Monday, March 1, 2010

Blogs to Check Out

Some law blogs that may be interests to some businesses:

  1. FDA Law Update - just what says it is, a way to keep up to date on happenings at the FDA.
  2. OSHA Law Blog. This may be of more interest to more businesses. Jackson Lewis hosts the blog so its definitely employer oriented.

Thursday, February 25, 2010

Georgia Wills, Trusts and Estate Planning Blog: Estate Planning: A Three-Step Strategy
The estate planning pyramid gives a hierarchy of goals for estate planning. This pyramid is useful in developing an estate planning strategy based on specific client goals. At the bottom of the pyramid is the SELF. The most important goals are centered on maintaining our estate for our own protection and benefit. Likewise an estate plan should provide protection and benefits for the ones that we love, our FAMILY. The next goal is to have the estate plan structured to protect what we have or PRESERVE WEALTH. Beyond that, our estate plan needs to anticipate INCREASING WEALTH. The final consideration is to reduce TAXES AND PROBATE.
Georgia Wills, Trusts and Estate Planning Blog: Estate Planning: A Three-Step Strategy
The Three-Step Strategy

Estate planning is a process, not a set of documents. For an estate plan to achieve all of a clients goals, a three-step strategy should be used.

1. Work with a Counseling Oriented Attorney
2. Use a Formal Updating System
3. Assure your Successors Utilize Fixed Fee Services after death

Tuesday, January 26, 2010

Garden Leave in Action

Considering garden leave's novelty, I thought a collection of news articles descring the use of garden leave might be of some help and interest.

Gardening leave has VCCP hanging on phone - Telegraph
However, VCCP may have used all up all its luck, with the launch of the mmO2 service less than 100 days away. Last month, Charles Vallance, VCCP's founder, was sidelined for the next six months on gardening leave after representations from m'learned friends.

Unusually, it is not his former employer that is insisting on this but his former client, Vodafone, which is clearly deeply worried that he is to work for a competitor.
ABN Amro rebels go on gardening leave - Business News, Business - The Independent
ABN Amro, the Dutch financial services group, had slapped in an injunction on Thursday after Mr Luckraft and Mr Thomas suddenly quit their jobs to go to rival Framlington. The writ was for breach of contract to prevent them joining Framlington early. Framlington had poached the pair at the beginning of April, but they had originally agreed to work out their year's notice with ABN Amro. They walked out on Wednesday, claiming an irrevocable breakdown in the working relationship had occurred.

Framlington said: "Following the legal action taken by ABN Amro there has been a further appearance in court today, 24 May 2002. The court has now lifted the Court Order (originally granted without notice to George or Nigel). George and Nigel have agreed to remain on gardening leave pending the resolution of the issues at a trial, which is to be convened as quickly as possible. We welcome an early trial and remain confident that the actions of George and Nigel will be fully vindicated by the court at that time.
Is gardening leave a bed of roses? - Yorkshire Post
Tim Waring became a partner in charge of launching the new Harrogate office of property specialists Knight Frank earlier this year, after quitting his partnership at estate agents Carter Jonas, where he had spent nine years.

Initial reaction when you were first advised of garden leave?

I was a little shocked, even though I could understand why the decision had been made. I'd planned to take my wife to Paris for a few days and the immediate
handover of my mobile phone ensured we enjoyed some wonderful peace and quiet in France.

What are your thoughts afterwards and what would you do differently if ever on gardening leave again?

If I was giving advice to anyone about to take gardening leave, I'd say seek advice from someone who has already done it. I did find that for the first one or two months
I was a bit shell-shocked. I'd been used to working at 90mph and suddenly I stopped. I had a lot of lazy mornings and met people for coffee and lunch.
Looking back, I think I could have done more during that early period, but then again, perhaps I needed the time to readjust and take stock

Hightex puts chief on "garden leave"
Stadium roof specialist Hightex today removed chief executive Klaus-Michael Koch with immediate effect and placed him on "Garden Leave" until 24 April 2009.


Non-exec chairman Charles DesForges will take a more active role in the company while a replacement chief executive is found. Frank Molter, currently finance director, has also been appointed chief operating officer.

Sunday, January 24, 2010

Why Use Garden Leave?

No, garden leave do think of garden leave as a panacea for all problems of departing employees. I can easily see that a departing employee (and/or their new company) may find the costs of litigation and the money paid during the garden leave outweighed by the profits of jumping ship. (One may also want to read BEAR, STEARNS & CO., INC. v. Sharon, 550 F. Supp. 2d 174 (D. Massachusetts 2008) for an example of a gardening clause not being upheld).

Hong Kong's Career Times gets to the nitty-gritty in Garden leave:

Q1 Why are employers keen to impose garden leave on employees?
A1 Placing an employee who intends to join a competitor on garden leave has several advantages for the employer:
- By temporarily delaying his arrival at the competitor, existing business relationships can be secured;
- The "shelf life" of current confidential information known to the employee will be reduced;
- The employee is not allowed to compete with the employer during his garden leave.
Better off thinking of garden leave as a tool for specific types of employment. I cannot see how it will work in the purely commission types of employment.

I see garden leave working as a very good substitute to non-competition agreements in certain areas. Such as the medical field where non-compete agreements are not exactly favored by the courts (see Enforcement of noncompete agreements).

On the other hand, consider these points from Garden leave a viable option once more as providing a counter-argument to this idea:
The majority went back to first principles and noted that an employer who is paying an employee appropriately is obliged to provide an employee with meaningful work only in limited circumstances - such as where the employee has a specific or unique skill, and where it is clear that the employee's future employment depends on maintaining this skill. Good examples are employees in the entertainment and sporting industries, such as television producers and professional footballers, where garden leave may blunt their skills.


The good news for employers is that a failure to provide work will not automatically give rise to a breach of contract claim - even if the parties do not include a term in the contract that garden leave is legitimate. As a matter of practice, and to ensure the employee cannot argue they fall within a special skill category, employers should continue to include clauses in employment contracts which allow them to:

# make a payment in lieu of notice; or

# require the employee to take garden leave.
Much depends on the actual terms of the agreement, of course.

Saturday, January 23, 2010

More On Limited Liability Companies' Fiduciary Duty

Now that we have an Indiana Court of Appeals decision describing the fiduciary duty of an LLC to its members, I almost thought to scratch this post. However, Chicago Business Litigation Lawyer Blog's Respected Law Professor's Insights on Corporate Freeze-Out Litigation may still have some benefit to you.

"In Fairness and Good Faith as a Precept in the Law of Corporations and Other Business Organizations, 36 Loy.U.Chi. L.J. 551 (2005), Murdock addresses the fiduciary duty of good faith and fairness that controlling interests of a business owe to minority interests. Noting that this internal duty is a fairly recent legal phenomenon, he surveys caselaw on the subject from around the country that applies to closely held corporations, public corporations and LLCs. Noting that the Uniform Limited Liability Company Act (ULLCA), a model law adopted by several states, doesn't include language that gives members of an LLC fiduciary duties to one another, he praises Illinois for modifying that language to protect members in the updated Limited Liability Company Act."

Friday, January 22, 2010

Garden leave - Writing Up The Agreement

First, the business needs to decide if a garden leave is a suitable tool. Suitable meaning that it makes economic sense.

Second, the employment contract needs a specific clause that expressly provides for the garden leave. I find support for this in reading A Breach of Contract? by Kate Payne.

Effective Garden Leave -

  • Include express provision in the Contract of Employment, providing for garden leave and expressly exclude any obligation on the employer to provide work to the employee. Also include an express obligation on the employee not to work for anyone else during the notice period.
  • Make sure the garden leave lasts no longer than is necessary to protect the legitimate business interests of the employer - the Courts are not shy of intervening to reduce the notice period or, more seriously, invalidate the right altogether.
  • Team departures - junior brokers and underwriters will often have a shorter notice period than their senior colleagues. Attempts to keep the senior colleagues on garden leave once the more junior ones have started their new jobs with the competitor are likely to fail as the damage to the employers business will already have been done.
  • Full salary and benefits must be paid throughout the period of garden leave. Failure to do so will amount to breach of contract by the employer and both the garden leave obligation and any restrictive covenants will be unenforceable.
The Key Issues
  • Employers should give thought to continuing to provide non-obligatory bonus benefits throughout the period of garden leave, such as discretionary bonuses, to help counter any claim by the departing employee that their financial interests have been unfairly prejudiced - this is particularly advisable where they form a major part of the employee's package.
  • Be cautious in the wording of staff handbooks or training manuals. In the recent Court of Appeal decision William Hill -v- Tucker [1998] the Court considered that the statement in a training manual that the employer was "prepared to invest in its staff to ensure that they have every opportunity to develop their skills" was incompatible with the concept of garden leave.
  • Payments made by an employer in respect of the garden leave period may be paid to the employee in the usual way or as a lump sum. However, in either case the payment is taxable.
Requiring a writing for the garden leave seems well established in those jurisdictions with ere they are being used. See Garden leave describes the rule in Hong Kong:
Q2 Can I send an employee on garden leave if his employment contract does not contain a specific clause allowing me to do this?
A2 You cannot be certain that you can place an employee on garden leave unless the employment contract clearly states that you have the power to do so.Indiana law requires the same thing in a non-compete agreement. I cannot imagine Indiana courts upholding an oral garden leave agreement.
You can find an English example here.

Hong Kong's Career Times writes on the importance of good drafting - in terms of English common law - in its Factors in drafting an effective garden leave clause:
"What risks are there for the employer if the clause is not properly drafted?

A4 According to the decision in Symbian Limited v Christensen, placing an employee on garden leave effectively terminates the employment relationship but not the contractual relationship. Hence, a departing employee may take up employment elsewhere during the period unless this is expressly forbidden in the contract. Thus, the extent to which a departing employee is free to compete during the garden leave period will depend on how carefully the terms of the employment contract are drafted."

Thursday, January 21, 2010

Indiana Funeral Home Law

Notes from a project for my father that never seems to get very far. With some luck the following listing of Indiana sources might be of use:

  1. Indiana Code - Licensing Laws
  2. Indiana Administrative Code.
  3. PLA: State Board of Funeral & Cemetery Service
  4. PLA :: License Litigation.
The last link should interest anyone dealing with any Indiana professional license that is regulated by the Indiana Professional Licensing Agency.

Wednesday, January 20, 2010

Intellectual Property and Business Succession Planning

I try to make the point that what has made Bill Gates all his money is his intellectual property: trademarks, patents and even copyrights. Pennsylvania Trusts and Estates Blog takes this a step further with Intellectual Property in Your Estate:

Forbes published a list of the 13 Top-Earning Dead Celebrities. The estates of these persons are making fortunes with the decedents' intellectual property. How much do they earn? The top-earning 13 decedents earned a combined $194 million over the last 12 months. It makes dying look like a good career move. Who are they? Elvis Presley, Charles M. Schulz, Heath Ledger, Albert Einstein, Aaron Spelling, Dr. Seuss (Theodor Geisel), John Lennon, Andy Warhol, Marilyn Monroe, Steve McQueen, Paul Newman, James Dean, Marvin Gaye.

Any author or artist should consider choosing a an executor who is knowledgeable in his or her field to serve as a special executor after his or her death. For example, an author might appoint a family member as executor to take care of the estate in general, but name a literary executor to be responsible for and carry out certain duties with regard to the decedent's written works.

Intellectual property can be a valuable assets and it must be managed in your estate to maximize
income streams income, address infringements, protections, registrations and maintenance.
What have you done to protect your heirs and your business when you die? What have you done to protect your business between now and your death? I do not suggest waiting - get yourself to a lawyer as soon as possible.

Tuesday, January 19, 2010

Contract Drafting As A Commodity?

I cannot disagree with Contract Drafting for the 21st Century: A Conversation Between Ken Adams and Ron Friedmann from Strategic Legal Technology.

Ron: It sounds like you think contract drafting should be a commodity.

Ken: Yes, in large measure. And that’s entirely achievable, given all the sophisticated information-technology tools now available to organizations that produce contracts. Companies that buy stuff or sell stuff generally use a few templates repeatedly. After a certain point, their contract volume will be big enough that it would be cost-effective for them to shift to drafting contracts by having their lawyers or, ideally, their businesspeople complete an online questionnaire. Once the questionnaire is completed, clicking “Done” would cause the system to pull together and adjust appropriately the pre-loaded and pre-approved contract language.
A rigorous document-assembly system for contract drafting would save time and money and would allow transactional lawyers to focus on tasks where they add real value—helping devise deal strategy and taking part in negotiations. But serious cultural obstacles remain. I suspect that people who buy into my view of things currently represent a small minority. Sure, you hear a lot of talk of change, but I’ve seen little in the way of action to back it up. So the vast silent majority perpetuates the current dysfunction.
Writing contract ought not take second to the "deal strategy and taking part in negotiations" but this - in my humble, small town opinion - requires a long term relationship with the client.

Nor it Mr. Adams.' views outside of current thinking. Richard Susskind has been predicting similar changes in how we provide legal services for quite some time.
Prophet Richard Susskind Predicts the Future of Law; Internet is Key:
"Now that the ubiquity of e-mail is no longer seen as a wild prediction but an established fact, newer cutting-edge changes to what Susskind describes as the classic interface between lawyers and clients include services that allow clients of some major United Kingdom law firms to download standard contract documents and lawyers in British courts to download standard judicial orders.

Monday, January 18, 2010

What Is An Acceptable Business Risk For Your Business?

Think you got an idea> Give Reading Word's The dark side of IP a read.

Business people often scoff at lawyers that "you have to take risks in business." True, but the risks should be valid risks: venturing the new product, entering the new market, changing up the marketing and ad campaign, leveraging up for growth tomorrow. Unacceptable risks should be those which introduce fines and penalties, complex litigation and jail time. Many businesses rarely think of the dark side, the flip side of their IP: On whom might you be infringing with what consequences? The reality is that if you do infringe, it will be expensive, time consuming and ruinous to your model. They can shut you down and take your profits. Don't consider this an acceptable business risk. Get the evaluations you need.

I know you don't like thinking about IP rights: they're complicated, uncertain and seem to cost you coming and going, for filing and defense. You tend to protect and defend what you can and leave the rest to fate, calling it risk. Don't. You have talked to the lawyers and have got a lesson in costs. A patent can cost $50,000 and up and may yet not issue or may may be invalidated, and the invention may yet infringe. After all the development costs for your goods and services, patents, and trademarks and copyrights are expensive to defend. Many businesses tread skeptically. Many choose to protect their inventions as trade secrets and close their eyes to much of the real world fate of their IP.

Think about how quickly you can be shut down and your profits stripped should your product be ruled to infringe, even a seemingly old, obscure patent. Unless you examine your work honestly according to the reality of IP law, you too run the risk of high damages and costs and being shut down. You need to pay those few thousand dollars at the front end before you go out on a limb and have experts examine the real world for patents, trademarks and copyrights which your products and creations might infringe.

Do you have any ideas what legal woes your business may be sitting on? By the time you think you need a lawyer, the mess may be big enough to swallow the business whole. An ounce of prevention....

Sunday, January 17, 2010

Preventive Law and Trade Secrets

It is a relief to have others repeat my points about preventive law. I wonder how much of it is passed off as being self-serving. It is not. What most do not realize is that cleaning up the mess - litigation - creates more difficulties for us lawyers than does preventive law. Which explains what I like Protecting business model can be costly about from The Wichita Eagle

Attorneys say that although taking legal action is lengthy and expensive, and the outcome uncertain, it's often the only way businesses can protect their intellectual property rights. And interest in protecting intellectual property interests has grown with the shift from a manufacturing to a service economy.

"Legal protection for inventions, patents and so on has become more important," said Herbert Wamsley, executive director of the Washington-based Intellectual Property Owners Association. "Because in the information age, intangible assets such as technology are more important relative to the traditional kinds of wealth, such as land and labor and capital."

Attorneys say the best way to protect company secrets and ideas is to take measures early on to avoid their falling into the hands of competitors.

That includes filing for patents on inventions, registering trademarks and preventing leaks of sensitive information — either by restricting the number of people who know it, or requiring insiders to sign non-compete or confidentiality agreements.
If you want your business to be safe, give me a call.

Saturday, January 16, 2010

Tweeting? Facebook? Be Careful What You Say and Do

Twitter may not seem related to business. Think again, what I am seeing as marketing advice is to join Twitter (I have and you can follow me, if you like).

Therefore, in the hope of preventing litigation, let me suggest reading To Avoid Libel Litigation, Lawyer Advises, Don’t Tank Up and Tweet

Following recent news that a woman is being sued by an Illinois landlord over a tweet she posted on Twitter about her apartment, a California lawyer is offering 10 suggestions to help other users of the popular micro-blog avoid being a defendant in defamation litigation.

At least some of the 10 tips offered by attorney Adrianos Fachetti in a TwiTip post may seem like common sense. For example, tanking up on alcohol and posting a tweet is not a good idea.

However, for those who don't pay sufficient attention to this issue and other potential litigation pitfalls, a horrible fate may await, the lawyer writes—losing the privilege of posting on Twitter
Remember that other social media sites exist to worry the business owner. See Social media permeate the employment life cycle for a whole range of pitfalls for the business owner.

Friday, January 15, 2010

Attorney Fees and Services

Think About What You Are Getting.

That is what I read as the point in 3 Geeks and a Law Blog's Cost Recovery…Such a deal:

You can see it in recent news items discussing the attitudes of General Counsels at large corporations as they struggle with reducing costs with major law firms. They are negotiating hourly rates aggressively and questioning every item that appears on their bill. The question of whether or not the hourly billing model has gone the way of the dodo has been debating extensively, including by 3Geeks’ own Toby Brown on this page. I think the hourly rate issue should be separate from the online research charges that appear on the bill. As you can see in my analysis below, these charges actually reflect the efficiencies these services provide.
I no linger favor the hourly rate in my practice, preferring flat fees, but I have to admit that this is a good argument for those using an hourly rate.

More importantly, the article touches on what every client should know and what every lawyer should provde: what the clients are getting for their money.

Thursday, January 14, 2010

Things To Do Before Signing That Franchise Agreement

Even if the economy continues its limpid trends though this year, someone ssomehwere will be looking at a franchise opportunity. Franchising offers wonderful opportunites to both the franchisor and franchisee. Unfortunately, franchises also offer achance for a fleeching by the unscrupulous and the criminal minded. Business Opportunities Weblog's

Franchise Contract Time Bombs does a fine job of setting out what can wrong.
* Do the numbers smell a little fishy to you? It is almost unheard of to have a franchise contract that supplies a full income statement. Watch out for exceptionally high and “pretty” looking expected income numbers.

* Take a look at what they want you to pay up front. Some franchisors make money right off the bat with a one time franchise fee. However, if the contract seems to show that you have a lot of costs up front then you should run in the opposite direction. This may mean trouble for you later when your having a tough time and they have already made their money off of you earlier on, recently stated on

* Make sure your royalty payments are not going to cost you an arm and a leg. Not all franchises charge these but if they do they shouldn’t break the bank to the point where it’s impossible for you to turn a profit.

* How Easy Is It To Get Out Of Your Contract? Franchise agreements can last for 10 years, and many franchisers make it difficult for franchisees to cut and run. Breach the contract and you’ll pay “liquidation damages.” Every UFOC contains (or should contain) a section devoted to rules governing termination, renewal and transfer of contracts. Read it–closely.
I have my own bit of advice: take the francise offering circular and the agreement to a lawyer before you pay a penny.

If you need a lawyer to review a franchise agreement, please contact me for an appointment.

Wednesday, January 13, 2010

Non-Compete Agreements: Are They Worth the Trouble?

TechCrunch's Apple And IBM Resolve Employment Dispute; Papermaster Can Now Get To Work raises this question:

Well, now he can finally go make future iPhones and iPods for Apple. The two companies have settled out of court. It kind of makes you wonder why companies even bother with non-compete clauses in employment contracts, especially when they are overly broad. More often than not, they are not worth the paper they are written on.
(CNN Money published a timeline of the case here.)

While I do not generally oppose using non-compete agreements, they do have limitations:
  1. They do not last forever.
  2. The business might lose employees.
  3. The business must enforce the agreement - that is go to court, pay court costs, pay legal fees - which may cost more than what is saved.
For more abstract problems there is Trade Secret Litigation and Free Speech: Is it Time to Restrain the Plaintiffs? by Elizabeth Rowe.

Think of non-compete agreements as a tool. They have their uses and the business must consider how they will use. I would point out that garden leave exists as an alternative/parallel tool to non-compete agreements.

Non-compete agreements exist to protect the employer from unfair competition.

Businesses contemplating the need for a non-competition need to have a long discussion with their attorney before turning them loose on creating a non-compete agreement. If you need a lawyer for a non-compete agreement, please contact me so we can set up a meeting.

Tuesday, January 12, 2010

Online Resources:, Federal Forms Catalog and

Not endorsing any of the following, just providing them for informational purposes.

About is intended as a useful, website where visitors may view retirement and welfare benefit information on the group or groups of their choice as this data appears on Form 5500 for free.
Federal Forms Catalog for Citizens provides citizens and businesses with a common access point to federal agency forms. the Corporate Community - Home is designed to empower corporate professionals with the latest in legal and commercial information from the world’s top law firms and industry insiders. Every year the top 100 American law firms produce more than 10,000 Client Alerts addressing the key commercial and legal issues faced by their clients. We aggregate, review, sort and summarize this content -for free- to give you a really useful corporate resource.

Monday, January 11, 2010

Free Reviewed

Yes, quite behind the times in posting this review from The New Yorker, Malcolm Gladwell reviews Free by Chris Anderson:

There are four strands of argument here: a technological claim (digital infrastructure is effectively Free), a psychological claim (consumers love Free), a procedural claim (Free means never having to make a judgment), and a commercial claim (the market created by the technological Free and the psychological Free can make you a lot of money). The only problem is that in the middle of laying out what he sees as the new business model of the digital age Anderson is forced to admit that one of his main case studies, YouTube, “has so far failed to make any money for Google.”


So how does YouTube bring in revenue? Well, it tries to sell advertisements alongside its videos. The problem is that the videos attracted by psychological Free—pirated material, cat videos, and other forms of user-generated content—are not the sort of thing that advertisers want to be associated with. In order to sell advertising, YouTube has had to buy the rights to professionally produced content, such as television shows and movies. Credit Suisse put the cost of those licenses in 2009 at roughly two hundred and sixty million dollars. For Anderson, YouTube illustrates the principle that Free removes the necessity of aesthetic judgment. (As he puts it, YouTube proves that “crap is in the eye of the beholder.”) But, in order to make money, YouTube has been obliged to pay for programs that aren’t crap. To recap: YouTube is a great example of Free, except that Free technology ends up not being Free because of the way consumers respond to Free, fatally compromising YouTube’s ability to make money around Free, and forcing it to retreat from the “abundance thinking” that lies at the heart of Free. Credit Suisse estimates that YouTube will lose close to half a billion dollars this year. If it were a bank, it would be eligible for TARP funds.
I am still as doubtful as when I wrote this.

Could Taxes Sink Your business?

Tough Times for Lenders blog posted Ticking Sound: Will the Current Tax Valuation Drag You Down?. Which brought back to mind this headline: State sets sights on back taxes. This comes from that Muncie Star-Pess article:

Sometimes the taxes owed are in dispute. Ed Faulkner Jr. of Faulkner Mortuary, which is included on the list, says he's "been battling with the state for the last 20 years to get our sales tax issues resolved." Faulkner said the amount he owes is less than $10,000 compared to a one-time bill of $160,000.

McFarland noted that some might assume the businesses owing back taxes are all small, "mom and pop" operations, but that isn't the case.
Tough Times has this in its post:
So, my suggestion simply is to add this topic to your workout check list, and include the following as tasks directed at this ticking sound:

* What taxes or assessments cover or encumber the collaterals? Governmental (per a current search of applicable governmental taxing offices)? Private (per a current title report)?
* What valuation has been given to the collateral? (Is it high?)
* How is valuation determined?
* What are the key dates (Due dates? Appeal dates? Etc.)
* Has the owner\borrower contested the valuation? Are written agreements covering valuation in place?
* Is it possible to file a “late” appeal? Are there special conditions for filing a late appeal?
* What input or role does the lender\servicer have in the valuation determination or appeal process? (Under applicable law or regulations? Under the loan documents?)

Todd Franks (with The Cantrell Company) tells me that they have recovered over $100,000 in overpaid property taxes for one loan servicer, after a borrower failed to timely protest their 2008 property tax valuation (in a situation involving Texas real property collateral). His experience is that if the current owner is unsophisticated and\or unfamiliar with the property valuation process, then when the owner is struggling to keep the property and to avoid a loan default or a foreclosure, many owners simply give up on contesting property valuations handed out by taxing authorities. (The result: it is a problem discovered by you AFTER you take title.)

Indiana Case law: LLC Fiduciary Duty to Former Member

The Indiana Court of Appeals decided that Indiana Liability companies have a continuing fiduciary duty to a former shareholder or member to accurately report the company's fiscal results to the IRS for a year in which the former member held stock or was still a member of the limited liability company. That is Mike A. Abdalla, et al. v. Raed I. and Hani I. Qadorh-Zadin. This is how the Court of Appeals got to that conclusion.

The Court of Appeals started with this legal basis:

Limited liability companies, such as the ones at issue here, were not available in Indiana until the enactment of Indiana‟s Business Flexibility Act in 1993. Ind. Code § 23-18-1-1 et seq. The popularity of LLCs has forced courts nationwide to address traditional business issues in terms of this statutory creation. In Indiana, there is little case law regarding LLCs and hardly any case law concerning fiduciary duties in the LLC context. In light of this limitation, we decided in Purcell v. Southern Hills Investments, LLC, 847 N.E.2d 991, 997 (Ind. Ct. App. 2006), that “common law fiduciary duties, similar to the ones imposed on partnerships and closely-held corporations, are applicable to Indiana LLCs.”

Shareholders in a closely-held corporation, such as Q Realty, owe each other fiduciary duties. G&N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 240 (Ind. 2001). In such a corporation, “[t]he fiduciary must deal fairly, honestly, and openly with his corporation and fellow stockholders. He must not be distracted from the performance of his official duties by personal interests.” Id.
Against which there was this law:
With regard to the assignment of membership in an LLC, Indiana Code section 23-18-6-4.1(e) provides that “[u]nless otherwise provided in a written operating agreement, a member who assigns the member‟s entire interest in the limited liability company ceases to be a member or to have the power to exercise any rights of a member when an assignee of the member‟s interest becomes a member with respect to the assigned interest.” Despite the option included in the statute to deviate from the provision on assignment of interest, the companies‟ operating agreements clearly state that a member who assigns all
of his interest in the LLCs “shall no longer have any rights or privileges of a Member . . ..” (Appellants‟ App. p. 82). As such, it would appear that the Zidans relinquished their fiduciary duties on August 4, 2006 and thus no longer have a course of action concerning the K-1 Schedules which were drawn up in the Fall of 2007.
The former members argued this:
On the other hand, the Zidans focus our attention on Thompson v. Central Ohio Cellular, Inc., f.k.a., Cellwave Inc., et al., 639 N.E.2d 462 (Ohio Ct. App. 1994). In Thompson, after the plaintiff sold his shares to Cellwave in late 1991, the corporation had tax returns prepared for the 1991 tax year. Id. at 464. On April 1, 1992, Cellwave provided Thompson with a K-1 Schedule that reflected an allocation to him of more than $6 million in long-term capital gains for 1991. Id. Although Thompson claimed that the K-1 Schedule improperly shifted a significant tax burden to him, Cellwave refused to provide a corrected K-1 Schedule. Id. Thompson filed a complaint, alleging breach of fiduciary duty and fraud. Id.
Analyzing the character of the „shareholder termination rule,‟ the Cellwave court emphasized that the rule is not absolute. Id. at 470. The court specified that “[t]ermination of the fiduciary relationship does not shield the fiduciary from its duties or obligations concerning transactions which have their inception before the termination of the relationship.” Id. Because the reporting to the IRS of Cellwave‟s financial results for the year 1991 was based on transactions which had their inception before the termination of the fiduciary relationship, the court concluded that Cellwave owed a fiduciary duty to Thompson. Id.
Notice that this differs in several ways from the Illinois case reported by Chicago Business Litigation Lawyer Blog in LLC Members Owe Company, Manager No Fiduciary Duty, Appeals Court Rules.

Sunday, January 10, 2010

Small Business (SBA) FAQ

Docuticker blog published SBA - Frequently Asked Questions which I think fits well with this blog.

Source: U.S. Small Business Administration, Office of Advocacy
From e-mail:

The Office of Advocacy released its annual update to the Frequently Asked Questions. It estimates that there were 29.6 million small businesses in the United States in 2008. Once again, the document shows the importance of entrepreneurship to our nation’s economy, with small businesses accounting for half of nonfarm, private real GDP and half of all private sector employment. In addition, small businesses generate the majority of net new jobs. Firms with fewer than 500 employees accounted for 64 percent (or 14.5 million) of the 22.5 million net new jobs (gains minus losses) between 1993 and the third quarter of 2008. An estimated 627,200 new employer firms began operation in 2008, and 595,600 firms closed that year. Moreover, according to U.S. Census data, seven out of ten new employer firms last at least two years, and about half survive five years.

Saturday, January 9, 2010

A Better Business-Lawyer Relationship

Never having had any success with this concept in Indiana, I still like its potential. Articles like's Small Law Firm Woos Clients With Monthly Subscription Fees keep me believing that this is the best practice for providing legal services to businesses:

Given the steps they go through to set each client's pricing at the outset, and the flexibility that both sides maintain in the month-to-month arrangement, they don't worry about clients taking advantage. "What if they stay with us one more month or one more year?" Smithline asks. "What if they refer another client?"

Earlier this year, executives at San Mateo, Calif., cloud computing startup Appirio Inc. were looking for a way to cut legal costs. The big firm the company was using wasn't too interested in entertaining flat-fee billing at the time, said Jim Emerich, Appirio's chief financial officer (he declined to name the firm). So the company's work went to Smithline Jha, Emerich said, after a beauty contest that attracted four competitors.


So in early 2008, the firm started experimenting by putting a few longtime clients on a flat-fee subscription. They'd estimate what the client would spend with the firm in a year, and divide that by 12 to arrive at a monthly price. (Depending on the client, they say, a month can cost from $6,000 to about $30,000.)
They've since come up with a way to set a monthly price for new clients, too, by negotiating based on what Smithline calls the exploratory month. At first, "You don't know enough about the client and they don't know enough about you." They charge $5,000 for that initial month, during which the firm does as much work as the client will give and learns how frequent and complex its deals are. Then, they negotiate a monthly figure.

"People think it's really complicated, but it can be a really quick and friendly discussion," Jha said.


To keep it simple, there are no caps or floors, and neither side is bound legally for more than a month at a time. That way, either party can address major fluctuations in work by requesting an adjustment for the following month, Smithline said. He noted that most client rates are not adjusted more than once a year.

Invoices list the assignments and tasks, but not the time spent, and Smithline says the firm doesn't track time spent internally, either.
So why would a business not prefer this type of relationship to one of hourly fees?

Thursday, January 7, 2010

Why Should Businesses Have a Long Term Relationship With Their Lawyers?

I should point out that for the business, a long term relationship leads to lower costs and better service. Lawyers get to provide a better service (and if you do not think that matters to your lawyer, give them a call and talk with them).

No, I suggest reading Schedule Your Legal Checkup over at JD Supra. Not much longer than this post but you will need Adobe Reader.

If you are an Indiana business wanting to know how a lawyer can help your business, I suggest giving me a call.

Wednesday, January 6, 2010

For Those Wanting to Check Up on Their Business's Reputation

I have not tried this out but Iam intrigued enough to pass it along.. Channel Signal seems to collect online chatter about a company and presents the information to the business. This knowledge can be very useful.