If One Sells a Sole Proprietorship, What is Being Sold?

If one sells a corporation, the shares of stock are what is being sold. If one sells a limited liability company, the membership interest is what is being sold. However, when one sells a sole proprietorship – a business which is not an entity– what exactly is being sold?

Generally speaking, the answer is that the assets are what is being sold. Some of these assets are easy to spot. For example, if the business has inventory; if it has vehicles or real estate, those can be the principal asset being transferred. Other times, especially in regard to a personal services sole proprietorship business (such as a doctor or lawyer’s practice), what is being sold is general intangibles. This can be everything from a copyright or a trademark to a right to collect money. These general intangibles are essentially the beginning and end of the value that of personal services sole proprietorships.

One of the more interesting dillemas is how to set a value on such general intangibles. Normally, this will be the central issue in determining the price for a sole proprietorship that does not have tangible assets.

© 2014 Nissenbaum Law Group, LLC

Improving Privacy Protections on the Internet

Congress is currently poised to create a number of restrictions on the ability of the government to search email and other digital content. While it is unclear what form such legislation would take, there is a bipartisan consensus that something needs to be done for two reasons: (a) United States citizens need to have more definable privacy protections in their electronic communications and (b) American companies are finding it difficult to compete globally because foreign companies are reluctant to buy American software and other applications that may provide a means for the government to spy on them.

Much of this debate was spurred by a 2010 case brought down by the Sixth Circuit Court of Appeals. That case U.S. v. Warshak, 631 F.3d 266 (6th Cir. 2010). That case dealt with the issue of whether the government’s review of private email could constitute an unconstitutional search and seizure. The Sixth Circuit found that it did. As the court wrote,

Warshak argues that the government’s warrantless, ex parte seizure of approximately 27,000 of his private emails constituted a violation of the Fourth Amendment’s prohibition on unreasonable searches and seizures.12 The government counters that, even if government agents violated the Fourth Amendment in obtaining the emails, they relied in good faith on the Stored Communications Act (“SCA”), 18 U.S.C. §§ 2701 et seq., a statute that allows the government to obtain certain electronic communications without procuring a warrant. The government also argues that any hypothetical Fourth Amendment violation was harmless. We find that the government did violate Warshak’s Fourth Amendment rights by compelling his Internet Service Provider (“ISP”) to turn over the contents of his emails. However, we agree that agents relied on the SCA in good faith, and therefore hold that reversal is unwarranted.

This case is notable because after it was decided, a number of internet service providers began to require search warrants for email.  It is entirely possible that the standard for obtaining emails may be further refined once the current legislation reaches the president’s desk.

© 2014 Nissenbaum Law Group, LLC

If the Seller of a Business Does Not Comply with Legal Requirements for the Sale, May that Seller Use That Fact to its Advantage by Voiding the Sale Altogether?

May a Seller seek to void a contract for sale of his business by taking the position that the sale contract was violated and therefore unenforceable, when the seller itself is the one that did not comply? That issue was raised in Meadowbrook Industries, LLC v. Walker Management Systems, Superior Court of New Jersey, Appellate Division, Docket No. A-3568-11T4 (March 5, 2013).

In that case, the seller violated a contract for sale of a waste disposal business by failing to obtain the approval of the New Jersey Department of Environmental Protection before entering the agreement. NJSA 48:3-7(c).  As it turned out, the seller was the one who wanted to scuttle the deal.  It tried to argue that because the requirement had not been complied with, the contract was unenforceable.

The Appellate Division of the Superior Court of New Jersey rejected that argument.  It held that the seller’s legal theory was barred by the doctrine of unclean hands. What this meant was that the party asserting the breach could not have caused that breach. The law protects those who did not cause their own harm.

© 2014 Nissenbaum Law Group, LLC

Will A Texas Cooperative Be Considered Similar Enough To A Non-Profit Such That The Non-Profit Statute Will Govern Its Conduct?

A recent Texas class action raised a novel issue of law. In that case, the Court was asked to determine whether Denton County Electric Cooperative, Inc. (“CoServ”) would be subject to the Texas Non-Profit Statute. The reason this came up was because the Non-Profit Statute had many more protections in it than the enabling statute for Texas cooperatives.

In Denton County Electric Cooperative, Inc. d/b/a CoServ Electric v. Nicole Hackett, Individually and on behalf of others similarly situated, Court of Appeals of Texas, Fort Worth, No. 02–09–00425–CV (May 10, 2012), the Court determined that the Texas “legislature did not intend to provide Electric Cooperative members with the same rights set out in the [Texas Non-Profit statute].” The sole exception would be if the cooperative enabling statute specifically incorporated the Non-Profit law.

Accordingly, the appellate court vacated the class certification.

How can a Business Owner Use a Prenuptial Agreement to Protect his or her Business From Being Subject to Equitable Distribution in a Divorce?

On June 28, 2013, Governor Chris Christie signed a law (Bill S-2151) which requires judges in New Jersey to evaluate prenuptial agreements as of the date of their signing and not as of the date of their enforcement.  This was a major change in the law.

It is of particular concern to business owners considering marriage. Typically, an owner will want to protect the business from being mandatorily sold in the event of a divorce. This law strengthens the enforceability of prenuptial agreements; therefore, it makes the protection afforded business owners that much more predictable.

The import of the law is that it prevents judges from considering the changes in circumstances between the time of signature and the time they are to be enforced. Prior to its enactment, N.J.S.A. 37:2-32 required judges to interpret premarital contracts as of the date of their enforcement. Therefore, if a contract was fair when it was signed, but when it was enforced would leave one spouse without financial support, it would be subject to attack. 

How can a For-Profit Corporation Adopt Some of the Social Conscience of a Non-Profit?

What do for-profit businesses need to do if they are seeking to perform the socially conscious work of a non-profit, as well? 
In light of the fact that some for-profit companies are looking for ways to do charitable work while avoiding the limitations imposed by the potential of shareholder derivative lawsuits for failing to maximize profits, new hybrid forms of corporations have been established.  Two examples of the new forms of hybrid entities are “benefit corporation” and “L3C” entities.
Benefit corporations, which are recognized in New Jersey, New York, Maryland, California, Hawaii, Vermont and Virginia, must have a dual purpose to perform a public benefit and create value for their stakeholders.  L3Cs (low-profit limited liability companies) have the same liability protection and tax treatment as an LLC but must have social benefit as their primary purpose and profit as the secondary purpose.

It remains to be seen whether this new development in the law will take the business community in a more socially conscious direction.

Comments/Questions: gdn@gdnlaw.com
© 2014 Nissenbaum Law Group, LLC

Will a Contract Provision in a Distribution Agreement Between Franchisor and Franchisee that Limits the Scope of Damages be Enforceable?

Will a provision of a distribution agreement between a franchisor and franchisee that prevents a party from recovering “lost profits” be enforceable? That issue was considered in Strassle v. Bimbo Foods Bakeries Distribution, Inc., United States District Court for the District of NJ. Civil 12-3313. (RBK/AMD) (March 13, 2013).
In that case, the franchisor, of a bakery franchise signed a distribution agreement with the franchisee which stated in part “DAMAGES: notwithstanding anything to the contrary contained in this Agreement, in no event shall either party be liable to the other for any consequential, incidental, indirect, or special damages, including loss profits and punitive damages.” The issue was whether the bar for certain types of damages was enforceable.

The Court found that it was. It held that “to the extent plaintiffs seek recovery of profits which they planned to make (but for Defendants alleged breach) on the sale of individual…breads and role products to retail clients within their distribution territory the court holds that such recovery is barred under 11.12 of the parties’ distribution agreement.”

Comments/Questions: gdn@gdnlaw.com
© 2014 Nissenbaum Law Group, LLC

Will the New Jersey Law Against Discrimination Protect People Who Voice Complaints About Behavior That They Cannot Prove is Discriminatory?

If an employee “voices a complaint about behavior or activities in the workplace that he or she thinks are discriminatory,” but it turns out they are not, is the employee still protected under the N.J. Law Against Discrimination? That issue was addressed by the Court in Battaglia v. UPS, 214 N.J. 518 (2013).
In that case, an employee of UPS was demoted after he complained that managers had made derogatory comments about women and certain other activities. However, he was unable to prove that the discrimination actually took place.
The Supreme Court determined that it would not matter if the activity was actually contrary to law, so long as the person complaining about it had a good faith basis to believe it was. As the Court noted “we do not demand…that he or she be able to prove that there was an identifiable discriminatory impact upon someone of the requisite protected class.”
The basis for the Court’s ruling was that the N.J. Law Against Discrimination is a remedial statute. That means that it is meant to address a social ill, in this case, discrimination. Therefore, it will be read expansively so as not to discourage people from making reasonable complaints that might happen to turn out later to be unprovable.

Comments/Questions: gdn@gdnlaw.com
© 2014 Nissenbaum Law Group, LLC

May a limited partnership require new partners to sign a personal guaranty to enter a partnership?

If a limited partnership admits new partners, may those new partners be required to sign a personal guaranty? That question was addressed in the recent case of Hughes v. Mainka, Superior Court of New Jersey, Appellate Division, Docket No. A-2721-11T# (June 14, 2013).

          In that case, the dispute was over whether the existed limited partners – who had guaranteed a loan to the partnership – could require the new limited partners to do the same thing.

          The Court determined that they could not. However, the holding was very fact-specific. It related to the fact that “neither the Original nor Amended Partnership Agreements required limited partners to personal guarantee a partnership loan.” Id at 17. The Court concluded that this reflected an intent not to make such a requirement a condition for new partners.

          The Court held that the new partners were right in resisting the requirement. This case highlights the necessity to carefully review both the intent and plain language of a partnership agreement before entering into a limited partnership.

Comments/Questions: gdn@gdnlaw.com
© 2014 Nissenbaum Law Group, LLC

New York Enacts the Nonprofit Revitalization Act of 2013

          The trend in nonprofit law is to provide for more oversight – both financial and managerial – so as to bring nonprofits in line with the best practices of the private sector. The State of New York recently took a step forward in that direction by passing the Nonprofit Revitalization Act of 2013 (“Act”).

          The Act provides for a number of changes to tighten the way nonprofits are run. First, it creates a mechanism for nonprofit boards of trustees to police their potential conflicts of interest. A formal structure must be set up to identify and consider whether these conflicts are such that they must be prohibited.

There is a new mechanism to allow for a lawsuit to “unwind”  interested party transactions. Likewise, an employee of the nonprofit will no longer be allowed to serve as its Board Chairman. There are also provisions to allow meetings to take place by email or video link.

Overall, any nonprofit operating in New York should review the provisions of the Act to ensure compliance with it.

Comments/Questions: gdn@gdnlaw.com
© 2014 Nissenbaum Law Group, LLC