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Business Law Update: Lessons From Court on Deadlock Between Business Owners.

July 12, 2017 2 comments

This morning was rainy and gray in Grand Rapids.

It is one of those days that prompted me to write on a topic that can be downright depressing – when relationships between shareholders go bad.

I had a client come in recently and ask me to set up an LLC for him.

rainy dayClient planned on owning the LLC 50/50 with a business partner. Someone he trusts (right, because no one goes into business thinking it will end in a lawsuit.) Regardless of the best intentions between these business partners, The 50/50 ownership can be problematic.

For an example, look no further than the May 11, 2017 Court of Appeals Decision in Shamee Catwilmat, LLC v Shamee Development Company, LLC et al.

The Shamee case originated out of Kent County’s Business Court Docket. (A little pride here, for our esteemed business court).

 

Shamee was a convoluted case regarding default on a Note, Mortgage and collateralized business assets – and ended in a mess for both sides. In essence, the Bank erroneously  foreclosed on only a portion of the Property that was otherwise secured by the mortgage.

However, of particular note for the purpose of this post is how the LLC was owned and the resulting problems:

50/50 ownership between members – Shah and Mead.

According to the Court:

“At some point, Shah and Mead began to disagree about the management of Shamee Development. Unable to reconcile their conflicting viewpoints, they reached a “membership deadlock” that prevented Shamee Development from continuing to service its debt to the Bank and from taking the necessary steps to refinance or renegotiate such debt. After Shamee Development failed to make payments as agreed, the Bank accelerated the debt, including the mortgages, and instituted this action against
defendants.”

 

Thus, one equal member had the power to halt business operations, fail to service its debt, and the result was this lawsuit foreclosing on real estate and an appeal.

There are several ways the members could have avoided this scenario, here are just a few:

  1. Create an Operating Agreement that contained a deadlock provision.  This provision could call for mediation/arbitration, or even a buy-out in the event that equal owners halt the business from making key business decisions.  Going back to my client mentioned above, that was my solution for him. Creating a deadlock provision in his Operating Agreement.
  2. Negotiate different ownership prior to forming your business: someone  has majority control, someone has minority.
  3. Set up the LLC as a manager-managed LLC – give certain powers to a single manager to take care of the daily business affairs of the Company – and retain some of the “major” decisions, such as amendment of operating agreement, admission of new members, dissolution, etc… to the members.

 

Lesson:

When setting up a business, you should always have the end in mind. How does a business owner get out of the business?  You should also make sure that one member does not have the power to halt business operations, like in the Shamee case.

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

 

 

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Business Law Update: Key Terms to Consider in Business Contracts.

January 13, 2017 Leave a comment

If you’ve followed my posts for any amount of time, you probably aren’t surprised that I  like reading and writing about the latest Michigan court cases.

Particularly if they are relevant to business or real estate. I always find there are some lessons to be learned.

As another aside – I also like to include photos I took of downtown Grand Rapids, Michigan – overloimg_1360oking Rosa Parks Circle. This one, from today, shows the Zamboni smoothing out the ice for skaters looking to enjoy some weekend ice skating.

The latest case on my mind:

Summit Diamond Bridge Lenders, LLC v Philip R. Seaver Title Company, Inc.

This dispute really has to do with:

Forum Selection Clauses in a Contract.

Backing up a step, why do we prepare written contracts for business transactions?

Contracts are about risk allocation.

In any business transaction, business owners need to  have set in stone terms that answer one question:

who bears what risk?

A Forum Selection Clause would include language indicating that no matter where a dispute about the contract occurred, the contract will be interpreted under (in our case) Michigan law, and the parties agree that any dispute shall only be resolved in _______ County (Typically,  Kent County, Michigan, for my clients.) The parties then would agree to submit to the jurisdiction of said Courts.

Therefore, if your contract contains a forum selection clause, and, for instance, you are owed money by a company in Florida, you would not need to retain a Florida attorney for initiating a lawsuit in Florida. Just initiate the lawsuit in good ole’ Grand Rapids.

So as a general principle, if your business operates in commerce in other states or countries, it is wise to have such a clause.

 

However, the Summit Diamond Bridge Lenders case tells us that although generally such clause is enforceable, it isn’t always the case.

FACTS:

This case involved an escrow agreement with a  forum selection clause that “provides that California law governs any dispute arising from or related to the escrow agreement. The parties also designated the state of California in the agreement’s forum-selection clause.”

Plaintiff brought suit in Michigan alleging defendant, title company, breached its fiduciary duty as escrow agent of the loan funds by dispersing the funds without an approved letter of credit. Id. at page 2.

Defendant filed a motion to dismiss – arguing that Plaintiff sued in the wrong state. California was the proper forum for the dispute under the plain language of the escrow agreement.

The trial Court agreed. It dismissed the case.

The trial court held that California was the proper forum based upon the plain language of the forum selection clause.

The Court of Appeals reversed.

The Court of Appeals noted on page 3 of its decision that “In Michigan, public policy favors the enforcement of such clauses and, absent certain exceptions” citing Michigan Statute, MCL 600.745(3)(a)-(e).

Those excepts are:

(a) The court is required by statute to entertain the action.

(b) The plaintiff cannot secure effective relief in the other state for reasons other than delay in bringing the action.

(c) The other state would be a substantially less convenient place for the trial of the action than this state.

(d) The agreement as to the place of the action is obtained by misrepresentation, duress, the abuse of economic power, or other unconscionable means.

(e) It would for some other reason be unfair or unreasonable to enforce the agreement.” Id. at pg 5, citing MCL 600745(3).

The Court looked to California Law to determine whether or not the forum selection clause applied. California had a statute that ” precluded from bringing suit against a defendant who is a foreign corporation unless …(2) the agreement relates to a transaction involving at least $1,000,00.” Id. at page 4.

Because the agreement does not relate to a transaction involving at least $1,000,000, because defendant only agreed to hold in escrow $700,000 of plaintiff’s funds.

Essentially, the court of appeals held that since California would not entertain the lawsuit – because it did not meet the monetary threshold – the parties couldn’t obtain effective relief in California – satisfying the exception under subsection b.

 

Important Lesson:

1. Understand Your Contract Before Signing. 

Contracts are about risk allocation. In a business relationship you need to decide what risk you are willing to bear, and what risk you will allocate away. I am sure in this case Summit did not foresee a dispute arising, and therefore was willing to bear the risk in the event of a dispute to litigate in California in an inconvenient forum. They were fortunate that an exception applied and allowed them to maintain their suit in Michigan.

2. Understand  Your Contract After Signing.

Your business contract will dictate what your rights and duties are.  Here, Summit had the perceived contractual duty to pursue its dispute in California. However, its attempt to avoid abiding by the contract worked out – but it was costly. It was initially dismissed. It took an appeals court to find that a narrow exception applied.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Twitter: @JeshuaTLauka

 

 

 

 

Business Law Update: You have Terms and Conditions, but are they CONSPICUOUS?

December 16, 2016 Leave a comment

Business Owners – ask yourself:

When selling or buying, what are in my company’s Terms and Conditions?

You can check out some of my prior posts on Terms and Conditions. “TnCs” are important to review closely. TnCs “allocate risk” among the two parties to the contract. In some instances, even if one party never reads the TnCs.

Recent Case…

On November 29th, a Court of Appeals case was issued stemming from a product sold by a business to a customer. The case: John French Jr. v Ben’s Super Center

This case involved “the sale of a defective outdoor wood furnace”

Facts:

“On May 21, 2011, after meeting with defendant’s salesman, Todd Kaatz, and having a fairly lengthy discussion with him regarding purchasing an outdoor wood furnace for his home, plaintiff purchased an outdoor wood furnace, (“Optimizer 250″) from Ben’s Supercenter for $12,000.00.” Id. at pg 1.

Defendant delivered the Optimizer 250 to plaintiff’s property and plaintiff installed it.

Sometime around Christmas of 2011, after plaintiff had been using the furnace for about three weeks, he began to have trouble with its performance and contacted Kaatz for help.

“Kaatz…came to plaintiff’s property and inspected the furnace, but they were unable to determine why the furnace was operating inefficiently.”

After several years of attempting to work with the manufacturer and “retrofit” to make the furnace work, Plaintiff sued Defendant.

Plaintiff raised about of claims, variations of “breach warranties”.

Among other things, Plaintiff claimed that Defendant had breached an “implied warranty of merchantability.”

Essentially, it is implied in a sale of goods that what the buyer is getting, he or she will be able to use for the purpose it is generally intended to be used for.

Michigan law allows a business to exclude such warranties.

So the question is: did this business properly exclude any such warranties?

Answer: No.

Under MCL 440.2316 if a business is going to exclude such warranty, it must do so in CONSPICUOUS LANGUAGE. According to the statute, conspicuous “means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it.” Id. pg 4.

In this case, the business pointed not to any of its own terms and conditions, but to the manufacturer’s handbook, which had one line that stated: “No other warranty is expressed or implied.” Id. Pg 5.

As the Court noted – this was not conspicuous language.

The Court upheld the verdict in favor of Plaintiff.

Take Away on Terms and Conditions

  1. Read the Terms and Conditions

Enough said.

2. Implement Terms and Conditions

I recommend business clients to always include a Terms and Conditions page that is either attached to the back of their physical Purchase Orders, or is included in their Website and incorporated by reference. The Terms and Conditions will, essentially, allocate risk and liability, on such items like:

  • warranties (what is the provider guaranteeing and what isn’t it?) As emphasized by the French case – disclaimers need to be CONSPICUOUSLY IDENTIFIED.
  • payment terms (when and how is payment accepted? Late fees?)
  • remedies (what is your recourse in the event the goods aren’t what the buyer expected? Are your damages limited to a refund, or can you get related damages as well? Can attorney fees be covered?
  • Venue – (where can you bring your dispute? An arbitrator? Who pays the fees? Is the location of the arbitration specified?

3. Enforce Terms and Conditions

And of course, its important that a business enforces its terms. I have had clients who have been sued before and forgot of their advantageous language in their terms and conditions. If a business is sued and it waits too long in the litigation before raising its right to arbitration, the court very well might consider the business to have “waived its right” to arbitration. Although, “Waiver of a contractual right to arbitrate is disfavored” by the Courts. Best v Park W Galleries, Inc, No. 305317, 2013 WL 4766678 (Mich Ct App September 5, 2013), app den 495 Mich 979 (2014).

Questions?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Recent Court Case Provides Good Lessons For Real Estate Investors.

September 28, 2016 Leave a comment

Its Wednesday and I wanted to share a court of appeals case that came out on September 15th.

Case: Key Bank v Lake Villa Oxford Assoc, et. al.

Lesson: be careful when drafting “personal guarantees”

I’ve written in the past about personal guarantees.

This particular case involved a real estate development gone bad.

Defendant, developer, Lake Villa and its principal Burnham apparently needed additional funding for the project.

Christopher Investment loaned Lake Villa Rochester $4.45 million, the loan was secured by a second mortgage on the subject property and Burnham, personally guaranteed the loan.

(Note – If I was an investor, and I knew that my mortgage was going to only be a 2nd mortgage, a personal guarantee from the borrower’s owner(s) is definitely a good idea.)

As it turned out, Lake Villa defaulted on its primary loan to KeyBank. KeyBank foreclosed on its mortgage.

Christopher assigned the mortgage and guarantee to Homestead Properties.

When Burnham and Lake Villa defaulted on its loan to Christopher, Homestead declared a default and sought to collect.

Problems arose in litigation.

Burnham claimed the guarantee was not assignable because the specific language in the personal guarantee provided “This Agreement shall be binding and inure to the benefit of the parties and…permitted assigns.” (emphasis mine). Burhman argued – “I never granted permission!”

Keep in mind, that there was no real argument that Burnham defaulted on his repayment obligation. The only relevant question was whether or not Homestead could enforce its rights as an assignee under the personal guarantee.

The trial court agreed!

The case went to a Jury Trial, where a jury returned a verdict in favor of Burnham individually, claiming that the assignment did not intend to benefit Homestead!

However the Court of Appeals did not agree with the Jury or with the trial court.

The Court of Appeals cited the following long standing rules of contract law:

  1. The parties are free to contract as they see fit. Citing Coates v Bastian Bros, Inc, 276 Mich App 498, 503 (2007).
  2. “Under general contract law, rights can be assigned unless the assignment is clearly restricted.” (emphasis added) Citing Burkhardt v Bailey, 260 Mich App 636, 652 (2004).
  3. The Court cited 3 Restatement Contract 2d for the notion that “contractual rights are assignable so long as the assignment is not ‘validly precluded by contract'”. KeyBank, pg 4.
  4. Michigan Courts have “striven to uphold freedom of assignability.” citing Detroit Greyhound Employees Fed Cred Union v Aetna Life Ins Co, 381 Mich 683, 689 (1969).

Conclusion:

The Court of Appeals found that given the legal authority in favor of freedom of assignability, unless clearly restricted, the language “permitted assigns” did not rise to the level that would forbid the assignment.

Burnham was therefore on the hook for the repayment of the debt under the personal guarantee.

Lesson:

Real estate investors: make sure the contractual language in your loan and security documents is clear. Particularly when executing personal guarantees. Courts have recognized that personal guarantees must be “strictly interpreted”.  Bandit Indus, Inc v Hobbs Int’l, Inc 463 Mich 504 (2001).

Here, the language was not clear. The result – undoubtedly significant attorney fees expended in pursuing a jury trial and an appeal.

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Grand Rapids’ Businesses: Lessons from a Recent West Michigan Court Case- Read Those Terms and Conditions.

September 19, 2016 2 comments

Business owner – let’s say you just signed a purchase order and agreed to buy some product for your business.

The product is not what you expected. In fact, its not going to help you in your business at all.

You don’t pay for it.

You get sued.

You take the contract to your lawyer and at the bottom of the contract are the words“Subject to Seller’s Terms and Conditions”.

You can’t be bound by those terms you never even looked at (whatever they are), right?

W-R-O-N-G.

On September 8th a Court of Appeals case was issued stemming from a business dispute initially decided in the Kent County Business Court. The case: Naturipe Foods, LLC v Siegel Egg Company, Inc.

This case involved a business contract dispute.

Naturipe offered to sell Siegel Egg Co. frozen blueberries.

Seigel Egg wrote in under the Offer “Grade A” and crossed out the reference to Georgia Blueberries.

Near the end of the first paragraph of the opinion tells you what you need to know about this case: Below DaCruz’s signature read, “Subject to Seller’s Terms and Conditions.

Plaintiff contracted to deliver 316,800 lbs of frozen Michigan blueberries to Defendant.

Plaintiff delivered two shipments.

The Blueberries delivered were “sub grade A” – so Defendant refused to pay.

So, Plaintiff sued Defendant for breach of contract.

The Trial Court held Defendant was liable, and the parties had a jury trial on damages.

The Jury awarded Plaintiff $723,578.83 – broken down to include costs, interest, and:

$327,644.98 in damages

$201,900.65 in attorney fees (yes – a lawsuit is expensive!)

Defendant appealed. Defendant argued that the Trial Court erred when it held that Plaintiff’s “Terms and Conditions” were incorporated into the parties’ contract.

You can check out some of my prior posts on Terms and Conditions. “TnCs” are important to review closely. They “allocate risk” among the two parties to the contract.

In this case, the Defendant asked the question: Can a business just state in its contract that the contract is “subject to Seller’s Terms and Conditions”?

The Court of Appeals told us a resounding – YES.

Law: Terms and Conditions are Part of the Contract.

The Court of Appeals laid out the law for clearly:

“Where one writing references another instrument for additional contract terms, the two writings should be read together.” Forge v Smith, 458 Mich 198, 207; 580 NW2d 876 (1998). That is, “[i]n a written contract a reference to another writing, if the reference be such as to show that it is made for the purpose of making such writing a part of the contract, is to be taken as a part of it just as though its contents had been repeated in the contract.” Id. at 207 n 21 (citations and quotation marks omitted).

Where additional documents or terms are made part of a contract by reference, the parties are bound by those additional terms even if they have never seen them. (Emphasis added) See Ginsberg v Myers, 215 Mich 148, 150-151; 183 NW 749 (1921). “It is well settled that the failure of a party to obtain an explanation of a contract is ordinary negligence. Accordingly, this estops the party from avoiding the contract on the ground that the party was ignorant of the contract provisions.” Scholz v Montgomery Ward & Co, Inc, 437 Mich 83, 92; 468 NW2d 845 (1991).

Take Away on Terms and Conditions

  1. Read the Terms and Conditions

Enough said.

2. Implement Terms and Conditions

I recommend business clients to always include a Terms and Conditions page that is either attached to the back of their physical Purchase Orders, or is included in their Website and incorporated by reference. The Terms and Conditions will, essentially, allocate risk and liability, on such items like:

  • warranties (what is the provider guaranteeing and what isn’t it?)
  • payment terms (when and how is payment accepted? Late fees?)
  • remedies (what is your recourse in the event the goods aren’t what the buyer expected? Are your damages limited to a refund, or can you get related damages as well? Can attorney fees be covered?
  • Venue – (where can you bring your dispute? An arbitrator? Who pays the fees? Is the location of the arbitration specified?

3. Enforce Terms and Conditions

And of course, its important that a business enforces its terms. I have had clients who have been sued before and forgot of their advantageous language in their terms and conditions. If a business is sued and it waits too long in the litigation before raising its right to arbitration, the court very well might consider the business to have “waived its right” to arbitration. Although, “Waiver of a contractual right to arbitrate is disfavored” by the Courts. Best v Park W Galleries, Inc, No. 305317, 2013 WL 4766678 (Mich Ct App September 5, 2013), app den 495 Mich 979 (2014).

Questions?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Owners: Think Before you Sign. Recent Court Case Shows Why the Language in Your Contracts Matter.

August 17, 2016 1 comment

I’ve previously written about the importance of understanding the contracts you sign.

I just read a recent Court of Appeals decision that provides a great illustration for business owners to give pause before signing a contract on the dotted line.

Check out the case of Solis v Kroger and The Greener Side.

It’s only a few pages – easy read.

Facts:

  • Solis slipped on some ice in a Kroger’s parking lot.
  • Solis sued Kroger.
  • Kroger’s response – “its the fault of our ice removal company!”
  • Kroger sued its ice removal company – Progressive and Progressive’s sub-contractor – The Greener Side.
  • The Greener Side’s response – “Yes, we had a sub-contract agreement, and YES, it had an indemnity agreement, but we didn’t have an obligation to indemnify Kroger in that instance.

So What’s going on here?

Before Kroger engaged Progressive and the Greener Side, it made them sign a subcontractor agreement.

This agreement had an indemnity clause. It intended to allocate the risk of some unknown event (e.g. – someone slipping and falling and suing Kroger) to the subcontractor, and away from Kroger.

According to the Court of Appeals:

“The threshold question in any indemnification action is whether the indemnity clause applies to the underlying claim at issue. Citing Miller-Davis Co v Ahrens Const, Inc, 495 Mich 161,174 (2014).

The Greener Side argued for a narrow interpretation of the indemnity clause. It’s argument – “the indemnity provision does not apply because it had no obligation to perform snow and ice removal services on the day of Solis’ fall.”

Unfortunately for the Greener Side, the Court of Appeals held that the indemnity clause language was broad. 

“The Greener Side agreed to take “the entire risk of any and all personal injuries or property damage arising out of or in any way connected” with its performance under the contract.”

That’s broad language. If the Greener Side did not want to assume that much risk, it should have attempted to narrowly tailor the indemnity language.

Important Lesson:

Understand Your Contracts Before Signing. 

Contracts are about risk allocation. In a business relationship you need to decide what risk you are willing to bear, and what risk you will allocate away and then make sure the contract clearly states your agreement.

www.dwlawpc.com

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

Celebrating Entrepreneurs: National Startup Day

August 5, 2016 Leave a comment

Yesterday August 4 was the 4th Annual National Startup Day Across America.

According to the website, National Startup Day Across America was created to:

“raise awareness of startup activity and job creation and help catalyze support for your local entrepreneurial community.

On the importance of startups in the U.S.:

“Startup companies act as entrepreneurial leaders, innovators, and job creators within our communities.”

An interesting statistic I read today from an article by Recode:

companies less than one year old have created an average of 1.5 million jobs per year over the past three decades, fueling both local and national economic growth.”

 

However, according to the Small Business & Entrepreneurship Council,Entrepreneurship is in decline.

SBE Council’s CEO, Karen Kerrigan is encouraging elected officials to “commit to policies that encourage startups.

We are fortunate to have a thriving and generous West Michigan Business Culture.

So, why not support a startup today?

Go grab a cup of coffee at a local business!

Spread the Word about an Entrepreneur Doing Good work in our community.

A shout out to some of the great organizations that support small business and encourage entrepreneurship in West Michigan:

Start Garden

LocalFirst

GRIN

GRAPE

LinkedUPGR

Grand Rapids Chamber

Small Business Association of Michigan

– Happy Startup Day!

 

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Twitter: @JeshuaTLauka