Law Office of Adam P. Whitney Blog
Posts by Adam Whitney

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Make the Best of this Difficult Time When Your Business Is Closed or Slowed

If your business is either closed or running a smaller operation, now may be the time to step back, do some planning, and get your “house” in order. It’s a good time to evaluate your focus and your customer base. Do 80% of your revenues come from 20% of your clients? Do 20% of your clients cause 80% of your headaches?

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Breaking Down the NLRB’s New Joint-Employer Rule

Over 14.5 million Americans belong to labor unions in the United States today, so it should come as a welcome sign for business owners who interact with third party workers such as subcontractors and franchisee employees that only those workers over whom they have substantial direct and immediate control will they be obligated to under the NLRA.

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See No Evil: Can Your Business be Held Liable when Your Employees Engage in or Simply Overlook Sex Trafficking that Occurs on Company Property?

A District of Massachusetts court decision from November of last year has helped to clarify the liability that employers can face for illegal sex trafficking that occurs on company property. Ricchio v. Bijal, inc. (Civil Action No. 15-13519-FDS). In Ricchio, the victim Lisa Ricchio was kidnapped by defendant Clark McLean, and was held for several days as a captive at the Shangri-La Motel in Seekonk, Massachusetts where McLean stayed as a guest. The Shangri-La is owned by defendant Bijal,...

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Business Owners and Partners Should Be Paranoid

Fox Moulder’s motto was “Trust No One.” Lawyers can understand this paranoia. Divorce lawyers know spouses cheat. Criminal lawyers know clients steal (and worse). You should know that your business partners and key employees that you trust the most can betray you. This includes both majority and minority shareholders in close corporations, members of LLC’s (Massachusetts limited liability companies), and partners in partnerships. Sadly, this also includes family members in a family business.

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No Good at Goodbyes: Why Employment Attorneys are Important to use for Creating Severance Agreements

Severance agreements, which are contracts between an employer and an employee that contain certain rules and guidelines for when an employee is terminated, may be regarded as somewhat of an afterthought by employers. An employer might think to himself, “the employee is leaving the company to go his or her own way, so what is there to worry about?” Despite this fact, it is imperative that anyone involved in the hiring process has an employment lawyer review a proposed severance agreement. A...

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New Ruling From Massachusetts Appeals Court Shows the Importance of LLC Operating Agreement Language

How do Limited Liability Company Operating Agreements affect the fiduciary duties owed to co-Members of the LLC? That issue was decided in the case of Butts v. Freedman, which also involved Boston Equity Advisors LLC (“BEA”) and Outcome Capital, LLC (“Outcome”).

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Prime Motor Group Split Shows Tactics Used by Majority Owners Against Minority Owners

This is exactly what I was talking about in this recent post:

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Breaking up is Hard to Do: Ending Your LLC Membership Interest by Sale, Resignation, Dissolution or Otherwise

What do you do when you are a minority or 50% owner and the other owner(s) are not treating you fairly? Maybe the other owner is taking an unfair salary, employing family members, or otherwise manipulating the system to take economic advantage of the situation. Maybe the other owner is taking cash and not reporting it. What do you do? What if you have taken cash too?

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Having a Company Holiday Party? Have Fun, but Don't Get Sued.

Your company holiday party comes with potential legal liability. While you can never eliminate all potential liability, you can minimize your risk. Here are some ways to do that:

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Should a Single-Member LLC Have an Operating Agreement?

When you have more than one Member in your Massachusetts Limited Liability Company, having an Operating Agreement is almost a must. Called an “LLC Agreement” in some states, an Operating Agreement is a formal legal document that sets forth the rights and duties of Members and Managers, including financial issues and working relations. But what about when you are the only Member? Isn't this just an agreement with yourself? Why would you need it?

Make the Best of this Difficult Time When Your Business Is Closed or Slowed

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If your business is either closed or running a smaller operation, now may be the time to step back, do some planning, and get your “house” in order.  It’s a good time to evaluate your focus and your customer base.  Do 80% of your revenues come from 20% of your clients?  Do 20% of your clients cause 80% of your headaches? 

From a legal perspective, here are some things to consider.

-    If you are an LLC, do you have an Operating Agreement?  Does it still work for your purposes?  Are your business partners treating you fairly or pulling their weight?

-    Are your restrictive covenants (Massachusetts noncompetes, confidentiality agreements, non-solicitation agreements, etc.) up to date with current law?

-    Do you use other Massachusetts employment contracts of some sort or even a written offer letter (which can be construed as a contract for a term in some circumstances)?  Have they been properly vetted and updated by a Massachusetts employment lawyer?

-    Do you have a standard severance agreement or separation agreement?  Is it up to date?  Does it fully protect you?

-    Do you have questions or concerns about laying off or firing employees?

-    Are your policies and procedures and employee handbooks up to date?  Including: sexual harassment; bring your own device policy; leave policies; work at home policies; earned sick pay; vacation; marijuana; etc.

-    Have you recently vetted whether your salaried employees are truly exempt under Massachusetts wage laws and the Fair Labor Standards Act?  There have been changes in the law.  Misclassification can come with great liability.

-    Do your commissions plans or commissions policies expose you to triple damages and attorneys’ fees?  There have been recent rulings in Massachusetts that could have devasting consequences.  Commissions are considered wages if due and payable and able to be calculated.

-    Has a Massachusetts employment lawyer vetted whether your “independent contractors” are really contractors, or will they be deemed to be employees, which could expose you to significant liability?

-    Do your standard contracts with customers, vendors and suppliers give you as much protection as you need?  Sometimes, one simple clause in a contract can make a world of difference.

-    Have you reviewed your lease?  Your other operating or service contracts?  Are they going to auto-renew?  Do you need to give notice?  Do you want to renegotiate them?  

-    Are your filings with the Secretary of the Commonwealth up to date?  

-    Have you had an insurance checkup with an independent broker?

-    If you are currently in litigation, do you need a second opinion regarding your goals and strategies?  Are your limited resources being put to good use?

-    Have you checked to see if your competitors are playing by the rules?  And do you have a strategy to make sure they do so?

By Adam P. Whitney: 617.338.7000

Breaking Down the NLRB’s New Joint-Employer Rule

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GUEST POST BY BRANDON SLOANE

On February 26, 2020, the National Labor Relations Board (NLRB) issued a final rule clarifying the standard for determining joint-employer status under the National Labor Relations Act (NLRA). The NLRB’s ruling is significant for any employer covered under the NLRA (which includes nearly all private-sector employers) because a joint-employer finding carries with it significant rights and obligations that a joint-employer must recognize for its employees. 

A joint employer under the NLRA accepts some of the duties and responsibilities that are accorded to an employee’s primary employer. These include: 1) for unionized employees, the joint employer must participate in collective bargaining over the terms and conditions of employment, 2) any picketing directed at a joint employer that would otherwise be secondary (unlawfully picketing someone other than your employer) is considered primary and thus lawful, and 3) each joint employer may be found jointly and severally liable for the other’s unfair labor practices under the NLRA. 

The Final Rule, which will go into effect on April 27, 2020, has five major aspects:

  1. It specifies that a business is a joint employer of another employer’s employees only if the two employers “share or codetermine the employees’ essential terms and conditions of employment”;

  2. It clarifies that the list of essential terms and conditions are: wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction; 

  3. It provides that a joint employer is one that possesses and exercises such “substantial direct and immediate control over one or more essential terms and conditions of employment of another employer’s employees” as would warrant a finding that the business meaningfully affects matters relating to employment;

  4. It defines “substantial direct and immediate control” as control “that has a regular or continuous consequential effect on an essential term or condition of employment”, and control that is not exercised on “a sporadic, isolated, or de minimis basis”; 

  5. It specifies that evidence of indirect or contractually reserved (but never exercised) control over essential terms of condition, and of control over mandatory subjects of bargaining under the NLRA other than essential terms and conditions, are indicative of joint-employer status, but only to the extent that it supplements evidence of direct and immediate control.

The Final Rule represents an attempt by the NLRB to clarify unsettled law as to which employers qualify as joint employers under the NLRA. In 2015, the NLRB issued Browning-Ferris Industries (BFI), 362 NLRB No. 186, which held that a company could be deemed a joint employer if it had merely indirect, limited and routine, or contractually reserved but never exercised control over a business’s employees. The BFI ruling helped to enforce joint-employer status for a larger number of businesses under the NLRA. The ruling particularly impacted a business owner’s duties to subcontractors or franchisee employees. The level of control that a business owner or franchisor had over these types of employees is usually more attenuated than what general contractors and franchisee owners would have. But the BFI ruling held they could still be joint employers with indirect or potential control. 

 The Final Rule, with its necessary requirement for substantial direct and immediate control, will in all likelihood eliminate the obligations that these business owners owed to franchisees and subcontractors under the logic of BFI. The ruling represents a win for employers, who will now have a better sense of exactly which workers they owe NLRA rights and obligations to. 

Over 14.5 million Americans belong to labor unions in the United States today, so it should come as a welcome sign for business owners who interact with third party workers such as subcontractors and franchisee employees that only those workers over whom they have substantial direct and immediate control will they be obligated to under the NLRA. 

Brandon Sloane is a third-year student at Boston College Law School. He aspires to become a Massachusetts labor & employment attorney after graduation.

Fine print: the above is the work of the author only. The above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.


See No Evil: Can Your Business be Held Liable when Your Employees Engage in or Simply Overlook Sex Trafficking that Occurs on Company Property?

'Human trafficking' found at https://flic.kr/p/dFhcA2 by Imagens Evangélicas (https://flickr.com/people/imagensevangelicas) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

GUEST POST BY BRANDON SLOANE

A District of Massachusetts court decision from November of last year has helped to clarify the liability that employers can face for illegal sex trafficking that occurs on company property.  Ricchio v. Bijal, inc. (Civil Action No. 15-13519-FDS).  In Ricchio, the victim Lisa Ricchio was kidnapped by defendant Clark McLean, and was held for several days as a captive at the Shangri-La Motel in Seekonk, Massachusetts where McLean stayed as a guest. The Shangri-La is owned by defendant Bijal, Inc., and was operated by defendants Ashvin and Sima Patel. (collectively known as “Bijal”).  Ricchio was suing for violations under the Victims of Trafficking and Violence Protection Act of 2000 (“TVPA”), which deals with criminal violations of sex trafficking, and the Trafficking Victims Protection Reauthorization Act of 2003 (“TVPRA”), which deals with civil violations. 

The crux of the case involves the third-party defendant Peerless Insurance Company (“Peerless”), which issued an insurance policy to indemnify Bijal against injuries sustained on motel property. After Ricchio’s case was filed, Peerless attempted to have the Court intervene to eliminate their obligation to pay any damages resulting from Ricchio’s injuries. This was in part because the insurance policy excluded from coverage injuries arising out of a criminal act committed by the insured. To put it more simply, Peerless asserted that because Bijal was guilty of criminal violations under the TVPA, they had no obligation to pay insurance.   

The TVPA establishes criminal liability for individuals and enterprises that provide forced labor and sex trafficking, and also for those who knowingly benefit from participation in a venture involved in such activity. This “knowingly benefitting” language is a way to assert liability against an employer who allows such activity to occur within his business. Peerless’s argument here is that because Bijal rented a room to McLean while he was engaged in trafficking, Bijal profited off this activity and thus and “knowingly benefitted” from it. 

The Court disagreed with the reasoning set forth by Peerless however, and found that Bijal was not guilty of criminal violations under the TVPA. The TVPA requires that the employer benefit from the trafficking “knowingly or in reckless disregard” of the fact that the trafficking is occurring. The court found no such evidence that Bijal had knowledge or reckless disregard of such knowledge that McLean was trafficking at the motel, so they found it improper to consider this a violation of the TVPA. 

Instead, the Court found that Bijal could be found liable for civil violations under the TVPRA. The TVPRA has a much lower bar for liability than the TVPA. So long as one “knowingly benefit[s]… from participation in a venture which that person knew or should have known” had engaged in trafficking, a violation of the TVPRA can properly be found. The phrase “should have known” is one that the court considered “common language used in describing an objective standard of negligence”. In essence, the court was saying that an employer will be held to a negligence standard under the TVPRA when there is found to be human trafficking occurring on its premises. 

Because the case focused more on Peerless’s obligations to pay damages as an insurer, the court did not definitely decide whether Bijal’s actions violated the TVPRA. But its statement that an employer can be civilly liable for negligently allowing human trafficking to occur on its premises so long as that employer benefits from such activity is significant. The holding placed a burden onto business owners to thoroughly investigate its premises, any customers on its premises, and its employees to make sure it does not overlook any trafficking violations. Other hospitality businesses, such as massage parlors, bars, casinos, could just as easily be exposed to liability for harboring trafficking victims and benefitting from it in the form of customers paying for services at the establishment. In addition, any sort of transportation company (shuttles, taxis, buses, etc.) could also unwittingly transport trafficking victims if their drivers are not wary of suspicious-looking passengers.  

While this may not feel like a huge issue that is plaguing America, according to the National Human Trafficking Hotline (https://humantraffickinghotline.org/states), from 2017 through the middle of 2019 there were over 24,000 reported cases of human trafficking in the United States. To make matters worse, this number does not account for the number of contacts made to the Hotline which did not develop into reported cases. Including these contacts, from 2017-2019 there were nearly 100,000 instances of the hotline being contacted regarding a potential human trafficking violation occurring. This is a real problem that employers, especially those involved in hospitality and transportation, need to be aware of. 

With plaintiff attorneys needing only to prove a negligence standard of causation to assert liability under the TVPRA, it seems likely that the amount of civil cases being filed in this area is bound to increase. One can only hope that having a very real threat of liability hanging over the heads of employers will create an incentive to improve the oversight of their businesses such that trafficking will no longer be able to occur under their watch.  

Brandon Sloane is a third-year student at Boston College Law School. He aspires to become a Massachusetts labor & employment attorney after graduation.

Fine print: the above is the work of the author only. The above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.

Business Owners and Partners Should Be Paranoid

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Fox Moulder’s motto was “Trust No One.”  Lawyers can understand this paranoia.  Divorce lawyers know spouses cheat. Criminal lawyers know clients steal (and worse).  You should know that your business partners and key employees that you trust the most can betray you.  This includes both majority and minority shareholders in close corporations, members of LLC’s (Massachusetts limited liability companies), and partners in partnerships.  Sadly, this also includes family members in a family business. 

I refer to all such persons as “partners,” because that is how people generally think of one another.  The term itself, partner, holds a special meaning of trust to the business person, as it should.  It’s no coincidence that the word also means a person with whom one has an intimate relationship, also founded on trust.

Trust may work fine for you, but don’t trust blindly. Someone reading this blog has a partner who is cheating them.  The obvious form of this is that the cheating partner is taking more than his or her share from the business.  He is paying his car payments from the company accounts while you pay for your own car.  She secretly increased her salary without informing you. Maybe’s he’s paying for his mistress’ apartment.  Or his cocaine addiction.  Or gambling.  Or her son’s college tuition. Maybe he’s going on shopping sprees with the company credit cards.  Maybe she fires you when you complain.  Or cuts your salary and forces you out.  This is a classic freeze out.

Sometimes the partner who is not in charge of the books can cheat as well.  By submitting false expenses. By moonlighting. By directing the business to his own secret company or a friend’s company.  By taking the customer’s payments.  By preparing to leave and start a competing business.  Maybe both of you are cheating the other in your own way.

I’ve seen all of these things, and much more happen.  It’s human nature to be tempted in financial matters.  It’s easy to tell yourself that you deserve it because you work hard. Your partner is lucky to have you.  Or to tell yourself that you’ll pay back the money next month.  There is always some justification.  

If you sense something is wrong, it probably is.  If you nip small things in the bud, you may be able to save the business.  Get involved in all aspects of the business.  You need access to the company books and financial records on a regular basis.  You generally have a right to this information.  If you let things go for too long, it may be too late to save your company.

If you discover that your partner has cheated you in some way or the other, you do have legal recourse.  That’s true even if you are not 100% clean yourself. Start to take control of the situation by addressing it directly.

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com

Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.

No Good at Goodbyes: Why Employment Attorneys are Important to use for Creating Severance Agreements

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GUEST POST BY BRANDON SLOANE

Severance agreements, which are contracts between an employer and an employee that contain certain rules and guidelines for when an employee is terminated, may be regarded as somewhat of an afterthought by employers. An employer might think to himself, “the employee is leaving the company to go his or her own way, so what is there to worry about?” Despite this fact, it is imperative that anyone involved in the hiring process has an employment lawyer review a proposed severance agreement. A poorly drafted severance agreement can have long term legal and economic consequences for a business.

Benefits of an Employment Attorney

1. Protecting an Employer from Liability

One of the primary benefits offered in severance agreements is a liability waiver, which is a clause stating that in exchange for some consideration provided by the employer in termination (usually in the form of monetary compensation), the terminated employee agrees to waive or release any potential claims he or she may have against the company.

An employer may think that using standard liability waiver clause language from legal technology websites would be sufficient for their agreements, but this is not always the case. Each state has its own body of statutory provisions and caselaw concerning what is allowed in waiver agreements. Without the help of a seasoned employment attorney, an employer may inadvertently include (or exclude) certain words or phrases that invalidate the waiver. Such an invalidation would expose the employer to many types of litigation, including wrongful termination, breach of contract, and breach of implied covenant of good faith and fair dealing.

In addition to preventing accidental invalidations of liability waivers, employment attorneys can add in language specifically aimed at preventing costly litigation. A prime example of this issue involves the Massachusetts Wage Act (c. 149, sec. 148 et seq.). Violators of the Wage Act are required to pay treble damages to winning plaintiffs (meaning that employers found guilty of violating the Wage Act automatically owe triple the amount originally owed to the employee, plus attorneys’ fees). If an employee was owed wages earned before termination, he or she could file a Wage Act lawsuit against the employer even after the employment relationship has ended. However, there is Massachusetts caselaw that allows for agreements in which an employee consents to releasing the right to file a Wage Act claim. See Gordon v. Millivision Holdings, LLC, 19 Mass. L. Rptr. 61, 3 (Mass. Supp. 2005). An employment attorney would know the exact right language to include in a severance agreement to ensure that the employee has properly released his or her Wage Act claim against the employer.

2. Guarding Company Confidentiality

Similar to liability waivers, severance agreements can include clauses binding the terminated employee to keep certain information about the company confidential. Employment law attorneys will be aware of the legal requirements for what can and cannot be included in a confidentiality clause in a severance agreement.

3. Restricting Competition

A staple of the severance agreement is the non-compete clause, which restricts the ability of the former employee to work at competitors within a certain geographic area and for a fixed time period. In 2018, Massachusetts enacted sweeping changes to its non-compete law. For smaller businesses that may not have had to make any hires in the past few years, they may be unaware of these changes. An employment law attorney would certainly be up to date on the law, and could ensure any non-compete clause didn’t violate the new legislation.

4. Ensuring an Employer’s Benefit Obligations have been Fulfilled

Most employers offer a set of perks and benefits designed to entice employees to work for them. These can include offering sick/vacation/PTO days, medical benefits, stock options, and retirement/pension plans. Terminating the employment relationship can have legal ramifications relating to the benefits that have accrued to the employee. An employment attorney could review an employer’s benefit plans and determine what termination would mean for these benefits, and design a severance agreement crafted to shield the employer from unnecessary liability.

5. Tailoring Specific Agreements for Problem Employees

Employees are like snowflakes: no two are exactly alike. Because of this, sometimes a severance agreement will require a clause or two that are tailored only to the one employee. This is especially true for problem employees, who employers may be worried about divulging confidential information, soliciting company clients, or even trying to poach current employees away from the company. An employment attorney will be able creating the right severance agreement for a problem employee, and also can help an employer come up with the right strategy to use when terminating the employment relationship to create as few headaches as possible.

In summation, when it comes to creating severance agreements, if you aren’t going to craft them with the help of an employment law attorney, you might be better off not using them at all. There are simply too many potential hazards that can arise from a poorly executed severance agreement to not have the assistance of a lawyer who is an expert in the field.

Brandon Sloane is a third-year student at Boston College Law School. He aspires to become a Massachusetts labor & employment attorney after graduation

Disclaimer: The above is the work product of the author only.  The above is not legal advice.

New Ruling From Massachusetts Appeals Court Shows the Importance of LLC Operating Agreement Language

'fiduciary' found at https://flic.kr/p/29iajFb by mikecohen1872 (https://flickr.com/people/null) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

How do Limited Liability Company Operating Agreements affect the fiduciary duties owed to co-Members of the LLC?  That issue was decided in the case of Butts v. Freedman, which also involved Boston Equity Advisors LLC (“BEA”) and Outcome Capital, LLC (“Outcome”). 

Underlying Facts:

Mr. Butts and Mr. Freedman co-owned BEA.  They were the founders and held equal ownership.  A third defendant, Mr. Ben-Joseph worked at BEA as an independent contractor. Butts and Fredman began having disagreements with one another, mostly about Ben-Joseph’s compensation.  Freedman and Ben-Joseph decided to leave BEA and join Outcome, a competing enterprise.

At first, there were discussions of merging BEA and Outcome.  Freedman and Ben-Joseph did not inform Butts of their meeting and discussions with Outcome.  After Butts found out that Freedman and Ben-Joseph joined Outcome, he/BEA sued for breach of fiduciary duty against Freedman (and another claim not relevant to this post against both Freedman and Ben-Joseph).  

Why Butts/BEA Lost:

The Appeals Court agreed that Freedman owed Butts and BEA fiduciary duties.  The Appeals Court explained that under Massachusetts law “fiduciaries may plan to compete with the entity to which they owe allegiance, provided that in the course of such arrangements they do not otherwise act in violation of their fiduciary duties.”

The question of whether Freedman “otherwise acted in violation of [his] fiduciary duties” depended on the interpretation of the Operating Agreement.  Specifically, the Operating Agreement of the LLC broadly provided that Members may engage in other business ventures and investment opportunities.  Notably, there was not a non-compete provision in the Operating Agreement or otherwise.  

The Appeals Court ruled that the language of the Operating Agreement limited the fiduciary duty of Freedman such that he had no duty to disclose the Outcome opportunity or to share the Opportunity with Butts or BEA.

Freedman made cogent arguments that the language was just boilerplate and that literal application would allow members to take corporate opportunities away from their LLC. However, the Appeals Court essentially ruled that the freedom to contract overrode those concerns.  Freedman prevailed in his defense.  

Takeaway

The lesson here is that the words of an Operating Agreement matter.  Some people think that they are “standard” and that they are all boilerplate.  But what do you think will happen when your business partner has disagreements and they go to a lawyer?  The lawyer will parse through each sentence of the Operating Agreement to find language that will support your opponent in a lawsuit.  So Operating Agreements don’t matter. Until they do.

If you are are going into an LLC, read the proposed Operating Agreement carefully and strongly consider having a lawyer review it with you.  It’s important to understand your business and your goals because each situation is unique.  I get that it seems like an unnecessary expense when you are starting a business, but you could be dooming yourself for failure if you don’t pay attention to the details.  

If you already have an Operating Agreement and you are having disputes with your co-owners, have a qualified lawyer review the language to see what leverage you have.  Or, maybe you can renegotiate and enter a new Operating Agreement.

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com


Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.

Prime Motor Group Split Shows Tactics Used by Majority Owners Against Minority Owners

'Maryland Future Business Leaders of America' found at https://flic.kr/p/bq35wt by MDGovpics (https://flickr.com/people/mdgovpics) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

This is exactly what I was talking about in this recent post:

 :https://awhitneylaw.com/blog/breaking-up-is-hard-to-do-ending-your-llc-membership-interest-by-sale-resignation-dissolution-or-otherwise

A day after I posted my blog on LLC breakups, the Massachusetts Supreme Judicial Court (“SJC”) issued a ruling regarding the break up of Prime Motor Group partners, Automile Holdings, LLC v. McGovern, __ Mass. __ (Jan. 14, 2020).  

https://law.justia.com/cases/massachusetts/supreme-court/2020/sjc-12740.html

While not the main focus of the case, the SJC described the tactics that the majority used to force the minority owner to sell his shares in the company, as found by the trial judge. 

First, they amended Prime’s operating agreement to remove a provision that allowed for the distribution of profits sufficient to cover the owners’ tax liabilities.  Such provisions are commonplace, and without it, McGovern faced a tax liability of between $500,000 and $600,000 for the 2015 tax year.  Additionally, Abrams and Rosenberg [collectively, the majority interest] denied McGovern access to Prime’s financial information, leaving McGovern unable to calculate his expected tax obligation for the 2016 tax year.  Abrams and Rosenberg also demanded that McGovern and his wife return the company vehicles that they had been using and threatened to report McGovern to the authorities as being in possession of stolen automobiles.  As the trial judge remarked, these tactics amounted to Rosenberg and Abrams applying “as much pressure as they could manage to put on [McGovern] to take the best deal they could get” in purchasing McGovern’s minority stake before the company’s anticipated liquidity event.

Slip Opinion at p. 6.

The SJC was less than impressed by these tactics.  It indicated that:

the sale of McGovern’s business interest did not resemble a prototypical arm’s-length transaction with a third-party purchaser.  Rather, Rosenberg and Abrams pressured McGovern to sell his interest to them, despite the fact that Abram’s company was the majority shareholder in a closely held corporation and owed a fiduciary duty of utmost good faith and loyalty in its dealings with minority shareholders.

Slip Opinion at 25.

This statement about “a fiduciary duty of utmost good faith and loyalty” to minority shareholders creates a powerful weapon for minority shareholders.  To be sure, this is not new.  The courts of Massachusetts have ruled on this duty for decades.  And keep in mind that the duty applies to minority shareholders as well.  But the fact that the SJC seemed to go out of its way to suggest a breach of this duty by high-pressure tactics bodes well for minority shareholders who will be litigating these claims in Massachusetts.  One other takeaway here, McGovern was a sophisticated and experienced business person, but he was still subject to majority pressure tactics.  Abrams got quality legal help and apparently sold his interest for full value.  What will you do?

The decision also made some statements about restrictive covenants in employment agreements that should make Massachusetts employers very nervous.  More on that later.

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com


Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.



Breaking up is Hard to Do: Ending Your LLC Membership Interest by Sale, Resignation, Dissolution or Otherwise

'engage stakeholders in your process. meet early, meet often.' found at https://flic.kr/p/4E1yj4 by Engin Erdogan (https://flickr.com/people/erdogan) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

What do you do when you are a minority or 50% owner and the other owner(s) are not treating you fairly?  Maybe the other owner is taking an unfair salary, employing family members, or otherwise manipulating the system to take economic advantage of the situation.  Maybe the other owner is taking cash and not reporting it.  What do you do?  What if you have taken cash too?    

Maybe the other owner is buying all the supplies from his other business or just shifting business from your company to his other company.  Maybe the other owner is taking supplies or equipment for his other business.  Maybe the other owner didn’t contribute his fair share to begin with.  What do you do?  What if things are not well-documented and your business partner is a master manipulator or con artist?  

Maybe the other owner is hiding the financial records of the company.  You don’t know if there is a profit or how much.  You don’t know how much money is coming in, let alone where it is going.  What do you do?  You usually have certain rights to financial records.  https://awhitneylaw.com/blog/a-minority-owners-right-to-inspect-llc-records-or-corporate-books-and-records 

What do you do if the majority terminated your employment?  Does it matter if the other owner is the Manager of the LLC? Does it matter if you have no employment contract? Does it matter if they have something on you?  No one is perfect, of course, and it’s inevitable that they will have something to complain about.  But does that give them the right to fire you from your own company?  Maybe, but maybe not.  Owners often have a reasonable expectation of employment and cannot be fired so easily.

Should you dissolve the LLC?  Put it in receivership? Maybe you are not getting along with the other owners.  They are abusive.  They are not treating you fairly.  They are trying to drive you out.  What do you do?  Maybe you can take one of these extreme remedies, but is it a good idea?  This is a complicated question and you need guidance from someone who has done it.

Can you sell your LLC Membership interest?  Does it matter if it’s a Massachusetts Limited Liability Company?  A Limited Liability Company formed in Delaware or some other state and operated in Massachusetts?  Can you force the LLC to buy your share?  Maybe, but it depends in part on if there is an Operating Agreement and what it says.  It depends on which state’s law controls.  You also need to follow the right procedures, which can be spelled out in an Operating Agreement.  You also must know how to value your share.  

Can you simply resign your interest?  The answer is the same, but the potential liabilities increase, so you have to proceed strategically and with caution.  Just giving up your interest may seem simple and without consequences, but that is not necessarily true.  At least do it the right way and get a full release and know the tax consequences.

Unfortunately, there are no easy answers to any of these questions.  There are no “LLC Police” to report your business partners to.  It’s unlikely that any government agency will be of much assistance.  The government doesn’t want to get involved in private business disputes unless there is a public interest, illegal activity or tax evasion.  Even then, a bad situation could become worse.  I have seen all the above situations and more.  Some business partners lie, cheat and steal. Some are sneaky. Some are tyrants. Some are substance abusers. Some are sexual harassers. Some are poor business people.  And some just have different priorities and visions for the business.  

There is help.  A lawyer who is experienced in these matters can come up with a plan and help you to decide what to do. Sometimes there are certain strategies and tactics that can provide your business partners with the motivation to do right by you.  Don’t you deserve that?  You invested blood, sweat, tears, and dollars into the business.  Are you willing to give up what you deserve, or do you want to fight for it?   

If you are having problems with your business partners and you cannot work it out personally, contact me so that I can help you come up with the best solution that works for you.  

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com

Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.




Having a Company Holiday Party? Have Fun, but Don't Get Sued.

'Party Time' found at https://flic.kr/p/ihruT3 by Nanagyei (https://flickr.com/people/nanagyei) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

Your company holiday party comes with potential legal liability.  While you can never eliminate all potential liability, you can minimize your risk.  Here are some ways to do that:

1.Don't Serve Alcohol.

If you must have alcohol at your party, do yourself a favor and do not serve alcohol yourself.  Either have a professional caterer who is properly trained, licensed and insured (and ideally, who will indemnify you or name you as an additional insured), or go to a bar or restaurant.  Consider providing employees with a limited number of drink tickets.  

2. Remind Employees to Be Safe and Behave Property.

Remind employees beforehand of company expectations and that people consuming alcohol should have a designated driver.  Offer to pay for rides home, no questions asked.  In the era of Uber and Lyft, there should be plenty of rides available in most areas.  Remind and expect the management team to lead by example.

Sexual harassment is also a major concern for office holiday parties.  Gently remind employees of company policies prior to the party.  

3. Set High Expectations for Managers and Supervisors.

Your first lines of defense are the company supervisors.  Recruit them to look out for employees who are drinking too much.

Remind them also that they lead by example.  If Sales Manager Bob is on his sixth triple IPA and telling dirty jokes, some in his sales team will follow his lead.  In Massachusetts, there is strict liability when a supervisor sexually harasses a subordinate.  If you can't trust your managers and supervisors, then you have a big problem.  If you haven’t provided sexual harassment training to managers recently, here is your excuse to do so.

4. Check with Your Insurer.

The end of the year is as good of a time as any to review your insurance coverage with your broker.  If you don't have a good broker who will take your call and answer your questions, find one who will.  Insurance is complicated and gaps in coverage are more common than business owners may think.  Checking your various policies for a holiday party will also serve as a good year-end check.

5. Remind People that it is a Party and they Can Have Fun.

The key here is to make it clear that the party is voluntary.  No one is going to get paid wages, so no one has to attend.  Hold the party when employees are not working.  You do not want any claims of failing to pay wages or overtime.  Don't require any employees to perform any duties, such as checking coats or tending bar, which could be viewed as work requiring pay.  This may also prevent a worker's compensation claim if someone is hurt at the party (check with your insurance broker).

If you have any questions about dealing with liability issues for an open house or company party, call me at 617.338.7000. As always, the above is general information, not legal advice.

Should a Single-Member LLC Have an Operating Agreement?

'Mirror, mirror...' found at https://flic.kr/p/PBXr1n by Rolf Dietrich Brecher (https://flickr.com/people/rolfdietrichbrecher) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

When you have more than one Member in your Massachusetts Limited Liability Company, having an Operating Agreement is almost a must.  Called an “LLC Agreement” in some states, an Operating Agreement is a formal legal document that sets forth the rights and duties of Members and Managers, including financial issues and working relations.  But what about when you are the only Member?  Isn't this just an agreement with yourself?  Why would you need it?

You might get away with not having an Operating Agreement if you are the sole Member of the LLC, but you should strongly consider having one. Consider these "pros" for doing so:    

  •      An Operating Agreement helps to establish that the Limited Liability Company is separate from the owner, helping to avoid any risk of having personal liability.

  •      Operating Agreements set out procedures for record-keeping and distributions, which can provide clarity to the Member and Manager of the LLC on how to act in certain situations.  

  •      The Operating Agreement can set out a succession plan in case the owner dies or becomes incapacitated, so your family has an easier time knowing how to run the business.  This could also help with estate planning.  

  •      An Operating Agreement can set out the procedures for admitting additional Members.    

  •      If you have a separate Manager, the Operating Agreement can guide the operation of the business.  

  •      Operating Agreements can avoid having your LLC governed by state default LLC and business rules.

  •      Many third-parties such as insurance companies, title companies, and banks may demand to see an Operating Agreement before doing business with you.  

  •      Presenting an Operating Agreement to investors/lenders can give them an idea of your business plan to make them more willing to provide you with the necessary financing.  

The biggest “con” to having an Operating Agreement is the cost.  You want it done right, by a lawyer who knows what he or she is doing. You might be reluctant to spend money on legal fees that could go to operations or supplies or more material things.  Some other potential cons:

  • Having an Operating Agreement in place dictating procedures can limit the flexibility of LLC owners somewhat, since you may not have complete autonomy in any scenario.

  • If your Operating Agreement is poorly drafted and not a fit for your business or industry, it could create more problems than it solves. A “standard” Operating Agreement free from the Internet is worth every penny that you paid for it.

  • There could be some problems with self-dealing in the creation of the Operating Agreement since you are negotiating an organizing document with yourself, but this is unlikely.  

In summary, the pros outweigh the cons, as long as you do it right.  

Adam P. Whitney, Esq. 617.338.7000, awhitney@awhitneylaw.com

Brandon J. Sloane (J.D. Candidate - 2020, Boston College Law School)