Archive

Posts Tagged ‘entrepreneurs’

Business Law Update: Michigan Supreme Court’s May 15, 2017 Decision on Minority Oppression

 

There are relatively few court opinions covering the Michigan Limited Liability Company Act. There have been even less on the issue of minority oppression claims.

It has been almost 3 years since the Michigan Supreme Court issued its Opinion in the  Madugula v Taub  case on Michigan’s shareholder/member oppression statutes.

The Madugula clarified that a claimant is not entitled to a jury a trial undmoney-73341_640er the Act; and breach of a Shareholder/Operating Agreement can be evidence of “oppressive” conduct.

On May 15, 2017 the Michigan Supreme Court issued its Opinion in Frank, et al v. Linkner, et al.

In summary, the Supreme Court held:

  • that MCL 450.4515(1)(e) provides alternative statutes of limitations, one based on the time of discovery of the cause of action and the other based on the time of accrual of the cause of action; and
  • That a cause of action for LLC member oppression accrues at the time an LLC manager has substantially interfered with the interests of a member as a member, even if that member has not yet incurred a calculable financial injury. See Frank, id. page 1.

 

The facts of Frank are admittedly, interesting (and unfortunate if you are the Plaintiffs):

Facts:

  • Defendant ePrize was founded by defendant Joshua Linkner in 1999 as a Michigan LLC specializing in online sweepstakes and interactive promotions.
  • Plaintiffs are former employees of ePrize who acquired ownership units in ePrize.
  • Plaintiffs allege Linkner orally promised them that their interests in ePrize would never be diluted or subordinated.
  • In 2005, plaintiffs’ shares in ePrize were converted into shares in ePrize Holdings, LLC.
  • In 2007, ePrize ran into financial difficulties and required an infusion of cash.
  • To remedy this problem, ePrize obtained $28 million in loans in the form of “B Notes” from various defendantmembers of ePrize and other investors;
  • plaintiffs were not invited to participate in these investments.
  • In 2009, ePrize remained struggling to meet its loan obligations and therefore issued new “Series C Units.”
  • These units were offered to various investors, including those who had obtained B Notes.
  • In exchange for the Series C Units, investors were required, amo
    ng other things, to make capital contributions, guarantee a portion of a $14.5 million loan from Charter One Bank, and convert their B Notes into “Series B Units.”
  • On August 20, 2012, ePrize sold substantially all of its assets and, pursuant to the Operating Agreement, distributed nearly $100 million in net proceeds to the holders of Series C and Series B Units.
  • Plaintiffs received nothing for their common shares.

Procedural History

Plaintiffs sued on April 19, 2013 alleging among other claims, minority oppression under MCL 450.4515. The trial court dismissed the claims, indicating that they were “untimely” under the 3 year statute of limitation period. The Court of Appeals reversed. This matter then went to the Supreme Court.

 

 

In General – Michigan Minority Oppression Statute

Michigan law provides a cause of action against the shareholders/members who are in control of a company and oppressing minority owners:

Minority Shareholder Oppression, MCL 450.1489 (Minority Member Oppression, MCL 450.4515)

“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:
illegal;
fraudulent;
or willfully unfair and oppressive to the corporation or to the shareholder.” 
“If the shareholder establishes grounds for relief, the circuit court may make an order or grant relief as it considers appropriate, including, without limitation,
an order providing for any of the following:
(a) The dissolution and liquidation of the assets and business of the corporation.
(b) The cancellation or alteration of a provision contained in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.
(c) The cancellation, alteration, or injunction against a resolution or other act of the corporation…
Therefore, if a court finds that those in control of the business committed misconduct against a minority owner amounting to “oppression”, the Court has broad discretion to create the type of relief it deems is best.
Back to the Supreme Court’s Decision in Frank…
a. Statute of Limitations
The Supreme Court agreed with the Court of Appeals that:
“MCL 450.4515(1)(e) contains two alternative statutes of limitations:”
1. (2 years) predicated upon discovery of the cause of action and
2. the other (3 years) predicated upon accrual of the cause of action. Id. at pg 6.
The Supreme Court clarified that under the statute “A plaintiff has two years from the time he or she ‘discovers or reasonably should have discovered the cause of action” to bring a claim [under the minority oppression statute]”. Id pg 13. “…a plaintiff cannot bring a claim three years after accrual of the cause of action, even if he or she did not discover and reasonably would not have discovered the cause of action during that period.”
b. when does an oppression claim accrue?
The Plaintiffs/minority members argued that their claims “did not accrue until they first incurred a calculable financial injury after ePrize sold substantially all of its assets in 2012.” Id. pg 16. They reasoned that no monetary damages occurred until the company was liquidated. Id.
The Supreme Court, however reasoned that the “plaintiffs’ argument conflates monetary damages with ‘harm'”.  The Court held that:
the actionable harm for a member-oppression claim under MCL 450.1515 consists of actions taken by the managers that “substantially interfere with the interests of the member as a member,” and monetary damages constitute just one of many potential remedies for the harm.
Therefore, the Court held that :the Court of Appeals erred by focusing on the availability of monetary damages, rather than on when plaintiffs incurred ‘harm’.” The Court reversed the Court of Appeals on this issue. Id. 17.
“Once a plaintiff proves that a manager engaged in an action or series of actions that substantially interfered with his or her interest as a member, the “harm” has been incurred, and therefore the claim has accrued.” Id.
Application 
In application, the Supreme Court therefore found that the alleged harm occurred when the minority members’ interest were subordinated (in 2009) by amendment of the operating agreement and not when the sale occurred (in 2012). Id. at 20.
So, unless plaintiffs can show fraudulent concealment, Plaintiffs’ claims for monetary damages are barred.

 

Take away for Business owners/Investors/Entrepreneurs:

 

1. Get an attorney involved before the business relationship begins and clearly document the business relationship, especially your shareholder/operating agreement. That will contain the exit strategy and relevant buy-out language. Further, any conduct the parties agree to in their shareholder/operating agreement will not be deemed “oppressive”. However, a breach of the agreement, may deemed interference with your rights sufficient to constitute “oppression” however, this is based on a highly fact-intensive analysis.

2. If you believe you are being frozen out of control/profits in a business – do not wait. The Michigan Supreme Court has held that your claim accrues when the harm occurs. Learn from the Frank Decision.  Michigan law gives you broad remedies, including the minority shareholder/member oppression statutes.

Questions?

Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Update: A discussion on Business Shareholder Oppression.

March 10, 2017 Leave a comment

There are relatively few court opinions covering the Michigan Limited Liability Company Act. There have been even less on the issue of minority oppression claims. So I was excited to see a recent Court of Appeals decision on that subject. Check out t2017-02-04-08-16-38-2he February 9, 2017 unpublished decision of Wisner v SB Indiana, LLC, et al

The Wisner case involves two separate parties who claimed an owner/manager, Hardy, violated their rights as members and froze them out of the company.

The first question to ask is, “freeze out from what*?”

                         Control – Decision-making

                         Disclosures of Company Business

                         Profits in the Company

                         Employment in the Company.

What should a business owner/operator do to protect himself/herself?

Well, you have two readily apparent choices – address the issue before the business is formed, or address it once the problem arises.

     1. Addressing the problems before the business starts.

The easiest way is this option: Get an Attorney involved at the onset of the business relationship.

Many of these business disputes in closely held companies could be resolved if, before going into business, the parties openly communicated their expectations, concerns, and clearly articulated in the formation documents (articles of incorporation/organization, Bylaws, shareholder agreement, Operating Agreement) a way out of the business relationship.

This could be the most cost-effective way to ensure to resolve business disputes – address them before they happen – with open communication, and clearly and concisely drafted (and executed!) documents.

       2. Addressing the problems once they occur: Shareholder/Member Oppression Lawsuit.

Michigan law provides a cause of action against the shareholders/member
s who are in control of a company and oppressing minority owners:

Minority Shareholder Oppression, MCL 450.1489 (Minority Member Oppression, MCL 450.4404)

“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:
illegal;
fraudulent;
or willfully unfair and oppressive to the corporation or to the shareholder.” (*in my experience this has been the most often the scenario where these cases arise – from the “freezing out” the minority owners from the business)
“If the shareholder establishes grounds for relief, the circuit court may make an order or grant relief as it considers appropriate, including, without limitation,
an order providing for any of the following:
(a) The dissolution and liquidation of the assets and business of the corporation.
(b) The cancellation or alteration of a provision contained in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.
(c) The cancellation, alteration, or injunction against a resolution or other act of the corporation.
(d) The direction or prohibition of an act of the corporation or of shareholders, directors, officers, or other persons party to the action.
(e) The purchase at fair value of the shares of a shareholder, either by the corporation or by the officers, directors, or other shareholders responsible for the wrongful acts.”

Although this Statute applies to closely held corporations, there is also a virtually similar Michigan statute that applies to LLCs.

Therefore, if a court finds that those in control of the business committed misconduct against a minority owner amounting to “oppression”, the Court has broad discretion to create the type of relief it deems is best.
Back to the Wisner Case:
Without getting into the details of the case, there are two points the Court made relating to oppression claims.
a. Is failing to communicate with the minority members oppression?
The Wisner Court looked at the claims made by the minority member – that the manager “cut him off from communication.” The court found that, although Defendant substantially interfered with the minority member’s ability to com
municate…this did not constitute unfair and oppressive conduct.  The court found that “it does not appear that his rights as a member of the LLC provided by MCL 450.4102(q), including any right to receive a distribution, or vote were substantially interfered with by Defendant’s conduct.”
b.  If the Operating Agreement allows activity – that activity cannot be “oppressive”
The court also noted that at the formation of the company the parties had executed an operating agreement to govern their relationship.
The court noted that the oppression statute “had no application if the conduct at issue was authorized by an operating agreement. So to the extent that any of Mr.
Hardy’s actions were authorized by the agreements, then he cannot be found to be willfully unfairly oppressing these members.” Id. Pg 4.
“Likewise the case law has indicated that even a breach of those operating agreements would not be enough to find that he was willfully unfair and oppressive in his conduct.”

Lesson:

Sometimes filing a law suit for Minority Oppression is warranted due to the egregious misconduct of those in control of the company.  However, to constitute “oppression” giving a minority owner relief, such conduct will need to be proven with sufficient facts.

The obvious take away points are two-fold:

1. Get an attorney involved before the business relationship begins and clearly document the
business relationship, especially an exit strategy
. Any conduct the parties agree to in their shareholder/operating agreement cannot be “oppressive”.

2. If you are being frozen out of control in a business – Michigan law gives you broad remedies, including the minority shareholder/member oppression statutes.

Questions?

Comments?

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

Reflections on the Guy with the Jack Hammer…

August 25, 2016 Leave a comment

This morning I was making my commute to work on the highway – traffic was backed up and at a stand still.

Eventually, all cars started to roll along slowly (at this point, I was happy that at least traffic was moving).

Fifteen minutes and a few miles later I slowly passed the root cause of the traffic congestion…one construction guy with a jack hammer.

He was working on a small patch of concrete on the highway. Yet his lone actions closed down a lane for miles and disrupted traffic flow for so many travelers.

It is amazing to me that one person’s actions can be the cause of such disruption.

It gave me pause to reflect:

Sometimes disruption is a good thing.

It gave me pause to ask myself:

am I being a disruptive force for good?

 

A quote from Jim Elliot came to mind during my commute this morning:

 

“Wherever you are, be all there. Live to the hilt every situation you believe to be the will of God.”
– Jim Elliot

 

Here’s a call to living courageously each day and being a disruptive force for  good.

 

e-mail: Jeshua@dwlawpc.com

www.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

Community Development: The Tension Between Real Estate Entrepreneurship and Keeping Families In Affordable Housing.

July 25, 2016 1 comment

This morning I read a MIBiz article by Nick Manes titled:

Hungry investors seek Grand Rapids housing deals, rankling longtime residents

The article does a good job of addressing the “tension” that I wrote about in a previous post. New investment in downtown Grand Rapids is exciting. But, as Nick Manes puts it, the flip-side of this new development is the “concern that new investment would lead to displacement of long-time residents.

Nick, in his article, illustrates this tension as articulated through the  interviews of the many interested parties: developers, investors, homeowners, renters, and community stakeholders.

As I’ve mentioned in my prior article, as a business/real estate lawyer and Chairman of the Board at Mel Trotter Ministries – I see this tension. I often find myself advocating on both sides of this tension.

Because of these different “hats” I wear, I have had to ask myself – what do I do with this tension?

I am committed to embracing this tension.

I am committed to ask the question: “Am I working to build a better community?

Just like I ended my previous article on this subject, so I will end this one:

 We should encourage entrepreneurs to revitalize blighted property – we should do everything we can to place families in affordable housing.

Let’s embrace the tension.

E-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Twitter: @JeshuaTLauka