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    Business Law Legal Research Blog

    Charlene J. Hicks

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    CORPORATIONS:  When Traditional Standing Rules Do Not Apply to Shareholder Derivative ActionsYour Blog Post Title Here...

    Posted by Charlene J. Hicks on Fri, Dec 15, 2023 @ 15:12 PM

    CORPORATIONS:  When Traditional Standing Rules Do Not Apply to Shareholder Derivative Actions

    Charlene J. Hicks—Senior Attorney

            Standing, or the right to pursue a judicial action, is often viewed in black-and-white terms, that is, either a plaintiff does or does not have standing. In some situations, however, the plaintiff’s status cannot be so easily quantified. One notable grey area is found in shareholder derivative litigation.

           Generally speaking, in order to maintain a shareholder derivative suit, an individual plaintiff must own stock in the corporation at the time the controlling shareholders or directors committed the wrongful act against the corporation that is the subject of the action, and the plaintiff must retain ownership of that stock for the entire duration of the lawsuit. If these stock ownership requirements are not satisfied throughout the entire course of litigation, the plaintiff lacks standing to maintain the derivative action on behalf of the corporation. This general rule is premised on the rationale that a former shareholder would not personally benefit from a recovery by the corporation; therefore, he/she “might be willing to accept an improper or inadequate settlement” to the detriment of the remaining shareholders. Noakes v. Schoenborn, 116 Or. App. 464, 470, 841 P.2d 682, 685 (1992).

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    Topics: corporations, stockholders

    BANKRUPTCY:  Eleventh Circuit Addresses Nuances in Preference Litigation

    Posted by Charlene J. Hicks on Tue, May 23, 2023 @ 16:05 PM

    Charlene Hicks, Senior Attorney, National Legal Research Group

            Bankruptcy preference litigation involves situations in which the plaintiff (normally the trustee) tries to claw back substantial monetary payments debtors make to creditors within 90 days of filing for bankruptcy. Preference cases are deceptively simple in form. However, complications often arise, particularly in cases involving creditors that regularly do business with the debtor. Such creditors may invoke diverse sections of the Bankruptcy Code in an attempt to negate the trustee’s reimbursement claim against them.

                In Auriga Polymers Inc. v. PMCM2, LLC, 40 F.4th 1273, 1277 (11th Cir. 2022), the Eleventh Circuit Court of Appeals recently analyzed the interplay between two such sections of the Bankruptcy Code. One of the eight preference defenses a creditor may raise is known as the subsequent new value defense and is set forth in 11 U.S.C. § 547(c)(4). Section 503(b)(9), in turn, contains an administrator expense claim that a creditor may obtain for payment in full for the value of goods sold to the debtor in the ordinary course of business within 20 days before the debtor files for bankruptcy. 11 U.S.C. § 503(b)(9). In an issue of first impression in the Eleventh Circuit and one which is unsettled in other circuits, the Auriga Polymers court addressed “whether post-petition transfers made under a 11 U.S.C. § 503(b)(9) request will reduce the creditor’s new value defense” under 11 U.S.C. § 547(c)(4). The trustee claimed that Auriga would effectively receive a “double payment” if it were allowed to obtain payment for its administrator expense claim and also to avoid repayment to the trustee under the preference defense of subsequent new value. Auriga Polymers, 40 F.4th at 1288.


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    CONTRACTS: Importance of Carefully Drafting Contractual Choice-of-Law Clauses

    Posted by Charlene J. Hicks on Thu, Oct 27, 2022 @ 09:10 AM

    Charlene Hicks—Senior Attorney, National Legal Research Group

                It is common enough for an overworked attorney drafting a contract to regard a choice-of-law clause as boilerplate and therefore not in need of thoughtful consideration. However, the specific wording of such a clause may well alter the outcome of a future dispute between the contracting parties. Perhaps the most important consideration in this regard is whether the clause is worded broadly enough to encompass all potential causes of action that may arise in both contract and tort. In addition, specific language may be included to ensure that the chosen forum’s statute of limitations will also apply.

                One recent illustrative case is ARKRAY America, Inc. v. Navigator Business Solutions, Inc., No. N20C-12-012 MMJ (2021) (CCLD), 2021 Del. Super. LEXIS 463 (June 9, 2021). There, the parties entered into two separate contracts, one for software and consulting services and one for a license. Both contracts contained nearly identical choice-of-law clauses except that one provided for Utah law to apply and the other for Delaware law. Both choice-of-law clauses utilized traditional language stating that the agreement shall be governed by and in accordance with the named state’s laws without reference to the state’s conflicts-of-law principles.

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    Topics: contracts, statute of limitations, Charlene J. Hicks, choice of law clauses, causes of action in contract and tort

    CORPORATE LAW: Delaware’s New Universal Test for Demand Futility—A Game Changer?

    Posted by Charlene J. Hicks on Thu, Nov 18, 2021 @ 09:11 AM

    Charlene Hicks—Senior Attorney, National Legal Research Group

                Prior to bringing a shareholder derivative action, the complaining shareholders must normally make a detailed presuit demand on the corporation’s board of directors or show the court that such a demand would be futile. In United Food & Commercial Workers Union v. Zuckerberg, No. 404, 2020, 2021 WL 4344361 (Del. Sept. 23, 2021), the Delaware Supreme Court announced a new “universal test” for determining whether a shareholder demand should be excused as futile. This new test imposes more stringent pleading requirements on the derivative plaintiffs to show futility.

                In United Food, the complaining shareholders alleged that the members of Facebook, Inc.’s (now “Meta Platforms Inc.”) board of directors violated their fiduciary duties when they voted in favor of a stock reclassification that would have allowed Mark Zuckerberg, Facebook’s CEO, to sell most of his Facebook stock while still maintaining voting control. The Board’s vote eventually led to the company spending approximately $90 million to defend against a class action lawsuit. The complaining shareholders filed the derivative action in an attempt to recoup those litigation expenses.

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    Topics: corporations, Charlene J. Hicks, impartial business judgment, shareholder dirivative action, presuit demand

    CREDITOR’S RIGHTS: IRS Form 1099-C—Reporting Requirement or Debt Extinguishment Trap?

    Posted by Charlene J. Hicks on Thu, Dec 13, 2018 @ 12:12 PM

    Charlene Hicks—Senior Attorney, National Legal Research Group 

           

                To date, no consensus has been reached among courts throughout the United States on the question as to whether a creditor’s issuance of an IRS Form1099-C results in the extinguishment of the reported debt in favor of the debtor. Form 1099-C bears the title “Cancellation of Debt,” and, according to the IRS, a creditor should issue this form to the debtor for any year in which a debt is cancelled. Depending on the state in which the debtor resides, a creditor’s issuance of a Form 1099-C may have the effect of barring further collection efforts and of completely discharging the reported debt.

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    Topics: creditor's rights, Charlene J. Hicks, IRS Form 1099-C, extinguishment of debt, discharge of debt

    CONTRACTS: The Importance of Distinguishing a Contracting Party from a Stranger

    Posted by Charlene J. Hicks on Thu, Jul 19, 2018 @ 10:07 AM

    Charlene Hicks—Senior Attorney, National Legal Research Group

         Although the law generally does not allow a contracting party to bring a tort claim against another party to the same contract, this protection does not extend to persons or entities that are classified as "strangers" to the contract. Thus, a contracting party may maintain a viable claim for tortious interference with contractual relations against a stranger to the agreement. In practice, however, the performance of a contract is often contingent on the acts and approval of persons or entities that did not formally enter into the agreement. This makes it difficult to distinguish between a protected contracting "party" and an unprotected "stranger."

         The popular Trader Joe's grocery chain recently found itself pushed into the murky realm of being classified as a "stranger" to a contract between two parties to which Trader Joe's had close business ties. In Redfearn v. Trader Joe's Co., 20 Cal. App. 5th 989, ___ Cal. Rptr. 3d ___ (2018), the evidence showed that Caliber Sales and Marketing Corporation, a food broker, entered into contracts with various manufacturers of food products and attempted to place those food products in Trader Joe's stores. Trader Joe's worked with Caliber in finding new products for its stores. Caliber's assignee alleged that a Trader Joe's executive falsely accused Caliber of spreading a rumor that the store's employees were soliciting bribes from brokers and that this false accusation tarnished Caliber's professional reputation to such an extent as to cause two food suppliers to terminate their contracts with Caliber to supply food products to Trader Joe's. Read More

    Topics: contracts, tortious interference with contract, stranger to a contract, intentional and negligent interference

    CREDITORS RIGHTS/CONTRACTS LAW: Revoking Contractual Consent to Receive Creditor Phone Calls

    Posted by Charlene J. Hicks on Wed, Jan 24, 2018 @ 12:01 PM

    Charlene Hicks, Senior Attorney, National Legal Research Group

                In what has been termed a groundbreaking opinion, the Second Circuit recently held that the federal Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. § 227(b), bars a consumer-buyer from revoking his or her contractual consent to receive creditor calls concerning the underlying contract or account.  The case, Reyes v. Lincoln Automotive Financial Services, 861 F.3d 51 (2d Cir. 2017), provides creditors with a strong defense against consumers who issue complaints about the creditors’ debt collection processes.

                In the case, Alberto Reyes Jr. (“Reyes”) leased a new Lincoln MKZ luxury sedan from a Ford dealership. The lease was financed by Lincoln. One provision of the lease stated that Reyes expressly consented to electronic or verbal contact from Ford and Lincoln and their agents, affiliates, and representatives. Id. at 53-54. This contact included manual calling methods, prerecorded voice messages, texts, and emails to any email or telephone number that Reyes provided, “now or in the future, including a number for a cellular phone or wireless device[.]” Id. at 54. In his lease application, Reyes provided Lincoln with his cell phone number.

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    Topics: contracts, creditor's rights, contractual consent, Telephone Consumer Protection Act

    CONTRACTS—Arbitration: Nonexistence of Designated Arbitral Institution at Time of Dispute May Void Mandatory Arbitration Requirement

    Posted by Charlene J. Hicks on Thu, Jul 20, 2017 @ 13:07 PM

    Charlene Hicks, Senior Attorney, National Legal Research Group

                Despite the federal policy favoring arbitration, prospective plaintiffs continue to push courts to reexamine the enforceability parameters of arbitration agreements. These efforts have met with some success in cases where the arbitration agreement designates a particular arbitral institution to resolve a dispute between the parties, and the designated institution no longer exists at the time an actual dispute arises.

                This factual scenario has unveiled a degree of uncertainty in the meaning of the Federal Arbitration Act ("FAA"). The FAA provides that if "there shall be a lapse in the naming of an arbitrator . . . or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator[.]" 9 U.S.C. § 5. It is unclear from the statute whether the nonexistence of an arbitral institution designated in an arbitration agreement to resolve disputes between the parties constitutes a "lapse in the naming of an arbitrator" such that the court is authorized to appoint a substitute arbitrator. If the designated institution's nonexistence does not fall within the dictates of 9 U.S.C. § 5, then the court does not have the power to appoint a substitute. To do so would violate the long-established contractual principle that a party cannot be compelled to arbitrate a dispute that he or she has not agreed to submit to arbitration.

                No definitive answer to this question has yet been reached. Some circuits have ruled that the choice of a designated arbitral forum is a material part of the agreement to arbitrate and, therefore, the court cannot legitimately appoint a replacement. See Flagg v. First Premier Bank, 644 F. App'x 893, 897 (11th Cir. 2016); Ranzy v. Tijerina, 393 F. App'x 174, 176 (5th Cir. 2010). Other circuits have reached the opposite conclusion and ruled that the unavailability of a named arbitral institution constitutes a lapse within the meaning of 9 U.S.C. § 5, and the court may, therefore, appoint a substitute. See Green v. U.S. Cash Advance Ill., LLC, 724 F.3d 787, 793 (7th Cir. 2013); Khan v. Dell Inc., 669 F.3d 350, 356 (3d Cir. 2012).

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    Topics: contracts, enforceability, arbitration, arbitral institution

    GOVERNMENT CONTRACTS: Supreme Court Decision Aids Veteran-Owned Business

    Posted by Charlene J. Hicks on Tue, Nov 1, 2016 @ 13:11 PM

    Charlene Hicks, Senior Attorney, National Legal Research Group

         In Kingdomware Technologies, Inc. v. United States, 136 S. Ct. 1969 (2016), the United States Supreme Court recently declared that the Department of Veterans Affairs (the "VA") is required to give priority to veteran-owned businesses in the bidding process for government contracts as long as two or more veteran-owned small businesses may reasonably be expected to submit fair and reasonable bids. This unanimous decision should provide a boon to veteran-owned businesses and should also give government agencies pause in assessing bids for contract work.

         The Kingdomware dispute originated shortly after the enactment of the Veterans Benefits, Health Care, and Information Technology Act of 2006 (the "VA Act"). The VA Act provides that the VA must restrict bid competitions to veteran-owned companies as long as the "rule of two" is satisfied. Specifically, 38 U.S.C. § 8127(d) states:

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    Topics: Charlene J. Hicks, VA priority, government contracts, veteran-owned business

    CIVIL PROCEDURE: Filing of Postjudgment Motion Tolls Deadline to Move for Attorney's Fees

    Posted by Charlene J. Hicks on Thu, Oct 29, 2015 @ 09:10 AM

    The Lawletter Vol 40 No 9

    Charlene Hicks, Senior Attorney, National Legal Research Group

         For a prevailing party in a civil lawsuit to obtain attorney's fees, he or she must file a motion requesting fees by a statutory deadline. Problematically, however, many state statutes do not specify whether this deadline is tolled by the filing of a postjudgment motion. As a result, counsel may be placed in the awkward position of deciding whether to move for attorney's fees while the losing party's postjudgment motion is pending before the court.

          The effect of a postjudgment motion on the time in which a prevailing party must move for attorney's fees was recently addressed in Barbara Ann Hollier Trust v. Shack, Nos. 63308, 64047, 2015 WL 4656697 (Nev. Aug. 6, 2015). There, the court noted that Rule 54(d) of the Nevada Rules of Civil Procedure requires a prevailing party to move for attorney's fees within 20 days after service of notice of entry of judgment. However, in the case before the court, the losing party filed a motion for judgment notwithstanding the verdict or, alternatively, for a new trial before the prevailing party moved for attorney's fees. The prevailing party did not file any motion for attorney's fees until after the court denied the losing party's postjudgment motions.

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    Topics: civil procedure, tolling, Charlene J. Hicks, motion for attorney's fees

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