Business Law

Published on: October 31, 2017

Fiduciary Duties Owed by Owners of Limited Liability Companies Under New Jersey Business Law

business-meeting-and-teamwork-large-team-at-the-table-300x160 New Jersey has followed the national trend in creating the “limited liability company,” (known as “LLC”), as an allowable form of business entity under New Jersey business law. The LLC combines the best elements of both a corporation and a partnership.

The Limited Liability Company

A (Limited liability company combines the best qualities of both corporations and partnerships (or sole proprietorships). Like corporations, but unlike partnerships and sole proprietorships, owners (known as “members” in an LLC) are shielded from personal liability for most corporate debts. However, like partnerships and sole proprietorships (but unlike many corporations, especially larger corporations), LLCs are “flow through” entities. This means that the business itself pays no income taxes. The profits “flow through” to the owners, who are then taxed on the profits as their income. This avoids the “double taxation” of corporations, where the company pays taxes on the profits before they are distributed to the owners, and then the owners pay income tax on the remaining after tax profits when they receive them. So essentially members in an LLC only pay tax once, while shareholders in a corporation pay tax twice, which can result in significantly higher after tax earnings for the owners on the same business revenue.

Published on: September 21, 2017

Void Contracts, Voidable Contracts and Severability under New Jersey Contract Law

by Maurice W. McLaughlin

New Jersey business law allows people and businesses to manage their relationships by entering contracts which define the terms of that relationship. Contracts are enforceable by the full force of the law. For instance, if one party owes another money under a contract but doesn’t pay, the wronged party can go to court; if it can prove its case the court will enter a judgment in its favor and it can then have the county sheriff go seize the breaching party’s property to pay the debt.

In some cases, all or part of a contract may not be enforceable. This area of New Jersey business law contains three distinct and important concepts: void contracts, voidable contracts, and severability.

Void Contracts or Contract Provisions

Published on: September 18, 2017

The Covenant of Good Faith and Fair Dealing Under New Jersey Contract Law

by Maurice W. McLaughlin

Contracts Under New Jersey Business Law

Under New Jersey business law, when two or more parties enter into a contract they are essentially writing their own law which will govern their relationship. A valid contract – one where each of the parties exchange value (“consideration”) and agree to the terms which will govern their relationship or transaction – will be enforced by courts. If there is a dispute, a court will make a decision which can be fully enforced.

The Covenant of Good Faith and Fair Dealing

Published on: June 23, 2017

New Jersey’s Statue of Frauds Limits Oral Contracts

by Maurice W. McLaughlin

handshake-2056023__340-300x200 As a general rule, oral contacts in New Jersey are enforceable – not that they are recommended; indeed. Our attorneys, we always recommend that contracts be in writing because they are easier to prove and leave less room for misunderstandings. However, if you can prove the terms of an oral contract New Jersey courts will generally enforce it.

A big exception applies to this, however, in the Statute of Frauds. Under the New Jersey Statute of Frauds, courts will refuse to enforce certain oral contracts even if you can prove them. This law is based on the premise that oral contracts are inherently less reliable, and writings in certain situations are necessary to prevent perjury or unfounded claims. The Statute of Frauds has its roots in the old Statute for the Prevention of Frauds and Perjuries which was adopted by the English Parliament in 1677, and was thus the law in England’s American Colonies when they became independent. The main elements of the Statute of Frauds are found in one section of New Jersey Statutes, but other elements are spread in different sections of Chapter 25 of Title 2A of New Jersey Statutes.

The main types of contracts which the Statute of Frauds requires to be in writing are:

Published on: May 31, 2017

Confidentiality Privileges in Internal Employer Investigations

by Pauline M.K. Young

puzzle-693873__340-300x228 An attorney-client relationship involves the reasonable reliance by an individual (the client) on the professional knowledge and/or skills of an attorney who is aware of and accepts responsibility for that reliance. While a written agreement is not required for this relationship to exist, there must be some mutual understanding, consensus, and/or act manifesting the acknowledgement of the relationship.

One of an attorney’s obligations to a client the duty to maintain the confidentiality of communications with the client. The New Jersey Supreme Court has said that:

Such an obligation is necessary for several reasons. Persons who seek legal advice must be assured that the secrets and confidences they repose with their attorney will remain with their attorney, and their attorney alone. Preserving the sanctity of confidentiality of a client’s disclosures to his attorney will encourage an open atmosphere of trust, thus enabling the attorney to do the best job he can for the client.

Published on: April 6, 2017

Fiduciary Duties and the Business Judgment Rule: Bad Judgment Without Bad Faith Does Not Create Liability for Directors, Officers and Owners

by Maurice W. McLaughlin

thumbs-up-1198238__340-300x300 Our attorneys represents businesses and the people who own and run them. One source of significant conflict in New Jersey business law are the fiduciary duties of the directors, officers and owners of businesses.

New Jersey business law imposes fiduciary duties on a company’s directors and officers. This also applies to joint owners, including shareholders in corporations, partners in partnerships and members in limited liability companies (also known as “LLCs”). Essentially, under New Jersey law directors, officers and joint owners act as trustees to all of the business’s owners. They owe a duty of loyalty to the owners, including both the majority and minority owners. As effective trustees, they must place the interests of the owners ahead of their own. They also owe a fiduciary duty of care – they must exercise reasonable care in carrying out their duties.

Breach of these fiduciary duties open directors, officers and owners up to personal liability. They may be sued for violation of these duties if any of the owners allege that they suffered harm, financial or otherwise, because of a breach of these fiduciary duties.

Published on: April 4, 2017

New Jersey Supreme Court Issues Opinion on Fraudulent Conveyance

by Maurice W. McLaughlin

american-963191__340-300x200 New Jersey’s Uniform Fraudulent Transfer Act, often referred to as the “UFTA,” is designed to protect creditors from debtors who transfer assets to avoid paying their debts. New Jersey’s Supreme Court recently issued a landmark decision on the UFTA.

In the case of Motorword, Inc. vs. William Benkendorf, et al., the New Jersey Supreme Court overturned an Appellate Division decision which had approved of the cancellation of a loan in a very fact-sensitive decision. Carol and Morton Salkind owned multiple companies, including Motorworld, Inc., Fox Development, Inc., and Giant Associates, Inc. Benk did landscaping work for Fox and Giant; Fox and Giant paid approximately $4,000,000 to Benk, but still owed about $1,000,000. Morton Salkind and Benk’s owner, William Benkendorf, were longtime friends and business associates, but Benkendorf did not expect to collect the last $1,000,000.

Benkendorf ran into trouble with the IRS and needed to resolve some payroll tax issues. He asked Morton for a loan. Morton agreed, but required that it go through Motorworld, and that the debts of Giant and Fox could not be used to offset the loan obligation. They signed the note for the loan, and Carol loaned $500,000 to Motorworld to fund the loan. Benkendorf did not pay, despite extensions and amendments, and incurred significant interest and penalties which increased the amount due to more than $1,000,000. Eventually, because of Benkendorf’s financial difficulties, Morton agreed to forgive the loan from Motorworld in exchange for Berkendorf forgiving the amounts due from Fox and Giant. So essentially the debts owed between the Salkinds’ companies and Benkendorf and his companies were mutually extinguished, which would be fine and fair – and legal – if the story ended there. (Of course, if it did the courts would have never become involved….)

Published on: March 20, 2017

Lost Profits as Commercial Damages and The New Business Rule

by Maurice W. McLaughlin

document-428335__340-300x200 In a business dispute, a prevailing party is awarding damages awarded damages it can prove, typically awarded lost profits. The “New Business Rule,” however, has traditionally including recovery of lost profits for “new” businesses, because their lack of a track record makes estimating lost profits too speculative. The is a longstanding rule in New Jersey commercial litigation. However, several newer cases indicate that it may be on the way out and indeed may already be dead, and in any event courts strain to avoid its application. This is logical, because another guiding principal of New Jersey business law is that equity requires that courts try to prevent a wrongdoer from profiting from its misdeeds at the expense of an innocent party. The new cases lead to the conclusion that that it is questionable whether the New Business Rule remains valid at all.

Lost Profits as a Measure of Damages.

When one party to a contract breaches a contract the other party may recover compensatory damages, which are the natural, probable and foreseeable consequences of that breach. As New Jersey’s Supreme Court explained “[T]he goal is to put the injured party in as good a position as if performance had been rendered.” Lost profits are one of main elements which businesses can recover as compensatory damages in a breach of contract lawsuit.

Published on: March 19, 2017

Equitable Relief in the Chancery Division of New Jersey’s Superior Court

by Maurice W. McLaughlin

courthouse-303370__340-300x192 The General Equity Part of the Chancery Division of the Superior Court of New Jersey has the ability to grant “equitable” relief in addition to money damages, making it a desirable venue for business dispute.

Where a New Jersey lawsuit is heard is determined by New Jersey’s Rules of Court. Civil actions are heard in the various divisions of the Superior Court. Civil cases with disputes of up to $3000 are heard in the Small Claims Division of the Superior Court. Civil cases with disputes of up to $15,000 are heard in the Special Civil Division of the Superior Court. All other cases are heard in either the Law Division or Chancery Division, General Equity Part. The Law Division hears lawsuits which seek primarily “legal” damages – ie., suits which are primarily for money. The General Equity Part of the Chancery Division hears “actions in which the plaintiff’s primary right or the principal relief sought is equitable in nature.” Thus, in order to understand what is heard in the Chancery Division, we need to take a brief trip back to Merry Olde England and talk about the split between courts of “law” and “equity.”

The law courts in England gave “legal” relief, but developed a complex system of writs. If a suit did not fit precisely within the requirements of one of the writs, relief was denied. The office of the chancellor developed even prior to the Norman Conquest in 1066 as the “king’s conscience,” and could grant relief when remedies at law were inadequate. The chancery, or equity, court eventually carved out its own sphere, creating a rigid and artificial barrier between law and equity, creating a situation in which litigants sometimes could not find relief in either. Charles Dickens described the effects well in his classic novel Bleak House:

Published on: March 17, 2017

Money Damages in Business Litigation

by Maurice W. McLaughlin

“Legal” and “Equitable” Remedies in New Jersey Courts

Business litigation involves a claim that one party caused business harm to another, and sometimes counterclaims that each side caused the other harm. At the end of the case, if a court (whether a judge or jury depending on the facts and procedural status of the case) finds that one side did, in fact, harm the other, it will award a remedy. Through ancient legal doctrine stretching back to Merry Olde England, the law recognizes two types of relief, legal remedies and equitable remedies.

Legal relief is at is essence money damages. A civil action for legal relief involves a claim that a party has been wronged in violation of the law, and the harm can be compensated with an award of money damages. For example, a contract was breached by party B, and as a result party A suffered $1000 in lost damages; when the court awards the party A $1000 in damages, that is a “legal” remedy, and the damages are “compensatory” damages. Let’s say instead that Party B defrauded Party A, and that Party A suffered $1000 in damages. The $1000 party A lost are still compensatory damages. However, in fraud punitive damages are available if the fraud was especially egregious. So let’s say the court awarded another $2500 in addition to the $1000 compensatory damages to deter Party B from ever defrauding anyone again. The $2500 are punitive damages.