Wilmington North Carolina Business Law and Litigation Attorney Blog

Port City Java Sues Founder

Wilmington-based coffee-house chain Port City Java has filed suit against its founder and former COO Don Reynolds.  The suit, filed in New Hanover County Superior Court, alleges that Reynolds, his wife, and an LLC held by Reynolds, diverted funds from the company for personal use, including the purchase of real estate in Highland, NC. 

According to the Star-News, the suit was filed on December 23, and in keeping with the Rules of Civil Procedure, does not specify the dollar amount sought, but instead recites the claim for damages as "in excess of $10,000."

Piercing the "Corporate" Veil of LLCs in North Carolina - Part 4

In the previous post, I promised a discussion of motions for sanctions pursuant to Rule 11 of the North Carolina Rules of Civil Procedure, in cases where LLC members are named as individual defendants in contract, fraud and Chapter 75 cases.

In North Carolina, the rule is straightforward:  an individual LLC member cannot be sued, except "by reason of his own acts or conduct."  See N.C.G.S. s 57C-3-30(a).  This section does not, however, establish an alter ego or veil piercing creteria.  It is intended to allow plaintiffs to recover for torts committed by LLC members, not, as some might have it, to establish member liability in actions against the LLC.

Clarifying this purpose, subsection (b) provides:  "A member of a limited liability company is not a proper party to proceedings by or against a limited liability company, except where the object of the proceeding is to enforce a member's right against or liability to the limited liability company."

This subsection should clarify any doubt a litigant might have about what subsection (a) allows. 

In Page v. Roscoe LLC, 128 N.C. App. 678, 497 S.E.2d 422 (1998) the plaintiff learned this lesson the hard way.  Plaintiffs sought to enjoin the defendant LLC from constructing a gas storage facility they deemed a nuisance.  LLC member Dale Bone was also named as a defendant.  No actions by Bone were alleged that were not also alleged to have been undertaken by the LLC.   Accordingly, the court held that naming Bone was a violation of Rule 11, on the theory that the complaint, in naming him, was not well grounded in law.

In so holding, the Court of Appeals agreed with the trial court, that "no acts by Bone, individually, were properly alleged. Therefore, under the above statute [N.C.G.S. s57C-3-30(b)], it was improper to name an individual member of a limited liability company as a party defendant without any evidence to support it.  As such, the naming of Bone as an individual defendant was not well-grounded in law and therefore a violation of Rule 11." 

The decision provides little guidance to a plaintiff hoping to pierce the corporate veil of an LLC.  There is no explanation about what would need to be alleged to state a complaint If anything, it provides broad grounds to support Rule 11 motions whenever an individual LLC member is named in the same complaint as the LLC.

Tips For Businesses: Getting the Most From Your Attorney

New York City business attorney Dan Abrams has published an article in the New York Enterprise Report called Getting the Most From Your Attorney.  I have linked to it here because it contains lots of helpful suggestions for business owners about how -- and when -- to make the best use of an attorney.  In the third item on Dan's list is one I always emphasize:

Use lawyers to prevent problems, not just fix them. Many small businesses do not have attorneys until they think they need them. You need to make sure you are proactive in identifying legal issues before they become problems, and problems before they become lawsuits.

I would personally prefer to have my days be filled with short, simple, inexpensive legal work that solves problems and ends them, instead of having them filled with long, complicated, intractable and expensive problems.  The latter might ultimately be slightly more lucrative for the attorney, but my view is that both myself and my clients are best served when the problems are handled while they are still small, manageable, easy to handle, and cost little to solve. 

Five Inside Tips for Improving Your Collection Rate

A lot of clients have problems collecting from their customers.  Most of my work involves recovering that money.  Over time, I have developed a series of techniques that clients can use to help improve their collection rates, save money (by not having to pay me) and increase cash flow.  Here are a few:

1. Use a professionally drafted contract or promissory note.  For one thing, the mere fact that a note or contract appears to have been drafted by an attorney gives the customer the subtle impression that you have an attorney on your side.  This alone will cause them to take you more seriously, and therefore, more likely to pay accordingly.  You may spend a few hundred dollars - or for larger transactions - a few thousand - but if you do hundreds of thousands - or millions - of dollars in transactions every year using the same form contract, a small investment in a well-drafted contract easily and quickly pays for itself.
2. Make sure you provide that the customer in default is liable for the costs of collection and attorneys' fees.  In North Carolina, you are not automatically entitled to attorneys' fees just because you had to hire an attorney to collect a debt.  There are only two ways to get them: either by a specific statute that grants them to you, or by contract.  Since you control the terms of your contract, it makes sense to insert a brief clause - even a single sentence - providing that if the customer ever defaults, the customer must pay collection costs and attorneys' fees.  You might be surprised by how many contracts do not provide for collection of these costs.
3. Define default.  If you are going to implement #2 above, you should also have a "Definitions" section that defines exactly when the customer is in default.  Often on things like open accounts,for example, it can be difficult to tell if the customer is in default, or just running a high balance.  Rather than let a judge decide, make it clear in your contract:  all invoices are due within X days of mailing, or the customer is in default.  Or if you are running an open account, define default as any balance exceeding X dollars that is not brought below X dollars within Y days of first exceeding X dollars.
4. Know Your Customer.  It's not enough to get a representative to sign a contract.  You need to have a specific entity on the contract that will be liable for the debt.  A lot of times I will see a contract signed by "Sam Signer as agent for Gulf Bay Dreams".  Only there is no actual company called "Gulf Bay Dream"s.  That may be the name of a project under development, but the actual company might be called XYZ, Inc, dba Gulf Bay Dreams of Tallahassee.  If the contract only says "Gulf Bay Dreams" and you end up in court, you're going to have the extra task of having to prove that the "Gulf Bay Dreams" you are suing is in fact one in the same with the one who signed your contract. The problem gets worse when you go to the Florida Secretary of State website and find that there are 53 companies in Florida with variations on the name "Gulf Bay Dreams", engaged in everything from propane wholesaling to fencepost repair.   Get the right name on the contract the first time around and you cut your risk dramatically. 
5. Don't ever let them forget that you are on top of things.  You don't have to be nasty about it, and in fact you shouldn't be; but if you are shipping goods on a net-30 basis and day 31 rolls around and you have neither been paid nor contacted by the customer, make sure someone gets on the phone at 9:01 am on Day 31 to find out the status of the payment.  The techniques for handling this are highly variable, as some client relationships are more delicate than others, but you should have a calendaring system in place to notify you the minute any account or contract is in default, and have someone available with the time and tact to handle the situation.  With collections, the maxim "the squeaky wheel gets the oil" is absolutely correct.

Borat Lawsuits: An Update

Borat litigation is in full swing since last I posted on this subject.  Since then, another suit against Fox has sprung up -- this one in Federal court in New York -- on behalf of the citizens of Glod, Romania, who appeared in the film. 

Here we have possibly a different set of facts/misrepresentations, and certainly a much more sympathetic set of plaintiffs.  To wit:

Spirea Ciorobea, 68, portrayed as the "village mechanic and abortionist" in the film, is being represented by the lawyer's group.  "I was approached in the street and asked whether I could play a welder," he said. "Like many people here, I can't find work, so I appreciated the chance to earn some money for my family. Later, they painted my arms up to my elbows with red paint. I had no clue what for and only realize now they wanted to show that I am covered in the blood of the women whose babies I was aborting. I would never have agreed to that, even if they had paid more than the $4 I was given. I am a Christian and oppose frivolous approach to abortion, and I think what they made me do was disgusting.

Wow.  I think even down here in low-verdict North Carolina, you wouldn't want to be the Defendant  while that poor guy testifies.  So I am anxious to see how Fox handles the Romanian plaintiffs, especially given the surprisingly nasty and unpleasant manner in which they hit back at the so-called "frat boy" suit filed in Los Angeles:

Plaintiffs may claim that they were tricked 'into making fools out of themselves' and becoming 'unsuspecting players' in the movie 'Borat,' " the studio said in opposing the request. "They never contend ... that bigoted and misogynistic statements were put into their mouths.

Then they follow with this volley:

It is also fatuous to argue as plaintiffs do that they wouldn't have vented their spleens but for their supposed belief that the movie 'would never air in the United States' but only to more than 500 million residents of Europe and Kazakhstan

Run-on sarcasm, or legal argument?  You decide.  Then again, you could just say it's a good example of "LA Law."

One other item of note:  although it has been said that the inebriation defense is unlikely to invalidate the waiver, it is interesting that the defendants, even at this early stage of the case, can't seem to get their story straight. 

According to Field Producer Todd Shulman:   "As soon as we arrived at the restaurant, I had each of them fill out and sign the so-called Standard Consent Agreement," Schulman says. "I made sure that they signed the Consent Agreement before they began consuming alcohol."

So he says they signed before consuming alcohol.  But that's not what Field Coordinator Chelsea Barnard said:  When I arrived, Todd handed me the signed release forms," she says. "Someone at the table made a comment indicating that they were on their second round of drinks. None of the participants appeared to me to be intoxicated.

Not a big deal yet, I don't think.  I imagine the defendants will get their witnesses "on message" before long.  Anyway, I haven't seen a copy of the pleadings in either of these cases yet, but will link to them once I do.

Quizno's Franchisees Sue for Fraud and Unfair Business Practices

A group of Quizno's franchisees has filed suit against Quizno's alleging:  fraud, unfair competition, breach of contract, and racketeering, among other things.  The primary allegations are that Quizno's agreements with franchisees unlawfully prohibits them from seeking the best price on the goods they buy -- particularly food -- and instead requires them to buy only from certain suppliers.  These suppliers, the plaintiffs claim, over-charge because they know the franchisees have no other options. 

While the allegations are explosive, such suits are not new.  A few years ago, Quizno's franchisees sued the company, alleging similar kinds of unfair business practices, in its hometown of Denver.  Those cases were dismissed.  It will be interesting to see both (a) what these franchisees have learned from the mistakes of their predecessors, and (b) how well the company fares outside its own hometown. 

Borat Lawsuits: Valid?

The Borat movie has only been out a few days, and lawsuits are flying already.  Two frat boys from South Carolina have sued "Borat", comedian Sacha Baron Cohen, and the movie's makers and producers.  The suit alleges that they were tricked into believing that the film would not be shown in the United States, and that the young men only signed the Standard Consent Agreement after they had been drinking alcohol. 

The Complaint alleges several causes of action: fraud, false light, appropriation of likeness, and negligent infliction of emotional distress.  This despite the fact that Paragraph 4 of the Consent Agreement specifically waives their rights to file any such actions.

They key then is the plaintiffs' demand for recission of the Consent Agreement.  If they can succeed in having that waiver rescinded, then the claims the waiver would otherwise bar can move forward.

The plaintiffs allege that they were both lied to about the movie, and that they were intoxicated at the time they signed the waiver.  Either allegation, if sufficiently proven, could serve as a basis for rescission of the waiver, which would allow the other claims to go forward. 

Click Fraud: Are You Wasting Online Advertising Dollars?

BusinessWeek Online has this article on click fraud -- a practice whereby online advertisers generate phony clicks and charge clients for them.  The salient portions of this scam are summarized as follows:   

"The spreading scourge poses the single biggest threat to the Internet's advertising gold mine and is the most nettlesome question facing Google and Yahoo, whose digital empires depend on all that gold.  The growing ranks of businesspeople worried about click fraud typically have no complaint about versions of their ads that appear on actual Google or Yahoo Web pages, often next to search results. The trouble arises when the Internet giants boost their profits by recycling ads to millions of other sites, ranging from the familiar, such as cnn.com, to dummy Web addresses like insurance1472.com, which display lists of ads and little if anything else. When somebody clicks on these recycled ads, marketers such as MostChoice get billed, sometimes even if the clicks appear to come from Mongolia. Google or Yahoo then share the revenue with a daisy chain of Web site hosts and operators. A penny or so even trickles down to the lowly clickers. That means Google and Yahoo at times passively profit from click fraud and, in theory, have an incentive to tolerate it. So do smaller search engines and marketing networks that similarly recycle ads."

Under North Carolina law, defrauded advertisers could claim for Breach of Contract, Unfair and Deceptive Business Practices (N.C.G.S. ss 75-1.1 et seq.), Fraud, and possibly Civil Conspiracy.  Depending on the number of affiliated operators, there could even be a devastating Civil RICO claim, described by one appeals court as "the litigation equivalant of a thermonuclear device".  See Katzman v. Victoria's Secret Catalogue, 167 F.R.D. 649, 655 (S.D.N.Y. 1999).  Violators could be subject to triple damages or punitive damages under either N.C.G.S. Ch. 75 or under the Civil RICO law.

In recent years, companies such as Google and Yahoo have paid out multimillion dollar settlements to satisfy claims that their "pay per click" advertising campaigns were being conducted fraudulently.  Many more claims are pending. 

Contracts and Religion

Over at the Contracts Prof Blog, an interesting question has been posed:  can a religious observance provide an impracticability defense to a breach of contract claim ?  The case takes place in Qatar. The Gulf Times reports that In June, a man reserved a tent for his wedding, which took place in September.  A few days prior to the event, he was told that only a limited area of the tent would be available.  The reason?  The tent had been modified in preparation for the Muslim holy month of Ramadan. 

Like any good plaintiff facing a breach, the man sought to mitigate his damages.  He moved the wedding to another location.  The wedding took place as scheduled.

Now the man is preparing to file suit, claiming financial losses for having had to move the wedding.  Seems reasonable enough. In America at least, and here in North Carolina, he would have a claim for the cost to find a suitable location, and the costs associated with the rescheduling.  But would the defendant be able to defend on the grounds that it was impracticable to perform, given the need to modify the tent for other upcoming clients?

In North Carolina, impracticability can be a defense to performance. But it is generally only available if conditions change unexpectedly.  The change must be extreme and unanticipated.  In this case, it seems pretty clear that the tent vendor would have known when Ramadan would be.  He promised to make the entire tent available for wedding on September 15.  Ramadan begins on the 23rd.  It is not as though Ramadan suddenly appeared out of nowhere; a look at the calendar would have revealed it.  This appears to be a simple case of a vendor scheduling two events too closely together in time, and not having the capacity to prepare his services for both events adequately.  As such, the impracticability defense would not be available to him.

Of course, this case is probably not going to be governed by the laws of the state of North Carolina.  I'm just saying.

Business to Business Contract Litigation on the Rise

According to this article lawsuits between businesses are multiplying rapidly.  There has been particular growth in lawsuits arising out of business contracts.

The article does not go into detail about why this is.  In my experience, it involves a number of things.  (1) Many businesses do not have lawyers draft, or review, their contracts before putting them into use.  Some of these contracts go out to thousands of clients.  A mistake, or a failure to add a clause reflecting an important legal protection, can be multiplied hundreds, or thousands of times.  (2) Often, a business will settle on a form contract, then use it over and over, for years on end without ever changing it.  Yet the law changes every year; even every month.  In North Carolina alone, there are hundreds of decisions every year that act as precedent in cases involving contracts, as well as the potentially devastating Unfair and Deceptive Practices Act, which permits triple damages, often in very routine business to business breach of contract litigation.

The moral of the story?  Make sure your contracts and business practices are as up to date as possible; if your contracts with customers, vendors, suppliers, distributors and everyone else you do business with aren't up to date with the latest developments in business and contract law, you could be staring at one of these "bet the company cases.