Author: Jeffrey Burd

Experience Matters in Negotiations

There are certain rules that experienced negotiators tend to follow.  Among the most important rules is: never bid against yourself.

An experienced negotiator will often use silence as a tool.  Rather than respond immediately to an offer, the experience negotiator will sometimes ignore it for awhile if the negotiator senses desperation on the other side.  If the other side improves the offer in the face of silence, the experienced negotiator will know two things:

  1.  The other side is not good at negotiations, and
  2.  The other side badly wants to get a deal done.

The Important Distinction Between You and Your Corporation

It is not uncommon to see a corporation whose president is the sole shareholder.  Sometimes the president will refer to the corporation as “my company.”  Whenever the company does something, the president will personalize it.  For example, instead of saying  “In 2002, XYZ corporation (or we) acquired ABC corporation ” the president/sole shareholder will say, “I bought ABC in 2002.”

This failure to recognize the distinction between the individual and corporation can come back to haunt both the company and the shareholder.  Individual shareholders are given a shield of immunity from corporate misdeeds because the corporation is supposed to be a separate entity with a mind of its own.  A chronic failure by the sole shareholder to separate the corporation and the shareholder can lead the courts to take away the immunity.

Sometimes corporate lawyers fall into the same trap.  In the recent Hamilton County Appeals case, Torbeck v. Industrial Manufacturing Company , 2015-Ohio-3041, the lawyers for Torbeck Industries, Inc. also represented the principal shareholder, Richard Torbeck in a lawsuit.  The corporation brought five causes of action against a number of defendants.  The shareholder joined the corporation in two of the causes of action.

The Court found in favor of the corporation on three causes, but did not award damages.  The other two counts, which were the counts that both the corporation and the shareholder brought, were dismissed.  Plaintiff’ ‘counsel argued that if the defendants were liable there surely must be some damages awarded.   Plaintiffs’ counsel filed an appeal.

The problem was, the notice of appeal said, “Notice is hereby given that Plaintiff Richard Torbeck appeals.”  The Court of Appeals dismissed the appeal – the Corporation was the party who was denied damages.  Richard Torbeck’s claims were dismissed.  The wrong party appealed.  The lesson is: it is important to always to recognize the distinction between the corporation and the individual who owns it.

Be Careful When Signing a Commercial Lease

Most of us at some point in our life has rented an apartment or house.  From that experience we may think have a vague understanding of landlord-tenant law.  As a result, when entering a commercial lease for a business we often do not pay close attention to rental agreement.

The problem is, commercial leases are very different from residential leases in Ohio.  First, the Ohio Landlord Tenant Act found in Chapter 5321 of the Ohio Revised Code does not apply to commercial leases.  Commercial tenants do not benefit from all of the protections that the Act gives to residential tenants.

Second, commercial leases often make both the company and at least one company principal liable on the lease.  Sometimes the lease defines the “tenant” as both the company and the principal.  Other times, the lease requires the principal to sign as a guarantor.  In either case, the benefits of the corporate shield may be lost if the tenant has not carefully reviewed the lease and required the lease to hold only the company liable in the event of breach.

Finally, most commercial leases are very landlord-friendly; more so than in most residential leases.  In some instances, the lease allows the commercial landlord can use self-help to reclaim the property.  This means that the landlord can take possession and change the locks without first going to court.  Along the same lines, in many commercial leases the landlord can improve the property and the common areas at the expense of the tenants.  This may be true even though the tenant does not want or like the improvements, or worse yet, can not afford the cost of the improvements.

No one likes reading commercial leases.  Leases are usually dry, wordy, and filled with legalese.  However, signing a commercial lease that has not been thoroughly reviewed is a bad business decision.

Does an allocation towards goodwill in the sale of business create an obligation not to compete?

This week an Ohio appellate court was confronted with a case involving the sale of a dental practice in which part of the sale price was allocated towards goodwill.  The sale also included an express non-compete provision.  Interestingly, the appellate court noted that even absent the non-compete provision, the sale of goodwill prevented the seller from advertising his services in direct competition with the purchaser after the sale.  Ultimately, the case was sent back to the trial court for reconsideration.

Not only was the selling dentist pulled into litigation with the purchaser, but the new employer of the selling dentist was also sued.  The purchaser, the seller, and the new employer had to pay attorneys for a trial, an appeal, and now further proceedings in the trial court.  The lesson, as always, is when selling a business it is important to make sure the contract and accompanying documents are well drafted.

State Courts Have No Jursidiction to Enformce Non-Compete Provisions of a Top-Hat Plan

On March 31, the First Appellate District of Ohio found that Ohio state courts do not have jurisdiction to enforce an employee non-compete clause found in a deferred compensation agreement.

At issue was whether a retired employee who had a “top hat” plan could compete against his employer while continuing to collect his deferred compensation.  Briefly, a “top hat” plan is a plan set up by an employer that allows a highly paid employee to defer some of his/her annual compensation.  The purpose of the plan is to allow the employee to take some of his/her compensation after the employee retires.  Presumably, the employee will have a lower tax rate after retirement and will lose less of the compensation to income taxes.

The problem is that “top hat” plans are considered employee benefit plans.  Federal law, specifically ERISA, governs employee benefit plans.  ERISA preempts state law.   Generally speaking, non-compete enforcement is governed by state law.  Therefore, the state court could not enforce the non-compete clause because the state law enforcement claims were preempted by ERISA.  The appellate court noted that there may be no provision of the ERISA statutes that provided relief to the employer.  As a result, the employee who contractually agreed not to compete against his employer, was able to get away from working for the competition while being paid by both companies.

The case site is Western and Southern Life Insurance Co. v.  Owens, 2015-Ohio-1188.

 

Why Common Partnerships Don’t Make Sense

When two or more people start a new business in Ohio, they will often form a corporation or limited liability company. Some professionals prefer limited liability partnerships to corporations or LLCs. The question I sometimes hear is: why don’t people form common partnerships anymore?

The answer is simple: liability. The general rule in Ohio is that shareholders and members (the owners of LLCs are called members rather than shareholders) are not personally liable for the bad acts of the company, its managers, officers, or employees.

The opposite is true for common partnerships. Ohio Revised Code Section 1776.36 holds each partner individually liable for the bad acts of the company and the other partners. Worse yet, Ohio law holds each partner jointly and severally liable. What this means is that if one bad partner commits a mistake, the innocent partner or partners may be the ones who pay for the acts of the bad partner.

As an illustration, let’s say the Al, Bob, and Charlie, are common partners. Al works on a project that goes terribly wrong and the company now owes a customer a million dollars. The customer can go after a judgment against all of the partners, and collect from whichever partner it chooses to collect from. It is possible that Bob pays the customer back completely while Al and Charlie pay nothing. Oftentimes, the partners then sue each other and the company goes out of business. Even if there is ample insurance, the customer will still probably sue each partner individually.

If Al, Bob, and Charlie would have incorporated or formed a limited liability company, it is unlikely they would be personally liable to the customer. Even if Bob and Charlie were personally sued, they could move to be dismissed from the case.

The laws of other states may be different, but in Ohio it doesn’t make much sense to form a common partnership.