Justia Corporate Compliance Opinion Summaries

Carhart and Halaska own CHI. CHI terminated its sales agent, MRO, which filed a federal suit for breach of contract. Carhart bought MRO’s claim for $150,000 and became the plaintiff in a suit against a company of which he was a half owner. Halaska then sued Carhart in Wisconsin state court for breach of fiduciary duties to CHI and Halaska by becoming the plaintiff and by writing checks on CHI bank accounts without approval, depositing payments owed CHI into Carhart’s own account, and withholding accounting and other financial information from Halaska. A receiver was appointed, informed the federal court that CHI had no assets out of which to pay a lawyer, and consented to entry of a $242,000 default judgment (the amount sought by Carhart), giving Carhart a potential profit of $92,000 on his purchase of MRO’s claim. In Carhart’s suit to execute that judgment, CHI’s only asset was its Wisconsin suit against Carhart. The court ordered the sale of CHI’s lawsuit at public auction; Carhart, the only bidder, bought it for $10,000, ending all possibility that CHI could proceed against him for his alleged plundering of the company. The Seventh Circuit reversed. Auctioning off the lawsuit placed Carhart ahead of CHI’s other creditors. Carhart was not a purchaser in good faith. No valid interest is impaired by rescinding the sale, enabling CHI to prosecute its suit against Carhart. View "Carhart v. Carhart-Halaska Int'l, LLC" on Justia Law

Plaintiff sued USBI, alleging retaliation in violation of the Sarbanes–Oxley Act, 18 U.S.C. 1514A. Plaintiff was disciplined and fired in retaliation for an email he sent alerting his superiors to unsuitable trades made by a co-worker, Harrigan, to the detriment of Plaintiff’s elderly client, Purcell. The trades occurred while Plaintiff was on disability leave. Plaintiff learned of the trades from his assistant shortly after they were made. He called his supervisor twice to express concern and wrote an email to his supervising principal, criticizing the trades for “destroy[ing]” Purcell’s estate plan. Upon returning, Plaintiff was reprimanded for his email. His superiors threatened his job, placed him on an aggressive “performance improvement plan,” and fired him when he ultimately failed to meet its goals. The jury awarded damages for economic loss and emotional damages, finding that Plaintiff proved by a preponderance of the evidence that he had an objectively reasonable belief that Harrigan committed unsuitability fraud and that his email was a contributing factor in his termination; and that USBI did not prove by clear and convincing evidence that it would have discharged Plaintiff even if he had not sent the email. The Sixth Circuit affirmed, holding that Plaintiff established that he engaged in protected activity. View "Rhinehimer v. U.S. Bancorp Inv.., Inc." on Justia Law

In 1973, Doe organized his medical practice as a “professional association,” a type of corporation doctors are permitted to form under New Jersey law. Since its creation, Doe has operated his practice through that entity. As of 2011, the entity employed six people. The government alleges that Doe entered into an illicit agreement with OTE, a blood laboratory, whereby it paid him monetary bribes for referring patients to it for blood testing. A grand jury subpoena was served on the entity’s custodian of records, directing it to turn over documents, including records of patients referred to OTE, lease and consulting agreements, checks received by it for reasons other than patient treatment, correspondence regarding its use of OTE, correspondence with specified individuals and entities, and basic corporate records. The district court denied Doe’s motion to quash. Doe persistently refused to let the entity comply; the court found it in civil contempt. Meanwhile, the entity fired its employees and hired independent contractors, tasked with “[m]aint[aining] accurate and complete medical records, kept in accordance with HIPAA and Patient Privacy standards,” and assisting with billing practices. The Third Circuit affirmed, agreeing that Supreme Court precedent indicated that corporations may not assert a Fifth Amendment privilege, and that the subpoena was not overbroad in violation of the Fourth Amendment. View "In Re: The Matter Of The Grand Jury" on Justia Law

These appeals both involved damages actions by stockholder plaintiffs arising out of mergers in which the controlling stockholder, who had representatives on the board of directors, acquired the remainder of the shares that it did not own in a Delaware public corporation. Both mergers were negotiated by special committees of independent directors, were ultimately approved by a majority of the minority stockholders, and were at substantial premiums to the pre-announcement market price. Nonetheless, the plaintiffs filed suit in the Court of Chancery in each case, contending that the directors had breached their fiduciary duty by approving transactions that were unfair to the minority stockholders. In both appeals, it was undisputed that the companies did not follow the process established in "Kahn v. M&F Worldwide Corporation" as a safe harbor to invoke the business judgment rule in the context of a self-interested transaction. In both cases, the defendant directors were insulated from liability for monetary damages for breaches of the fiduciary duty of care by an exculpatory charter provision adopted in accordance with 8 Del. C. 102(b)(7). Despite that provision, the plaintiffs in each case sued the controlling stockholders and their affiliated directors, and also sued the independent directors who had negotiated and approved the mergers. The issue central to both, presented for the Supreme Court's review was whether, where the plaintiff challenges an interested transaction that is presumptively subject to entire fairness review, must plead a non-exculpated claim against the disinterested, independent directors to survive a motion to dismiss by those directors. The Court answered that question in the affirmative: a plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board's conduct. The Court of Chancery in both of these cases denied the defendants' motions to dismiss because it read the Supreme Court's precedent to require doing so, regardless of the exculpatory provision in each company's certificate of incorporation. When the independent directors are protected by an exculpatory charter provision and the plaintiffs are unable to plead a non-exculpated claim against them, those directors are entitled to have the claims against them dismissed, in keeping with the Court's opinion in "Malpiede v. Townson" (and cases following that decision). Accordingly, the Court remanded both of these cases to allow the Court of Chancery to determine if the plaintiffs sufficiently pled non-exculpated claims against the independent directors. View "In Re Cornerstone Theraputics, Inc. Leal, et al. v. Meeks, et al." on Justia Law

Drake and Brian each owned a 50 percent interest in the corporations; in the limited liability companies, they held different interests. Drake and Brian were each a director, officer, and shareholder or member of each of the companies. Seyde was also involved in two of the companies. Drake filed suit alleging multiple types of misconduct against Brian and Seyde and seeking involuntary dissolution. Brian filed a cross complaint. The trial court denied Brian’s motion to stay dissolution of the corporations and limited liability companies and appoint appraisers to permit a buyout to occur (Corp. Code, 2000, 17707.03). The court of appeal affirmed, agreeing that, as a result of Drake’s dismissal of the dissolution claim, the court lacked jurisdiction to consider a motion for buyout. View "Kennedy v. Kennedy" on Justia Law

Robl and Homoly formed the Company to develop real estate. Robl held a 60% share and Homoly held 40%. Steve Robl was the tax matters partner; his wife, accountant Vera Robl, assisted with financial records; Homoly was a project manager. From 2006-2011, the Company operated at a loss. Robl periodically advanced money. The operating agreement required the consent of both members before “creation of any obligation or commitment of the Company, including the borrowing of funds, in excess of $10,000; [and] . . . . Any act which would cause a Member, absent such Member’s written consent, to become personally liable for any debt or obligation of the Company.” Vera notified Homoly that the Company needed “to make a capital call or increase loans on existing inventory,” that Robl had “put in $71,500 so if you go the route of capital call, your share to get caught up would be $47,666.” Homoly responded, “I would prefer the money from Robl to be considered a loan ... If Steve would rather me put in a capital call, however, I will … write the check.” In 2011, Robl sued for breach of contract, seeking $172,617.61. The district court entered summary judgment, finding that Homoly did not personally guarantee any loan. The Eighth Circuit reversed. The record showed that the parties genuinely dispute whether Homoly authorized Robl’s loan and personally guaranteed repayment. View "Robl Constr., Inc. v. Homoly" on Justia Law

Menard operated a store in a building subleased from Wal-Mart. In 2006, Menard entered into a Purchase Agreement (PA) with Dial; Clauff signed as a managing member of Dial. Menard planned to build a store and wanted to be relieved of its obligations under the sublease. Menard and Dial agreed that Dial would assume responsibility for the sublease after Menard opened its new store. With Wal-Mart’s consent, DKC (Chauff's other LLC) and Menard executed an Assignment. Clauff purported to sign as a member of DKC. DKC did not file Articles of Organization until later. Clauff and Menard claim, but neither provided evidence, that DKC adopted the Assignment after the company formed. Menard remained secondarily liable. Menard opened its new store in 2008. When the Sublease expired in 2011, Wal-Mart was owed more than $700,000. Menard paid $350,000 and sued Dial, DKC, and Clauff. The district court granted summary judgment, finding Clauff liable under Nebraska Revised Statute 21-2635: "[a]ll persons who assume to act as a limited liability company without authority to do so shall be jointly and severally liable for all debts and liabilities of the company." The Eighth Circuit reversed for determination of whether common law or section 21-2635 preclude Clauff's argument that his liability may be avoided because DKC adopted the contract and commenced performance. View "Menard, Inc. v. Clauff" on Justia Law

Whenever a Michigan corporation holds a shareholder meeting, it must disclose any proposals on the agenda that a shareholder wishes to submit for shareholder action. In 2012, one of Bancorp’s shareholders asked the company to circulate such a proposal before the company’s 2013 annual meeting. The proposal called for “director accountability” in amending Bancorp’s bylaws, which did not permit the corporation to claw back fees paid to directors found liable for breaching their fiduciary duties. In its proxy statement discussing the agenda, Bancorp neither distributed the proposal nor described it, stating only that a shareholder planned to propose a resolution urging the board to amend the bylaws and that, If that resolution materialized, the directors would use their “discretionary authority” to vote it down by treating all submitted proxies as no-votes absent instructions to the contrary. After the proposal was voted down at the meeting, the shareholder sued. The district court dismissed. The Sixth Circuit reversed, finding that the “notice” did not satisfy Mich. Comp. Laws 450.1404. Mere acknowledgement of the existence of a proposal, without describing even its subject matter, cannot amounts to “notice” under the statute. View "Hartman Revocable Living Trust v. S. Mich. Bancorp, Inc." on Justia Law

Between 2004 and 2009, Stryker submitted information to the Securities and Exchange Commission’s Enforcement Division regarding alleged wrongdoing by ATG and an involved individual. In 2009, the SEC opened an investigation and interviewed Stryker. The SEC subsequently filed an enforcement action against ATG and the individual, charging them with violating Section 5 of the Securities Act of 1933. In 2010, the SEC reached a settlement with the respondents to the enforcement action. The district court approved the settlement, whereby ATG and the individual were held liable for more than $19 million. In 2011, Stryker sought a whistleblower award under Section 21F of the Dodd-Frank Act, 15 U.S.C. 78u-6, based on the successful enforcement action. The SEC denied the award because the information was submitted before enactment of Dodd-Frank. The Second Circuit affirmed, concluding that the SEC’s interpretation was within its authority and consistent with the legislation. View "Stryker v. Secs. & Exch. Comm'n" on Justia Law

Petters purported to purchase and resell electronics. His operations were a Ponzi scheme. In 2005, Petters purchased Polaroid and become Chairman of Polaroid’s board of directors. Polaroid continued to engage in legitimate business. Petters took several million dollars from Polaroid. In 2007-2008, Petters’s companies, including Polaroid, experienced major financial difficulty. Ritchie made short term loans of more than $150 million, with annual interest rates of 80 to 362.1%. Polaroid was not a signatory, although some proceeds were used to repay a Polaroid debt. When the loans were past due, Ritchie demanded collateral. Petters executed a Trademark Security Agreement (TSA) giving Ritchie liens on Polaroid trademarks. Polaroid’s CEO objected to the TSA as impeding Polaroid’s ability to raise needed capital. The TSA did allow Polaroid to grant first-priority trademark liens to secure $75 million in working capital. After the FBI raid, which resulted in Petters’s convictions for mail fraud, wire fraud, and money laundering, and sentence of 50 years in prison, Ritchie accelerated all of the loans. Polaroid filed for bankruptcy and challenged the TSA as an actual fraudulent transfer under federal and Minnesota bankruptcy law, citing the “Ponzi scheme presumption.” The bankruptcy court presumed Petters executed the liens with fraudulent intent, found Ritchie had not received them in good faith and for value, and granted summary judgment. The district court upheld the admission of expert testimony and application of the Ponzi scheme presumption. The Eighth Circuit affirmed. View "Ritchie Capital Mgmt., LLC v. Stoebner" on Justia Law