The BUSKLAW July Newsletter: The "Inside Baseball" Business Litigation Stupid Strategy Post

There's baseball and there's inside baseball. The former brings to mind Detroit Tigers baseball and the legendary Ernie Harwell. In the early 60s, my father and I would camp out on our porch during the summer months and listen to Ernie's play-by-play over the recently-invented portable transistor radio. Late games were punctuated by euphonious crickets and frogs, some of whom resided in or around our cement-pond swimming pool. This chorus - combined with Ernie's sonorous narrative - often sent me off to dreamland. 

But "inside baseball" is different. The term implies knowing something that is beyond ordinary understanding. Esoteric even. More effort is required to grasp "inside baseball" information, but the payoff is greater: you become smarter! So bear with me.

This blog has often cited business cases decided by Kent County (MI) Circuit Court Judge Christopher Yates. Judge Yates not only writes opinions with brevity and wit; he's a modest soul who invites lawyers to call him "Chris" outside of the courtroom (a judge with humility? - what a concept).

In the case of Young v Vandermeer, Judge Yates was presented with the messy aftermath of a business falling out. The corporation was Grand Connection, Inc. ("GCI"), and its two shareholders were Amy Young and Teresa Vandermeer. Five years ago, Judge Yates order GCI dissolved after Young and Vandermeer couldn't agree on how to run the operation. But now the parties were back before Judge Yates to decide the fate of eight claims brought by Young against Vandermeer. 

Let's set the stage. Trial lawyers make claims for their clients. That's what trial lawyers do. And trial lawyers are prone to make claims that have little or nothing to do with the facts or the law of their case, thinking that if you throw enough mud (or a more disgusting substance) against the wall (here defined as the Court), some will stick. But judges take a dim view of peppering them with unfounded claims; the reputation of the lawyer bringing these claims may suffer - and rightfully so. Fortunately for Young's lawyer, Judge Yates was tolerant, stating in a footnote that:

A hallmark of the Kent County [MI] Specialized Business Docket is numerosity of claims. The instant case surely does not disappoint in that regard, so the Court must engage in its usual practice of plowing, claim by claim, through the plaintiff's overstuffed pleading.      

Here are the eight claims against VanderMeer that Young pitched to Judge Yates, the required elements of each, and why they failed: 

Claim Description	Required Elements (MI law)	Why The Court Rejected
1. Statutory Conversion  of Money	(1) Money must amount to personal property; and (2) VanderMeer must have had an obligation to return that money to Young.	There wasn't any actual money that could have been converted. Unrealized profits are not personal property, so they couldn't have been converted.
2. Misappropriation of Corporate Opportunities	VanderMeer must have been a corporate officer or director who appropriated a corporate opportunity for her own benefit, thereby breaching her fiduciary duties to the corporation.	Young has no standing to assert this claim because she isn’t the corporation that was allegedly injured, and she can’t assert the claim as a GCI shareholder because she doesn’t meet the statutory requirements for a derivative shareholder suit.
3. Fraudulent Misrepresentation	VanderMeer must have misrepresented a past or existing fact.	The alleged fraudulent misrepresentations were made by the court-appointed receiver who wasn't even a representative of VanderMeer.
4. Silent Fraud	VanderMeer must have suppressed a material fact that she was legally obligated to disclose, rather than making an affirmative misrepresentation.*	No evidence that VanderMeer's action in renewing an essential GCI software license without informing Young was fraudulent.
5. Shareholder Oppression	(1)  VanderMeer must have engaged in fraud, illegality, or oppressive conduct. (2) Young must have been a minority shareholder in GCI who was abused by “controlling” persons.	Young was an equal GCI shareholder with VanderMeer so the minority shareholder requirement wasn’t met.
6. Tortious Interference with Business Relationships & Expectancies	VanderMeer must have done something illegal, unethical or fraudulent.	Young failed to prove that VanderMeer did anything illegal, unethical or fraudulent.
7. Civil Conspiracy	Requires a combination of two or more persons, by some concerted action, that accomplished a criminal or unlawful purpose, or that accomplished a lawful purpose by criminal or unlawful means.	Young failed to prove that VanderMeer engaged in criminal acts by dealing with GCI's customers.
8. Unjust Enrichment	For an unjust enrichment claim to succeed, there must not be any express contract covering the same subject matter.	There was an express contract between the parties.

*Further, Young must show some type of representation by words or actions that was false or misleading and intended to deceive. 

For my trial lawyer audience, does it make good sense to allege these claims when there was no legal or factual support for any of them? Are you worried that making unsupported claims tarnishes a lawyer's credibility in arguing future cases before the Court? 

For my business audience, now that you know about these somewhat esoteric causes of action, if you find yourself in a nasty dispute with a fellow shareholder, you can alert your lawyer to give them due consideration. Perhaps you will fare better than Ms. Young - or not! 

Cue music: And it's one, two, [NO] eight strikes you're out at the old ballgame!

If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. And my email address is busklaw@charter.net. Thanks!

The BUSKLAW November Newsletter: Dead Turkeys and Deader Tort Damages

November is the month of Thanksgiving. And Thanksgiving for most folks means time with family and friends (better yet, family who are friends), an appropriate but modestly-priced wine, and a turkey. Turkeys should live their brief sojourn on this earth in relative peace before winding up on our table. But that was not to be for the poor fowls in the recent Kent County (MI) Circuit Court case of White Acres, LLC et al v. Shur Green Farms, LLC et al. 

The case involves a plethora of parties (hence the "et al"), all of whom were in the distribution chain of a biofuel called Lascadoil. Unlike its parent product, Lasalocid, Lascadoil is not an appropriate turkey-feed additive. (Does anything with "oil" in its name sound fit for human or animal consumption?) So when a bunch of turkeys died after eating feed tainted with Lascadoil, the lawsuits started flying; each party was sued by its downstream buyer who in turn sued its upstream seller. And numerous insurance companies entered the fray.   

Before discussing the case itself, we need to talk about the differences between tort and contract claims. In the law, a tort is a civil wrong having the elements of duty, breach of duty, causation, and damages. Wrongful death is a common tort. For example, we go pheasant hunting, and I wave my loaded shotgun in your face. It discharges. You are killed entirely. Your estate sues me, alleging that I had a duty to handle my firearm safely. I breached that duty by discharging my loaded gun in your face which caused your death. And you (and your survivors) personally sustained damages because of my conduct; you're no longer around to give your family love and financial support. 

But torts are - and should be - unrelated to contracts, and the damages are different. Contract damages depend on a contract stating the parties' respective duties, a party breaches one or more of these duties, and the other party suffers damages as a result. But the damages are economic, i.e., you didn't get what you bargained for (money or something valuable). 

Even so, plaintiffs' trial lawyers are optimistic souls. They will argue anything if there's even a one percent chance that a court will agree. In the case at hand, they not only alleged breach of contract, but they also threw in several tort claims alleging negligence, intentional fraud, and "innocent misrepresentation." The defendants targeted with these negligence allegations asked Judge Christopher Yates to dismiss them under the economic loss doctrine, and he agreed.  

Judge Yates correctly found that the negligence claims couldn't stand because the economic loss doctrine bars tort recovery and limits remedies to those available under the Michigan Uniform Commercial Code where a claim for damages arises out of the commercial sale of goods and the losses are purely economic.  There is an exception for damages caused by fraud in the inducement (i.e., a defendant's fraud induced a plaintiff to sign a contract for the purchase of Lascadoil as a feed additive), but no one alleged that tort. The Court let stand breach of contract claims, including breach of implied warranty, so the case will now continue on that basis.

Calculating probable damages in contract disputes can be tricky. You need an experienced team consisting of a competent lawyer (who isn't litigating the matter), an accountant, and risk manager to perform an accurate analysis. But alleging tort damages in a breach of contract case will likely get those allegations thrown out of court  - and may earn you the judge's disrespect in the process.

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If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. And my email address is busklaw@charter.net. Thanks! 

The BUSKLAW October Newsletter: Liquidated Damages Must be Reasonable to be Enforceable

                                                   This Photo by Unknown Author is licensed under CC By-SA

In last month's newsletter, we determined that Michigan law doesn't recognize the concept that "unreasonable" or adhesion contracts are unenforceable. But there is a caveat: a liquidated damages contractual provision must be reasonable to be enforceable. 

A liquidated damages provision is a term of art in the legal world. It applies when, according to Professor Bryan Garner, the parties to a contract agree in advance on the measure of damages to be assessed if a party defaults. Liquidated damages provisions are common in employee non-competition agreements, and it was that clause in one such agreement that Kent County Circuit Court Judge Christopher Yates examined in the case of Alpha Automotive v Cunningham Chrysler of Edinboro.

The facts of the case are simple. Cunningham is a car dealer who contracted with Alpha to conduct promotional events to sell Cunningham's cars. The agreement contained mutual non-solicitation provisions that barred each side from poaching the other's employees. After the promotional events ended, Alpha accused Cunningham of taking two of its employees in breach of the contract. After Judge Yates found that Cunningham had indeed breached the contract by hiring Alpha's employees, Alpha asked the Court to enforce the following liquidated damages provision for each employee that Cunningham "stole" from Alpha:

[Cunningham will pay Alpha] an agency or recruitment fee of $100,000, such amount representing the reasonable value of said individual's specialized training and by potential earnings to Alpha.

Judge Yates cogently summarized Michigan law on the enforceability of liquidated damages provisions:

• The amount of the liquidated damages must be reasonable in relation to the possible injury suffered and not unconscionable or excessive. If the liquidated damages number is excessive, the provision is a penalty and thus unenforceable. 
• A liquidated damages provision is particularly appropriate where actual damages are uncertain and difficult to ascertain.

In concluding that Alpha was entitled to $200,000 in liquidated damages from Cunningham, Judge Yates examined Alpha's profit and loss statements proving that Alpha earned around $113K from its work for Cunningham in 2014, but that income evaporated after Cunningham hired the two Alpha employees and then decided to perform promotional events itself in 2015. 

And just to close the loop, Judge Yates found that although the Rory decision (see my September post) rejected the concept that "unreasonable" or adhesion contracts are unenforceable, the same analysis doesn't apply to liquidated damages provisions based on an unpublished (thus having no precedential value) Michigan Court of Appeals case decided after Rory. But the premise that an unpublished appellate court decision holding that Rory doesn't apply to liquidated damages provisions is weak. How can judges get away with this? There are two answers. First, they can and do because the law - like everything else in life - is messy imprecise! Second, the doctrine affirmed in Rory that a contract is "made to be kept" despite being "unreasonable" is just as enshrined in U.S. contract law as the concept that a liquidated damages clause must be reasonable in amount to be enforceable.   

Do your contracts contain liquidated damages provisions? Have you hired expert legal counsel to make sure that they are valid?   

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The BUSKLAW August Newsletter: This Single-Sentence Contractual Provision Can Save - or Ruin - Your Day!

When it comes to business contracts, some provisions are more important than others. And it's true that some of these critical clauses are buried deep within a contract, so by the time you get to them, your eyes are glazed over, and you gloss over them. But that could be unfortunate. 

One such provision is what lawyers call the choice of law and forum selection clause (for convenience, "COLFS"). That clause typically reads as follows:

The validity, interpretation, and construction of this agreement are governed by the laws of the State of [INSERT STATE], and any and all claims hereunder shall be brought in [SPECIFY NAME OF COURT AND COUNTY].

A recent decision by Kent County Circuit Court Judge Christopher Yates underscores the importance of a COLFS provision in an employment contract between OtterBase, a Grand Rapids, MI-based staffing firm, and two of their former employees, Carrie Rogers and Emily Reed. Rogers and Reed had experience in the staffing services industry in southern California, and OtterBase wanted to expand its business to that area. In 2013, OtterBase entered into an employment contract with Rogers and Reed that included provisions restricting them from competing with OtterBase and soliciting OtterBase clients during and after the term of the contract. The contract included a COLFS provision stating that Michigan law governs the contract, and any claims between the parties could only be decided in Kent County Circuit Court. 

The contract ended badly in 2016. Contrary to the contract, Rogers and Reed started a new company in California that competed with OtterBase and apparently solicited OtterBase clients. OtterBase sued Rogers and Reed in Kent County Circuit Court, and they asked Judge Yates to throw out the suit on the basis that the COLFS provision was unenforceable.
At stake here was more than the inconvenience of Rogers and Reed having to come to Michigan to defend the lawsuit, but whether the non-compete and non-solicitation provisions were enforceable. Simply stated, Michigan law recognizes the validity of these restrictions (if carefully drafted), but California law does not. California law states that "any contract by which anyone is restrained from engaging in a lawful provision, trade, or business of any kind" is void. So, if the Judge Yates upheld the COLFS provision, it was "game over" for Rogers and Reed. 

The criteria for the validity of COLFS provisions are well-established. Judge Yates reviewed them and determined that:

• Michigan had a substantial relationship to the contracting parties because OtterBase is headquartered in Grand Rapids, and the purpose of the contract was to have Rogers and Reed extend its business to California.
• OtterBase does business in several states, and it has a legitimate purpose in having a Michigan COLFS provision to avoid confronting a crazy quilt of laws that require different treatment of employees working in different states.
• Rogers and Reed were free to negotiate the COLFS provision. 
• Michigan public policy favors the enforcement of COLFS provisions. 
• The COLFS provision may stand despite the fact that Michigan law recognizes restrictive covenants in employment contracts but California law does not. The two states' different views on that subject aren't enough to invalidate the COLFS provision.  

Do your contracts contain COLFS provisions that may save - or ruin - your day if you litigate with the other party? You should have your attorney carefully review your contracts for COLFS provisions and summarize them as part of your contracts database. You do have a contracts database, right? 

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If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. Thanks!