Since the last post already gave away the end of the story, I thought I’d go back to the beginning and try to fill the blanks. As you may recall, I was describing a win I had recently that was somewhat surprising. My client had sued his former employer and business partner and won via summary judgment. Really isn’t anything too unusual or exciting about that, except the way the judge crafted the relief in the Order exactly the way I wanted–and then some!
So, first I’ll let the court explain the basic facts for the employment claim (although my client wanted me to use the real names, they have been changed to protect the guilty):
Fisher was employed by Mountain Const. Inc. as the site superintendent for a restaurant Project from October 8, 2012 through February 5, 2013 at a rate of $1,750 per week. Fisher was not compensated for seven weeks and two days of work, for which Fischer is owed $12,950.00. Mountain Const. Inc. is liable for this debt as Fisher’s employer. Fisher also claims that Mountain Const. Inc.’s owner, TJ, should be held personally liable by piercing the corporate veil of Mountain Const. Inc.
Knowing that the company was defunct with no assets, and after hearing numerous threats of bankruptcy, I thought I would take a long shot and try to hold the owner personally liable for the unpaid wages. The main reason I tried was because of how often TJ kept throwing around the “B” word (Bankruptcy) throughout the case–including during his deposition–smugly. I knew it was less likely for TJ to file bankruptcy personally, at least not until absolutely necessary. We proved TJ took money from the Project and used it personally to buy a house and flip it. It is much easier to buy real estate if you don’t have a bankruptcy on your credit report.
After Fisher was fired, he provided the statutorily required written demand (Minn.Stat. § 181.13(a)) on his employer. After 24 hours passed, with his wages remaining unpaid, the statutory penalty of an extra day’s pay was added on for each day he went unpaid (up to 15 days). The Court also ordered the employer to pay for Fischer’s attorney’s fees and expenses (Minn.Stat. § 181.171). Piece of advice: Pay your employees on time in Minnesota.
Before and during the case, Fisher was accused of being the reason there was no profit from the Project and told he would never be paid. In essence, he was accused of being a traitor due to working with the General Contractor to finish the Project (TJ walked off the job); accused of being a forger for trying, unsuccessfully, to sign his own name to a lien waiver for work that was paid for; and a conspirator, for helping turn documents in so the Project could be closed out and everyone could be paid–even TJ and Mountain Const. Inc.! For doing all that he was fired and told he didn’t deserve to be paid for over two weeks of work.
As the litigation progressed, we could tell we would not be getting any useful documents from TJ or Mountain Const. Inc. We decided to change course and serve subpoenas on the company’s credit union and see what we could uncover. My client had done some (a lot) of the bookkeeping for the Project but TJ said he had not completed a final accounting yet because he was broke. With the subpoenas, Fisher’s understanding of the Project’s finances and some help from the General Contractor, we were able to piece together a puzzle that only formed one picture when the pieces fit and locked together: TJ took all the money from the Project and the business’s bank accounts and kept it for himself.
Here’s what the Court did with that:
A. The Victoria-Elevator Test Favors Piercing the Corporate Veil
In the usual case, an individual shareholder is not liable for the debts and obligations of the corporation. To
determine the appropriateness of disregarding the corporate entity in this case, however, the Court applies a two-pronged test considering: (1) whether TJ has sufficiently established MCI as a separate entity and; (2) whether the failure to impose personal liability on TJ would work an injustice or be fundamentally unfair to Fisher. Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., Inc., 283 N.W.2d 509, 512 (Minn. 1979). Here, “courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation.” Id. at 512 (citing DeWitt Truck Brokers, Inc. v. W. Ray Flemming
Fruit Co., 540 F.2d 681, 684-87 (4th Cir. 1976)). That can be determined by an analysis of the following factors:
insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and existence of corporation as merely facade for individual dealings.
Id. Not all but “a number of” these factors need to be present to satisfy the first prong of this test.
The Court applies these factors to our case’s facts and here is the lesson that can be learned from this. If you want to maintain the liability protection you gain from doing business as a corporation or a limited liability company (LLC), you need to follow corporate formalities, keep your business and personal finances separated and keep current and accurate records. And pay your employees, your taxes and don’t lie in a deposition.
In this case TJ did not treat MCI as a separate entity and failed to distinguish between property owned by him and property owned by the corporation. The Court has no evidence that TJ observed any of the corporate formalities necessary to distinguish MCI as an entity separate from himself. TJ was the sole shareholder of MCI. He admits that no taxes have been paid by the corporation and, according to him, he no longer possesses the corporation’s financial documents.
TJ claims that he did not pay himself a regular salary as CEO of MCI. He treated MCI’s bank account, however, as his personal account. Depo. at 42. He wrote checks from MCI’s account at the Credit Union and deposited them into his personal account at his Bank without recording transactions. The amounts of these transactions varied from $6,000 to $40,000. TJ also claims that he cannot remember why he transferred that money. Id.
*****[numerous self serving transactions deleted]****
TJ claims to not remember any of the above transactions or their purpose. Furthermore, the only records of the transactions were kept by the bank and credit union. The Court can only conclude that TJ was using MCI to support himself and his other businesses and investments. Based upon the evidence in this case, TJ did not distinguish between his own assets and those of MCI.
Under the first prong of the Victoria-Elevator test, TJ’s failure to observe corporate formalities, the absence of corporate records, and the evidence that the existence of the corporation is merely a facade for individual dealings, all support the piercing of MCI’s corporate veil.
Stay tuned. The next post will address the second prong’s analysis of the injustice and unfairness of allowing the corporate entity to shield the owner from liability. Now isn’t legal geeking fun! Oh yeah, and please pay your employees and taxes.
Happy, Happy, Joy Joy! Bankruptcy stats for the fiscal year are out! This is better than x-mas and thanksgiving all rolled into one holiday!
BANKRUPTCIES ARE BACK DOWN TO PRE-RECESSION NUMBERS!
There is just a little taste below, but for more sexy stats and tantalizing tables go here:
I am asked contract questions by small business owners all the time. Basically the owner invariably wants to know, “Would my contract stand up in court if I have to sue or get sued?” My response is usually to ask (lawyers have a genetic defect that makes them answer questions with questions) if they always have a new contract signed for every job, with every customer and if they can find all their contracts when they need to? This is usually met with a long pause and then a look that’s something like, “He makes a living doing this???”
But the real reason I’m asked the question in the first place is that most small business owners (fortunately) don’t get sued, or have to sue, too often. That means they never have their contracts tested trying to enforce or defend one. Understandably, it would be comforting to know if, after all the hassle that can be inherent in getting clients to sign a written agreement, if it is even enforceable anyway.
Some people seem to think that if they show me their contract, I can pull out the crystal ball they give all of us in the second year of law school, and after I peer intensely into it, a before-then-unknown future is revealed to me. Of course, the future revealed takes place in a courtroom with a Judge ruling on the validity of the guy’s contract. Unfortunately, I must’ve missed class the day the crystal balls were passed out, because I don’t have one and I’ve never been able to do this.
Is that a Vulcan Thing?
I suppose it’s easy enough to just answer with a classic. Like rattling off something about a contract requires an offer and acceptance with valuable consideration exchanged and a meeting of the minds. But this answer seems to draw another look that indicates my ability to financially support myself is seriously being questioned. To avoid this constant questioning, I usually try a different approach.
I have never seen a perfect contract that will be guaranteed to be upheld in every imaginable, unknown factual situation that may come up. My prediction is usually worthless in the end (particularly when they don’t show me the contract) and I think the focus should be on a different aspect of the contractual relationship that’s controllable: It’s physical manifestation.
Get What You Pay For
Of course it is best to not use the contract you found on the internet that seems close to a good fit. Or better yet, don’t use the contract you cut and pasted together from many contracts you found on the internet. Make sure you have a solid agreement that was at least reviewed, if not written, by a lawyer with contract experience. It is a critical part of getting paid for what you do after all and not the best place to cut corners to save a little money (Grandma called it pennywise and pound-foolish).
The most important thing is to make sure you require a signed contract before starting any work on any job. Especially with existing clients. It is when you deal with people you think you know that most people get lax and don’t get a signed agreement. It is also when you will let your guard down and tend to have your larger credit lines extended. It isn’t a coincidence that people behave a bit differently when they know they have a signed agreement with you.
Don’t Trust–Verify First
Because you have done business with the client before and for awhile, it is only natural to get a false sense of trust built up. Then you get sloppy (or lazy or don’t want to offend) and you’ll let them go a little longer or deeper with you on credit. But don’t do it. Guard against this.
This is when you have the most exposure. And it is when it hurts the most if a dispute comes up or the deal goes south or for some other reason the client can’t or won’t pay you. This is when you look back in the file after trouble has begun to find the contract it never seems to be there.
I Can See . . .
There is a future I can see and one I can guarantee will come to pass. Without that signed contract I”ll guarantee a future that is going to be harder and more expensive when you try to sue the contracts client. Without that signed paper, you probably lost your ability to collect the costs of collection, including recouping any of your attorney’s fees. Or worse, now you can’t prove it at all if the former client can’t seem to remember anything at all about this account or the terms you’re talking about or who the hell you even are?
My point is that no matter what type of contract you have it can be completely unenforceable if it is unused or goes unfound or is unsigned. The most important issue for a small business owner to worry about is actually using contracts religiously on every project and always requiring a signed contract for every job, from every customer, on every account and in every situation. At least this way when you do need to sue something out, or worse yet you get sued, you’ll have the best chance at prevailing. And prevailing in the most effective, efficient and economical way possible.
BTW: Yes, oral contracts are valid in Minnesota and can be (and are) successfully enforced. It is much more difficult and expensive to enforce an unwritten agreement if the other party denies the agreement or disputes the terms and conditions that you believe were agreed upon. Oral contract cases can (usually do) devolve into messy “he said-she said” situations that are decided on highly subjective credibility determinations alone. Don’t bet on that one.
Minnesota on Pace to Exceed 2013 in New Business Filings
More than 14,000 New Business Filings Reported in Third Quarter
Contact: Nathan Bowie, (651) 297-8919, firstname.lastname@example.org
SAINT PAUL, Minnesota — Secretary of State Mark Ritchie reports 14,135 new Minnesota businesses were filed in the third quarter of 2014, bringing the state’s year-to-date filings to 45,637 — edging out the 44,544 new business filings reported through the third quarter in 2013. The 2014 business filings are on pace to surpass the 58,260 filings for all of last year.
“It’s been a strong year for business filings, and these numbers point to the great number of innovators and entrepreneurs who call Minnesota home and believe in doing business here,” says Secretary of State Mark Ritchie.
Minnesota’s new business filings reports are available to view online for 2014 and 1990–2013. Last year, the Office of the Minnesota Secretary of State reported 58,260 new business filings, the third-highest annual total on record.
My new desk is finally complete! It was supposed to be for my new law clerk (who isn’t very new any more) and was going to be done back in May–Five months later: TA-DA! Now that I’ve hired my first Associate Attorney (more later) I’ll just say it’s for the new attorney. Just to be special, ya know? Now that I think of it, the law clerk was supposed to have written a blog post sometime this summer too. I wonder what ever happened to that? I’ll check and get back to y’all (or he will). Until then, enjoy the wonders of the new desk in full living color, showing off all of it’s glorious deskiness . . .
How much trust do you put in online reviews of local businesses? A lot of people use them as a decision-making tool before spending their hard-earned money on a good or service. Quite often and understandably, small business owners with a poor review or rating want to sue the messenger.
Recently, Yelp! was sued for manipulating some small businesses’ online ratings after the companies would not buy, or quit, advertising on Yelp!’s website. Continuing to deny what restaurateurs have said was true for years, Yelp! says it does not rearrange positive and negative reviews so they are higher or lower on a review list. At times in can seem the reviews are posted without any discernible reason other than to impact consumers’ perceptions.
However, Yelp! got another positive review from a federal court last week and this one is at the top of the list. The Ninth Circuit Court of Appeals, ruled in Yelp!’s favor and confirmed the business owners that brought the suit did not sufficiently allege they suffered from “economic extortion.” The allegations included that the businesses’ ranking’s had plunged following negative encounters with Yelp! staff or sales reps usually over ad sales. The Court explained:
The business owners may deem the posting or order of user reviews as a threat of economic harm, but it is not unlawful for Yelp to post and sequence the reviews. As Yelp has the right to charge for legitimate advertising services, the threat of economic harm that Yelp leveraged is, at most, hard bargaining.
Did you catch that? Yelp! may legally post the reviews it wants to, and not the ones it does not, and in any order it wants. That means Yelp! has the right to not post particular reviews (good or bad), can bury a bad review or raise an older, positive review from the obscure second or unseen third page to the most prominent top spot on page one.
The blindly trusted, and unreliable, user reviews we dutifully turn to and place so much credence in before making a purchasing decision may lawfully be manipulated by the companies that own them. Worse yet, the purely portrayed common man’s opinion may be dishonestly altered in order to deceive consumers to make a profit.
The other conduct Yelp! was accused of was writing negative reviews itself. The Court didn’t find it plausible and found dismissal of the claim proper. Although Yelp! has admitted it used to pay folks to write reviews during its infancy, the Court determined the factual allegations were insufficient to allow the case to continue.
In 2007, the CEO for Yelp! even wrote in a blog post (where else?) for The New York Times “there was a time in our earlier days where we experimented with paying for reviews directly in cities outside of San Francisco to help get the ball rolling in our otherwise empty site.” Yet, pleading this fact coupled with some rather weak allegations did not suffice.
But the Court does offer an assurance to small business owners everywhere when it concludes the opening the Court’s written opinion by hinting there may be a way to attack Yelp!’s alleged conduct:
We emphasize that we are not holding that no cause of action exists that would cover conduct such as that alleged, if adequately pled. But for all the reasons noted, extortion is an exceedingly narrow concept as applied to fundamentally economic behavior. The business owners have not alleged a legal theory or plausible facts to support the theories they do argue.
The hint is nice. Kinda like “Come on lawyers, the answer is right there! Just use it!”
Don’t worry Yelp!. I won’t say what claim to use either . . .
The Terrible Yelp Ruling Isn’t So Bad–The New Yorker