Category Archives: Corporate Law

Does the Consumer Fraud Act Apply to the Sale of an Ongoing Business?

In 539 Absecon Boulevard, LLC., v. Shan Enterprises Ltd P’ship, 406 N.J. Super. 242 (App. Div. 2009), the Appellate Division of the Superior Court of New Jersey was presented with the question of whether the New Jersey Consumer Fraud Act applies to the sale of an ongoing business.

In that case “the defendants . . . owned a variety of commercial properties which they apparently bought and sold for investment purposes.”  Id. There were allegations of fraud and other causes of action relating to the sale by the defendants of an ongoing motel business and the real estate upon which it was situated.

The Appellate Division determined that the Consumer Fraud Act did not apply to the transaction.  The allegations of wrongful conduct pertained solely to the sale of the motel as a business, not with respect to the property on which it was located.  The court gave a number of reasons, the most notable of which was that the “false assurances did not relate to any good, service, or commodity offered to the public for sale.” Id

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

When is a Former Employer Guilty of Improper Solicitation?

What constitutes improper solicitation of a customer of a former employer? That was the question before the New York Court of Appeals in a 2011 case. Bessemer Trust Co., N.A. v. Branin, 2011 NY Slip Op 3307 (2011).        

The plaintiff, Bessemer Trust Company (“Bessemer”), was a privately owned wealth management advisory firm. The defendant, Francis Branin (“Branin”), was an employee of Brundage, Story & Rose, LLC (“Brundage”) until the firm was acquired by Bessemer in 2000. The sale of Brundage to Bessemer included the sale of the firm’s assets, including client accounts and related good will. Good will is the benefit of a business having a good reputation under its name.

Following the acquisition, Branin worked for Bessemer. Between November 2001 and June 2002, he met with the C.E.O. of the wealth management firm, Stein Roe Investment Counsel LLC (“Stein”), to discuss possible employment opportunities. Branin resigned from Bessemer on July 12, 2002; received an offer from Stein ten days later; and began his employment as a senior vice president of Stein on July 29, 2002.

While at Stein, Branin helped devise a strategy to enable the company to acquire clients he worked for at Bessemer. Though he did not contact any of his former clients directly, Branin did participate in at least two in-person meetings with a major client. He also responded to his former clients’ inquiries. After several of the clients moved their business from Bessemer to Stein, Bessemer sued Branin. The company alleged that Branin had breached his duty of loyalty to Bessemer by improperly soliciting his former clients to join him at Stein, thereby impairing the good will that Branin had sold to Bessemer in connection with Bessemer’s acquisition of Brundage.

After a bench trial on the question of liability, the United States District Court for the Northern District of New York granted Bessmer’s motion for summary judgment. The case was appealed to the United States Court of Appeals for the Second Circuit on the issue of damages.

Under New York law, an employee has a “duty to refrain from soliciting former customers, which arises upon the sale of the ‘good will’ of an established business.” Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276, 283 (N.Y. 1981). The Bessemer Court held that a “seller’s ‘implied covenant’ not to solicit his former customers is a ‘permanent one that is not subject to divestiture upon the passage of a reasonable period of time.’” Bessemer at 6. However, the Court determined that an employee may accept the business of his former clients if they choose to follow him to a new employer.

Additionally, “[t]here is no hard and fast rule in determining whether a seller of ‘good will’ has improperly solicited his former clients,” and the Court declined to create one in this case. Id. at 7. The Court did note several factors that can be considered to determine whether improper solicitation has occurred, including:

  • Whether, following the sale of a business and its good will, a seller initiated contact with his former customers or clients;
  • How much bad faith the seller demonstrated when initiating contact with his former clients; and
  • How much the seller’s conduct actually lead to the former clients moving their business to the seller’s new company.

Id.

The Court concluded 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.” Id. at 8. Additionally, if a client requests more 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.’” Id.

The Court’s decision provides a guideline for how those who have sold their good will can conduct business relations with former clients. Its decision to not develop a strict rule regarding what is and is not improper solicitation continues to leave this area of the law only partially undeveloped. However, to avoid being found guilty of improper solicitation, sellers should avoid initiating business-related contact with former clients and should act in good faith in order to not be perceived as recruiting the clients to their new company.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

In New York, LLP Liability Shield Does Not Apply to Obligations Between Partners

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