complexity of the case and the nature of the issues involved, a trial may last only a few hours or many weeks.  Trials are rarely, if ever, as exciting as they sometimes appear on TV or in movies.

After "opening statements", both sides have the opportunity to present evidence.  Evidence can be in the form of documents known as "exhibits" or through the testimony of various individuals known as "witnesses".  Cases involving business or commercial disputes are usually "bench" trials heard only by a judge.  Sometimes the judge will rule immediately at the conclusion of the trial, but more often it will be several weeks before the judge issues a deicison.  As mike points out, having quality legal representation is key to maximizing the likelihood of success.

Post-trial/Appellate Proceedings.  As in Michigan, parties unhappy with the outcome of trial or grant of summary judgment may appeal the judgment, first to the applicable regional Court of Appeals  and then to the Ohio Supreme Court.  That appeal must be filed within thirty days after the final judgment is entered.  As in Michigan, appeals from the Court of Appeals to the Ohio Supreme Court are discretionary in nature.  this means they are permitted only if the Ohio Supreme Court accepts jurisdiction after reviewing the appellant's Memorandum in Support of Jurisdction and the appellee's countervailing brief.  Oho Court of Appeals' jduges and Ohio Supreme Court Justices, like their trial court counterparts, are elected by Ohio voters.

Consensual Resolution.  If a case is going to be resolved by the parties themselves rather than leaving it to a judge or jury, there are several points along this timeline where this typically occurs.  Shortly after the Complaint is filed and before either side has committed substantial resources of time or money, cases are often settled.  At various points during discovery is another common time when cases are resolved by the parties.  And many cases are settled just before trial.  An experienced attorney can be helpful in identifying these windows of opportunity.  

N.B. - Acccidentally deleted this post and had to recover it, 

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Posted on March 1, 2008 by Teri Rasmussen

Responding to a Bankruptcy Preference Claim

As a bankruptcy attorney who mostly represents creditors, I am not infrequently asked to assist companies who have recently received correspondence demanding that they repay thousands of dollars of payments received from a now bankrupt customer because it's a "preference". Often this happens well into the bankruptcy proceeding and long after the creditor has closed its books on the account, perhaps even writing off a remaining balance as uncollectible. If you have been unfortunate enough to be tagged for a "preference", the most important thing to remember is that you still have options and it is not always necessary to just write a check for the amount demanded.

Bizpointer>>> As a practical matter, it is NEVER wrong for a creditor to accept a payment even if the creditor thinks it might be a "preference". For one thing, the failing company may last longer than you think and may not file until after the payment to you is outside the ninety day preference period. In addition, to recover, it is the debtor which must demonstrate its "insolvency" at the time the payment was made. Furthermore, there are a number of defenses which can be asserted which can wind up justifying the creditor's receipt of the payment. Finally, preference actions are typically matters especially susceptible to neogtiation and settlement which may allow creditors to keep a portion of the prefernce payment.

Bankruptcy Preference Defined. So what, exactly, is a "preference" and what should you do if you get one of these letters, or worse, actually get sued? Basically, a "preference" is a payment that allows the recipient to receive more than their fair share of the now bankrupt customer's available cash and assets. The Bankruptcy Code says that a "preference" must be repaid because it frustrates the underlying policy of federal bankruptcy law that similar creditors should be treated in a similar fashion. This policy is intended to discourage a mad grab by creditors that might accelerate a financially ailing company's slide into bankruptcy.

On a more technical level, section 547 of the Bankruptcy Code defines a "preference" as a payment

  • On an antecedent (i.e. past due) debt owed to a creditor;
  • Made while the now bankrupt customer was "insolvent";
  • Within 90 days (or a year, if the creditor is an "insider" such as a shareholder, officer, or director of the bankrupt debtor, or another affiliated company) before the date the bankruptcy proceeding was filed; AND
  • That allowed the creditor to receive more on its claim than it would have had the payment not been made and the claim paid through the bankruptcy proceeding.

Banks and other creditors holding collateral for a debt can wind up receiving a preference payment if they are owed more than the collateral is worth. However, it is unsecured creditors such as the ordinary trade creditor in the form of suppliers, product inventors, and service providers that are the most vulnerable. In addition, it is important to understand that a preference claim can be asserted against a creditor even if the debtor still owes money to the creditor after the payment.

How to Respond. The records of a company in bankruptcy are, not surprisingly, often disorganized and sometimes incomplete. As a result, the net for possible preference payments is usually cast far wider than the true universe of actual preference payments. Thus, once fingered as a possible preference payment defendant, it is crucial to do a thorough "preference analysis" to determine whether there is really any actual liability.

A bankruptcy and creditors' rights attorney has the skills and experience to assist with this crucial task of evaluating what the likely liability exposure is. Martindale-Hubbell's Counsel to Counsel magazine offers this helpful, but very brief, overview of action steps and conceptual considerations that should be undertaken by any company being confronted with preference allegations.

  • The CMA Daily News offers several suggestions about how to avoid being in a preference payment situation by taking certain preventive action such as requiring payment in advance of supplying goods or services.
  • Thomas Onder of the New Jersey Law Blog recommends that, before contacting your attorney, you should try to gather a full payment history for the period of at least the year before the payment was made. A copy of all invoices showing both sales and payments received during this period is essential to a good defense. In addition, copies of any correspondence (including e-mail), contracts, checks, or other evidence of payments received can be extremely helpful. If you can determine the number of days which generally elapsed between presentation of the invoices and receipt of payment and detect any patterns, that can also be useful.
  • Why is this information useful? Well, the two leading defenses to a preference action rely upon what this information can show. The "contemporaneous exchange" defense found in section 547(c)(1) excepts payments where the debtor receives something of value at the same time the payment is made. A related defense depends upon the amount of "subsequent new value" extended to the debtor by the creditor. Alternatively, the "ordinary course" argument based on section 547(c)(2) rests upon a demonstration that a payment comported with a reasonable course of dealing between the creditor and the debtor.

How This Helps in the Defense of a Preference Action. A preference analysis can utilize this information and preventive action to determine whether there is in fact a defense to the demand for repayment of the alleged preference payment. Three of the most common defenses are:

Contemporaneous Exchange. In many cases, as the now bankrupt customer begins to have more and more severe financial problems, there will be times in which the need for a particular shipment of goods or services is so great, that there will be payment for that particular shipment. When the shipment of goods or services and receipt of payment for those goods and services happen more or less at the same time, there is said to be a "contemporaneous exchange", constituting an exception within the meaning of section 547(c)(1) of the Bankruptcy Code.

Ordinary Course of Business. Section 547(c)(2) of the Bankruptcy Code offers another defense if the payment was made in the "ordinary course of business or financial affairs" of the creditor and bankrupt customer in payment of a debt "incurred in the ordinary course of business or financial affairs" of the parties. Payment made "according to ordinary business terms" are also excepted. Thus, both the course of dealing between the parties as well as customs in the relevant industry can be important. Changes in the Bamkruptcy Code in the last few years has made it somewhat easier to rely upon this defense.

Subsequent New Value. Sometimes, even as a financially distressed company struggles for survival, it is able to induce creditors to continue doing business with it, perhaps on the strength of a promise to get everything caught up in the near future or a partial payment of the past due amount. If there are both payments and supplying of goods and/or services within the ninety day "preference period", it is likely that the "subsequent new value" defense found in section 547(c)(4) will be applicable at least to some extent. If applicable, the amount of "subsequent new value" extended will be subtracted from the amount of payments received.

All of these defenses depend greatly on the timing of invoices and payments and require a careful legal analysis of the creditor's documentation. Once a preference analysis has been completed by a bankruptcy attorney, you will have a much better idea of the strength of your case. This will then allow you to make a legally informed decision whether to fight or negotiate your best settlement quickly, thus minimizing the cost both in the amount paid back and attorneys' fees.

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Posted on February 13, 2008 by Teri Rasmussen

Customer Lists and Expanded Trade Secret Protection

Your best salesperson has just left for your major competitor.  Although you are fairly certain she didn't take any company documents or written customer lists, you are equally sure that she knows EXACTLY who your best customers are and the most effective way to contact them.  You always meant to get an Employment Agreement, complete with noncompetes and confidentiality provisions, signed up with this employee, but somehow never quite got around to it.  So what now?  Is there anything you can do?

Well, last week the Ohio Supreme Court brought joy to the hearts of procrastinating employers everywhere in the state when it ruled that the use of a memorized customer list by a former employee to the detriment of his one-time employer constituted a trade secret protected under Ohio's Uniform Trade Secrets Act.  In Minor & Assoc. v. Martin, 2008 Ohio 292, a unanimous Ohio Supreme Court upheld a trial judgment in favor of the employer in the amount of $25,973 even though the employee had no employment agreement and was not subject to any noncompete or confidentiality provisions.  The Public Information Office of the Ohio Supreme Court issued this summary of the decision.

Issue Presented. The new Employer Law Report blog [welcome to the blogosphere], in a post prior to the issuance of the decision, framed the dilemma facing the Court as "creating what in  most cases would be a non-solicitation prohibition of an indefinite term" and a ruling that "could open the doors to the creation of de facto non-competition/non-solicitation agreements for which neither employers nor employees bargained."  As seen by the Ohio Supreme Court itself, the positions of the parties were as follows:

Martin asserts that a client list memorized by a former employee cannot be the basis of a trade secret violation and that the appellate court's decision in this case overly restricts his right to compete in business against AMA.  He also argues that AMA should not have the right to control the use of his memory and that AMA had the opportunity to protect its confidential information by way of an employment contract, which it did not do.

 

AMA counters that public policy in Ohio favors the protection of trade secrets, whether written or memorized; that the definition of a trade secret should focus on the nature of the information and the potential harm that its use would cause the former employer; and that no meanigful difference exists between a written and memorized client list.  

Decision.  This decision resolved a split in Ohio appellate courts.  Despite initially framing the issue somewhat more broadly, the Ohio Supreme Court chose to focus on the extremely narrow issue of whether the fact that the client list in question was memorized took it outside the protection of the Uniform Trade Secrets Act, codified in Ohio Rev. Code Chapter 1333.  After noting that the majority view made no distinction "between information that has been reduced to some tangible form and information that has been memorized" and recognizing that protection of trade secrets involves a balancing of public policies, the Ohio Supreme Court held:

the determination of whether a client list constitutes a trade secret pursuant to R.C. 1333.61(D) does not depend on whether it has been memorized by a former employee.  Information that constitutes a trade secret pursuant to R.C. 1333.61(D) does not lose its character as a trade secret if it has been memorized.  It is the information that is protected by the USTA, regardless of the manner, mode, or form in which it is stored - whether on paper, in a computer, in one's memory, or in any other medium.  

In somewhat interesting dicta, the Ohio Supreme Court hastened to add: