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Parent Company Not Liable for Acts of Subsidiary

Monday, April 12th, 2010

In a recent Maryland Federal District Court Case, Antonio v. SSA, LLC, (2010) it was held that the parent of a company may not be held liable in Maryland for the acts of a subsidiary corporation under the corporate veil piercing doctrine without a showing of fraud or a necessity to enforce a paramount equity.

While the parent company, in this case ABM, did have control over the operations of the subsidiary company SSA, Inc., for example: (1) ABM owned 100% of the voting securities in SSA, Inc., (2) SSA, Inc. does not hold annual board meetings, keep corporate minutes, or conduct its own audits, and (3) all but one of SSA, Inc.’s officers are ABM’s officers, the Court held that control was by itself not enough to hold the parent company AMB liable and justify piercing the corporate veil.

The Court required that in order to hold the parent liable for the acts of the successor, the plaintiff mush show fraud on the part of the parent, or necessity to enforce a paramount equity. The court did not define what in this case would have amounted to a paramount equity, only stating that in this case none existed.

To read a comprehensive blog of all of the issues address by the court in this case, visit the blog of the Business Law Section of the Maryland State Bar Association at http://marylandbusinesslawdevelopments.blogspot.com/search/label/corporate%20veil.

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How to Collect on a Maryland Judgment

Tuesday, March 2nd, 2010

Your business did what it was supposed to do when faced with a customer or client that owed money for goods or services your company provided under an agreement signed by both parties: You retained an attorney, who then filed a complaint in Maryland state court, or if the agreement called for it, filed an arbitration demand with the appropriate arbitration forum, against the other side on your company’s behalf.

Your business paid the attorney out of its own pocket and did things by the book. The other side may or may not have hired an attorney, and maybe did not take part in the case at all. Your attorney propounded discovery, the other side may or may not have complied with your requests. Your attorney attempted to depose a representative of the other side. You and your attorney showed up in court or at the arbitration on the day of the hearing, the other side may or may not have, and if they did show up, maybe with or without an attorney representing them.

The judge or arbitrator sided with your company after a trial or arbitration hearing on the merits, or your company was simply awarded a judgment by default when the other side failed to appear. In any event, your company was awarded damages, and maybe even attorney’s fees depending on what the agreement at issue said.

But when you left the hearing room that day, unfortunately you did not leave with a check from the other side. Instead, you left with a court’s order, or an arbitrator’s award, merely stating that you won and how much.

So the question now is, how do you actually get paid what the court or arbitrator awarded? Often times, the trial or arbitration is not the end, but rather only the mid-way point, of the collection process.

The first thing you must do in this situation is identify the debtor’s assets, as well as determine the value of each, by following Md. Rule 2-633, titled “Discovery in aid of enforcement.” Rule 2-633 states that you may conduct discovery in writing by mailing to the other side no more than 15 questions and requests for documents regarding the assets and other financial information of the debtor. These are known as Interrogatories in Aid of Execution. The debtor has 15 days from receipt to respond to these Interrogatories.

In addition to Interrogatories, Md. Rule 2-633(b) states that you may also petition the court to order the debtor to appear before a judge and answer under oath your questions related to the identity of the debtor’s assets. This is called requesting an Oral Examination in Aid of Enforcement of Judgment. Both of the above options may take place no earlier than 30 days after entry of the judgment.

Should the debtor ignore your Interrogatories or Request for Oral Exam, there are additional measures you may take, including filing to hold the debtor in contempt of court.

Assuming the debtor complies with your written requests or your oral exam, and you have successfully determined what assets the debtor owns and the value of each asset, now it is time to turn your attention to actually collecting on the judgment. One option you have is to garnish an individual debtor’s wages, done by filing a Request for Garnishment of Wages form with the court. You will then receive the garnished wages within 15 days of each of the debtor’s pay periods.

A second collection option is garnishing an individual or corporate debtor’s bank account. This is accomplished by filing a Request for Garnishment of Property Other Than Wages form with the court, using the financial information you gathered in your Interrogatories or Oral Exam. After 30 days, you must file an additional form, a Request for Judgment Garnishment.

Yet another collection option is seizing a debtor’s property or real estate, then selling it to help satisfy your judgment. Doing so requires the recording of your judgment in the circuit court for the county where the property is located, complete and file a Notice of Lien, and then file a Writ of Execution. This process if more complicated and time consuming than either garnishing wages or a bank account. Retaining a competent business attorney to help you in your collection efforts is a smart move.

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Problems with arbitration – PART 2

Monday, February 22nd, 2010

Last week I wrote Part 1 of this blog on the problems I have encountered with arbitration. Please see that post if you have not read it. What follows is Part 2 of the reasons that I advise my franchise and business clients why they should be wary of automatically including an arbitration clause in any franchise agreement or other contract that they execute:

4. Judges are generally more experienced, more versed in the law, and otherwise more qualified to hear disputes than most arbitrators. While not every judge is equally qualified, most judges have been vetted by their local and state bar organizations, and either elected by voters or appointed by politicians. Judges have a track record that can be reviewed and relied on. Judges in most courts serve on a rotational basis, hearing different types of cases and thereby gaining differing experiences. Judges have resources like law clerks to research the law for them. So while judges may lack technical expertise in a certain area, they make up for that my relying heavily on the attorneys and evidence presented in a given matter. Whatsmore, judges must construe existing law to base their rulings on, or else risk being overturned on appeal. Arbitrators, on the other hand, are in most cases practicing or retired attorneys with a specific area of expertise who have asked to be appointed to serve. Many times, an arbitrator will have only a peripheral knowledge of the subject of the arbitration, yet without the experience, knowledge of the law, or resources to ensure that his or her ruling is correct on the law. This set of circumstances can often times lead to inconsistent or downright baseless arbitrator’s decisions.

5. Judges produce formal opinions reciting the law relied on and applying the law to the facts to reach a decision. Many arbitrators, meanwhile, can issue awards without including their specific legal reasoning for an award. For purposes of appeal, judges are required to produce formal opinions citing the issues, facts, law and conclusion in an orderly fashion. This allows parties to focus many times on a distinct area for appeal, and allows appeals courts to easily review the court’s basis for a decision. Conversely, many arbitrators are required to issue only a narrowly written award unless otherwise agreed to by the parties. Even then, an arbitrator issuing a “reasoned award” may not satisfactorily explain the evidence relied on, the law used and how the arbitrator’s conclusion was arrived at. This not only makes it difficult for the parties to decipher how a particular arbitration award was arrived at, but more importantly, makes the record for appeal nearly impossible.

6. Even if an arbitrator issues a reasoned award, the right to appeal an arbitration award is extremely narrow when compared to a party’s ability to appeal a court ruling. In most instances, losers at trial have the right to appeal the merits of a court’s decision to a higher court “de novo”, using almost any substantive or procedural issue available to them. The basis of an appeal of an arbitration award however is severely limited, and many times requires the appealing party to clear such high hurdles as proving fraud, corruption of the arbitrator, or the arbitrator exceeding his or her powers. The difficulty of appeal, when combined with the erratic decisions of some arbitrators, is another reason to forego arbitration in favor of litigation, except in a specific set of circumstances discussed with and approved by my client.

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Current Problems with Arbitration Clauses in Franchise and Other Agreements – PART 1

Saturday, February 20th, 2010

I frequently tell my franchise and business clients to be wary of automatically including an arbitration clause in a franchise agreement or other contract they execute. Several years ago it was savvy for a business owner or franchisor to include mandatory arbitration in their agreements. Now, many of the reasons that supported the inclusion of arbitration clauses have been diminished, making the inclusion of mandatory arbitration in many contracts a questionable strategy at best. I now advise my business and franchise clients against arbitrating disputes for the following reasons:

1. Arbitrations are not “cost-savers” like they used to be thanks to the multiple fees associated with the process. Unlike judges, arbitrators are paid by the parties on an hourly basis. It is therefore in an arbitrator’s financial interest for the case to reach a hearing, regardless of the claim’s merits. In addition, many hearings go on much longer than necessary, allowing witnesses and testimony with questionable relevance to be heard. As a result, arbitrator’s fees can be quite significant for even routine business disputes. The arbitrator’s fees are of course in addition to the fees that business clients pay to their own attorneys for handling the matter, plus the hefty filing fees that many arbitration forums charge as well. For example, the American Arbitration Association, the preeminent arbitration forum in the U.S., charges filing fees ranging from $300 to $2,500.00 for commercial arbitration disputes. Contrast these expenses with trials and other court hearings, where judges have no financial interest in prolonging a case, and filing fees are minimal.

2. The distribution of who pays the arbitrator’s and other fees can disfavor the party bringing the action. The filing party, known as the Claimant, will be responsible for paying not only the arbitration filing fees, but also its portion AND the other party’s portion of the arbitrator’s fees mentioned above should the defending party, called the Respondent, refuse to pay its share of such fees. In such a case, the Claimant must pay all fees in order for the matter to go on, yet the Respondent remains entitled to participate in the arbitration process. If the Claimant fails to pay all of the fees owed to the arbitrator, the arbitrator will likely suspend or dismiss the action entirely. Because there is no incentive for a Respondent to pay its share of an arbitrator’s compensation or other fees, the absurd ersult of the Claimant paying all fees happens more than one would think. Combined with the fees a Claimant must pay to its own attorney, it is easy to see why a business owner would question the use of arbitration in the first place.

3. Arbitrators have far more discretion to rule than judges, sometimes in spite of the evidence presented. The arbitration process is much less formal than a trial. While some informality saves the parties time and expense and speeds up the process, the biggest informality can alter the entire outcome, namely, the fact that the rules of evidence do not apply to arbitration. As a result, arbitrators are free to allow documents and testimony that is questionable as to veracity and authenticity into evidence, even though such evidence would not be permitted in a court of law. In plain terms, an arbitration hearing can literally turn into a free for all, with the arbitrator allowing all kinds of testimony and documents to be factored into an award. This sort of setting can severely hurt a business client who is relying strictly on the language of documents and the actions of the parties, while in turn favoring a party hoping for chaos, basing its case on hearsay and unsupported and unreliable accusations. [Tune in to PART 2 next week]

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A Non-Compete Can Be Enforced Even When Lacking Geographic Limitation

Tuesday, December 8th, 2009

Maryland law is well settled that a non-compete must be reasonable in geographic scope and duration in order to be held enforceable. However, Maryland courts will enforce a covenant not-to-compete that does not contain a geographic limitation in certain narrow and limited circumstances. The U. S. District Court for the District of Maryland stated in Intelus v. Barton and Medplus, Inc., 7 F. Supp. 2d 635 (1998) that every non-compete must be examined to determine reasonableness based on the specific facts at hand, even non-competes that fail to contain a finite geographic limitation. The Intelus court stated:

“Competition unlimited by geography can be expected where the nature of the business concerns computer software and the ability to process information. . . Because of the broad nature of the market in which Intelus operates, a restrictive covenant limited to a narrow geographic area would render the restriction meaningless.”

In determining the reasonableness of a non-compete that does not contain a geographic limitation, Maryland courts will consider the nature of the industry and the national and perhaps global nature of the competition. In Intelus, the court concluded that the restriction was reasonably related and limited to Intelus’s need to protect its good will and client base, and therefore upheld the enforceability of the non-compete.

In Hekimian Labs, a Florida federal court, interpreting Maryland law, found that where “testimony indicated that competition within the business of remote access testing is such that the whole world is its stage” and “that there are only about 20 companies that compete in this business, and they do so on a worldwide basis,” then “to confine the restrictive covenant to a specified geographical area would render the Agreement meaningless.”

The Florida Court concluded that if the agreement did contain a geographical restriction, the offending party would only need to move outside of this restricted area and the damage to the harmed party would be the same. Because of the national and international scope of the competition between the parties, the absence of a specified geographic limitation was reasonably necessary for the protection of the party attempting to enforce the non-compete, and the covenant was upheld.

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Maryland Courts May Grant Injunctive Relief Even when an Arbitration Clause Exists

Tuesday, December 8th, 2009

Maryland law permits a party to request injunctive relief from a Maryland federal or state court even when a contract states that all disputes must be referred to arbitration. The Court of Appeals of Maryland held in Brendsel v. Winchester Construction Company, Inc., 898 A.2d 472 (2006) that:

“[A]n interlocutory mechanics’ lien is in the nature of a provisional remedy, not much different than an interlocutory injunction or attachment sought to maintain the status quo so that the arbitration proceeding can have meaning and relevance, and the predominant view throughout the country is that the availability of such remedies by a court is permitted by the Federal and Uniform Arbitration Acts and is not inconsistent with the right to enforce an arbitration agreement.”

In its ruling, the Maryland Court of Appeals focused on the need for courts to have the ability to preserve the status quo by granting injunctive relief while a dispute is sent to arbitration. Without this ability, the Court held, a ruling by an arbitrator could very well be immaterial, as the damage done to a party could by that time be irreparable.

The Maryland Court of Appeals’ holding finds support from the Fourth Circuit in Merril Lynch et al. v. Bradley and Collins, 756 F.2d 1048 (1985):

“Accordingly, we hold that where a dispute is subject to mandatory arbitration under the Federal Arbitration Act, a district court has the discretion to grant a preliminary injunction to preserve the status quo pending the arbitration of the parties’ dispute if the enjoined conduct would render that process a “hollow formality.” The arbitration process would be a hollow formality where “the arbitral award when rendered could not return the parties substantially to the status quo ante.” Lever Brothers, 554 F.2d at 123.”

Therefore, Maryland courts are permitted to intercede and grant injunctive relief in spite of an arbitration clause where the absence of such relief would cause the arbitration to be nothing more than a “hollow formality.”
This power exists even when a contractual provision states that the parties must refer all disputes to arbitration.

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Maryland Case on the Definition of “Solicit” in a Non-Solicitation Agreement

Thursday, October 29th, 2009

Mona Electric v. Truland, 193 F. Supp. 2d 874 (2002), as well as the appeal of that case, provide support for the position that a terminated employee who executed a non-solicitation provision when hired, but which did not contain an accompanying non-compete covenant, will not be in violation of the non-solicitation agreement if the clients and customers of the employee’s former place of business, and not the employee himself, initiate contact with the former employee for the purpose of conducting business. The District Court for the Eastern District of Virginia held:

“there is no evidence that Gerardi violated the Agreement by “soliciting” Mona’s customers. Truland hired Gerardi as a Service Account Manager. Gerardi’s responsibilities in this new position include preparing estimates and working in the field. A part of Gerardi’s position at Truland is handling customer solicitation calls. In the electrical contracting field, customers often solicit bids from the electrical contractors. Plaintiff has not presented any evidence that Gerardi has initiated calls to customers during his employment at Truland. Rather, the evidence is that Gerardi responded to customer calls to Truland for bids. Gerardi’s acts of responding to customers who solicited him for bids clearly do not violate the Agreement. Gerardi did not sign an agreement that prohibited him from competing with Mona, he signed an agreement that precisely prohibited his “solicitation” of Plaintiff’s customers. Plaintiff asserts that the Agreement prevents Gerardi from submitting estimates to customers who call him to request bids. This would turn the non-solicitation agreement into a non-competition agreement, and under the unambiguous terms of terms of the Agreement, only solicitation of Mona’s customer’s is prohibited. Thus, were the Court to find the Agreement valid, no evidence has been presented in this case that Gerardi violated the terms of the Agreement, and summary judgment should be granted for the Defendant.” Mona Electric v. Truland, 193 F. Supp. 2d 874 (2002).

On appeal, the Fourth Circuit Court of Appeals, applying Maryland law, upheld the lower court’s findings:

“Despite Mona’s assertion to the contrary, the district court held and we agree that the plain meaning of “solicit” requires the initiation of contact. (J.A. at 135.) Therefore, in order to violate the nonsolicitation agreement, Gerardi must initiate contact with Mona’s customers. Mona argues that Gerardi solicited when he submitted estimates to Mona’s customers. However, this does not fall within the plain meaning of “solicit.” If Mona intended to prevent Gerardi from conducting business with its customers it could have easily stated that in the agreement. Taking the facts in the light most favorable to Mona, there is no evidence that Gerardi solicited Mona’s customers. Therefore, summary judgment was proper and the district court is affirmed.” Mona Electric v. Truland, 56 Fed. Appx. 108 (2003). [On appeal]

Conclusion

The Mona case and its appeal give substantial support to the position that: 1) if an employee executed only a non-solicitation agreement and not a covenant not-to-compete; and 2) because Maryland courts will interpret “solicitation” as requiring some action on the employee’s behalf to initiate contact, then by itself, the employer would fail in its attempt to prevent the former employee from doing business with the business’ clients and customers, PROVIDED that the business cannot show that the employee actively solicited those customers. The employee is barred from soliciting, ie. from taking any action to initiate contact in order to gain business. Courts will strictly construe this requirement and delve into the actual conduct of the employee in order to determine whether the employee actually “solicited” customers.

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What are Bylaws and a Shareholders’ Agreement for a Maryland corporation?

Monday, August 3rd, 2009

Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

Shareholders

Shareholders

A Maryland corporation need only file Articles of Incorporation with the Maryland Department of Assessment and Taxation in order be lawfully incorporated. Once formed, though, it is advisable that every Maryland corporation consult with a Maryland business attorney to discuss the drafting of a set of Bylaws, as well as a shareholders’ agreement.

Maryland law mandates that each Maryland corporation must have a set of Bylaws that lay out the procedures concerning the governance of the corporation. A Maryland corporation’s Bylaws may contain any provision not inconsistent with law or the charter of the corporation for the regulation and management of the affairs of the corporation.

A Maryland corporation’s Bylaws usually set out the powers, duties, rights and obligations of its directors and officers, including how many directors the corporation may have, the procedure for calling shareholder and Board of Director meetings, how and where corporate records are to be maintained, stockholder reports, voting and proxy procedures, how stock may be transferred, how directors are elected and removed, how officers are appointed and removed, as well as numerous other matters related to the corporation as a whole.

A Maryland corporation may, but is not required to, have a shareholders’ agreement. A shareholders’ agreement is an agreement between the stockholders of a corporation that governs the rights and obligations of the shareholders. First and foremost, a shareholders’ agreement will state the individual equity in the corporation as held by the shareholders. A shareholders’ agreement typically states how new shares of stock are issued, and addresses issues surrounding restrictions on stock repurchase and transfer, including how stockholders of a company may sell their shares, what happens to the shares upon the death or disability of a shareholder, whether other shareholders have the right to purchase another shareholder’s stock upon death or disability, what procedures are used in order to assign value to stock shares, and what happens to stock upon the breach of a shareholder agreement by a stockholder.

A shareholders’ agreement will also govern how the day-to-day operations of the company are managed, how a Board of Directors will be elected and terminated, what decisions require majority, super-majority or unanimous consent of the shareholders, how the Board will appoint Officers of the corporation.

The resolution of shareholder disputes through mediation, arbitration or litigation, or a combination thereof, may also be included in a shareholders agreement, as well as what law governs any dispute.

When you are in the start up and formation stages of your new business, consult with your business attorney regarding the drafting of Bylaws and a shareholders’ agreement.

Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

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Issues Surrounding a Maryland Breach of Contract Case

Thursday, July 23rd, 2009

Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

Breach of Contract

Breach of Contract

If you are forced to file suit in Maryland for breach of contract, do not let a poorly drafted contract hurt your chance of prevailing. Do not lose a case that you should win simply because of faulty contract language, language that could have been avoided had you retained an experienced Maryland business attorney to assist.

A contract drafted in Maryland with little or no input from a Maryland corporate lawyer can fail to include several necessary components that help to make a contract legally enforceable. These deficiencies can be fatal to your business’s chance of prevailing in a lawsuit. As a result, make sure that an experienced Maryland business attorney reviews your contracts, and that such contracts address, at minimum, the following five points:

1. Jurisdiction: If you want the ability to sue in Maryland courts, your contract must contain language where the parties submit to the jurisdiction of Maryland state and/or federal courts. This language allows you to sue a business in Maryland courts, even if the company is not incorporated in, or have offices in, Maryland. Without this language in your contract, you will most likely be forced to sue the corporation in its home state. Suing out of state can be significantly more expensive and time consuming.

2. Choice of Law: A Maryland choice of law provision states Maryland law will be used to decide the dispute. Many non-lawyers confuse choice of law with jurisdiction, and interpret the phrase “Maryland law will govern this contract” to mean that a dispute has to be heard in Maryland. That is not the case. Rather, this clause simply means that regardless of where a dispute is heard, whether in Maryland Circuit Court or Virginia or anywhere else, Maryland law will be used to decide the matter.

3. Non-compete and non-solicitation clauses: Do you want to prohibit the other party from competing with you entirely, or just stop them from soliciting your clients? If the former, then you are in need of a non-compete clause, which must be limited in geographic scope, limited in duration, and narrowly defined to protect only the interests of your business in order to be enforceable. Maryland courts will typically enforce reasonable non-competes. However, a non-compete that overreaches will often be struck down. If the latter, then you need a non-solicitation agreement, which allows the other party to compete with you, provided they do not solicit your current or former clients. A non-solicitation clause need not have geographic or time limitations so long as it only forbids the solicitation of your clients by the other party.

4. Default and Termination provisions: Make sure that your contract’s default and termination provisions are clear with regard to: a) what breaches may be cured and what breaches cannot be; b) what the time period exists for any cure; and c) whether amounts due over the life of the contract still owed even if the contract is terminated.

5. Dispute Resolution: Choose the type of dispute resolution system that you feel best fits your business. Mediation, arbitration and litigation are options, and they can be used in compliment of one another. Regardless of what method of dispute resolutions you choose, always allow your business the option of filing for emergency injunctive relief in Maryland court when necessary to avoid irreparable injury to your business.

Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

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