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Wednesday, March 7th, 2012
To prevail on a claim of fraudulent misrepresentation in Maryland, a plaintiff must establish, by the heightened evidentiary standard of clear and convincing evidence:
“(1) that the defendant made a false representation to the plaintiff, (2) that its falsity was either known to the defendant or that the representation was made with reckless indifference as to its truth, (3) that the misrepresentation was made for the purpose of defrauding the plaintiff, (4) that the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) that the plaintiff suffered compensable injury resulting from the misrepresentation.” VF Corp. v. Wrexham Aviation Corp., 350 Md. 693, 703 (1998), quoting Nails v. S&R, 334 Md. 398, 415 (1994).
The defendant must actually be aware of the falsity, or atleast the potential for falsity. The requirement concerning knowledge of the falsity or reckless indifference as to the truth of the representation means either the defendant’s actual knowledge that the representation was false or the defendant’s awareness that he does not know whether the representation is true or false. Ellerin v. Fairfax Savings, 337 Md. at 231, 652 A.2d at 1124.
Negligence or misjudgment, “‘however gross,'” does not satisfy the knowledge element. Ellerin, 337 Md. at 232, 652 A.2d at 1125, quoting Cahill v. Applegarth, 98 Md. 493, 502, 56 A. 794, 796 (1904). See also VF Corporation and Blue Bell, Inc. v. Wrexham Aviation Corp., 350 Md. 693 (1998).
A defendant must have the intent, the scienter, to cheat another: “It is well recognized under Maryland law that an action for fraud cannot be supported … without any design to impose upon or cheat another.” VF Corp. v. Wrexham Aviation Corp., 350 Md. 693, 703 (1998).
The complaining party though, must have reasonably relied on the defendant’s representations. To determine whether one party’s reliance upon the allegedly fraudulent statements of another party is reasonable, a court looks to all the facts and circumstances present in the particular case. “In determining whether reliance is reasonable, a court is required to view the act in its setting….” Parker v. Columbia Bank, 91 Md. App. At 361-362.
The One of the most important circumstances in this regard is the plaintiff’s background and experience. For example, a complaining person who is knowledgeable in the commercial real estate realm could not be said to have reasonably relied on another’s false representations in that realm, as the complainant would have the requisite knowledge and resources to determine whether such statements were true in the first place.
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Tags: breach of contract case, breach of contract lawsuit, buseness attorney, business breach of contract, business contract review, business formation, business incorporation, business law, business lawsuit, business lawyer, business litigation, business start up, Buy a Franchise, buying a franchise, buying a franchised business, corporate attorney, corporate formation, corporate lawyer, corporate litigation, federal franchise law, franchise agreement, franchise attorney, franchise lawyer, franchise litigation, fraud, fraud law in marylabd, fraud law in maryland, fraudulent misrepresentation, FTC Franchise Rule, limited liablity company, maryland breach of contract, maryland business, maryland business law, maryland fraud law, non solicitation agreement, shareholder agreement, small business attorney, small business lawyer
Wednesday, March 7th, 2012
Before transacting interstate or foreign business in Maryland, a foreign limited liability company (“LLC”) shall register to transact business with the State Department of Assessments and Taxation (“SDAT”) in accordance with Md. Corp. & Ass’ns. Code Ann. § 4A-1002:
“(a) Requirement. — Before doing any interstate, intrastate, or foreign business in this State, a foreign limited liability company shall register with the Department.”
Under § 4A-1002, a foreign LLC is required to complete an application setting forth, among other information, its name, state of organization, business purpose, and resident agent, and pay a filing fee to SDAT.
Md. Corp. & Ass’ns. Code Ann. § 4A-1007 states that any foreign limited liability company that fails to register with the SDAT in accordance with § 4A-1002 is barred from maintaining a lawsuit in any court of this State, as follows:
“(a) Barred from maintaining suit. — If a foreign limited liability company is doing or has done any intrastate, interstate, or foreign business in this State without complying with the requirements of this subtitle, the foreign limited liability company and any person claiming under it may not maintain suit in any court of this State, unless the limited liability company shows to the satisfaction of the court that:
(1) The foreign limited liability company or the person claiming under it has paid the penalty specified in subsection (d)(1) of this section; and
(2) (i) The foreign limited liability company or a successor to it has complied with the requirements of this title; or
(ii) The foreign limited liability company and any foreign limited liability company successor to it are no longer doing intrastate, interstate, or foreign business in this State.”
In essence, Md. Corp. & Ass’ns. Code Ann. § 4A-1007 bars a foreign LLC from acting as a plaintiff in any Maryland state or federal court if the LLC is doing or has done “any intrastate, interstate, or foreign business” in Maryland without registering or qualifying with SDAT.
Foreign corporations face nearly identical Maryland statutes. See Md. Corp. & Ass’ns. Code Ann. §§ 7-202, and 7-301, respectively.
The Maryland Court of Appeals stated the following in Yangming Marine Transport Corporation v. Revon Products U.S.A., Inc., 311 Md. 496 (1988):
“As pointed out above, under § 7-301, a foreign corporation that has not complied with § 7-202 or § 7-203 is barred from suing in Maryland if the corporation “is doing . . . any intrastate, interstate, or foreign business in this State.” …. Instead, we have held that § 7-301 embodies a test for determining whether a foreign corporation is “doing business” in Maryland. See G.E.M., Inc. v. Plough, Inc., 228 Md. 484, 486, 180 A.2d 478, 480 (1962). Under this test, § 7-301 bars an unqualified or unregistered foreign corporation from suing in Maryland courts only if the corporation is doing such a substantial amount of localized business in this State that the corporation could be deemed “present” here. See, e.g., S.A.S. Personnel Consult. v. Pat-Pan, 286 Md. 335, 339-340, 407 A.2d 1139, 1142 (1979); G.E.M., Inc. v. Plough Inc., supra, 228 Md. at 488-489, 180 A.2d at 480-481.
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Tags: arbitrate business disputes, arbitration award, breach of contract arbitration, breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business incorporation, business law, business lawsuit, business lawyer, business litigation, commercial arbitration, corporate agreement, corporate bylaws, corporate formation, corporate lawyer, corporate litigation, foreign corporation, foreign LLC, franchise litigation, limited liability company operating agreement, limited liablity company, litigate or arbitrate?, LLC, LLC transacting business in MD, maryland business, maryland business law, shareholder agreement, single member limited liability company, small business attorney, small business lawyer, transacting business in maryland
Thursday, April 28th, 2011
Often times I have prospective franchisor clients, that is, clients who believe they have a business concept that can be expanded possibly through licensing or franchising, ask me to explain the differences between licensing and franchising from a legal perspective. Inevitably, the conversation turns to an explanation from the client as to why the concept is not truly a franchise after all. As I have explained on this blog previously, while there certainly are relationships that are true licenses, more often than not, many licensing relationships are indeed nothing more than disguised franchises.
Here is what the FTC Franchise Rule states on the issue, directly from the FTC website found at http://www.ftc.gov/bcp/edu/pubs/business/franchise/bus70.pdf. The FTC Franchise Rule covers the offer and sale of franchises. As under the original Rule, a commercial business arrangement is a “franchise” if it satisfies three definitional elements.
“Specifically, the franchisor must: (1) promise to provide a trademark or other commercial symbol; (2) promise to exercise significant control or provide significant assistance in the operation of the business; and (3) require a minimum payment of at least $500 during the first six months of operations.”
Be aware that the name given to the business arrangement is irrelevant in determining whether it is covered by the amended Rule.
“With regard to the trademark element, a franchise entails the right to operate a business that is “identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark.” The term “trademark” is intended to be read broadly to cover not only trademarks, but any service mark, trade name, or other advertising or commercial symbol. This is generally referred to as the “trademark” or “mark” element.
The franchisor need not own the mark itself, but at the very least must have the right to license the use of the mark to others. Indeed, the right to use the franchisor’s mark in the operation of the business – either by selling goods or performing services identified with the mark or by using the mark, in whole or in part, in the business’ name – is an integral part of franchising.
In fact, a supplier can avoid Rule coverage of a particular distribution arrangement by expressly prohibiting the distributor from using its mark.”
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Tags: business law, Buy a Franchise, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise dispute, franchise law, franchise law firm, franchise lawyer, franchise litigation, franchise your business, franchisee, franchising or licensing, FTC Franchise Rule, licensing v. franchising, maryland business law, Maryland franchise registration, maryland franchise registration and disclosure, sell your franchised business, small business attorney
Tuesday, February 8th, 2011
A Stock Purchase refers to the sale and purchase of an ownership interest in an entity like a corporation, partnership or limited liability company. The Seller sells, and the Buyer purchases, all or part of the outstanding shares of stock in a corporation, or all or part of the membership interest in an LLC or partnership, as well as all of the existing assets and liabilities of the entity. This includes the name and goodwill of the business, which oftentimes can be valuable. The existing entity itself does not change. Rather, the owners of the stock or membership interest in the entity change from Seller to Buyer, while the entity itself continues uninterrupted.
In a Stock Purchase, unless agreed otherwise, the Seller is absolved of any obligations or liabilities stemming from its prior ownership interest in the entity, as the Purchaser becomes the owner of not only the assets of the entity, but likewise the debts and obligations as well. For this reason a Seller will generally prefer a Stock Purchase over an Asset Purchase, as a Stock Purchase allows the Seller to walk away from the business without the fear of future debts, liabilities or obligations of the business. For the Purchaser of stock in such a transaction, I cannot stress how important it is to perform the maximum amount of due diligence it can, in order the possibility of assuming any unintended or unknown liabilities and obligations, since such liabilities should have or could have been known.
Unlike a Stock Purchase, an Asset Purchase involves, as the name implies, the purchase and sale of only the assets of a particular business, without the purchase or sale of any stock or other ownership interest in the company. The Purchaser buys, and the Seller sells, only the specific assets identified in the governing document, named the Asset Purchase Agreement. Any assets not included in the Asset Purchase Agreement remain the property of Seller. The Buyer must create a new entity that will own the purchased Assets, or use an already existing entity for the transaction.
The Seller of assets retains ownership of the shares of the stock or other membership interest in the business, and as a result the Seller also retains any existing or future obligations and liabilities of such business, except those specifically transferred to the Buyer as part of the sale. For this reason a Purchaser will normally prefer an Asset Purchase to a Stock Purchase. This way, the Buyer obtains only the specific assets which it desired to purchase, and which debts, obligations and liabilities it is assuming, if any.
An additional cost that may be necessary in an Asset Purchase is the need to possibly transfer ownership of certain assets used in or by the business, and/or assign leases and other third party contracts to which Seller was a party.
There are many tax issues that must be addressed when deciding between a Stock Purchase an Asset Purchase. I advise my clients to see the advice of an accountant for such issues.
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Tags: asset purchase agreement, breach of contract case, business contract review, business formation, business incorporation, business law, business litigation, business start up, Buy a Franchise, buy sell, buy-sell agreement, corporate bylaws, corporate formation, corporate lawyer, limited liablity company, LLC, LLC sale, maryland breach of contract, maryland business, maryland business law, operating agreement, purchase a franchise, sale of assets, sale of corporation, shareholder agreement, small business, small business lawyer, stock purchase agreement, stockholder dispute, why incorporate?
Wednesday, January 26th, 2011
A local business owner came to me recently in order to appeal MDOT’s denial of an application for Maryland DBE/MBE certification. Since I had never before read an MDOT denial opinion, there were several interesting issues raised by MDOT that I thought were worth discussing.
1. Ownership – The owners of the business are a husband and wife, and the wife applied as the majority owner of the business for MBE Certification. MDOT focused in part in denying the application on the fact that when the woman owner invested capital in the business at the outset, that her investment came from a credit card jointly held with her husband, and that the credit card balance was eventually paid in full from a jointly held checking account owned by her and her husband. Careful legal drafting of the Articles of Incorporation, and legal advice with regard to who funds the business and how it was funded, would have gone a long way at the outset in potentially avoiding MDOT’s rejection of this application.
2. Control – With regard to control, MDOT focused on two issues: i) the woman owner unquestionably has to be able to prove that she exercises control over the day-to-day operation and management of the company, and has an overall understanding, competence and experience in the business; and ii) the corporate documents, including the Articles of Incorporation, Bylaws, and Shareholder Agreement or Operating Agreement cannot in any way restrict or limit the woman owner’s ability from making the business decisions of the company without the cooperation of the non-disadvantaged owner. In this instance, the company’s Bylaws gave the non-minority owner the same voting rights as the disadvantaged owner, so that she was effectively precluded from making business decisions unilaterally. Properly drafted Bylaws may have avoided this problem.
Reading the opinion as a whole, MDOT focused on several issues which, while separately may not have added up to much, when combined, raised enough questions in MDOT’s mind so as to justify the denial of the business’s DBE/MBE application. The good news is that many of these issues can be avoided with careful legal drafting at the outset.
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Tags: business formation, business incorporation, business law, business start up, corporate bylaws, corporate formation, DBE, DBE application, DBE certification, Disadvantaged Business Enterprise, government contracting, government contracts, maryland business, maryland business law, maryland government contracting, MBE, MBE application, MBE certification, MBE/DBE, mdot certification, minority business, minority business enterprise, minority owned business, montgomery county government contracting, operating agreement, shareholder agreement, small business attorney, small business lawyer, uniform certification application, woman owned business, Women's Business Enterprise
Thursday, January 20th, 2011
I was recently asked to litigate a breach of contract claim on behalf of a party who was wronged by the breach of another party to a contract. The kind of contract is immaterial for the purpose of this article. It could have been an independent contractor agreement, or employment agreement, or an asset purchase, stock purchase, non-compete, or non-solicitation agreement, or any one of a dozen other types of contracts. Regardless, as I have said previously in these posts, there are certain contractual provisions that should be found in just about every contract. What may be possibly be the single most important provision, from my perspective, happened to have been omitted from this particular contract, that is, a provision addressing the potential recovery of attorney’s fees resulting from litigation.
I say that this may be the single most important provision in a contract not in a substantive sense, as the material terms of the contract must of course be included with specificity. The services to be performed or the products to be sold are obviously vital, since without which there may be no meeting of the minds and thus no contract in the first place. And there are other material provisions related to the deal itself that must be included as well, ie the duration of the agreement, compensation, termination, etc.
But aside from the substantive points of the deal, there is not a more important procedural, boilerplate, provision than a provision addressing attorney’s fees. Why? Because in many cases, the lack of such a provision makes litigating over a contract a financially untenable idea. A party to a contract may have the facts and the law on its side. The case may essentially be a slam dunk, if such things exist. However, if at the end of the day, the damages available to the winning party only barely exceed the amount the party paid to its attorney’s to prosecute the case, then regardless of how great a case it is, the filing of a lawsuit or arbitration makes little sense from a bottom line perspective. None of us, clients or attorneys, litigate in order to achieve moral victories. If maintaining a lawsuit does not make sense from a financial point of view, then regardless of right and wrong and getting even, I always advise my clients to consider the case strictly from a business perspective, leaving aside emotion.
That is why it is such a huge benefit when a contract at issue contains a prevailing party clause with regard to attorney’s fees. This magic language allows a wronged party to sue with the understanding that if the facts and the law support her case, then she will be made whole in regard to not only the actual damages she sustained as a result of the breach of contract, but in addition, all costs, expenses and attorney’s fees she expended in litigating the matter. Please then, I ask you to review EVERY agreement your business has signed, as well as every agreement you sign from here on out, and prior to execution, include a provision similar to the following:
“In the event of litigation [or arbitration] for any matter arising out of or related to this Agreement, the party prevailing in any such action shall be entitled to recover from the losing party its reasonable attorney’s fees and all other legal costs and expenses, including filing fees, expended in the matter.”
The importance of this provision cannot be overstated, since attorney’s fees on even a fairly “routine” matter can easily run into the tens of thousands of dollars, and for more complex cases against defendants with deep pockets, it would not be a surprise to see attorneys’ fees in the hundreds of thousands of dollars.
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Tags: arbitration, arbitration clause, asset purchase agreement, attorneys fees, attorneys fees clause, breach of contract arbitration, breach of contract case, breach of contract lawsuit, business breach of contract, business contract, business contract review, business law, business lawsuit, business litigation, confidentiality agreement, contract terms, corporate agreement, corporate litigation, covenant not to compete, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise law, franchise litigation, maryland breach of contract, maryland business, maryland business law, non solicitation agreement, operating agreement, partnership agreement, prevailing party, prevailing party clause, shareholder agreement, shareholder dispute, small business attorney, small business lawyer, stock purchase agreement
Wednesday, January 5th, 2011
In Flynn v. Everything Yogurt, et al., 1993 U.S. Dist. Lexis 15722 (D. Md. 1993), the Maryland Federal District Court granted a motion to dismiss a fraud claim for failure to state a claim under Rule 12(b)(6). The Court held that ““Projections of future earnings are statements of opinion rather than statements of material fact. Projections cannot constitute fraud because they are not susceptible to exact knowledge at the time they are made. Layton v. Aamco Transmissions, Inc., 717 F. Supp. at 371 (D. Md. 1989); See also, Johnson v. Maryland Trust Co., 176 Md 557, 565, 6 A.2d 383 (1939) (statement referring to value of securities representing collateral for the payment of trust notes was a matter of expectation or opinion). Thus, the Defendants’ projections can not constitute statements of material fact under § 14-227(a)(1)(ii).”
The Maryland Federal District Court also held in Payne v. McDonald’s Corporation, 957 F.Supp. 749 (D. Md. 1997) that claims of fraud against McDonald’s must be dismissed: “McDonald’s projections concerning the future building costs of the Broadway restaurant and concerning the impact of new restaurants on future sales of the Broadway facility are just as much predictions of ‘future events’ as are projections of future profits. Accordingly, this Court concludes that it was unreasonable for plaintiff Payne to rely on any of McDonald’s predictive statements as a basis for the assertion of fraud-based claims in this case.”
In addition to the McDonald’s case cited above, see Miller v. Fairchild Industries, Inc., Finch v. Hughes Aircraft Co., and Hardee’s v. Hardee’s Food System, Inc., all of which stand for the proposition that predictions or statements which are merely promissory in nature and expressions as to what will happen in the future are not actionable as fraud.
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Tags: arbitration, arbitration clause, breach of contract lawsuit, business breach of contract, business law, business litigation, Buy a Franchise, corporate litigation, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise fraud, franchise law, franchise litigation, franchisee, fraud, fraud in the inducement, fraudulent, fraudulent representation, FTC Franchise Rule, maryland breach of contract, maryland business, maryland business law, maryland fraud law, shareholder dispute, shareholders' agreement, small business attorney, small business lawyer
Wednesday, October 6th, 2010
If you have registered your business trademark or service mark with the U.S. Patent and Trademark Office (“USPTO”), then you have the right to sue a party that is infringing your trademark rights. The criteria used to determine whether the use of your mark or a similar mark qualifies as infringement is whether such use causes a “likelihood of confusion” to the public. Likelihood of confusion exists when a court believes that the public would be confused as to the source of the goods, or as to the sponsorship or approval of such goods.
Courts deciding a trademark infringement action will mainly look at two issues in deciding an infringement action: 1) the similarity of the two marks, for example, are the marks identical or merely similar; and, 2) what goods or services are the marks associated with. The more similar the marks, and the more related the products or services of the two marks are, the more likely a court will find a likelihood of confusion and enjoin the offending party’s use of the mark.
Should your prevail in a trademark infringement action, you are entitled to some or all of the following remedies: 1) injunctive relief to enjoin the other party from using the mark; 2) profits the opposing party made as a result of its use of the infringing mark; 3) monetary damages you sustained as a result of the infringing party’s use of the mark; and, 4) the costs you incurred in bringing the infringement action. In addition, a court may award treble (triple) damages if there is a finding of bad faith on the part of the offending party.
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Tags: breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business formation, business law, business lawsuit, business litigation, business name registration, business trademarks, corporate formation, corporate litigation, franchise agreement, how do you trademark a name, infringement, limited liablity company, maryland business, maryland business law, protect your trademark, shareholder dispute, small business attorney, small business lawyer, trademark actions, trademark damages, trademark dilution, trademark infringement, trademark law, trademark protection, trademarking a name, what is a trademark
Wednesday, October 6th, 2010
Maryland law does not require that a sole member limited liability company (“LLC”) have an existing, enforceable operating agreement on file. Nevertheless, there is an excellent reason to draft and execute one: by executing an LLC operating agreement, the single member of the LLC has drawn a line of protection guarding that person against personal liability for the business debts and obligations of the LLC.
Specifically, Maryland courts have held that the protection from liability that exists by virtue of the LLC’s formation can disintegrate if the LLC fails to observe certain corporate formalities. One of these formalities is the existence of a valid operating agreement. Having an operating agreement in place can protect the single member from liability when a third party attempts to sue the individual member in order to satisfy an obligation resulting from a debt of the LLC.
Without an operating agreement, it may prove more difficult for the sole member to avoid liability. Courts sometimes blur the line between a sole member LLC with its protection from liability for its individual owners, and a sole proprietorship where such protection does not exist. However, this line becomes more clear cut, and courts will as a result hesitate to “pierce the corporate veil” and hold an individual liable for the LLC’s debts, when corporate formalities like having an operating agreement are complied with.
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Tags: benefits of LLC, business contract review, business formation, business law, business name registration, business start up, corporate bylaws, corporate formation, corporate start up, limited liability company operating agreement, limited liablity company, LLC, llc agreement, llc operating agreement, maryland business, maryland business law, operating agreement, partnership agreement, shareholder agreement, shareholder dispute, shareholders' agreement, single member limited liability company, single member llc, small business, small business attorney, small business lawyer, small business needs
Tuesday, August 24th, 2010
Click this link to view an excellent powerpoint presentation discussing the application process for Maryland Minority Business Enterprise status as found on the Maryland Transit Administration website:
http://mta.maryland.gov/business/advertisingwithmta/MBE%20Certification%20Power%20Point%20Presentation.pdf
Please contact me if you need assistance with your MBE certification.
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Tags: business formation, business incorporation, business law, business name registration, business start up, corporate formation, corporate start up, DBE application, DBE certification, government contracting, government contracts, limited liablity company, maryland business, maryland business law, maryland government contracting, MBE, MBE application, MBE certification, MBE/DBE, minority business, minority business enterprise, minority owned business, montgomery county government contracting, operating agreement, shareholder agreement, small business, small business attorney, small business lawyer, small business needs, woman owned business
Raymond McKenzie is a corporate and franchise attorney in the Washington, D.C. metropolitan area.
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