BUSINESS FORMATION & SALES BLOG

In accordance with general principles of law, rescission of a contract is generally allowed only in narrow situations, such as where a party is fraudulently induced into entering into the contract. Rescission may also be permitted where there is a willful, material, and substantial breach of the contract which essentially defeats the purpose of the contract.

In the employment context, a court may be inclined to rescind an employment contract where an employee misrepresents certain aspects of his employment history in order to secure a position. However, before a court will rescind a contract on this basis, the employer is usually required to show that he relied on the employee’s oral or written misrepresentations, and that such reliance was reasonable.

In one such case, National Medical Health Card Systems, Inc. v. Fallarino, 863 N.Y.S.2d 556, the Supreme Court of New York for Nassau County found that the employee’s misstatements as to his prior employment could not serve as a basis for his termination. In that case, the employer only realized that the employee had made misrepresentations in his resume after the employee had already been terminated. Nonetheless, the Court held that the employer’s reliance on the employee’s misrepresentations was not reasonable. Specifically, the Court found that the employer failed to exercise due diligence in investigating the employee’s background despite having had an ample opportunity to do so and that information about the employee’s prior employment was readily available. In fact, the Court noted that during the interview, the hiring coordinator focused on only one of the employee’s prior positions, which happened to be legitimate, and did not inquire into his other prior experience. In addition, and although the employee had provided more than one reference, the employer’s agent contacted only one of the references provided. Accordingly, the Court found that the employment contract could not be rescinded because the employee did not defraud the employer.

Employers beware—the mere fact that an employee made false statements about his employment history does not necessarily mean that a court would hold him liable for fraud, justifying the rescission of the employment contract. Rather, the courts place a burden on the employer to exercise due diligence in evaluating an employee’s credentials.

© 2024 Nissenbaum Law Group, LLC

The United States Court of Appeals for the Second Circuit held that a debt collector violated the Fair Debt Collection Practices Act (“FDCPA”) when it instituted a Syracuse City Court action in New York State against a debtor in a city where the debtor did not reside. Hess v. Cohen & Slamowitz, LLP, 637 F.3d 117 (2d Cir. 2011).

The FDCPA establishes the proper venue where a debt collector may sue to collect on a debt.  The FDCPA requires that the lawsuit be brought “only in the judicial district or similar legal entity … in which [the] consumer resides at the commencement of the action.”  15 U.S.C. §1692i(a)(2)(B).  Debt collector Cohen & Slamowitz (“C&S”) brought a debt collection lawsuit against debtor Jonathan Hess in Syracuse City Court.  Hess’ motion to dismiss C&S’s complaint was granted by the trial court on the grounds that Hess did not reside in the City of Syracuse, nor in an adjacent town as required by the FDCPA.

Following the dismissal of C&S’s complaint, Hess sued C&S in the United States District Court for the Northern District of New York on the ground that C&S violated the venue provisions of the FDCPA by suing him in Syracuse City Court.  The District Court dismissed Hess’ complaint for failure to state a cause of action.  Hess appealed that decision to the United States Court of Appeals for the Second Circuit.

The Second Circuit noted at the outset that the matter presented a question of first impression, “whether a debt collector violates the FDCPA’s venue provisions by suing a consumer in a city court in the State of New York when that court lacks power to hear the action because the consumer does not reside in that city or a town contiguous thereto.”  Id. at *1.  The evidence revealed that Hess lived in the Town of Clay and never lived, worked, or maintained a place of business in Syracuse.  Also, Syracuse and Clay are not adjacent to one another.

Per the Second Circuit, the FDCPA was enacted “to eliminate abusive debt collection practices by debt collectors, to ensure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.”  Id. at *2.  Among those abuses is “the problem of ‘forum abuse’, an unfair practice in which debt collectors file suit against consumers in courts which are so distant or inconvenient that consumers are unable to appear, hence permitting the debt collector to obtain a default judgment.  As a result, Congress adopted venue provisions to ensure that a debt collector who files suit [does] so either where the consumer resides or where the underlying contract was signed.”  Id. at *2.

The issue was whether C&S filed suit “in the judicial district or similar legal entity where Hess resided as of the commencement of the action.”  Id. at *3.  The court determined that Congress meant the phrase “judicial district” to refer to a territorial subdivision of the courts.  Taking that analysis a step further, the court held that the term “judicial district” in the context of a debt collection action must be defined within the judicial system of the state where the action was brought.

Applying its analysis to the facts, the court held that “the FDCPA’s term ‘judicial district,’ as applied to a case where a debt collector sues a consumer in one of New York State’s city courts, extends no farther than the boundaries of the city containing that court and the towns within the same county that are contiguous by land thereto. Because the proper ‘judicial district’ here does not include the town where Hess resides, we hold that the district court erred by dismissing his complaint.” Id. at 123. Further, where “a state law outlines the required nexus between the residence or activities of the consumer and the location of the court, we hold that such a law sets forth the appropriate ‘judicial district’ for purposes of the FDCPA with respect to debt collection actions brought in that court, regardless of whether that provision is styled as jurisdictional or otherwise.” Id. at 124. Finally, “when a debt collector elects to sue in a court of limited jurisdiction, the FDCPA requires, at the very least, that the suit be brought in a court where the consumer’s non-residency or lack of contacts thereto does not serve as a bar to further proceedings.” Id. at 125.

In conclusion, the Court of Appeals held that Hess stated a claim that the underlying debt collection action was not brought in the appropriate “judicial district.”  As a result, the Court of Appeals reversed the District Court’s dismissal of Hess’ complaint and remanded the matter to the District Court for trial.

Comments/Questions: gdn@gdnlaw.com

© 2024 Nissenbaum Law Group, LLC

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

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

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.