Category Archives: Current Affairs

Will the Disability Provision of an Operating Agreement be Upheld Under New Jersey Law?

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.

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© 2012 Nissenbaum Law Group, LLC

Is a Person who Indirectly Benefits from a Nonprofit Organization Considered a “Beneficiary” Under the New Jersey Charitable Immunity Act?

Who should be considered a beneficiary under the New Jersey Charitable Immunity Act?

In Larissa Sapia and Joseph Sapia v. Hunterdon County YMCA, L-10265-09 (N.J. Super. App. Div. August 10, 2012), Larissa Sapia (“Plaintiff”) went to the YMCA (“Defendant”) to examine its facilities with her parents. Plaintiff went with her parents only to act as a translator for them because they did not speak English.  While touring the facilities, Plaintiff slipped on a puddle of water located in front of a water fountain. The fountain was between the men’s and women’s locker room entrances. 

Plaintiff sought damages against Defendant that were caused by the unsafe condition of Defendant’s premises. Defendant claimed its potential personal injury liability was limited by the New Jersey Charitable Immunity Act (“Act”) and moved for summary judgment. The court granted Defendant’s motion. Plaintiff filed a motion for reconsideration with the Superior Court of New Jersey, Appellate Division (“Court”). Plaintiff acknowledged Defendant’s status as a nonprofit tax exempt entity that was organized for charitable purposes. Therefore, the issue considered on appeal was confined to whether Plaintiff was a beneficiary of the charitable works. If it were, it could potentially receive immunity under the Act.

The Court explained that the Act shields charitable entities from liability for negligence in certain circumstances. The Court noted that the grant of immunity under the Act is not mandatory; it is not conditional. However, the Court also noted that the Act is liberally construed so as to afford immunity to nonprofit corporations organized for charitable, educational, or hospital purposes. 

In order for an entity to qualify for charitable immunity it must be:

1) formed for non-profit purposes;

2) organized exclusively for religious, charitable, or educational purposes; and

3) promoted for objective and purposes at the time of the injury to the plaintiff who was then a beneficiary of the charitable works.

The Court elaborated upon who is considered a beneficiary of the charitable works under the Act. The Court explained that beneficiary status does not depend upon a showing that plaintiff personally receives a benefit from the works of the charity. Rather, the issue was whether the entity claiming immunity was engaged in the performance of the charitable objectives that was the purpose of its
creation. 

The Court considered the following factors:

  • Plaintiff was educated regarding the nature of available services that Defendant offered
    and on Defendant’s proposed goals.
  • Plaintiff’s presence was incidental to the accomplishment of her own objectives, which were
    related to the charity’s beneficence; ensuring her parents could receive the benefits of the facility tour.
  • Defendant was advancing its charitable goals at the time Plaintiff was injured because it
    occurred while walking a guided tour of the facility where Defendant conducted its activities and functions.

Based upon these factors, the Court held that Plaintiff benefited from the charity’s works. Therefore, she was a beneficiary of Defendant. Thus, the Court affirmed Defendant’s motion to dismiss.

A lesson to be noted is that nonprofits may be immune from personal injury claims even if the person
injured is on the premises for purposes that do not directly benefit them.

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© 2012 Nissenbaum Law Group, LLC

What Will Square’s Partnership With Starbucks Mean For New Jersey Businesses?

On August 8, 2012, Square, the mobile payment device start-up, announced its decision to join forces with Starbucks.  The two entities will unite at thousands of Starbucks locations across the United States to allow customers the option of paying for their purchases through the Square mobile phone application.  The joint venture has left many asking what this will mean for the retail payment industry.

Customers will have the option of making on-site payment through the mobile payment application. The venture will also process debit and credit card transactions. The aim is to streamline the payment process and strengthen the industry-wide initiative to eliminate money.

Starbucks will process customers’ orders through Square software installed on Starbucks’ existing registers. In the alternative, customers can instead use the Square-created “dongle.”  The dongle attaches to a mobile phone or iPad and transforms that product into a debit or credit card processor. 

The mobile payment sector is becoming a very significant part of how customers transact business, and Square’s may have just put itself at the forefront of this booming enterprise. Square’s product is so attractive to merchants because of its ease of use. If mobile payment continues to make such an immense impact on how we make purchases, the plan to eradicate cash just might materialize.

While Square has designed its own products and patented some of its technology, its model is not completely novel.  Square has managed to combine and make use of existing products, such as the iPad, with existing ideas that other mobile payment operators make use of, and throw a twist on it to make an innovative product.  It will be interesting to see if any intellectual property disputes arise from Square’s use of an old but revised idea.

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© 2012 Nissenbaum Law Group, LLC

May a Car Manufacturer Increase Wholesale Prices In Order to Avoid Incurring the Cost of a Statute Meant to Protect Dealerships?

Should courts interpret a statute that was meant to protect car dealerships in such a way that it does very little protecting? Should car manufacturers be able to circumvent statutes implemented to protect dealerships by simply increasing wholesale prices?

These questions underlay a case heard in the United States Court of Appeals for the Third Circuit. Liberty Lincoln-Mercury, Inc. v. Ford Motor Co., 676 F.3d 318 (3d. Cir. 2012).  Ford Motor Co., concerned the fact that Ford provided warranties to buyers of new Ford cars. These buyers were allowed to take their car to any dealership for repair or replacement of defective parts, regardless of where the buyers purchased the vehicle. Prior to the enactment of the New Jersey Franchise Protection Act (“NJFPA”), Ford would reimburse its dealers 40% more than the cost of making the parts for vehicle repairs under warranty. However, since the enactment of the NJFPA Ford was required to pay their dealers the retail price of the parts, which resulted in higher costs to Ford.

In an attempt to recoup that increased cost, Ford came up with a Dealer Parity Surcharge (“DPS”). The amount of the surcharge varied among dealers; the more warranty work a dealer performed, the higher the surcharge amount. The dealers filed suit against Ford based upon the wrongful implementation of DPS.

The District Court determined that DPS violated the NJFPA. In affirming the decision, the Third Circuit noted that NJFPA “did not preclude cost-recovery systems effected through wholesale vehicle price increases.” The Court nevertheless, “rejected Ford’s contention that the DPS constituted such a system.” Id. at 322.

Subsequently, Ford utilized a new protocol for surcharges called the New Jersey Cost Surcharge (“NJCS”). NJCS is based upon the total cost of Ford to comply with the NJFPA across New Jersey. Unlike DPS, this resulted in across the board (rather than individualized) increases in the wholesale price of vehicles. The result of the NJFPA is a flat surcharge for every dealer which increased according to the number of vehicles the dealer purchased, rather than how many warranty repairs the dealer submitted.

Thereafter, the dealers brought another suit against Ford, claiming that the NJCS was unlawful because it violated the NJFPA. Liberty Lincoln-Mercury, Inc. v. Ford Motor Co., 676 F.3d 318 (3d. Cir. 2012).  The Third Circuit held that NJCS does not violate NJFPA and thus was not unlawful.

The NJFPA provides that:

“The motor vehicle  franchisor shall reimburse each motor vehicle franchisee for such [warranty] services as are rendered and for such parts as are supplied, in an amount equal to the prevailing retail price charged by such motor vehicle franchisee for such services and parts in circumstances where such services are rendered or such parts supplied other than pursuant to warranty; provided that such motor vehicle franchisee’s prevailing retail price is not unreasonable when compared with that of the holders of motor vehicle franchises from the same motor vehicle franchisor for the identical merchandise or services in the geographic area in which the motor vehicle franchisee is engaged in business.”

In holding that the NJCS did not violate the NJFPA, the Court examined the ruling by a Maine court  interpreting a similar statute. Acadia Motors, Inc. v. Ford Motor Co. (Acadia), 44 F.3d 1050 (1st Cir.1995). In Acadia, the Court held a flat surcharge imposed on all wholesale vehicle prices was lawful. The Court reasoned that, since the statute said nothing about wholesale or retail prices, it appeared to
leave the manufacturer free to increase wholesale prices, resulting in a corresponding increase in retail prices.

Similarly, in Ford Motor Co, the Court held that the New Jersey statute was enforceable because it did not directly address the increase of wholesale or retail prices. Thus, although the NJFPA regulated warranty reimbursements, it does not regulate wholesale price increases nor did it regulate retail price increases. 

Therefore, the Court, in Ford Motor Co held that the DPA was unlawful but the NJCS was lawful. While the NJCS was a bona fide wholesale price increase, the DPA surcharge was unlawful because it was based
on how many warranty reimbursements individual dealers submitted. The NJCS was lawful because it was a flat surcharge assessed on all wholesale vehicles sold
within the State.

In the end, NJFPA did not protect dealers against Ford increasing its wholesale prices, nor did it protect consumers against dealerships increasing the dealerships’ retail prices. Thus, it is highly questionable as to whether the public interest was served by this decision.

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© 2012 Nissenbaum Law Group, LLC

Family Limited Partnerships Are Important Alternatives For Keeping a Business in The Family

Family Limited Partnerships are an important tool when a family wants to transfer a business from one generation to the next.  Essentially, it serves two purposes: it transfers the ownership without going through probate (because the older generation is still alive), and it leaves management authority with the older generation.

In essence, a Family Limited Partnership is nothing more than a limited partnership in which some or most of the ownership interest is transferred to the Next generation by way of a limited partnership interest.  The older generation may even maintain a minority interest, but remain as the general partner(s).

There are many variations on the foregoing approach, but the key point is that limited partners do not manage the affairs of the partnership; that is only done by general partners.  There can be complex variations on this approach that take into account particular estate planning objectives.  However, the basic idea is to establish a way of transferring a family business before those in control have passed away.  This is aimed at providing a better chance for the business to avoid disruption, and possibly outright destruction, if it were to be sudden transferred without adequate preparation, upon the death of the owner(s). It can also be a very effective planning tool to avoid excessive taxation relating to the transfer.

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© 2012 Nissenbaum Law Group, LLC

May a 501(c) Organization Utilize Its Funds For Issues Oriented Advocacy?

Most people are familiar with 501(c)(3) non-profit organizations.  These are entities that perform charitable work that is mostly (though not necessarily completely), devoid of political content.  Generally speaking, donations to such entities are fully deductible for tax purposes.

However, many people are unaware that there are a series of additional types of entities under section 501(c) of the Internal Revenue Code (“IRC”).  Those entities can engage in far more issues oriented political advocacy.  Generally speaking, donations to those entities are not necessarily deductible.  An example of such entities are 501(c)(4) organizations that are often specifically organized for the purpose of political advocacy.

One of the critical changes to this scheme has occurred as a result of Citizens United v. Federal Election Commission, 558 U.S. 50 (2010).   In that case, the Supreme Court held, among other items, that a 501(c)(4) entity could donate unlimited amounts for an issue oriented campaign.

One of the more interesting questions is whether this will allow donors to shield themselves from being identified.  While the Federal Election Commission has approved that anonymity, recent court decisions have called that into question.  We expect that this will become an issue on appeal in the months and years to come.

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© 2012 Nissenbaum Law Group, LLC

What Will Become of The NJ Meadowlands Sports Complex?

In June 2012, the New York Jets and New York Giants filed a lawsuit in New Jersey Superior Court, arguing that the American Dream Meadowlands project would cause unbearable traffic on game days.  The teams argued that the additional attractions and additional traffic at the complex would impede football fans’ enjoyment of the game.  The teams mentioned a 2006 agreement that requires the heads of other projects at the complex to obtain written consent to build anything that would adversely impact the game-day experience of the sports fans.

Among other attractions, the retail complex has already begun being transformed into a waterpark and indoor amusement park.  The developer of the project, Triple Five, is also in the process of securing over one billion ($1,000,000,000.00) in additional financing.

Triple Five is not the only supporter of the project. The Meadowlands Regional Chamber of Commerce (“Chamber’) also feels that the project should continue because it has the potential of creating business opportunities and jobs.  Local politicians are also on board, because they find the current state of the arena unsightly.

Two Bergen County state senators presented the idea of a compromise and making the new entertainment center stay closed on Sundays to clear traffic on the days when the teams would be playing.  However, Triple Five was not happy about the proposal as it could significantly decrease business, considering how many people are only available to enjoy the attractions on weekends.

The Chamber released a concept plan that exposed a prior intention to develop the complex beyond just the MetLife Stadium.  The concept plan included ideas for a convention center, hotels and a casino, that would join the MetLife Stadium, American Dream, the Meadowlands Racetrack and IZOD Center.  If carried out, the plan would allow the region to capitalize on enormous opportunities and an injection of jobs into a depressed employment market.

Since the two sides (the sports teams and the developer of the Meadowlands entertainment project) are at odds about the continuation of the project, it is likely that the litigation will continue.  What the outcome of the lawsuit will be is unknown.

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© 2012 Nissenbaum Law Group, LLC

Will an American Franchisor Establishing a Franchise in Canada be Subject to Special Laws Providing Liability For Failing to Maintain Brand Strength?

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.

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© 2012 Nissenbaum Law Group, LLC

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

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.

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© 2012 Nissenbaum Law Group, LLC

Will a Court Enforce a “Put” Offering Buy Out Clause in a LLC Operating Agreement

In Martin Heller v. Lauren Gardner Trust, No. A-0914-11T2 (N.J. Super. Ct. App. Div. June 27, 2012), the court considered the enforceability of a “put offering notice, by which one or more members could require the other members to buyout their shares.”  The mechanism was straightforward.  It involved the following:

Under the terms of the Agreement, ‘upon receipt of the Put Offering Notice, the responding member shall be obligated to purchase the Membership Interest of the Initiating Member at the purchase price set forth in subsection (b) of this Section 6.03.’

Id. at 3.

In that case, the issue was whether an April 27, 2010 letter from one of the members to the other was enough to invoke the put option.  The letter stated, in part, “as per page 19 paragraph 6.03-Put Option, this letter should be construed as a put offering notice.”  The court determined that the letter was clearly sufficient to invoke the Put.

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© 2012 Nissenbaum Law Group, LLC