Home > Uncategorized > Business Disputes In Closely Held Companies: A Warning Why Business Partners Should Not be Quick to File Lawsuits

Business Disputes In Closely Held Companies: A Warning Why Business Partners Should Not be Quick to File Lawsuits

No one likes to be wronged. But there are plenty of good reasons to avoid acting on that gut response of suing for everything you feel you are entitled to.

 

There is a reason why closely held companies can sometimes result in some of the most bitter lawsuits – the relationships between business partners are usually very close, and often involve family.  Business partners in smaller businesses have a lot of hands on involvement – blood, sweat and tears go into forming the Company.

 

So when a dispute arises, it is not only a business conflict, it is personal.

 

However, there are many good reasons to avoid making personal.

 

Don’t Sue For the Principal of the Matter.

 

As a general rule – suing “on the principal of the matter” is never a good idea. It is always wise, especially in the business context, to try and take a big picture approach of the situation. Weigh the costs and benefits. Make a good, sound business decision. Is the issue worth spending potentially tens (maybe hundreds) of thousands of dollars in legal fees in order to achieve an uncertain outcome?

A recent unpublished Court of Appeals Case, Vidosh v. Trans Audit, Inc., 306746, 2013 WL 4081106 (Mich. Ct. App. Aug. 13, 2013), illustrates good reasons for business partners to take pause and consider before filing a lawsuit for a perceived wrong.

See the Opinion here: http://www.michbar.org/opinions/appeals/2013/081313/55244.pdf

 

I. Facts

Defendant was a minority shareholder and member of the board of directors of Trans Audit, Inc (TAI),
In 2008, TAI entered into an agreement with plaintiff to form Trans Audit Parcel Services, LLC (TAPS) a Michigan limited liability company.
Pursuant to the agreement, plaintiff owned 33.33% of TAPS, and TAI owned the remaining interest.
Plaintiff was to serve as TAPS’ president and as a member of TAPS’ board of directors.
Defendant was also a member of the TAPS board.
Plaintiff was entitled to 40% of the first $250,000 of TAPS’ annual revenue and she was also entitled to a percentage share of TAPS’ distributed profits based on her ownership interest.
Plaintiff did not receive any of the profit-sharing distributions in 2008 or 2009. She was either fired or resigned in September of 2009.
On January 26, 2010, plaintiff filed a six-count complaint against defendant, TAI, TAPS, and three other TAI and TAPS board members.
In her complaint, plaintiff demanded a formal accounting and alleged breach of contract, unjust enrichment, breach of fiduciary duty, oppression, and statutory conversion. Vidosh v. Trans Audit, Inc., 306746, 2013 WL 4081106 (Mich.
Ct. App. Aug. 13, 2013)
Defendant, minority shareholder responded that Plaintiff’s lawsuit was completely frivolous,  and it should be dismissed and Plaintiff should be required to pay all of Defendant’s attorney fees.  The Circuit Court dismissed Plaintiff’s Complaint, but did not award Defendant attorney fees.
Defendant appealed, and the Court of Appeals found that “yes” – Plaintiff’s complaint was frivolous and therefore Plaintiff should be required to pay Defendant’s attorney fees.
II. Law
There are Penalties for Filing a Frivolous Lawsuit.
In General, each party pays its own attorney fees incurred in a lawsuit; “[a]wards of costs and attorney fees are recoverable only where specifically authorized by a statute, a court rule, or a recognized exception.” Keinz, 290 Mich.App at 141. Courts may award attorney fees as a Sanction to a party who brings a frivolous lawsuit.
“The purpose of imposing sanctions for asserting frivolous claims is to deter parties and attorneys from filing documents or asserting claims and defenses that have not been sufficiently investigated and researched or that are intended to serve an improper purpose.” BJ’s & Sons Constr. Co., Inc. v. Van Sickle, 266 Mich.App 400, 405; 700 NW2d 432 (2005); Vidosh v. Trans Audit, Inc., 306746, 2013 WL 4081106 (Mich. Ct. App. Aug. 13, 2013).
Pursuant to MCL 600.2591, a claim is frivolous if one of the following conditions is met:
(i) The party’s primary purpose in initiating the action or asserting the defense was to harass, embarrass, or injure the prevailing party.
(ii) The party had no reasonable basis to believe that the facts underlying that party’s legal position were in fact true.
(iii) The party’s legal position was devoid of arguable legal merit.

Vidosh v. Trans Audit, Inc., 306746, 2013 WL 4081106 (Mich. Ct. App. Aug. 13, 2013) citing MCL 600.2591

The Court of Appeals analyzed every cause of action raised by Plaintiff and found that Plaintiff had no reasonable basis to bring forth her claims and therefore Defendant was entitled to have his attorney fees paid for.
III. Lesson
The Vidosh case is a lesson for business partners who feel like they have been wronged. Certainly Vidosh had a reasonable feeling for being wronged – her Presidency and board position were terminated and she did not benefit from what she expected to gain by entering the business relationship.
However, a careful investigation of the motives for bringing a lawsuit should be undertaken before filing suit- try to separate the “personal indignation” from the perceived wrong versus the sound business decision that should be made. Because at the end of the day, Vidosh did not get the outcome she hoped for by pursuing the lawsuit – in fact, she had to pay her attorneys, as well as the Defendant’s attorneys.  Hindsight is 20/20, but the end result was certainly not a good business decision.
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