Litigation

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I love endurance sports, and I work out incessantly. But I don’t watch sports or know much about them. Before hanging out with a group other men, I ask my wife to give me a summary of which local sports teams have recently won a match so I don’t embarrass myself. Results have been mixed. So forgive me if my football analogies are a little off here.

In football, wide receivers have little control over whether they’ll be thrown the ball on any given play. Though they might end up making a big play once the ball is thrown to them, they’re powerless without it in their hands. Even plays that are designed to get them the ball might be impacted by the defense, leaving them high and dry.

Unlike a wide receiver, a court-appointed receiver can exert control over the situation. A receiver is a court-appointed neutral steward of a business. They have independent authority to manage operations, make business decisions, and preserve (or strategically wind down) the business’s assets while litigation grinds forward. In some situations, they’re given limited marching orders from a court, and they must take action that’s within the confines of those orders.

But at other times, they have broad authority to call the shots, including whether to buy or sell company assets, and how to wind down a business.

A recent Pennsylvania Superior Court decision, Toth v. Toth, 324 A.3d 469, offers a detailed look at just how broad authority a receiver can have to protect the assets of a closely held business when feuding co-owners threaten to destroy it from the inside out.

Toth v. Toth: When a family business leads to a family war

Toth concerned a battle over Learning Sciences International, LLC (“LSI”), a company founded by Michael Toth in 2002. The company provides solutions for professional development and performance management in education. Over the years, Michael gave ownership interests in LSI to his brother Bryan, his father Eugene, and his mother Marie. Michael and Bryan each held 50% in voting rights and 25% in ownership rights, while Eugene and Marie held only 25% in ownership rights.

In late 2020, their relationships deteriorated dramatically. By January 2021, Bryan, Eugene, and Marie executed a series of documents that they believed amended LSI’s operating agreement to change the company’s headquarters to Florida, remove Michael as CEO, and strip him of his management role. They based this attempted coup on a technical reading of the voting provisions in the original operating agreement.

There was just one problem. They were wrong.Continue Reading THIS AIN’T FOOTBALL: PA. SUPERIOR COURT LETS A RECEIVER CALL THE PLAYS

We represent closely held businesses and business owners in high-stakes litigation who often lack general counsel to align litigation with broader business goals. To fill the gap, we advise clients on the risks, rewards, and costs of each approach. We have watched hundreds of clients ingest this information, process it and make decisions related to the ligation in reliance on it. Some do a better job than others. Here’s three things that work well:

  1. Figure Out What a “Win” Looks Like, Do It Early and Do It with Both Feet on Planet Earth

Before diving into the legal strategy, take time to articulate what success looks like. One of our first questions to a new client is “what do you want to happen here?” Do you want money? Do you want a problem gone? Do you want to send a message to discourage similar future claims? Think about that goal in the context of your entire business. Get specific. And then get realistic. Talk without counsel about what is ascertainable and the odds of achieving a given result. In a perfect world, we would always be in a position to tell our clients we have great claims or strong defenses that can be litigated at minimal costs. In the real world, we are more regularly talking about good claims but with concerns about collecting a judgment from a defendant. There are many situations where we have strong defenses that will cost a significant amount to litigate. Sometimes where clients are in difficult positions and the only promise we could make was time—to pay, for market shifts, or to refinance. In the reality is that in large majority of business related litigation, you likely won’t be ‘made whole,’ especially since you’ll usually cover your own legal fees, you can’t get compensation for your and you staff’s time in dealing with us and there is usually some point in the litigation where you will accept or you are willing to pay money to eliminate the ongoing risk of litigation.

  1. Think In Terms of Probabilities – Make “Investment” Decisions

Nothing is certain in life, and nothing is certain in litigation. There is no way around it – litigation is risky. For that reason, the clients who display the best litigation decision making are those who think in terms of probabilities. They understand that no attorney that is being honest with them can tell them what is going to happen with certainly – there is no such thing in business litigation. The best decisionmakers find ways to get uncomfortable with uncertainty. They think in terms of the odds of success on a particular motion or a particular strategy. Two clients in recent memory were particularly adept and managing litigation risk. One had a background in data analytics and the other was a bond trader. Every time we came to them with a decision to be made, they employed some version of the same approach. They would define the possible outcomes, determine the probably of each outcome and push us on the cost of implementing a particular strategy. They viewed each decision like an investment decision – how much does it cost, what’s the potential upside and downside, and what are the odd of each?  If the odds of success and the magnitude of the outcome met their criteria, they went ahead; if it did not, we would try a different approach. We never saw them, but I am sure they had elaborate spreadsheets. You do not need spreadsheet or an actuary, but you do need to think in terms of odds, not certainties.

  1. Listen to Your Lawyer and Then Challenge Their Approach

The best client decision makers we have seen all have one thing in common – they listen to our advice and then push us on it. It may seem counterintuitive, but we welcome clients challenging our advice. When a client is questioning me on a strategy decision it is usually a good thing. I do not even mind clients using the wisdom of ChatGPT to test my analysis. On one of the first big cases I handled on my own, I was explaining to a client how the statute of limitations might apply to a portion of their claim and that laches might bar another. The issue was germane to settlement discussions and what our opening demand would be. He was upset about the likely bar and the lower opening demand I was suggesting. We talked about the issue at length and, before long, we were talking about the difference between law and equity courts and their merger. We arrived at the decision to make a higher opening demand, somewhere between what I was suggesting and what he initially proposed. (If you are reading this unnamed client and now good friend, I am curious if you remember this discussion). This was a more involved discussion than I expected but I left the discussion knowing that the client had a good handle on what was going on, had fully considered the issues and made a fully informed decision. Ultimately, the client makes the final call on major decisions. The client is entitled to our best advice and zealous advocacy but client makes the calls and lives with the consequences.  A client that is pushing us on strategy is one who is taking their vote and the consequences that can stem from it seriously. This is the client you want to be.…

Continue Reading HOW SMART BUSINESS OWNERS MAKE BETTER LEGAL DECISIONS

In Pennsylvania, Manufactured Deadlocks are Unlikely to Trigger Judicial Dissolution

In disputes among the owners of a closely held company, involuntary judicial dissolution is the nuclear option.

When a group of shareholders successfully petitions a court to dissolve and then liquidate their company because the owners reached an impasse they could not overcome, there will be no more company to speak of. While that might have been the intended outcome for the petitioning shareholders, the fire-sale price the company’s assets will probably fetch on the open market is an unpleasant accompanying pill they’ll have to swallow.

Despite the risk of a fire sale, in many shareholder disputes at least one party will threaten to seek judicial dissolution of their company. They argue that dissolution is required because of some irreconcilable difference that makes it impossible to continue operating the company.Continue Reading AIN’T NOTHING LIKE THE REAL THING

When shareholders of a company believe the leaders of the company have breached their fiduciary duties to it, they can bring a lawsuit against those leaders in one of two ways. Shareholders can bring the suit in their own names (a direct suit), or they can bring it on behalf of the company if the company failed to bring claims against the leaders on its own (a derivative suit). If the injuries the shareholders are alleging were only suffered by the company, they cannot move forward with any direct claims.

When bringing a derivative claim in federal court, the plaintiffs must comply with Federal Rule of Civil Procedure 23.1. The rule, besides explaining what a derivative complaint must include, prevents a plaintiff from bringing a derivative lawsuit if the plaintiff “does not fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association.”Continue Reading PENNSYLVANIA’S ALTERNATIVE PATH FOR MINORITY SHAREHOLDERS WHO CAN’T PASS FEDERAL RULE OF CIVIL PROCEDURE 23.1’S “ADEQUATE REPRESENTATION” TEST FOR DERIVATIVE CLAIMS

There is perhaps no richer vein of literary gold than conflict between fathers and sons. Hamlet, Robinson Crusoe, multiple characters drawn by Charles Dickens, not to mention the mother of all family contretemps, Oedipus Rex, touch on this deeply human power struggle.

One such conflict was the backdrop for the Pennsylvania Superior Court’s recent decision in MBC Development, LP v. James W. Miller, 281 A.3d 332 (Pa. Super. Ct. 2022). The decision serves as an important reminder that courts overwhelmingly favor arbitration as a means of dispute resolution, and gives us an opportunity to think about the virtues of arbitration provisions in organizational documents like limited partnership and operating agreements.Continue Reading A FATHER-SON FIGHT HELPS DEFINE THE SCOPE OF ARBITRATION PROVISIONS IN CLOSELY HELD COMPANY DISPUTES

Image a home buyer finally finds their dream house. There’s just one problem.

During their home inspection, they discover the foundation is cracked. But they buy the house anyway, fully aware of the issues with the foundation.

In the sale agreement, there’s a clause stating the house’s foundation is flawless.

Should the seller be liable to the buyer for breaching the sale agreement, even though the buyer knew the foundation was not flawless at the time they signed the agreement?

In other words, and to have some fun with legal terminology, should the buyer be able to “sandbag” the seller?

The unsatisfying answer is that it probably depends on if the sale agreement addresses sandbagging.Continue Reading SELLERS BEWARE: SANDBAGGERS WELCOMED IN PENNSYLVANIA & DELAWARE

Over the past few years, the term “receipts” has entered the pop culture lexicon to mean something broader than its traditional definition of a document that acknowledges either the receiving of a product or service, or money in exchange for a product or service.

These days, if you hear “receipts” mentioned in a song, television show, or movie, or see it on social media, there’s a good chance it is being used to mean proof that something is how a speaker claims it to be. For example, someone might claim to have the “receipts” that another person cheated on their spouse—perhaps in the form of screenshots of now-deleted social media posts or direct messages.

Well, when it comes to proving ownership of a closely held business, receipts—in the trendiest sense of the word—are a good thing. In fact, receipts are required.Continue Reading CLAIMING OWNERSHIP OF A COMPANY? YOU BETTER HAVE THE RECEIPTS.

Business partnerships are built on the trust and loyalty of their participants. Without mutual coordination and honesty among all involved, tensions will inevitably arise that could derail a partnership’s success. The resulting fallout could be costly in several ways, as lost profits, ruined business opportunities, protracted litigation, and busted personal relationships would surely follow.

Given the dark clouds that quickly form overhead as tensions increase among partners in a partnership, one would assume it would make good business sense, if not common sense, for those partners to look out for each other.

It certainly would make legal sense to do so because partners in a partnership, and, generally speaking, co-owners of all businesses, will typically be deemed to owe a fiduciary duty to each other. At its core, a fiduciary duty is the legal duty of a fiduciary (i.e., one business owner) to act at all times in the best interests of the beneficiary (i.e., the other owner(s) of a business). This requires partners in a partnership to act loyally toward each other, with care, with good faith and fair dealing, and to disclose material information to each other.Continue Reading PA. SUPERIOR COURT CHANNELS SPIDER-MAN: RULES THAT IN BUSINESS PARTNERSHIPS, GREAT POWER COMES WITH GREAT RESPONSIBILITY (INCLUDING FIDUCIARY DUTIES TO OTHER PARTNERS)

“Piercing the corporate veil” is one of those legal terms that makes a legal action seem more romantic than it really is. When a party to a legal dispute attempts to pierce the corporate veil of a corporate adversary, they are asking a court to move aside the metaphorical veil created by the adversary’s corporate structure and hold the owners of the corporate entity personally liable for the entity’s actions or debts.

Corporate veil piercing—or at least attempts to pierce a corporate veil—arise more frequently in closely held businesses than in other settings. That’s because the owners of closely held businesses tend to be intimately involved in their businesses’ operations and are more likely to attempt to use the limited liability created by their businesses’ corporate structures to shield them from legal liability for the wrongdoing they or their businesses engage in.Continue Reading THE PENNSYLVANIA SUPREME COURT MAKES IT HARDER FOR BUSINESS OWNERS TO ESCAPE LEGAL LIABILITY BY HIDING BEHIND CORPORATE STRUCTURES

When legal disputes between owners of closely held companies turn the corner past “Let’s resolve this issue without litigation” and head toward “See you in court,” the owners and their lawyers typically begin jockeying for the upper hand in a potential lawsuit. The most effective way to grab the upper hand is to be the…