BUSINESS FORMATION & SALES BLOG

Corporate Law: Individuals seeking to buy into a partnership in New York should be wary of the fact that their personal assets may be at risk in the event of a future dispute with the other partners of the company. Pursuant to a 2007 decision handed down by the New York Court of Appeals, the partners in a firm operating as a limited liability partnership, or LLP, are not shielded from personal liability in disputes with one another. Ederer v. Gursky, 9 N.Y.3d 514 (N.Y. 2007).

Under well-established principles of New York partnership law, when a claim is brought against an LLP, individual liability is generally limited to only those partners directly involved in the activity underlying the claim. However, the Court of Appeals in Ederer held that the legislative intent behind the New York LLP statute was clearly to protect partners from claims brought against the partnership by third parties, and was not meant to interfere with the fiduciary duties and obligations existing between the partners themselves.

In Ederer, one partner in an LLP filed suit against his former partners for money he claimed he was owed when he withdrew from the firm pursuant to a partnership agreement. The claimant’s former partners disputed the claim but also asserted that they were shielded from personal liability because of the firm’s status as an LLP. The Court held that the liability shield does not protect the partners from personal liability for breaches of the partners’ obligations to each other.

Per the dissent in Ederer, it is noteworthy that the decision could create unfair results for partners with relatively smaller interests in an LLP. In practice, the minority partners could be held personally liable for claims of former partners who had much larger interests in the firm. In that respect, the decision arguably gives preferential treatment to such majority partners over both the other partners of the LLP and other third party creditors.

The Ederer case highlights the need for careful drafting of a partnership agreement, or other applicable documentation, at the outset of a company’s establishment. Many ignore this critical aspect because they are still in the “honeymoon” period. However, before buying into a partnership, it is crucial to clearly set forth each partner’s rights and obligations at the beginning and to prepare for the potential that some or all of the partners may want to go different ways in the future. It also emphasizes the importance that the document be customized to the company’s and the partners’ unique needs, rather than be left to chance by using “form” agreement that is not fully vetted by an attorney.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

“Individual defendants may be liable for corporate acts or practices if they (1) participated in the acts or had authority to control the corporate defendant and (2) knew of the acts or practices. . . . ‘Authority to control the company can be evidenced by active involvement in business affairs and the making of corporate policy, including assuming the duties of a corporate officer.” (citations omitted).

• Ensure that all advertising and promotional materials have been cleared by legal counsel prior to their publication and distribution.

• Implement employee training to advance sales methods that are effective, but not violative of the Federal Trade Commission Act.

• Implement management controls to verify that the recommendations and training protocols are being internally adhered to.

Comments/Questions:

ljm@gdnlaw.com

Commercial Real Estate: Commentary: The New Jersey Statute of Frauds requires that certain contracts be in writing. The most well-known type of contract subject to these requirements are contracts for the sale of personal property for $500 or more be in writing. In addition, contracts for the sale of real estate are generally required to be in writing. Quite surprisingly, however, under certain circumstances an oral agreement concerning the transfer of a real estate interest may be enforceable.

Specifically, an oral agreement concerning the sale of real estate will be enforceable where it is established by clear and convincing evidence that the following has been articulated (a) a sufficient description of the real estate; (b) the nature of the interest that is to be transferred; (c) the identity of the transferor and transferee of the interest; and (d) the existence of an agreement. The “agreement” can be found from this perspective even where the parties anticipated the drawing up of a written and more formal contract of sale.

If you think of a transaction for the sale of residential property, the above terms are generally agreed upon earlier on in the negotiations. What that means is that a buyer and seller arguably could be bound by an oral agreement for the sale of real estate even though they contemplated negotiating additional terms and incorporating them in a written contract of sale at a later point in the transaction.

Given this risk, parties to a real estate transaction in New Jersey should proceed cautiously and act with the understanding that they may be bound to their oral representations. There are a few things that can be done to lessen the risk that an oral agreement will be binding. First, they should avoid utilizing letters of intent or term sheets. But, if they do utilize such a document, they should explicitly state on its face that they do not intend to be bound by the terms therein until a written agreement is executed. In addition, when they are negotiating orally with respect to the terms, they should provide the other party to the transaction a short correspondence and/or email at the very outset that they do not intend to be bound to any terms as stated orally or any other writings until a formal contract for sale is executed. In this situation, they should also reiterate their position orally to the other side and take notes of these conversations. In these notes, they should make particular note of those items as to which they have not yet come to an agreement. Although the risk continues, this may help to generally preclude the Court from finding that an oral agreement for the sale and purchase of real estate is enforceable. Of course, this is a nonexclusive list. Further, none of these suggestions is a guarantee that the parties will be protected from such a risk, and the particular facts of each situation are critical in determining a legal strategy. However, they should be kept in mind when a real estate deal is being negotiated.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

Commercial Litigation: Courts are taking a hard line in requiring litigants to preserve evidence. It is only logical that given the increased use of technology in our lives, courts are taking an active role in sanctioning litigants for destroying electronically stored data. The problem arises because electronically stored data can be voluminous and often erased by a mere click of a button. Sometimes evidence is destroyed by companies who routinely erase data. However, it can be difficult to determine whether documents were destroyed in the ordinary course of business or in an effort to avoid presentation in a lawsuit. For this reason, simply asserting that the destruction of electronic documents was routine might not avoid court sanctions.

The problem becomes more burdensome since many litigants are not aware of some of these rather elaborate court rules regarding discovery and yet the litigants are still required to follow the rules. And the consequences of failing to abide by electronic discovery rules may be harsh. Sanctions may include requiring a litigant to pay an adversary’s attorney’s fees, preclusion of evidence and/or striking a litigant’s pleadings, the latter two of which could certainly prejudice a litigant in his case.

Even more troubling are situations where discovery is destroyed prior to the filing of a lawsuit. A potential litigant should be aware that courts can impose sanctions for failing to comply with the litigant’s discovery obligations even if the destruction of the documents happened prior to the commencement of the litigation.

Accordingly, there are some steps that can be taken to help minimize the risk of sanctions. First, we generally recommend that all businesses have a document retention policy, that it has prepared with its attorney. This should outline what can be destroyed and when. Moreover, businesses should always be prepared for a situation where litigation is commenced or threatened. At that point, the attorney for the claimant may create what is called a “litigation hold.” During that time, there is usually a moratorium placed on any destruction of emails, documents and other materials in the possession of the business. In such event, the “hold” would likely interrupt the destruction that may have transpired in the ordinary course of business under the document destruction policy.

In short, it is important to consult an attorney sooner rather than later when a lawsuit is brought or threatened. In addition to evaluating the claim, defenses and potential counterclaims, you need an attorney to advise you as to the type of information that should be preserved and the amount of time that preservation should last.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

Commercial Real Estate: The New York Statute of Frauds requires certain agreements to be in writing in order to be enforceable. Among the types of agreements that must be in writing are those conveying an interest in real estate (other than a lease for a term not exceeding a year) and a contract to pay compensation for services rendered in negotiating a purchase and sale of real estate. However, New York, by statute, provides different standards as to what constitutes a writing for these purposes.

Specifically and with respect to a contract to pay compensation for services rendered in negotiating a real estate transaction, an email exchange between the parties will constitute a writing where it contains the essential terms and there is an indication by the sender of the email as to his intention to authenticate this transmission. This is because this section of New York’s General Obligations Law was amended to specifically include a provision that written text produced by electronic signals constitutes a writing.

However, and with respect to an agreement for the purchase and sale of real estate, it appears that an email exchange is insufficient to constitute a writing even if it contains all of the essential terms and the e-mail sender authenticates the transmission. Thus, the revision made to the statute as to the brokerage services was not made to the statute pertaining to a conveyance of real estate.

In this day and age, the use of email to transact and conduct business is commonplace and occurs in a large quantity and variety of transactions. It makes sense for the legislature to deem certain agreements as more important than others and, thus, require a higher standard for them to be deemed “in writing.” However, once this determination is made, it is confusing to the public to render an e-mail a sufficient writing with respect to certain agreements and not others. It will not be surprising if the New York State Legislature clarifies this. Hopefully, this will occur sooner rather than later so that the general public can proceed with certainty as to whether or not they are bound.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

Consumer Protection Law: New York’s consumer protection laws generally prohibit deceptive acts or practices when conducting business or providing services. Where a person or entity has engaged in a deceptive act or practice, the injured consumer may commence a private cause of action and recover either actual damages or statutory damages in the amount of $50.00, whichever is greater.

However, the Court has discretion to increase actual damages subject to certain constraints in situations involving an individual or entity that willfully engaged in a deceptive act or practice. But, this discretion is limited in that the amount cannot exceed three times the actual damages up to $1,000.00. In addition, and unlike New Jersey’s mandatory attorneys’ fee shifting provision in its Consumer Fraud Act, New York courts have wide discretion to award or not award attorneys’ fees to a prevailing consumer.

New Jersey’s Consumer Protection Act is superior to New York’s in a number of other respects. In New Jersey, there is no limit on the compensatory amount; it is tripled automatically; and there is a very elaborate set of regulations that define what is a per se violation of the Consumer Fraud Act. In sum, if a transaction involves both New York and New Jersey, careful attention should be given to decide whether New Jersey’s enhanced remedies are available.

Much of the law of consumer fraud relates to class actions. Recently, class actions have been brought by consumers alleging deceptive acts or practices in violation of New York’s consumer protection laws. Many of these claims are based on the failure of a seller to disclose a material fact about a product or service being offered for sale. Although class actions may prove effective where a seller repetitively engages in deceptive acts and practices, the Court will first have to certify the class of consumers. In accordance with general principals of law, the Court will likely not certify a class where the class is overbroad or the claims among the class members are distinct.

It is truly important to carefully evaluation the potential of consumer protection related claims to determine the preferred laws under which to sue and whether it should be structured as an individual lawsuit or a class action, among other things.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC