Articles Posted in Partnership Law

photo - fraud remediesAn ongoing fraud case involving an apparently fake plan to build cancer treatment center located in Montebello, funded by Chinese nationals seeking to take advantage of the EB-5 visa program, is an example of investment fraud. Normally fleeced investors lose money. These individuals also lost an opportunity to obtain at least temporary legal residency status in the country as well.

Investors who have been defrauded can take legal action against those who have stolen their money. How difficult this may be depends on the facts of the case and the applicable laws, which could be state and/or federal laws. Common hurdles in these cases beyond carrying the burden of proving fraud occurred is finding where the money went and then getting it back.

If the allegations against Charles Liu, Xin Wang and three corporate defendants are true, this would be a case of fraud by intentional misrepresentation. While investors were told their Continue reading

photo - business divorceIf it’s more than you running the business chances are pretty good the relationship between you and other owners will hit a rocky patch at some point, maybe even become adversarial. Breaking up that business relationship can be seen as a divorce. With some thought, planning and proper execution the split need not necessarily a traumatic break up.

A business divorce is a court-ordered dissolution of a business entity that the parties are involved in. They normally involve corporations, limited liability companies or limited partnerships, though they can also involve general partnerships. Depending on the circumstances this type of dissolution may be not possible or is just not the best option for you. There are other methods that can create leverage for you resulting in a better outcome.

How things can or should end depend on a number of things, including the form of the entity and any agreements between the parties. You would also need to consider state statutes, bylaws and any agreements.

If a partner is not controlling the company or part of management, he or she has a right to inspect the books and records of the company as long as there is a proper purpose for seeking these documents.

  • In a business divorce you might say you’re “investigating possible mismanagement” or “valuing my interest in the company.”
  • Company documents could be the basis for a lawsuit against the managers or directors.
  • Your request to look at books and records may spark a discussion between you and management about how your concerns could be resolved.

The stockholder, member or partner can sue the persons or entities controlling the company for damages due to breach of fiduciary duty or the relevant agreements. If successful, on paper this type of action will not break up the relationship, but as a practical matter that may be the best way to settle the case. Continue reading

photo - Under Armour lawsuitIn less than ten years Under Armour has gone from the owner selling its sporting goods from the trunk of his car, after making them in his grandmother’s basement, to a $3 billion business. That aggressive growth is being matched with legal aggression against companies who may, or may not, be infringing on the company’s trademarks.

One example is a lawsuit against a company whose owner claims its name, Armor & Glory, is biblically inspired, not inspired by its much better known competitor, according to the Washington Post. Terrance Jackson started his company in 2013, he says after he found much of the clothing marketed for his three year old son were covered in skulls and crossbones.

Jackson has only sold a couple hundred shirts and has no marketing budget beyond its Facebook page. Despite its small size Armour & Glory got the attention of Under Armour, the country’s second biggest sportswear company, which sued it, claiming trademark infringement. The lawsuit was filed in federal court in Maryland where both companies are based. According to the Post,

photo - Vicki's VodkaTruth is stranger than fiction and it plays out in court rooms all across the country, often involving small businesses and the people who own them. One such story involves Vicki’s Vodka, a now defunct business formerly owned by reality TV star and insurance agency owner Vicki Gunvalson and professional poker play Robert Williamson, III. Like any good reality TV show, this business apparently featured owners involved in double dealing, back stabbing and lying.

Gunvalson, of Bravo’s Real Housewives of Orange County fame, and her ex-boyfriend Brooks Ayers were sued in 2013 by Robert Williamson, III, in a Nevada court for $250,000 because they allegedly conspired to commit fraud in their Vicki’s Vodka venture. The lawsuit was filed, dismissed after an alleged settlement and then re-filed because that settlement was allegedly breached, according to Radar Online.

Williamson, a poker player by trade, alleges Gunvalson breached a contract, was involved in fraud, failed to live up to good faith dealings, engaged in misrepresentation and “conspired to unjustly enrich herself.” Ayers was named as a co-defendant in the action, but was recently dismissed from the case, along with claims that he defamed, extorted and intentionally inflicted emotional distress upon Williamson.

Williamson’s lawsuit alleges,

  • Gunvalson and Williamson created Vicki’s Vodka and Gunvalson gave Ayers 16.67% ownership of the business without notifying Williamson.
  • Ayers sold his interest to Williamson for $50,000.
  • Gunvalson later “demanded” the ownership interest purchased by Williamson from Ayers be given back to her.
  • Ayers and Gunvalson used the purchase to extort money from Williamson “without the intent to honor the intent of the transaction.”
  • Ayers and Gunvalson intended to “lure Robert Williamson III into the purchase of Brooks’ interest” without the intent to comply with the contract and make the company successful.

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photo - PPA comparisonPonzi schemes are fraudulent investment arrangements where instead of money being invested legitimately, it’s used to pay those engaged in the fraud as well as earlier investors. As long as the money continues to flow in, the scheme stays afloat. When the incoming money stops, since there was no actual investment, the scheme implodes.

The CEO of Irvine based Pacific Property Assets (PPA) Michael Stewart is facing eleven federal criminal charges at the U.S. District Court in Santa Ana. The charges claim that PPA changed from a legitimate real estate company into a Ponzi scheme, according to the Orange County Register.

  • Apartment rentals couldn’t cover the company’s costs so profits were made due to increased property values, allowing for sales at a profit and mortgage refinancing that reflected new equity in the buildings.
  • As the economy soured in 2008, the sales and refinancings dried up. That money was allegedly made up by obtaining money from investors through false claims about returns and collateral for loans.
  • By the time PPA’s operations ground to a halt and ended up in bankruptcy court in 2009, investors and banks holding mortgages were out about $115 million.

Stewart claims he operated the business in good faith and, like many other businesses, was simply the victim of a downturn in the economy.

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photo - handshake deals by Flazingo PhotosIt’s an all too familiar story. College students with a brilliant idea get together, start a hugely successful business then end up suing each other because handshake agreements end up being broken. These business founders may be brilliant when it comes to technology and marketing, but brilliant legal minds? Not so much. That’s why contracts are needed so the business founders know their rights and responsibilities towards each other and the business.

Whether the companies are Mom & Pop restaurants or budding billion dollar businesses common denominators for feuding founders are that they are friends or family, they optimistically think the close relationships will continue and can substitute for a binding business contract. These relationships often fall apart over money, whether the business is running out of it or is suddenly making a lot of it.

One example is Snapchat. It was founded by two Stanford University students who shook hands in their dormitory in early 2011, agreeing to partner on what they hoped would be the next big technology start-up, according to the Los Angeles Times. They got what they wished for but that didn’t mean the founders are living happily ever after. One co-founder was fired and the company’s foundation of oral agreements, notes on napkins and youthful enthusiasm didn’t stand the test of time. The company’s founders are now involved in litigation over breach of contract claims.

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photo - due diligence by Simon JamesStarting a franchise can be a good way to get into business or add a new business if you already own one. Many franchisors offer turnkey operations and spell out what you should do, and how you should do it, to help you make your business a success. You need to do your due diligence when exploring if a franchise is right for you and if so which one. You need to know all the relevant facts to make an informed decision before you invest your time, money and energy into a franchise. Finding those facts is the topic of a recent Entrepreneur magazine article.

To get the facts needed to make the right decision author Ann Wilds makes these suggestions:

  1. Respect the discovery process.

Do your homework. Understand how the franchise would work and the potential market in your area. Learn about the positives and negatives of this type of business. Be well informed so you’re prepared to…

  1. Prepare questions for other franchisees.

Start with ten to twelve good, meaningful questions to learn about the franchisor’s training and support mechanisms, its processes, the business model and marketing strategy. One good question is, “What’s a day in the life of a franchisee like?”

  1. Speak with five or more franchisees.

Get to the bottom of the reality of running these businesses to go beyond the sales pitch from the franchisor. What kind of investment of your time, energy and money should you expect? What kind of return on your investment should you expect? What are the major problems they face? How can they be resolved? How helpful or unhelpful is the franchisor? How good is their training?

  1. Look for trends.

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photo - injuction by Clover AutreyLegal actions can result in one party paying the other for damages, but a judge can also order a party to do, or not do, something to protect the plaintiff’s rights and interests. This can be accomplished through an injunction or restraining order, which can be temporary or permanent.

A judge can issue an injunction pursuant to a statute of through his or her equitable powers when not specifically authorized by statute. Equitable powers of a judge allow a decision based on the overall fairness of the situation. Given how broad this could be and the potential for abuse, judges are normally not eager to exercise equitable powers.

A party wanting a temporary restraining order or preliminary injunction must show that the relief sought in an underlying lawsuit depends on preventing the occurrence or continuance of an act that would result in waste or irreparable injury.

An injunction can be granted on a showing of,

  • An inadequate remedy at law, meaning compensation would be insufficient,
  • A serious risk of irreparable harm without injunctive relief,
  • A likelihood the plaintiff will prevail on the merits of the underlying lawsuit, and
  • When balancing the harm to the defendant in issuing an injunction against the harm to the plaintiff without the injunction, fairness shows it should be issued.

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photo - joint venture sins by Charlie CollisA joint venture is a business marriage of a sort. Each company has strengths and weaknesses and to work on something so they can both profit, they enter into a joint venture for a service or product. The hope is that by working together, they can make more money than if they worked separately.

Like marriages, joint ventures don’t always work out. The joint venture may have been a bad idea to begin with, the market may not have been as strong or as mature as the companies hoped or perhaps they just didn’t work well together. Patricia Farrell’s piece in Entrepreneur magazine discusses the “seven deadly sins” that frequently break up joint ventures.

  1. Gluttony

Many joint ventures use up their initial capital much faster than expected. Failure to properly plan for the possibility that resources may be consumed too quickly may result in unwise loan to raise funds. Prudent joint venturers will anticipate the need for additional capital and determine acceptable sources of funding in the initial joint venture agreement.

  1. Wrath

Arguments over control can occur because partners are used to having control. Compromise about how to run the joint venture may not be easy. The relationship may fall apart and partners may no longer want to work together.

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Early Settlement ConferenceA corporation, in and of itself, is a legal entity. Laws have been established to encourage their creation to help the economy grow. It’s a vehicle by which investors can engage in business while limiting their financial and legal liabilities. Whether it’s big or small, a corporation is run by its board of directors and officers. It is these people, not the legal shell, who owe a fiduciary duty to shareholders.

Such a duty arises when there is a fiduciary relationship.

“A fiduciary relationship is ‘ “ ‘any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party. Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter’s knowledge or consent. …’ ” ’ ”

Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29 (130 Cal.Rptr.2d 860).

In August, Delaware Vice Chancellor Sam Glasscock III issued a letter opinion in the case of Buttonwood Tree Value Partners LP v. R.L. Polk & Co., that discussed the principle that a Delaware corporation does not independently owe its stockholders fiduciary duties. Those duties are owed to the stockholders (and the company) by the directors and officers who are the actual actors on behalf of the company.

The plaintiffs sued both the members of the board of directors of R.L. Polk & Co. Inc. as well as the company itself, claiming that they breached of their fiduciary duties by inducing plaintiffs to sell their shares of stock for Continue reading