“Beware of Small Print – It Can be Bad for Your Wallet”

(February 6, 2012): You consult with an attorney, do all the necessary due diligence, start a company or corporation, and finally begin doing business.  You execute many contracts for services or supplies, signing as the “president” or “manager’ of your corporation.  You assume that each contract is between the corporation and the service provider.

Later on, there is a dispute on whether or not the corporation owes for certain services or supplies.  You get a demand letter from an attorney.  You are unconcerned about the letter, however, because if the corporation is sued, you will have an attorney file an answer on behalf of the corporation.

You are then served with a lawsuit – not to the corporation – but to you, individually.  The lawsuit alleges that “you” agreed to pay any debts or past due amounts.

You ask “How can this be?”

Beware of the small print – it can be bad for your wallet.   Read the small print at the bottom of an account application or agreement with a service company, such as a print shop, or supply store, such as office supplies or production materials.  Many times the small print contains a provision that states something like: “The party signing this agreement acknowledges he/she will be individually liable on this account and that he/she has the full authority to act as agent for the party in whose name this order is placed.”

By signing the agreement, you have not only agreed that you had the authority to enter into the agreement on behalf of the corporation, but also that you would be individually liable for any debts or past due amounts.

So, if you are an officer, president, or manager of a corporation, always read the fine print before you sign a contract. Better yet, call your attorney and have him/her review the contract.  Many times the other party will agree to strike that provision, or the corporation can agree to indemnify you individually. As always, an ounce of prevention is worth a pound of cure.

Leonard Schneider and other Liles Parker attorneys have extensive experience in business litigation, contract review and drafting. Call 1 (800) 475-1906 today for a free consultation.

“There is a fiduciary duty here. It’s really inconceivable to us.”

(February 3, 2012): Many folks or businesses agree to manage another person’s interests, money or business.   When this happens there is a fiduciary duty that attaches to the person or entity managing the other person’s interests, money or business matters.

The acceptance of a fiduciary duty can occur, for example, by being a General Partner in a Limited Liability Partnership, a Finance Advisor to an individual, or by managing the funds, property or affairs of another.

When you handle the money or manage the assets of another person or entity, you assume a higher duty to that person or entity than is normal – this duty is called a “fiduciary duty”.  The basic definition of “fiduciary duty” is to put the interests of others you are representing or assisting above your own interests.  For example, you cannot steal or double-dip from the funds you are managing, grossly mismanage another’s assets or fail to keep adequate records.

However, many times the person or entity that takes on the management of another’s money, business or assets does not understand this fiduciary duty, becomes complacent or just doesn’t care about his duties.  Thus, as Henry Silverman, former CEO of Cendant Corporation, famously said when uncovering accounting improprieties of a business recently acquired by Cendant: “There is a fiduciary duty here. It’s really inconceivable to us.”

What he was saying is that it was inconceivable that proper care was not used to manage the funds or affairs of others, even in spite of the fiduciary duty owed.  The failure to exercise proper care in handling the money and affairs of others can not only place you or your business in great danger of incurring civil liability, but also opens a serious threat of possible criminal charges against you.

So, if you are about to manage, oversee, or care for the money or assets of another,  be sure to call your attorney, explain what you want to do, determine if there is a fiduciary duty and what type of risk management control you need to have to make sure you do not violate that fiduciary duty.   As always, an ounce of prevention is worth a pound of cure.

Leonard Schneider and other Liles Parker attorneys have extensive experience in business litigation, contract review and drafting. Call 1 (800) 475-1906 today for a free consultation.

“A verbal contract isn’t worth the paper it is written on.”

(November 21, 2011) After twenty years of practicing law, I still receive many calls from folks who have had a deal gone bad, money taken, partnerships that defrauded them, et cetera; of course, the first thing I ask is what did the contract say?

The response I most often hear is, “there is no contract” or “we had a verbal agreement” or perhaps “we made some notes”.  As Sam Goldwyn, the noted Hollywood mogul observed: “A verbal contract isn’t worth the paper it is written on.”

While after extensive litigation and attorney fees, I may be able to help the client without a contract by arguing in good faith there is evidence to assert there was an enforceable contract, it usually would have been a lot easier and less expensive to have had a written contract at the beginning.

Many times you hear “my word is my bond”, or “we can shake hands, that is the way it used to be done in the good old days”.  However, as I was told by a

professor at law school, a contract is not bad, or negative, or shows a lack of trust, it just is a written memorandum of what was agreed on at the beginning.  In other words, a written contract helps parties remember what they agreed to when they started to do business.  It helps the memory of the parties that do business together.

So, if you are about to embark on an expensive endeavor, or a project that may reap financial benefits, be sure to call your attorney, explain what you want to do, and have a contract written.  An ounce of prevention is worth a pound of cure.

Leonard Schneider and other Liles Parker attorneys have extensive experience in contract review and drafting. Call 1 (800) 475-1906 today for a free consultation.

Part III: Analysis and Conclusion

(April 26, 2010): Part III:  Analysis and Conclusion

In the midst of an economic downturn, headlines are filled with accounts of failed corporations and bankruptcies as well as notorious government bailouts.  There are many threatened lawsuits directed at officers and Directors of corporations for breaches of their fiduciary duties or seeking judicial declarations that corporations are insolvent or in the so called “zone of insolvency.” Gheewalla provides important guidance to  Directors, creditors and their professionals. It establishes that, irrespective of whether a Delaware corporation is within the zone of insolvency or insolvent, individual creditors cannot assert direct claims for breach of fiduciary duty against Directors. In the case of an insolvent corporation, however, creditors can assert derivative claims on behalf of the corporation against Directors. It should be noted that the ruling is limited to breach of fiduciary duty claims: it does not restrict other kinds of claims or rights that may be asserted by creditors directly against a corporation under a contract, agreement or applicable law. Also, the ruling may engender increased litigation over when a corporation becomes “insolvent” and which parties should have the right to prosecute derivative claims.

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Robert W. Liles or one of our other attorneys at 1 (800) 475-1906.

Part II: The “Zone of Insolvency” — the Delaware Example

(April 26, 2010): This is the second installment of a three part article by David P. Parker examining the fiduciary duties of officers and directors of insolvent corporations and corporations operating in the so called “Zone of Insolvency.”

In Gheewalla, a significant Delaware law decision regarding creditors’ ability to sue corporate fiduciaries, the Delaware Supreme Court addressed the issue of whether a corporate director owes fiduciary duties to the creditors of a company that is insolvent or in the “zone of insolvency.”  The Court ruled that directors of a solvent Delaware corporation that is operating in the zone of insolvency owe their fiduciary duties to the corporation and its shareholders, and not to its creditors. The Court also ruled that the fiduciary duties of directors of an insolvent corporation continue to be owed to the corporation.   However, with respect to an insolvent corporation, you must have standing in order to pursue derivative claims for directors’ breaches of their fiduciary duty to the corporation.

The Supreme Court of Delaware examined the issue as to whether Delaware law recognizes a creditor’s right to bring direct fiduciary-duty claims against the directors of a corporation operating in the zone of insolvency. In holding that Delaware law does not recognize such a right, the Court explained:

When a solvent corporation enters the zone of insolvency the focus for Delaware directors does not change: Directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.

The Court also stated that creditors, unlike shareholders, already have several protections available to them, including contractual agreements, security instruments, the implied covenant of good faith and fair dealing, and fraudulent conveyance laws that “render the imposition of an additional, unique layer of protection through direct claims for breach of fiduciary duty unnecessary.” The Court also agreed with the Chancery Court’s reasoning that:

[A]n otherwise solvent corporation operating in the zone of insolvency is one in most need of effective and proactive leadership — as well as the ability to negotiate in good faith with its creditors — goals which would likely be significantly undermined by the prospect of individual liability arising from the pursuit of direct claims by creditors.

The Court also closed the door on a creditor’s right to bring a direct breach of fiduciary duty claim against directors of an insolvent corporation, reasoning that such a right would create uncertainty for directors who have a fiduciary duty to exercise their business judgment in the best interests of an insolvent corporation. According to the Court, a direct right of action would create a conflict between the duty of the directors to “maximize the value of the insolvent corporation for the benefit of all of those having an interest in it, and the newly recognized direct fiduciary duty to individual creditors.” The Court explained that it is important to allow a director to “engage in vigorous, good faith negotiations with individual creditors for the benefit of the corporation.” The Court did not, however, leave creditors without recourse for a breach of fiduciary duty by a director. It made clear that creditors of an insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for a breach of fiduciary duty.

The ability of a creditor to sue a fiduciary can vary, depending on the specific facts at issue.  David Parker has extensive experience in this care of the law and can represent your interests.  For a complementary consultation, you may call Mr. Parker or one of our other attorneys at:  1 (800) 475-1906.

Part I: The Fiduciary Duties of Officers and Directors of Insolvent Corporations

(April 23, 2010): This is the first installment of a three part article by David Parker examining the Fiduciary Duties of Officers and Directors of Insolvent Corporations and Corporations operating in the so called “Zone of Insolvency.”

Part I:  The Fiduciary Duties of Officers and Directors of Insolvent Corporations

Over the next few days, David P. Parker will be posting several articles examing the  fiduciary duties of Officers and Directors of insolvent corporations and corporations operating in the so called “Zone of Insolvency.”

In the United States, corporations are creatures of state law, and the fiduciary duties of a corporation’s directors are defined by its state of incorporation. Many U.S. corporations are incorporated in the state of Delaware, which has a strong tradition of well-developed corporate jurisprudence.   There may, however, be differences between Delaware law and the laws of other states within the United States.  In general, Directors of solvent corporations have two basic “fiduciary” duties, the duty of care and the duty of loyalty, owed to the corporation itself and the shareholders. Directors must act in good faith, with the care of a prudent person, and in the best interest of the corporation. Directors must also refrain from self-dealing, usurping corporate opportunities and receiving improper personal benefits.  Decisions made by a Director on an informed basis, in good faith and in the honest belief that the action was taken in the best interest of the corporation will be protected by the “business judgment rule.”  Generally, officers owe the same fiduciary duties as directors.

It has long been settled that under ordinary (i.e., solvent) circumstances, shareholders typically have only a derivative (and not direct) right to sue for breach of the fiduciary duties of directors. If they do bring suit against directors, they must do so on behalf of the corporation, and any proceeds of those suits are for the benefit of the corporation.

The Delaware Supreme Court in Catholic Educ. Programming Found., Inc. v. Gheewalla opined that upon insolvency, creditors (who have, after all, taken the place of shareholders as the de facto owners) may likewise bring only derivative – and not direct – suits on behalf of the corporation against directors

 David Parker has extensive experience representing the interests of Corporate Officers and Directors.  Should you have questions regarding the responsibilities of these individuals to insolvent corporations, give us a call.  Mr. Parker can be reached at: 1 (800) 475-1906.

D&O Coverage: Understanding the Role of Outside Directors

(March 29, 2010): A Federal court recently preliminarily approved a $55.95 million settlement involving securities claims against outside directors in a case against Peregrine Systems, Inc.  This is one of the largest ever recorded settlements involving outside directors.  Pursuant to the settlement, several former Peregrine directors agreed to settle claims for $55.95 million. It has been reported that the Peregrine’s insurers contributed to the settlement, and the outside directors are pursuing coverage from the excess insurers.  However, the payment terms of the settlement indicate that a large part of the settlement will be paid from the outside directors’ personal assets.  So how do you respond when your outside directors ask you about your company’s D&O insurance?

I.     An Overview of the Peregrine Systems Litigation:

In 2002, plaintiffs filed securities class action lawsuits against Peregrine, certain Peregrine officers and directors, and various other defendants. The outside directors settled these claims for $55.95 million. Like prior settlements involving personal contributions from outside directors, the case featured elements including a bankrupt company, insider trading allegations, a huge accounting restatement and officers guilty of criminal charges.

II.     Why Peregrine’s  D&O Coverage Proved Inadequate to Fully Cover Losses of the Outside Directors:

Court records reveal that Peregrine Systems Inc. maintained $20 million of D&O insurance: $10 million primary, and two $5 million excess policies. The total $20 million limits, in the face of massive litigation, proved insufficient to meet all of the defense and settlement costs.  Court records also show that Peregrine’s primary policy did not contain application “severability” or other non-rescission wording to protect innocent directors. Therefore, the D&O insurers sought to rescind coverage as to all named insureds under the policies, rather than just the officer defendants who pleaded guilty to crimes.

III.     How to Avoid Personal Contribution by Outside Directors In The Event of Claims:

One thing that can be done to prevent personal contribution by outside directors in the event of claims is to insert “severability” provisions to carve back coverage for outside directors if that officer’s conduct triggers allegations of fraud, criminal conduct, or the exclusion of illegal profits. These exclusions should include a “final adjudication” requirement, ensuring they are not triggered until after a court determines that insured persons engaged in the excluded conduct.  In addition, companies should make sure that “priority of payment” provisions are included to ensure that Side A director losses are paid before the policy pays for covered losses of the company, either through its indemnity obligation under Side B or for covered Side C claims directly against the company.  Furthermore, companies should provide adequate and “non-rescindable” Side-A only excess “difference in conditions” (DIC) coverage to insure directors have sufficient insurance in the event indemnification is unavailable from the company, the underlying limits are eroded by company claims, or the underlying insurers deny coverage to the directors. Include in the Side A policies automatic “reinstatement of limits” for outside directors only.  Finally, consider purchasing independent director liability (IDL) policies that can apply to a single nonofficer director, or group of such directors.

David Parker has extensive experience representing corporations, their officers and / or directors in connection with corporate-related litigation.  Should you have questions about these issues, call Mr. Parker for a complimentary consultation at: 1 (800) 475-1906.

Senator Dodd: Dabbling in Major Corporate Governance Reform

(March 29, 2010): Chairman of the Senate Banking Committee, Senator Chris Dodd (D-Conn.) is flaunting  his “regulatory reform” bill, the Restoring American Financial Stability Act of 2010, as a bi-partisan effort with Senate Republicans  and Committee Ranking Members.

Senator Dodd stated on March 11, 2010: “I have been fortunate to have a strong partner in Senator Corker, and my new proposal will reflect his input and the good work done by many of our colleagues as well.” Senator Dodd’s draft financial reform bill, over 1,000 pages long, is primarily aimed at regulating financial institutions and their products.  Under the bill, the Federal Reserve would gain new powers over non-bank financial firms and keep much of its authority over banks.  However, it also includes several corporate governance and executive compensation provisions that would apply to all public companies.

The corporate governance provisions would require the following:

• The SEC would need to adopt rules requiring companies that are subject to the SEC’s proxy rules to include shareholder nominees for the board in the company’s proxy statement on terms determined by the SEC.
• Companies listed on securities exchanges would be required to adopt a majority voting standard in uncontested elections. Any directors that do not receive a majority vote would be required to resign. The board must accept the resignation or vote unanimously to reject it and disclose the reasons for the rejection.
• Companies listed on securities exchanges would be prohibited from having a staggered board unless approved by shareholders.
• Companies would be required to disclose in their annual proxy statements the reasons they have chosen to either have a single CEO and chairman or have separated the CEO and chairman positions.

The executive compensation provisions would require the following:

• Companies subject to the SEC’s proxy rules would be required to have an annual advisory vote on executive compensation and golden parachutes.
• Companies would be required to include proxy disclosure of the relationship between executive compensation and financial performance, and a pictorial comparison of the amount of executive compensation and the company’s financial performance over the preceding five years.
• Compensation committee members of companies listed on securities exchanges would need to satisfy independence standards established by the national securities exchanges. In addition, the SEC would be required to adopt rules ensuring that any compensation consultant, legal counsel, or other advisor to the compensation committee was “independent” (as defined by the SEC).
• Companies would need to develop and implement a clawback policy that would require recovery of all incentive-based compensation from all executive officers (both current and former) in the event of a financial restatement, for the three-year period preceding the restatement in excess of what they would have been paid under the restatement.
• Companies would be required to disclose whether their employees are permitted to engage in hedging activities that are designed to hedge or offset market declines affecting compensatory equity awards.

This bill, if passed, would significantly alter the landscape for executive and corporate compensation.

A number of Liles Parker have extensive experience representing corporate clients in compliance matters.  For more information on this or other corporate issue, please give attorney David Parker at 1 (800) 475-1906.