Successor Liability and Piercing the Corporate Veil

Successor Liability and Piercing the Corporate Veil: Protect Your Assets We have had several meetings recently with new clients who are either purchasing the assets of an existing business, or are beginning a new company.    When we are in these meetings, we will often stress the importance of separation between the business assets and those assets that belong to the individual owners of the business.   In addition, when a business is purchasing the assets of a former business, it is important to structure the transaction such that the business buying the assets can limit or eliminate any obligations for debts owed by the selling business. These meetings have brought to mind a previous post concerning the same issues, including the factors that a court will examine when determining whether or not to hold an individual liable for a corporation’s debts period. While the Ziese case discussed in that previous post was more focused on “successor liability”, another important decision from the Indiana Court of Appeals around that same time held that in addition to the elements discussed in the Ziese case concerning whether or not a court should consider “piercing the corporate veil,” (and thereby hold the individual shareholders liable for the debts of the corporation), a plaintiff seeking to do so must also show a causal connection between the fraud or injustice alleged by the party seeking to pierce the corporate veil and the harm that that party complains of.   In other words, it is not enough to prove that the defendant corporation did not follow corporate formalities or otherwise misused the corporate form.   Rather, the plaintiff must...

Due Diligence

Due Diligence How Much Effort is Required to Find the Person You are Suing? In what should have been an otherwise uneventful mortgage foreclosure, the Indiana Court of Appeals recently made clear to parties in lawsuits that they must take some reasonable efforts to notify all necessary parties of a lawsuit before they will be entitled to a judgment.  In Hair v. Deutsche Bank National Trust Company, a bank filed a foreclosure action, and needed to name another lien holder in order to complete the foreclosure, clear title to the real estate, and obtain a judgment.  There was no question that the bank’s mortgage lien was the first lien on the property, but Hair held a “junior” lien on the property.  After the bank was unable to serve a summons on Hair, it attempted to serve him through “publication”, which is a technique allowed under Indiana law.  However, a party may only rely upon service by publication after providing evidence that a diligent search was made and that the party cannot be found, has concealed his whereabouts, or has left the State. The Court found that the bank had not made a diligent effort to ascertain Hair’s whereabouts, and held that “mere gestures are not enough” and the “means employed must be such as one desirous of actually informing the party might reasonably adopt to accomplish it.” Because the Court found that the bank had not exercised that due diligence, and that had the bank performed even a bit of Internet research Hair could have easily been located, the Court granted Hair’s motion to set aside the judgment.  The...

Indiana Courts Enforce the Intent of the Parties

  A bedrock principle of Indiana law is that the intent of the parties controls the contract. We are constantly advising our clients of this principle, and that is why it is so important that a contract clearly express the true intent of the parties, so that anyone who later reads that contract can understand without question what both parties meant when they agreed to the contract. The Indiana Court of Appeals has again reaffirmed this principle and repeated its long-standing policy of enforcing business contracts when the parties’ intent is clear. In the case, which involved lien priorities, subordination agreements, crop financing and bankruptcy issues, there were 3 different lenders who had loaned money to a farmer.  At one point the lender who had the senior lien (“Lender #1), and therefore was entitled to be paid first from the proceeds of the farmer’s assets, entered into a partial subordination agreement with the lender which was “third in line” in terms of its lien position (“Lender #3).   It was clear from the subordination agreement that the reason for Lender #1 and Lender #3 to enter into the agreement was to induce Lender #3 to loan additional money to the farmer to plant crops.   Lender #3 then loaned additional money to the farmer, who ultimately filed bankruptcy.  The question then was which Lender was entitled to proceeds from those crops. After analyzing case law concerning subordination agreements from other States, and parsing through a number of different arguments made by Lender #2 (who was trying to claim some portion of the crop proceeds even though it had not loaned any...

What Triggers the Beginning of a Non-Compete?

In a recent case decided by the Indiana Court of Appeals, the judges unanimously agreed that a 10 day break in employment with a prior employer started the running of the non-compete agreement between that employer and its employee, despite the fact that same employee was rehired by that same employer 10 days later.      At the time of the employee’s original hire, he was asked to sign a non-compete agreement, which he did.  He was subsequently fired.  Ten days later his employer offered to revoke the termination and allow him to return to his prior position.  The employee returned to his position but the employer did not ask the employee to sign a new non-compete agreement.  Approximately 2 ½ years later, the employee left that employment and immediately began working for his former’s employer’s competitor.      The employer filed a lawsuit seeking to enforce the non-compete agreement that the employee signed at the time of his original hire.  The employer argued that because the termination was “revoked”, and the employee rehired, the non-compete agreement signed when the employee was originally hired should still remain in full force and effect.      The Indiana Court of Appeals rejected the employer’s argument and ruled in favor of the employee.  The Court noted certain principles related to non-compete provisions, which we have previously discussed here.  Included among these are the fact that covenants not to compete are in restraint of trade and are not favored by the law; they are strictly construed against employers and are enforced only if reasonable; and those covenants must be reasonable with respect to legitimate protectable interest of the employer....

Law Does Not Always Keep Pace with the Rest of the World

Lawyers rely upon previous court decisions when determining what advice to give to clients. By reading previous decisions based upon facts similar to a particular situation, a lawyer can best advise the client what is likely to happen and how to approach the problem.  For this reason, lawyers rely on the law generally being the same year after year. The law can and does change, however.  In fact, sometimes a court will actually reverse one of its prior rulings.  The 7th Circuit Federal Court of Appeals recently did just that, and noted it is “not attractive” to “move from one side of a conflict to another,” but because the Court has a duty to apply the relevant law in a way to avoid “unnecessary litigation,” then the Court must do so. Furthermore, as we all know the world changes, and sometimes changes very quickly.  It is amazing to think that the iPhone was not introduced until October 2007. Think about how much the world has changed as a result of the introduction into our lives of the iPhone/ Smartphone.  Looking back a few years further, the Internet used to be a novelty, and yet now is a practical necessity to everyday life, school and business. However the process for changing the law is often quite slow, and so situations arise where technology and the world change so fast that the law is unable to keep pace and so there is no legal precedent to deal with new situations.  As a result matters  must be resolved using laws that were not really designed to deal with issues in the modern...
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