Articles Posted in Contract Disputes

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A California appellate court affirmed a judgment holding a corporation and individual managers liable for tortious interference with the contract of a corporate subsidiary. Asahi Kasei Pharma Corp. v. Actelion Ltd., et al, No. A133927, slip op. (Cal. App. 1st Dist., Dec. 18, 2013). The case has at least two important effects on breach of contract lawsuits in California. First, the court held the defendant corporation liable for tortious interference, finding that it was a “stranger” to the contract under state law. Second, it rejected the individual defendants’ claim that the “manager’s privilege” barred liability, holding that they were not managers of the breaching company.

The plaintiff is a Japanese pharmaceutical company that produced and marketed Fasudil, a drug used to treat stroke patients. New research in the late 1990’s suggested that Fasudil could also help patients suffering from pulmonary arterial hypertension (PAH). The plaintiff entered into a license agreement with CoTherix, San Francisco-based pharmaceutical company, in June 2006. CoTherix was to develop Fasudil for PAH treatment and obtain regulatory approval for the drug in the U.S. and Europe. CoTherix developed a plan that envisioned approval of Fasudil for multiple treatments between 2009 and 2011.

The defendant, Actelion, produces Tracleer, which is also used to treat PAH. Actelion began investigating the acquisition of CoTherix soon after the announcement of the license agreement, allegedly for the express purpose of stopping the development of Fasudil. During the negotiation of the merger, a manager at Actelion reportedly recommended that the company return Fasudil to the plaintiff. The merger was completed in November 2006, and in April 2007, the plaintiff declared that CoTherix was in material breach of their agreement.
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Recovering monetary damages is the ultimate goal of most business and commercial lawsuits, with one party seeking compensation from the other for some wrongful act. Even if a plaintiff is able to obtain a judgment for damages, it does not guarantee that the defendant will actually pay. California law gives a plaintiff, now known as a judgment creditor, certain rights to seize assets from a judgment debtor, but what happens if a judgment debtor has nothing to seize? This type of debtor is called “judgment proof.” A judgment creditor may still be able to collect through an equitable procedure that adds individual directors or officers to the original judgment as new debtors. A California appellate court recently described how it could be inequitable to deny a judgment creditor the ability to use this procedure. Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership, 2d Civil No. B244612, slip op. (Cal. App. 2d., Dec. 31, 2013).

The plaintiff, Relentless Air Racing (“Relentless”), sued Airborne Turbide Ltd. Partnership (“Airborne”) over a contract dispute. After Relentless prevailed at trial, the court awarded it close to $181,000 in damages and attorney’s fees. It was unable to recover the judgment from the insolvent Airborne, so it moved the court to add two individuals and two corporations as judgment debtors. The two individuals were Airborne’s sole limited partners, and they were the sole officers and directors of the two corporations. One of the corporations was Airborne’s general partner. Relentless alleged that Airborne and the two corporations were merely alter egos of the two individuals.

Corporations and other business entities are viewed as separate legal entities from their owners, directors, and officers. This generally means than an individual director or officer is not liable for judgments entered against the business entity. In some situations, however, a court may “pierce the corporate veil” and hold directors or officers liable for corporate debt. One of these scenarios might occur when an individual uses a business entity as an “alter ego,” meaning that the business entity has no significant purpose other than the individual’s interests.
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Forum-selection clauses are very common provisions often contained in commercial contracts. These clauses not only make future litigation on a contract more predictable and allow parties to avoid the threat of hostile foreign laws, judges, and juries, but they also have the capacity to make litigation less expensive. This is especially the case for companies that do business outside their home state and country. Nevertheless, in some cases, despite the existence of these clauses, defendants are oftentimes still sued by plaintiffs in courts that are not the contractually selected forums. That is exactly what happened in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District Court of Texas, a case recently brought all the way to the U.S. Supreme Court and decided on December 3, 2013.

The contract at issue was a subcontract between a general contractor, Virginia-based Atlantic Marine Construction Co. Inc. (“Atlantic”), and its subcontractor, J-Crew Management, Inc. (“J-Crew”), a material and labor supplier based in Texas, for a construction project in Texas. Like many contracts, the subcontract contained a forum-selection clause stating that all disputes under the contract would be litigated in the Circuit Court for the City of Norfolk, Virginia or the U.S. District Court for the Eastern District of Virginia, Norfolk Division. Notably, the contract did not contain a choice-of-law clause. After a payment dispute developed between the parties, J-Crew brought suit against Atlantic. However, J-Crew elected not to follow the terms of the contract and sued Atlantic in the U.S. District Court for the Western District of Texas, where the project was located.

Atlantic thereafter requested that the District Court transfer the litigation to Virginia. The Fifth Circuit performed an analysis using factors relevant to the litigation, including the existence of the forum-selection clause in the contract, to determine the proper venue for the dispute. The court determined that, while a forum-selection clause is a factor identifying the intent of the parties at the time of the contract, the final decision of the proper forum rests with the court. The court thereafter determined that the matter was properly venued in Texas and that Atlantic did not meet its burden of showing a transfer was proper.
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Electronic signatures have become an everyday part of business deals and contracts around the world, beginning in 1996 when the UNCITRAL Model Law on Electronic Commerce was adopted by the United Nations. Three years later, the U.S. Code broadly defined e-signatures in the Uniform Electronic Transactions Act (adopted in the State of California) as “an electronic sound, symbol, or process, attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.”

Both the UETA and the Electronic Signatures in Global and National Commerce Act (ESIGN) state that a document or signature cannot be denied legal effect or enforceability solely because it is in an electronic form. Additionally, laws specifically allow electronic signatures to be used in real estate transactions. Up until recently, however, e-signatures were not commonly used in real estate transactions because financial institutions were hesitant to accept electronic signatures on documents relating to real estate transactions. More recently, e-signatures finally began to gain momentum in the real estate industry, with more banks and financial institutions beginning to accept electronic signatures on documents related to real estate transactions.

As in the case with contracts signed on paper in handwriting, legal disputes can also arise concerning the authenticity of e-signatures. For example, a buyer or seller can claim that he or she did not sign or authorize the contract, or the buyer or seller can claim the content of a document is different than the actual document he or she signed. The authenticity of e-signatures can be proven in a variety of ways, including:

• Signer authentication – for instance, verifying a signer’s identity prior to signing or assessing a document by utilizing software that forces the signer to access the software via a link sent to a personal email account

• Activity logs – logs tracking information including the computer the software was accessed from, the software or web pages accessed by the signer

• Data security – information about how the software is physically and electronically secured to prevent tampering after a document is e-signed.
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Eminent domain is generally associated with the government taking private property from people. However, the City of Richmond is attempting to take a novel approach to this tool by using the power of eminent domain to keep its own residents in their homes. Earlier this month, the City Council of Richmond voted in favor of its mayor’s plan to allow the use of eminent domain to seize underwater mortgages. In doing so, the City of Richmond became the first city in the United States to take such a step toward helping its residents from avoiding foreclosure.

Recent reports highlight why the city might be considering taking such a drastic step. According to recent reports, in 2012, 914 families in Richmond lost their homes to foreclosure. In addition, not only were 4,649 Richmond residents underwater on their mortgages (49% of all mortgages in the city) by over $700 million combined, but these foreclosures have come at a great cost to the city. In 2012, there was a $1.4 million decline in property tax revenues to the city of Richmond, including $7.9 million cost to the local government.

The city hopes to acquire the mortgages with negative equity so that the families can stay in their homes. Since the City of Richmond does not have money to take on these loans alone, they joined with investment firm Mortgage Resolution Partners (MRP) to sort out a plan to prevent banks from foreclosing on the homes. More specifically, if the city goes forward with the plans, the city would seize the underwater mortgage through eminent domain. Then, investors brought together by MRP would pay off bondholders at close to the current appraised value, and eventually line up a new mortgage lower than the previous amount.
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Lockaway Storage v. County of Alameda

On May 9, 2013, the California Court of Appeal issued a ruling in Lockaway Storage v. County of Alameda with positive implications for property developers. More specifically, the court’s decision may make it easier for developers to allege damages caused by project delays.

In Lockaway, plaintiff Lockaway Storage purchased an 8.45 -acre parcel of land in Alameda County in May 2000. A year prior, the County approved a conditional use permit (“CUP”) for the property that authorized its use a storage facility for recreational vehicles and boats. However, in November 2000, only 6 months after Lockaway purchased the property, voters in Alameda County passed Measure D, which prohibited the development of a storage facility in the area where Lockaway’s property was located, except by public vote.

Since Measure D contained a grandfather clause providing that the ordinance did not affect existing uses that were legal at the time the ordinance became effective, Lockaway continued to the develop its property. During this time, the County planning department assured Lockaway that the ordinance did not prevent Lockaway’s development plans. Nonetheless, despite the grandfather clause and the County’s repeated assurances, on August 30, 2002 the County planning department reversed course and informed Lockaway that it had to obtain a new CUP by September 22, 2002 to proceed with its project. The County denied Lockaway’s extension request, and when Lockaway did apply for a new CUP before the deadline under protest, it was denied. By this time, Lockaway had spent $800,00 to purchase the property and another $400,000 on the storage facility project.

Following the County’s denial, Lockaway filed a lawsuit against Alameda County, alleging that the County’s conduct amounted to temporary taking under the Fifth Amendment. The trial court agreed and found that the County’s conduct constituted a temporary taking, meaning the government took private property for public use without just compensation.

The Court of Appeal affirmed, finding that the Lockaway project was exempt from the use restrictions of Measure D, and therefore the suspension of Lockaway’s project amounted to a constitutional taking. More specifically, the court found that, even though Lockaway’s property was not rendered useless after the County refused to allow Lockaway to continue the project, the County’s decision had a “devastating impact on Lockaway” and deprived the company of “a meaningful opportunity to protect its property rights.”

This decision shows a potential shift towards overreaching growth control measures by the government and may lead to more court judgments in favor of property owners for temporary and partial damages due to property as a result of subjective actions by city and county planning departments.
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Student loans are the largest form of consumer debt. In 2011, student debt surpassed $1 trillion nationally, which amounts to an average of $17,000 in student loan debt per person. On average, the amount of loan debt a student graduated with in 2010 was $25,250. Unfortunately, unlike almost all other kinds of debt, getting rid of either public or private student loan debt without dying or paying it in full is nearly impossible. In fact, federal loans have not been eligible for discharge in bankruptcy since 1978 and, in 2005, this treatment was extended to private student loans as well.

Specifically, student loan debt can currently only be discharged upon a showing of “undue financial hardship.” The usual standard to determine whether an individual has a claim of undue hardship is based on the three-part “Brunner Test.” The “Brunner Test” requires a debtor to prove each of the following:

1. Based on current income and expenses, the debtor cannot maintain a minimal standard of living for the debtor and dependents if forced to pay off student loans;

2. Additional circumstances exist indicating that the debtor’s current state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

3. The debtor has made good faith efforts to repay loans.

Courts generally apply the three prongs very stringently. However, a recent court ruling and proposed California and federal legislation may affect the dischargeability of student loans for both Californians and other Americans alike.

Hedlund v. The Educational Resources Institute and Pennsylvania Higher Education Assistance Agency

Nearly ten years after Hedlund initially brought his lawsuit to determine the dischargeability of his student loan debt, on May 22, 2013, the Ninth Circuit Court of Appeals released its opinion in Hedlund v. The Educational Resources Institute, Inc., and Pennsylvania Higher Education Assistance Agency. The case may make it easier for student loan debtors to have their student loans discharged in bankruptcy.

In Hedlund, the Ninth Circuit found that the Bankruptcy Court had properly applied the Brunner test when it examined Hedlund’s efforts to find a better job and found that his expenses were mostly reasonable. In addition, the Ninth Circuit Court also ruled that the Bankruptcy Court correctly examined Hedlund’s efforts to negotiate a payment plan, and that his only option would create an undue hardship that would require the then-35 year old Hedlund to make loans until he was at least 65 years old. The recent decision by the Ninth Circuit establishes that debtors may not have to go to extreme efforts to repay their loans, a debtor may have some unreasonable expenses, and a 30-year repayment term may not be reasonable.

Proposed Federal Legislation

The Private Loan Bankruptcy Fairness Act of 2013 (H.R. 532) and The Fairness for Struggling Students Act of 2013 (S. 114)

These bills were introduced to the U.S. House of Representatives and U.S. Senate in February 2013 and January 2013 respectively. The proposed legislation hopes to have private student loans lumped with all other kinds of debt, making student loan debt fully dischargeable in bankruptcy. The bills would repeal the portion of the 2005 bankruptcy law overhaul, which removed the option for debtors to discharge outstanding private student loans in bankruptcy court. Notably, federal loans would not be impacted by this legislation.
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A recent California Court of Appeal decision highlights that a board of director’s discretion under the business judgment rule is by no means absolute. The “business judgment rule” (“BJR”) generally protects a corporate director from his or her business decisions when made in good faith, with due care and inquiry, and in a manner the director reasonably believes to be in the company’s best interest. The rule is based on the fact that the directors, not the courts, are in the best position to determine whether a particular act is beneficial to the organization. However, this does not mean that directors are protected from all decisions they make that turn out badly.

In fact, in January of this year, the California Court of Appeal affirmed the trial court’s decision, finding that California Dairies, Inc.’s (“Cal Dairies”) board of directors (the “Board”) exceeded its discretion when it instituted a quota system that breached its contractual obligations to its members. Plaintiff John Scheenstra was a member of Cal Dairies, a member-owned milk marketing and processing cooperative. Any time a member joins the cooperative, he or she agrees to be bound by the cooperative’s bylaws, which thereby creating a contract between Cal Dairies and each of its members.

In 2007, the Board established an internal quota system based on the discretionary authority granted to it in its bylaws to institute such a system. The system was put in place to reduce milk production in anticipation of overproduction. When the Board instituted this system, it was aware that there was an industry-wide oversupply of milk and that other cooperatives had adopted similar programs to reduce milk production by its members. Claiming that the quota was too low and was causing him hardship, Scheenstra subsequently filed suit against Cal Dairies alleging, among other things, breach of contract. He relied on a contract provision that obligated Cal Dairies to implement a quota system equitably and on a uniform basis based on representative years of production. The trial court sided with Scheenstra and found that the BJR did not shield Cal Dairies from liability for breach of contract.

Cal Dairies appealed and the Court of Appeal granted review, focusing on, among other things, whether the Board could seek the protection of the BJR and whether it acted within the scope of its discretionary authority. The court concluded that Cal Dairies could seek the protection of the California BJR since it is organized as a corporation.
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Ruling on the enforceability of an arbitration clause contained within a confidentiality and noncompetition agreement signed as a condition of employment, the U.S. Supreme Court once again reiterated its position that the Federal Arbitration Act (“FAA”) is the supreme law of the land, giving it priority over any conflicting state law or policy.

In Nitro-Lift Technologies, LLC v. Howard, two employees entered into confidentiality and noncompetition agreements as conditions of their employment. The agreements each contained a provision that mandated that any dispute between Nitro-Lift and its employees be resolved through arbitration. After the two employees quit their employment with Nitro-Lift, they both went to work for one of Nitro-Lift’s competitors, thereby breaching their noncompetition agreements. Nitro-Lift filed an arbitration claim alleging breach of contract. The employees filed suit in an Oklahoma state court, seeking to have the agreements deemed unenforceable under state law.

The trial court ordered the to case to arbitration, finding that since the agreements contained valid arbitration clauses, an arbitrator, not the court, had to determine the enforceability of the noncompetition agreements. However, the Oklahoma Supreme Court reversed, holding that the existence of an arbitration clause does not prohibit judicial review of the underlying agreement. The court then found that the enforceability of a noncompetition is a matter of state law, ultimately determining that the noncompetition agreements were “unenforceable as against Oklahoma’s public policy.”

The U.S. Supreme Court granted review and vacated the Oklahoma’s Supreme Court decision, finding that the Oklahoma Supreme Court’s decision plainly “disregard[ed] this Court’s precedent on the FAA.” Notably, the court cited to a previous U.S. Supreme Court case that affirmed that the FAA “declares a national policy favoring arbitration” and that the substantive law created by the FAA is applicable in both state and federal courts.
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An interesting breach of contract dispute is brewing between coffee powerhouse Starbucks and a family-owned food company who alleges that the larger corporation has basically put them out of business. Starbucks reportedly decided to stop honoring its contract with Mellace Family Brands, who provided them roasted nut snacks, once customers started complaining about the quality of the nut products. Mellace views that decision to discontinue its products as a breach of contract; one which resulted in the California-based food company going bankrupt.

In an interesting twist to the story, an FDA investigation revealed that the roasted nut snacks were apparently contaminated due to gas leaks in a facility that actually belonged to Starbucks, not Mellace. If true, that would seem to support Mellace’s side of the issue, rather than the coffee giant’s version. Mellace has sued Starbucks for approximately $20 million in damages over the discontinuation of their roasted nut snacks.
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