Category Archives: sale of business

If One Sells a Sole Proprietorship, What is Being Sold?

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 limited partnership require new partners to sign a personal guaranty to enter a partnership?

If a limited partnership admits new partners, may those new partners be required to sign a personal guaranty? That question was addressed in the recent case of Hughes v. Mainka, Superior Court of New Jersey, Appellate Division, Docket No. A-2721-11T# (June 14, 2013).

          In that case, the dispute was over whether the existed limited partners – who had guaranteed a loan to the partnership – could require the new limited partners to do the same thing.

          The Court determined that they could not. However, the holding was very fact-specific. It related to the fact that “neither the Original nor Amended Partnership Agreements required limited partners to personal guarantee a partnership loan.” Id at 17. The Court concluded that this reflected an intent not to make such a requirement a condition for new partners.

          The Court held that the new partners were right in resisting the requirement. This case highlights the necessity to carefully review both the intent and plain language of a partnership agreement before entering into a limited partnership.

Comments/Questions: gdn@gdnlaw.com
© 2014 Nissenbaum Law Group, LLC

What are you selling when you are paid for the “good will” of your business?

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.

Will a Loan be Discharged When the Lender Releases the Liens on the Collateral Prior to Ensuring That the Payoff Checks Have Cleared?

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 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.

Comments/Questions: gdn@gdnlaw.com

© 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.

Comments/Questions: gdn@gdnlaw.com

© 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.

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

What Are You Selling When You Are Paid for the “Good Will” of Your Business?

Recently, 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.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

When is it Appropriate to Use an Indemnification Provision in Selling a Business?

Most people selling their business are unaware (at lease at the outset) that the contract of sale normally includes some sort of indemnification language. There are many variations, but in the typical case, this means that the seller agrees to hold the buyer harmless from claims of third parties relating to what the seller did or did not do when they owned the business. Likewise, the buyer holds the seller harmless from claims of third parties for what the buyer does or does not do after the sale concludes.

Obviously, there are many legitimate variations to this approach. For example, if the seller is going to continue as a consultant or even employee to the business, the indemnification may need to take into account that he should continue to have some sort of indemnification obligation. Likewise, one might decide to define the indemnification obligation as applying to no more than a fixed upper amount or limit it to a certain period of time.

In the extreme case, a buyer or seller might want to take the position that there should be no indemnification provision at all. This includes situations in which the business is being sold for a relatively small sum that is less than the business is actually worth. In such a case, the seller may insist that it is being sold “as is” and “with all flaws” the same way as distressed real estate. In other words, the price figures in the risk inherent in having no indemnification clause.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC