BUSINESS FORMATION & SALES BLOG

What is Business Goodwill?

by Gary Nissenbaum | Jun 28, 2013

The United States Court of Appeals for the Second Circuit held that a seller of the “good will” of a business is not barred from answering the factual inquiries made by the former client as long as the seller’s responses are within the scope of the information sought by the former client. Bessmer Trust Co v. Branin, 16 N.Y. 3d 549 (2011).

Branin worked as an investment portfolio manager at Brundage, Story & Rose, LLC (Brundage). While working at Brundage, Branin became the favorite of one of Brundage’s clients, the Palmer family. Eventually, Brundage sold its assets, including client accounts and related good will, to Bessemer. For a while, Branin continued to work for Bessemer. Eventually he resigned from Bressemer to join Stein Roe. Before leaving Bessemer, Branin prepared a list of his clients to help Bessemer transition the accounts to other investment advisors at the firm. Branin did not notify his clients about his decision to join Stein Roe. Thus, he did not actively solicit any of his former clients. In spite of this, several of Branin’s clients decided to transfer their accounts to Stein Roe. The Palmers were among them.

Before transferring their accounts to Stein Roe, the Palmers had a separate meeting with each of the firms to discuss how the firms would handle their accounts. Branin participated in the meeting between Stein Roe and the Palmers, but only as a passive participant. Finally, after meeting with both the firms, the Palmers decided to transfer their accounts to Stein Roe. Based on this, Bressemer, Branin’s former employer brought an action for breach of good will against Branin. The United States District Court for the Southern District of New York found that “Branin ‘improperly induced the Palmer account to leave Bessemer and that this inducement in fact caused the Palmer account to leave Bessemer and join Stein Roe’ in violation of New York law.” Id at 555.

Branin appealed and the Court of Appeals barely provided anything useful other than the basic principles regarding solicitation of former clients. The Court not only acknowledged the absence of a specific rule to determine whether a seller of “good will” has engaged in improper solicitation of his former clients, but also declined to create one. The Court held that “while a seller may not contact his former clients directly, he may, ‘in response to inquiries’ made on a former client’s own initiative, answer factual questions. Furthermore, under the circumstances where a client exercising due diligence requests further information, a seller may assist his new employer in the ‘active development . . . [of] a plan’ to respond to that client’s inquiries. Should that plan result in a meeting with a client, a seller’s ‘largely passive’ role at such meeting does not constitute improper solicitation in violation of the ‘implied covenant.’ As such, a seller or his new employer may then accept the trade of a former client.” Id at 560.

The lesson of this case is to tread very carefully when one could be accused of backtracking on the sale of business good will.

New York Franchised Motor Vehicle Dealer Act: When Does a Franchisor Have to Provide a 180-Day Notice of Termination of Dealership Agreement?

by Gary Nissenbaum | May 14, 2013

Compass Motors, Inc. (“Plaintiff”) was a franchised motor vehicle dealer for Volkswagen Group of America, Inc., (“Defendant”). As a part of the dealership agreement, Plaintiff agreed to renovate its facilities pursuant to a Facility Renovation Agreement (the “Agreement”). The Agreement required Plaintiff to renovate its facilities in order to incorporate a Volkswagen-only showroom with a minimum of 1800 square feet and three offices. According to the Defendant, the Plaintiff failed to implement those required facility renovations. Id. at 284-285 As a result, the Defendant sent Plaintiff a 90-day notice of termination. The notice explained that if Plaintiff failed to cure the alleged breach within 90 days Defendant would terminate the dealership agreement between them. Id.

Plaintiff commenced an action in the Supreme Court of New York (the “Court”), seeking a declaration that the notice of termination was invalid. Compass Motors, Inc. v. Volkswagen Group of America, Inc., 944 N.Y.S. 2d 845 (2012). Plaintiff argued that under the New York Franchised Motor Vehicle Dealer Act (the “Act”), particularly §463(2)(e)(3), Defendant was required to give it a 180-day, as oppose to a 90-day, notice to cure. In its analysis, the Court cited the relevant portions of the Act as follows:

¶463(2):

(d) (1) To terminate, cancel or refuse to renew the franchise of any franchised motor vehicle dealer except for due cause, regardless of the terms of the franchise. A franchisor shall notify a franchised motor vehicle dealer, in writing, of its intention to terminate, cancel or refuse to renew the franchise of such dealer at least ninety days before the effective date thereof, stating the specific grounds for such termination, cancellation or refusal to renew. In no event shall the term of any such franchise expire without the written consent of the franchised motor vehicle dealer involved prior to the expiration of at least ninety days following such written notice except as hereinafter provided.

(e) (3) The franchisor shall provide notification in writing to the dealer that the dealer has one hundred eighty days to correct dealer sales and service performance deficiencies or breaches and that the franchise is subject to termination under this section if the dealer does not correct those deficiencies or breaches. If the termination is based upon performance of the dealer in sales and services then there shall be no due cause if the dealer substantially complies with reasonable performance provisions of the franchise during such cure period and, no due cause if the failure to demonstrate such substantial compliance was due to factors which were beyond the control of such dealer.

Vehicle and Traffic Law, article 17-A §463 (emphasis added).

The Court stated that subsection (2)(e)(3) which affords a breaching party notice that he or she has 180 days to cure prior to termination of the dealership agreement, by its plain terms, applies only to notices to correct a dealer’s sales and service performance deficiencies or breaches. The Court explained that since Defendant’s notice of termination was based upon Plaintiff’s failure to properly renovate its facility in accordance with the Agreement, it had nothing to do with sales and service performance deficiencies or breaches. Therefore, the Court held that the 180-day notice requirement encompassed within §463(2)(e)(3) was not applicable. On this basis, the Court concluded that the 90-day notice to cure was sufficient under the Act. Id. at 294-295.

Is a Loan Discharged When the Lender Releases the Liens on Collateral Prior to the Payoff Checks Clearing?

by Gary Nissenbaum | Apr 29, 2013

In JPMorgan Chase Bank, N.A., v. Jeffco Cinnaminson Corporation, et. al., No. A-2601-10T3
(N.J. Super. Ct. App. Div. March 27, 2012), JP Morgan Chase Bank, N.A. (“Plaintiff”) sued Jeffco Cinnaminson Corporation (“Jeffco”) and Paul T. Andrews (“Andrews”) (collectively “Defendants”) based upon its premature disbursement of collateral held as security against two loans.

In that case, Plaintiff granted Jeffco two loans in order to acquire a Ford GT and a Ferrari (collectively the “Vehicles”). In regard to both loan agreements (collectively the “Agreements”), Andrews signed the Agreements as a cosigner which made him a
guarantor of the debt. Id. at 4.

Plaintiff disbursed the money and, in order to secure the loans, recorded liens on the Vehicles. Subsequently, Defendants entrusted the vehicles to Alfred Sciubba (“Sciubba”), who owned and operated a specialty car business named “Auto Toy Store.” He agreed to find buyers for the Vehicles. Id. at 4.

Sciubba found buyers for both vehicles. It provided pay off checks from Jeffco’s bank account to satisfy the car loans so the sale could be consummated (the buyers obviously would not want to purchase the cars with liens still recorded on the title). The problem arose when the Plaintiff bank endorsed the liens as paid before the check cleared. In fact it did this on two separate occasions, since the cars sold at different times. However, since neither check cleared due to insufficient funds in Jeffco’s bank account, Plaintiff was left with two unpaid and unsecured loans in Jeffco’s and Andrews’ names. Id. at 6-7.

As a result, Plaintiff filed suit in the Law Division of the Superior Court of New Jersey (“Lower
Court”) against Jeffco and Andrews to recover the amounts due. Defendants argued that because Plaintiff had failed to protect the collateral, their two loans were discharged. They also filed a counterclaim which alleged that Plaintiff was negligent because it should not have endorsed both liens as paid before either of the checks had cleared. Id. at 7-8.

Subsequently, Plaintiff filed a motion for summary judgment and Defendants filed a cross motion for summary judgment. A motion for summary judgment allows a Court to determine a case without resort to a trial when there are no material issues of fact and judgment can be granted by applying
the relevant law.

Defendants’ submitted to the Court an expert report and opinion. The expert opined that Plaintiff’s release of the liens violated financial industry standards and was contrary to its policies and procedures. Further, the expert asserted that it failed to properly monitor and manage the Jeffco
loan portfolio after the first payoff check (for the Ford GT) bounced. Id. at 8-9.

The Lower Court stated that Plaintiff “implicitly knew” Sciubba was in the business of selling cars because it received a check from “Auto Toy Store.” It reasoned that because Sciubba regularly sold cars to the public, that alone was a sufficient basis for the Plaintiff to reasonably believe that the checks received from him were adequate and sufficient. Thus, it asserted that it was proper for Plaintiff to have endorsed the liens as paid before the checks had cleared. Further, the Lower Court stated that Defendants could not complain about Plaintiff’s release of the liens because they had set in motion the very facts that led to the consignment of the vehicle to the dealership.

Accordingly, the Lower Court granted Plaintiff’s motion for summary judgment against Defendants for the amounts due plus approximately $40,000.00 in attorney’s fees. Id.

Subsequently, Defendants appealed to the Superior Court of New Jersey, Appellate Division (the “Appellate Court”). In its analysis, the Appellate Court considered Plaintiff’s argument based upon Chapter Nine of the New Jersey Commercial Code (the “UCC”). It claimed that whenever an “innocent purchaser” is involved in the acquisition of an automobile, the rights of a secured lender, almost instantaneously (and inexorably), must bend to the will of the buyer. Id. at 11-12. The Court rejected that argument.

It explained that under N.J.S,A. 12A:9-315(a)(1) and (2), a properly filed and recorded lien was not extinguished when the secured property was transferred to another, unless an exception to the UCC applied. One such exception is N.J.S.A. 12A: 9-320(a) because it automatically severs the lien so that the purchaser of the goods enjoys them with clear title; free of any liens due to their seller’s debt. Id.at 14. For example, if you purchased a new coat from a department store you will own that coat without any fear that the department store’s creditors have any rights in them. N.J.S.A. 12A: 9-320(a)
stated:

Except, as otherwise provided in this subsection (e), a buyer in the ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

(emphasis added) Id.

Further, the Court noted that the UCC did not require a secured lender to blindly release a lien without conducting reasonable due diligence; including ensuring that the proffered payoff is sufficient to extinguish the outstanding amount due on the loan. Id. at 13.

In its analysis, the Court explained several reasons why the Lower Court’s grant of summary judgment in favor of Plaintiff was improper. Some of those reasons were:

Contrary to the Lower Court’s conclusion, Plaintiff could not have implicitly known that the
entity transmitting title to the vehicles was in the business of selling vehicles because it never received a check from the Auto Toy Store. Rather, Plaintiff received a check from Jeffco who was not an entity that was in the business of selling motor vehicles at the time Plaintiff received the checks. Id.
The security interests in this case were created by Jeffco and Andrews, not the Auto Toy Store.
Since, the buyers of the Vehicles were dealing with Auto Toy Store, not Jeffco and Andrews, the provision did not apply to them. Thus, those buyers would have taken free of any security interest created by Auto Toy Store (the buyer’s seller), but not those created by Jeffco and Andrews. Therefore, that argument was immaterial.
Id. at 15.
There was no requirement in the UCC that mandated a speedy release of Plaintiff’s security
interests in the Vehicles. In light of Defendant’s expert’s opinion, it was possible that had the Plaintiff waited a few more business days, instead of robotically processing the lien releases, its discovery of the checks’ dishonor might have enabled Defendants to prevent the conversion
of the purchase proceeds. Id.

Since many questions of fact remained open for the trier of fact to determine, the Appellate Court reversed the grant of summary judgment in favor of Plaintiff, vacated the reallocation of attorney’s fees without prejudice, and remanded back to the Lower Court. Id. at 21.

Will an Operating Agreement’s Disability Provision Be Upheld Under New Jersey Law?

by Gary Nissenbaum | Sep 19, 2012

In Zavodnick, Perlmutter & Boccia L.L.C., v. Zavodnick, No. A-1242-11T1 (App. Div. August 2, 2012), the Superior Court of New Jersey, Appellate Division, upheld an arbitrator’s decision to allow a law firm to buyout a disabled member. Id. at 8. In so doing, the Court refused to limit the scope of the arbitrator’s authority to determine issues relating to the disability.

In that case, the members of the law firm, Zavodnick, Perlmutter & Boccia L.L.C (“law firm”), had signed an operating agreement that provided of resolution of any disputes concerning the withdrawal of a disabled member. That resolution was to be handled by the parties themselves, if possible. If not, the exclusive remedy would be arbitration under the rules of the American Arbitration Association (“AAA”). An AAA arbitration was instituted in regard to the members’ decision to require one of the attorneys, Allen Zavodnick, Esq. withdraw due to his disability.

Zavodnick challenged the arbitrator’s ruling upholding the decision to have him removed. In that
regard, Zavodnick filed a lawsuit in the Superior Court of New Jersey, Chancery Division, Hudson County. The Court upheld the arbitrator’s decision. Zavodnick appealed to the Appellate Division.

The Appellate Division also upheld the decision. In its opinion, it stated in part “[b]ecause the request for arbitration . . . clearly encompassed the issue of whether defendant’s disability or his
cessation of professional service constituted a withdrawal event, and because the operating agreements plain terms required arbitration of that issue, we find defendant’s arguments to be of insufficient merit to warrant discussion in a written opinion.” Id. at 8.

This case highlights the importance of paying particular attention to the disability provision of an operating agreement before entering into one. Very few of us ever expect to become disabled; however, it is best to account for the unlikely event that such a provision might need to be invoked.

Comments/Questions: gdn@gdnlaw.com

Will an American Franchisor Establishing in Canada Be Subject to Laws for Failing to Maintain Brand Strength?

by Gary Nissenbaum | Aug 14, 2012

American Franchisors should be aware of the special laws relating to establishing franchises in Canada. For example, the Quebec Civil Code attaches a contractual obligation to the franchisor of a franchise agreement to protect and enhance the franchise brand. In Bertico Inc, et al. v. Dunkin’ Brands Canada LTD., No. 500-17-015511-036; 500-17-019989-048; 500-17-028727-058 (Quebec Super. Ct. June 21, 2012), the Quebec Superior Court addressed this issue and held that an American franchisor could be liable for failing to sufficiently maintain the strength of its brand for Canadian franchisees.

In that case, a class action was filed against the Dunkin’ Donuts franchisor in Quebec for failing to address the franchisees’ concerns about rejuvenating the Dunkin’ brand and business strategy to compete with a new franchise competitor. The franchisees argued that the Dunkin’ Donuts franchisor was unresponsive to their request in violation of their franchise agreements. In the agreements the franchisor promised to protect and enhance Dunkin’ Donuts’ reputation and “the demand for the products of the Dunkin’ Donuts system.” Id at 6.

The Court sided with the franchisees, finding the franchisor’s failure to sufficiently protect the brand had fundamentally breached its franchise agreements. As a result of the franchisor’s inaction, the competitor’s franchise achieved considerable market share in Quebec at the cost of Dunkin’ Donuts and its franchisees. The Judge stated that the franchisor’s failure to respond in a way that was competitive with others in the industry prevented the franchisees from benefiting from their investments in the Dunkin’ Donuts franchise. See id. at 19, 37.

In coming to its decision, the Court did make mention of the franchisees’ level of fault or lack therefore. Ultimately, the Court did not find that the franchisees were poor operators. See id. In fact, the Judge stated that ‘[t]hey were amongst the best and most successful in the Quebec …” Id.

It should be noted that while the franchisor was found at fault, this decision is particular to Quebec Civil Code, and only binding on Quebec courts. As previously stated, the Quebec Civil Code attaches a contractual obligation to the franchisor of a franchise agreement to protect and enhance the brand. In Bertico, the Court relied on the specific terms of the franchise agreements and made the franchisor accountable for its written promise to protect and enhance the Dunkin’ Donuts brand.

Franchisors should be cautious of the kinds of promises and representations made when drafting or signing a franchise agreement in Canada. As shown here, a Court may look to the terms of the franchise agreement when determining the franchisor’s responsibilities, and ultimately, the franchisor’s liability.

Comments/Questions: gdn@gdnlaw.com

May a Texas Nonprofit Organization Use Charitable Donations for Personal Use?

by Gary Nissenbaum | Jul 25, 2012

In December 2011, Texas Attorney General Greg Abbott (“Abbott”) sued the Texas Highway Patrol Association (“THPA”), the Texas Highway Patrol Museum, THPA Services, Inc. and several senior THPA officials (collectively “THPA and Affiliates,” separately “Affiliates”). The suit claimed that THPA and Affiliates defrauded charitable donors by illegally soliciting donations under the false pretense that the contributions would be used to benefit the families of slain state troopers. Instead, state investigators found that few survivors actually received financial assistance from THPA and Affiliates, and the money went toward personal use such as meals, movie theater and amusement park tickets and unauthorized association credit card charges for travel for officials and their family and friends.

THPA and Affiliates received up to $10,000.00 a day and they could not produce receipts for their expenditures that evidenced business related transactions. While the organization had raised approximately $12,000,000.00 in donations within five (5) years, only a reported $63,500.00 was given to the families of fallen state police officers.

Some THPA officials gave employees excessive compensation and used donations to pay for personal vehicles. Although THPA officials told investigators that the cars were for business, the insurance policy listed the purpose of the vehicles as being for pleasure.

The lawsuit also charged THPA and Affiliates with falsely claiming that they were a tax-exempt, charitable organization registered with the Internal Revenue Service (“IRS”). THPA was a nonprofit business league, not a charity.

THPA and Affiliates also face civil penalties under the Texas Deceptive Trade Practices Act for falsely claiming that they are associated with the Texas Department of Public Safety (“DPS”) and its highway patrol division. Neither the THPA nor its Affiliates are associated with the DPS.

The Travis County Probate Judge Guy Herman appointed a temporary receiver and froze THPA’s assets at $490,000.00. The total amount of money improperly used was not acknowledged in the suit because Abbott plans to make that a part of the ongoing investigation. The suit has not yet been adjudicated.

Comments/Questions: gdn@gdnlaw.com

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