Archive for the ‘COMMERCIAL LITIGATION’ Category

Creditors, beware of promises from Debtors who own a business and file Bankruptcy

Wednesday, March 12th, 2014

Debtors engaged in business who file for relief under the Bankruptcy Code usually list the value of their business enterprises a $0.00.  Usually, this is because their businesses are typically saddled with debt which exceeds the value of their business’ assets, leaving the business with a negative book value.  However, this value is typically not the true value of the business.   In many instances the business has a customer base, sufficient cash flow to meet its needs and pay the debtor a salary or draws, have strong relationships developed over the years with vendors and suppliers, and have developed and tested management systems in place.  Therefore, the true value of the business may likely be substantially different than book value under alternative and more accepted valuation methods.  However, since many bankruptcy trustees only rely upon book value because they are paid on the value of assets they recover and liquidate, they do not challenge the valuation given by the debtors.   Many debtors involved in businesses know this and use it to their advantage, causing the creditors, who typically understand the true value of the businesses, to negotiate with the debtors and their counsels directly. This negotiation typically lead to the parties entering into a settlement agreement where the debtor makes various promises in exchange for the creditor not challenging the value of the business and not challenging the debtor’s discharge based on fraud upon the court, or other grounds.

Creditors should be aware, however, that entering into a settlement agreement and taking the debtor’s promise to abide by its terms are not enough to protect their interests.   A case before the Bankruptcy Court for the Middle District of Florida illustrates this point.  A debtor filed for relief under chapter 7 of the Bankruptcy Code in 2009.  This debtor and another family member operated several businesses in Florida, with assets in excess of several million dollars, and income in the millions.  His only major creditor filed a claim for over one million dollars and objected to the debtor’s discharge.  This creditor also sued the debtor’s family member, who was also his business partner, on a note with a balance due in principal and interest of over on million dollars.   With the aid of the debtor’s attorney, the creditor, his partner, and his attorney negotiated an agreement, which, by its terms was not a debt, in whole or in part, that was subject to the chapter 7 case, but was owed by the debtor’s partner.  The debtor and partner signed and complied with the settlement agreement for two years, then stopped paying the creditor.  The debtor subsequently filed for relief under chapter 11 of the Bankruptcy Code and argued that the settlement agreement was invalid.  The Creditor filed an adversary proceeding in the 2009 chapter 7 case to determine the validity of the agreement. Despite the following facts, the court ruled that the agreement was invalid as to the debtor because the agreement was not filed with the court or approved by the court: 1) the debtor provided false information on his chapter 7 petition as to the value of the businesses, his residence, transfers of shares of stock and membership interests in various businesses, and in his statement of financial affairs; 2) the debtor testified that the consideration for the debt was in whole for the obligation his partner owed to the creditor; 3) the debtor and his partner was allowed to operate the businesses and collect hundreds of thousands of dollars because of the agreement; 4) the debtor signed over his interest in the companies to the creditor and turned over the stocks to the creditor; 5) the debtor provided false information in his new chapter 11 case.

The lesson here is that creditors of debtors who file for relief under the bankruptcy code and operate a business should not be satisfied with the debtor’s promises, even if those promises are journalized in a settlement agreement signed by the debtor. The creditor must have the debtor’s attorney sign off on the agreement physically, file the agreement with the bankruptcy court, and have the agreement approved. All of this must be done before the creditor withdraws its claims, motions and other papers and voluntarily dismisses its adversary proceedings against the debtor.

For more information on how to negotiate with debtors who own a business and seek to discharge the debt they owe to you in bankruptcy while maintaining their business, please call Attorney Persad at 407-647-7887 or email him at attorneypersad@cplspa.com.

 

The Regulation of State Banks

Monday, February 25th, 2013

Is a state law that is preempted from enforcement against national banks also preempted from enforcement against out-of-State, State banks? That was the question in Baptista v. PNC Bank, 91 So. 3d 230 (Fla. 5th DCA 2012).

RBC Bank was a North Carolina bank. One of its account holders wrote a check to Ms. Baptista.  Ms. Baptista went to one of RBC’s branches in Florida, and presented the check for payment. Ms. Baptista did not have an account at RBC. The teller charged Ms. Baptista a $5.00 check-cashing fee.

However, Florida Statutes, section 655.85 provides that “an institution may not settle any check drawn on it otherwise than at par.” Accordingly, we filed a class action suit against RBC. After some preliminary discovery, RBC moved for summary judgment. It claimed that because section 655.85 is preempted from enforcement against national banks, it was also preempted from enforcement against out-of-State State banks, pursuant to title 12 U.S.C. § 1831a(j)(1). Section 1831a(j)(1) provides in part: 

(1)Application of host State law. The laws of a host State, including laws regarding community reinvestment, consumer protection, fair lending, and establishment of intrastate branches, shall apply to any branch in the host State of an out-of-State State bank to the same extent as such State laws apply to a branch in the host State of an out-of-State national bank.

At the time of RBC’s motion, every court that had addressed the issue had interpreted section 1831 to mean that statutes that are preempted from enforcement against national banks are also preempted from enforcement against out-of-State State banks. The trial court granted RBC’s motion for summary judgment, and we appealed.

On appeal, we pointed out that section 1831 does not refer to the “enforceability” of State laws; only to the “applicability” of State laws. We argued that although section 655.85 is “unenforceable” against national banks it is “applicable” to them. We noted that section 655.85 is only preempted from enforcement against national banks because enforcement against national banks would conflict with 12 C.F.R. § 7.4002. However, enforcement of section 655.85 against State banks would not conflict with section 7.4002, because section 7.4002 does not apply to State banks. We argued that section 1831 only prevents States from discriminating against out-of-State State banks. In other words, if a State law provides that it does not apply to national banks, section 1831 prevents that law from applying to out-of-State State banks. Section 655.85 does not discriminate against out-of-State State banks because section 655.85 applies to all banks.

RBC argued that section 1831 was enacted to place State banks on par with national banks, and to preserve competitive equality between national banks and State banks. It said that Congress’ intent was to remove incentives for banks to charter at the federal level rather than the State level, and vice-versa, in order to insure the health and stability of our dual banking system. It argued that having to adjust to bank policies and procedures on a State-by-State basis, and having to stay current on the changes in each State’s laws would be virtually impossible for State banks, and that they would be forced to either abandon banking in foreign States or increase fees to depositors.

The court said that RBC’s arguments contorted the express language of section 1831. It said that the statute simply prohibits States from discriminating against out-of-State State banks. It concluded that section 1831 was not applicable because section 655.85 applies to all banks. Accordingly, the court reversed, and remanded the case for further proceedings.

RBC subsequently filed a petition for a writ of certiorari with the Supreme Court of the United States, but the petition was denied.

Companies Should Review Their Non-Compete Agreements And Update Them, If Necessary, Before It Is Too Late

Thursday, June 21st, 2012

CONCLUSIONS:

1. Non-compete agreements may not be enforceable against employees or independent contractors by successor companies unless drafted properly.

2. Non-compete agreements between employees and their original employers which specified that they applied only to the specific companies that had originally hired each employee, and which make no provision for the continuation of the agreement upon any acquisition of the original company by another company, are not enforceable by the successor company past the non-compete period agreed to by the employees and their original employers in Ohio.

On May 24, 2012, the Ohio Supreme Court issued an opinion which all Companies should pay attention to. It may mean that many non-compete agreements will not be enforceable against employees or independent contractors by successors.

In Acordia of Ohio, LLC v. Fishel, 2010 Ohio 6235 (Ohio 2012), the Court reviewed an employment agreement with a non-compete agreement with the following language:

In consideration of my employment and its continuation by Frederick Rauh & Company (hereinafter, Company) I hereby covenant as follows:

A. For a period of two years following termination of employment with the company for any reason, I will not directly, indirectly, or through association with others solicit, write, accept or in any other manner perform any services relating to insurance business, insurance policies, or related insurance services for any of the following;

(1) Any individual or entity for whom the company has written, accepted, or in any other manner performed any services relating to insurance business, insurance policies, or related insurance services at any time while I was employed by the Company;

(2) Any individual or entity whose name was provided me as a prospective client at any time while I was employed by the Company.

B. For a period of two years following termination of employment with the company, I will not encourage nay [sic] other employees of the company, directly, indirectly, or through association with others to leave the Company’s employment.

The agreement of noncompetition did not contain language that extends to other employers, such as the company’s “successors or assigns.” Frederick Rauh & Company became known as Acordia of Cincinnati, Inc. after its acquisition by Acordia, Inc. in 1994. Fishel began his employment with Frederick Rauh in 1993.  Wells Fargo acquired Acordia, Inc. in May 2001. Seven months later, Acordia, Inc. underwent a merger with the Acordia of Ohio, L.L.C.; following the merger, only Acordia of Ohio, L.L.C.  remained. Fishel continued to work for the Acordia of Ohio, L.L.C. until August 2005, when he and others (who had the same non-compete agreement) began employment with another company. They soon used their contacts to recruit multiple customer accounts from Acordia of Ohio, L.L.C. to their new employer. Within six months, 19 customers had transferred $1 million in revenue to their new employer from Acordia of Ohio, L.L.C.

Acordia of Ohio, L.L.C. sued the former employees and their new employer for to stop them form competing with it (injunctive relief) and monetary damages.  The Supreme Court of Ohio framed the question as follows: whether the non-compete agreements apply only to the original contracting employer or whether after the merger, Acordia of Ohio, L.L.C. may enforce the non-compete agreements as if it had stepped into the shoes of the original contracting employer.

Even though the law is clear in Ohio, and most other states, that a company’s assets transfer to the new company after a merger, and when a merger or consolidation becomes effective, the surviving or new entity possesses all assets and property of every description, and every interest in the assets and property, wherever located, and the rights, privileges, immunities, powers, franchises, and authority, of a public as well as of a private nature, of each constituent entity, the Ohio Supreme Court ruled that Acordia of Ohio, L.L.C. may not enforce the non-compete agreements as if it had stepped into the shoes of the company that originally contracted with the employees. To rule otherwise, it said, would require a rewriting of the agreements, which, by their terms, the non-compete agreements are between only the employees and the companies that hired them.

After Acordia of Ohio, L.L.C. absorbed Acordia, Inc., the companies with which the employees agreed to avoid competition had ceased to exist. Because the non-compete agreements do not state that they can be assigned or will carry over to successors, the named parties intended the agreements to operate only between themselves–the employees and the specific employer. While the employment agreements transferred to Acordia of Ohio, L.L.C. by operation of law, the wording within those agreements prevented Acordia of Ohio, L.L.C. from enforcing a noncompetition period as if it were the original company with which the employees agreed not to compete. Acordia of Ohio, L.L.C. acquired only the ability to prevent the employees from competing two years after their employment terminated with the specific company named in the agreements.  Therefore, the Court ruled that non-compete agreements that are transferred as a matter of law by a merger between companies is enforceable according to their terms only.

The implications of this case are far reaching, and its reasoning may be applied to similar cases in all other states.  To avoid the problems faced by Acordia of Ohio, L.L.C., companies should review their employment agreements, independent contractor agreements, and other agreements containing non-compete clauses.

To find out more about employment agreements, independent contractor agreements, and other agreements to protect your company, please contact attorney Tee Persad at 407-647-7887 or email him at attorneypersad@cplspa.com.

Florida Courts may review non-compete agreements for reasonableness in time, area and relation to a legitimate business interest of the employer

Wednesday, June 13th, 2012

CONCLUSIONS

1. A covenant not to compete which prohibits competition per se violates public policy and is void.

2. A condition precedent to the validity of a covenant not to compete entered into by an agent, independent contractor or employee is the existence of a legitimate business interest of the employer to be protected.

3. It is the employer’s burden to plead and prove the underlying protectable interest.

4. Trade secrets, customer lists, and the right to prevent direct solicitation of existing customers are, per se, legitimate business interests subject to protection.

5. Other business interests, such as, but not limited to, extraordinary training or education, may constitute protectable interests depending upon the proof adduced.

6. Chapter 90-216, section 1, Laws of Florida, shall apply to and control all actions.

7. The right created by section 542.12, and carried forward in section 542.33(2)(a), is applied prospectively.

FACTUAL SCENARIO

ABC, Inc. (“ABC”) operates an automobile repair shop. [While employed by ABC, John Doe (i) received no significant training in the installation and repair of automobile air conditioning systems, beyond the knowledge and skill that he possessed when he began work with ABC (ii) he received significant training in the installation of cruise controls and cellular telephones in automobiles, (iii) he had no significant contacts with ABC’s customers and developed no significant relationships with ABC’s customers, and (iv) he acquired no trade secrets or confidential business information of ABC.

HISTORICAL PERSPECTIVE

Under the common law of England, a contract restricting a person's right to pursue his trade or occupation was deemed void as against public policy. Medieval concepts that a person could not pursue a trade in which he had not been apprenticed made the rule necessary, because prohibiting a person from working under the supervision of one other than his original employer would leave the person in involuntary servitude or unable to provide for himself and his dependents.

With the passage of time, the ancient rules of apprenticeship were abandoned, and it became recognized that in special circumstances limited restraints of competition were both necessary and proper to protect an employer's proprietary rights. Thus evolved the distinction between contracts prohibiting competition per se, which were prima facia invalid, and contracts protecting an employer from unfair competition from a former employee who had obtained trade secrets, or other confidential information, or special relationships with customers during the course of his employment. It is a settled principle of law that no man may, per se, contract with another that the other will not follow a calling by which he may make his livelihood. These basic concepts are embraced in the law of Florida.

OTHER JURISDICTIONS

Other states which permit employee noncompetition agreements reveals an overwhelming majority requiring, at a minimum, that such contracts be reasonably related to the protection of a "legitimate business interest" or "protectable interest" of the employer. The rule, generally stated, is that an employer may not enforce a post-employment restriction on a former employee simply to eliminate competition per se; the employer must establish its legitimate business interest to be protected. See Bryceland v. Northey, 160 Ariz. 213, 772 P.2d 36 (Ct.App. 1989).

The Supreme Court of Tennessee expressed the rule as follows: " [A]ny competition by a former employee may well injure the business of the employer. An employer, however, cannot by contract restrain ordinary competition. In order for an employer to be entitled to protection, there must be special facts present over and above ordinary competition. These special facts must be such that without the covenant not to compete, the employee would gain an unfair advantage in future competition with the employer.”

The rule is an expression of common sense which both protects the employer from unfair competition and recognizes the right of an individual, in a free and competitive society, to earn an honest living and better his status along the way. In a broader sense, all consumers benefit from the availability of goods and services, the quality and price of which are determined by fair competition, unfettered by artificial monopolistic practices.

FLORIDA LAW

In 1953 the Florida legislature enacted section 542.12, Florida Statutes (1953) (renumbered in 1980 as section 542.33), which acknowledged the common law principle that contracts in restraint of trade are void. The statute provides an exception which includes, in general terms, that an employee may agree with his employer, to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer. The statute is silent on the issue of whether for such contracts to be valid they must relate to the protection of a proprietary interest of the employer. However Florida courts have determined that such requirement is to be implied in the statute. Florida’s supreme court addressed the constitutionality of section 542.12 (the predecessor of 542.33), and in upholding the statute, observed: “[T]he fact that such contracts may be lawfully made and enforced under the statute does not ipso facto make every such contract enforceable as written. The restrictive provisions of such contracts will generally be enforced in such way as to protect the legitimate interests of the employer…”  The same court held “that there was a `reasonable interest’ to be protected by the restraining covenant.” Later, the it explained that section 542.12 “is designed to allow employers to prevent their employees and agents from learning their trade secrets, befriending their customers and then moving into competition with them.”

Most fundamental to these decisions is that “[t]he right to work, earn a living and acquire and possess property from the fruits of one’s labor is an inalienable right.” Implicit in this right is the opportunity to move freely within the labor force in the quest for advancement in position and economic productivity. Certainly the common law of this state recognized and jealously guarded this freedom in condemning and restricting contracts of the kind here considered.

A plain reading of section 542.33(2)(a) dispels any notion that the legislature intended to dispense with the bedrock requirement that covenants of this nature must relate to a legitimate business interest of the employer in order to restrict or impinge upon the right to pursue and earn a living guaranteed by our constitution. Therefore, pursuant to section 542.33(2)(a), the existence of a legitimate interest of the employer to be protected is a threshold condition to the validity of a covenant not to compete.

WHAT CONSTITUTES LEGITIMATE INTERES T O THE EMPLOYER TO BE PROTECTED

Generally, three such interests are recognized: (1) trade secrets and confidential business lists, records, and information, (2) customer goodwill, and (3) to a limited degree, extraordinary or specialized training provided by the employer.

Clearly categories (1) and (2), by the expression of the legislature in the 1990 amendment to section 542.33(2)(a), are interests which may be protected. The third category is difficult to define with any degree of precision. Where recognized as a protectable interest, it is generally required that the employer provide more in training than that acquired by simply performing the tasks associated with a job.

In our factual scenario, because John Doe, although thoroughly schooled in the installation and repair of auto air conditioners upon his employment by ABC, did acquire the knowledge and experience necessary to install and repair cruise control units and cellular telephones while in the employ of ABC.

To constitute a protectable interest, however, the providing of training or education must be extraordinary. “Extraordinary” is that which goes beyond what is usual, regular, common, or customary in the industry in which the employee is employed. The rationale is that if an employer dedicates time and money to the extraordinary training and education of an employee, whereby the employee attains a unique skill or an enhanced degree of sophistication in an existing skill, then it is unfair to permit that employee to use those skills to the benefit of a competitor when the employee has contracted not to do so. The precise degree of training or education which rises to the level of a protectable interest will vary from industry to industry and is a factual determination to be made by the trial court. Skills which may be acquired by following the directions in the box or learned by a person of ordinary education by reading a manual do not meet the test.
In our scenario, John Doe extended his air-conditioning installation and repair skills to include cruise control units and cellular telephones. This is not to say that unique training in performing the simplest of tasks cannot be protected when the employer’s methods fall within the category of trade secrets or other confidential information.

In 1990 the Florida legislature enacted chapter 90-216, section 1, Laws of Florida. The impact of this amendment was as follows: first, the presumption of irreparable injury is strictly curtailed; second, a test of reasonableness is injected into the enforcement process because the amendment prohibits the enforcement of an unreasonable covenant. In determining the reasonableness of such an agreement, the courts employ a balancing test to weigh the employer’s interest in preventing the competition against the oppressive effect on the employee. This balancing test has been limited strictly to covenant provisions pertaining to duration and geographic area. The court may not refuse to give effect to a valid noncompetition agreement on the ground that enforcement would have an overly burdensome effect on employee. The only authority the court possesses over the terms of a noncompetition agreement is to determine reasonableness of the time and area limitations. A court is not empowered to refuse to give effect to a covenant not to compete on the basis of finding that the enforcement of the contract’s terms would produce an unjust result by causing an overly burdensome effect upon the employee.

This restriction upon the court’s powers of review flows from the terms of section 542.33(2)(a) that an “employee may agree with his employer, to refrain from carrying on or engaging in a similar business … within a reasonably limited time and area.” Judicial interpretation construed this language as an implied limit upon the court’s authority because it granted no power to extend the test of reasonableness beyond that area specifically defined. This language remains unchanged in the statute as amended. Added, however, is the specific authority to deny injunctive relief as to an “unreasonable covenant.” In this regard, the intent of the legislature to be to authorize the courts to apply traditional equitable principle in cases of this nature to avoid unfair and unjust results.

The legislature has specifically identified and segregated for special treatment covenants which protect trade secrets and customer lists and prohibit solicitation of existing customers, all of which are universally identified as legitimate business interests which may be protected. In such cases, the proof of such an interest to be protected provides the threshold for a presumption of irreparable harm on breach of the contract. All covenants not to compete, however, must be founded on an interest, determined by law, to be the proper subject of protection. That is, the proof of a protectable interest is the threshold to enforcement of such covenants; it is only the degree of proof thereafter which varies depending on the class of interest to be protected.

The right created by section 542.12, and carried forward in section 542.33(2)(a), is applied prospectively.

To learn more about non-compete agreements and other agreements which can protect your business please call attorney Persad at 407-647-7887 or email him at attorneypersad@cplspa.com.

Business litigation with no upfront fees and costs? A dream come true.

Thursday, March 22nd, 2012

Businessmen and women know the nightmare of business litigation. Bills, bills and more bills. Every phone call to the attorney is charged. Every copy made is charged. A one page motion may cost thousands of dollars in “research and drafting.” Cases seem to never end. You wonder if your attorney is working for you or for himself. Have you ever dreamed of being able to litigate a meritorious business claim that will not cost you a penny unless you win? If you have, your dream has come true at CPLS, P.A. Our attorneys have brought into the business litigation world the concept of contingent fee litigation. We will evaluate your case and if we conclude that you have a meritorious case that will likely result in a substantial recovery of money or property, we will agree to represent you without you having to front a penny. Our attorneys will be paid our fees and costs if and only if we obtain a recovery for you. The percentage of our fees may vary with the complexity of the case, the monetary amounts involved and the likelihood of collection, and will typically be in the range of 25% to 45%.

For more information, please call us at 407-647-7887 or email us at info@cplspa.com