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COVID-19 Business Survival Series
We hope all is well with you and your families during this historic time.
BBR was recently invited to participate in Katz Sapper & Miller’s Business Survival Series related to the COVID-19 pandemic. In the first webinar of the series, entitled “Managing Cash Flow and Accessing Capital”. In this webinar which was hosted by Inside Indiana Business host Gerry Dick,, the presenters discussed some of the various federal government loan programs that that have been implemented in response to the devastating economic impact caused by the COVID-19 pandemic, as well as some general strategies for handling financial crises and other challenges, whether caused by the current pandemic or generally. BBR discussed what lenders typically look for in these distressed situations, some strategies for businesses dealing with their lenders, and how the current pandemic may affect decision making for the foreseeable future.
We hope you find this useful, and as always feel free to contact us should you care to discuss any of these further issues. Thank you again to Katz Sapper & Miller for the opportunity to participate in this very important program.
ler for the opportunity to participate in this very important program.
That’s Not Our Job . . .
We have written on many occasions about non-competition/non-solicitation agreements, which for purposes of this post we will refer to as non-competition agreements. These are a topic of great interest to both employers and employees, and we get numerous calls about these types of agreements. In Indiana, non-competition agreements are enforceable provided they are “reasonable”.
In this Blog we have also discussed how courts, when asked to enforce contracts (and non-competition agreements are contracts), will attempt to enforce the intent of the parties as determined by the words that have been chosen by the parties to be in the contract. While doing that, the courts say that they will not ignore any of the provisions in a contract; rather they seek to enforce all of the provisions of the contract so that none of the words that have been agreed to by the parties are ignored.
There is also a provision within Indiana law that is commonly known as the “Blue Pencil Doctrine”, which is a misleading term, because, as the Indiana Supreme Court recently noted, it is not really a Blue Pencil Doctrine, but is rather an “Eraser Doctrine”. Under the Blue Pencil Doctrine, courts can make overbroad covenants in a contract reasonable by deleting language and then enforcing the remaining parts of the covenant. However, in utilizing the Blue Pencil Doctrine, courts may not add any terms, even if the parties have agreed within the terms of the contract to allow a court to do so. Rather, a court may only delete the unreasonable terms.
Therefore, if the parties agree to a non-competition or non-solicitation agreement that is overbroad, and by removing certain terms the covenant cannot be made “reasonable” and therefore enforceable under Indiana law, the entire covenant will be deemed unenforceable.
In that recent case, a former employer sought to enforce a non-competition agreement that provided in relevant part that the former employee would not:
employ, solicit for employment, or advise any other person or entity to employ or solicit for employment any individual employed by Company at the time of employee’s separation from company employment . . . .
Also included in the agreement was a provision, which is not uncommon in commercial contracts such as this, that provided that if any court interpreting the provisions of the agreement found any provision to be unreasonable or unenforceable, the parties agreed that the court would have the “authority, if necessary, to reform any such provision to make it enforceable under applicable law.” Therefore, it seems that the intent of the parties was to allow the court to re-write the agreement so that it would comport with the law.
The trial court originally found that the agreement was reasonable and therefore issued a preliminary injunction against the former employee. The Indiana Court of Appeals found that the covenant was overbroad and unenforceable, but because of the reformation clause mentioned above, the Court of Appeals revised the non-solicitation covenant to make it reasonable by adding language limiting the scope to only those employees in which the company had a legitimate protectable interest.
The Indiana Supreme Court reversed, and once again reaffirmed that under the Blue Pencil Doctrine, a court may remove unreasonable language from a restrictive covenant, by erasing those terms, until only reasonable portions remain. However, even if the parties have agreed to allow a court to re-write portions of the contract, a court may not rewrite agreements by adding, changing or rearranging terms. In short, the Court reaffirmed that it is not the court’s job to write reasonable agreements; that is the job of the parties themselves.
In addition, given that most non-competition agreements are primarily, if not exclusively drafted by employers and rarely are “freely negotiated”, the burden is on those employers to follow the law and draft reasonable agreements that can be enforced rather than looking to the courts to do that for them. This makes sense given that while non-competition agreements are enforceable in Indiana, they are a restraint of trade, generally disfavored by the law, and therefore will be strictly construed against employers.
So the next time you are reviewing a non-competition agreement and notice that it allows a court to reform the agreement to be enforceable under the law, remember that the court can only remove portions of the contract, and cannot add anything to which the parties did not previously agree.
It has been too long since this blog was updated, but with the disruption to all of our lives caused by the Coronavirus, it is an opportune time to catch up on a few rulings that have been issued that affect our business clients. Although much of the business world has been grinding to a halt, courts do remain open for business and have been on a daily basis issuing new rulings. The courts are not physically open at this time, but we do continue to receive opinions of interest that we are sharing with our clients and the general public so that all can stay better informed.
Previous posts in this blog have talked about the fact that many of the Rules of Civil Procedure have not necessarily kept up with modern business practice. One of the difficulties faced in commercial litigation is often centered around how to properly introduce evidence related to loans that were made many years ago. Often times the witness who is being asked to introduce/identify those loan documents is not the person who made the loan, is not the person who has a relationship with the borrower, not employed by the lender who made the loan, and likely has very little if any personal knowledge about the loan when it was made. There are rules in place to assist in introducing those loan documents which, without these rules, would be considered hearsay and therefore inadmissible.
Part of the difficulty in this world that we now live in is that loans and credit relationships are often sold several times before a borrower actually goes into default. By the time three, four or more sales have occurred, the new bank loan officer has absolutely no idea who these borrowers may be, and would have no chance to be able to testify about the loan was made, whether these people actually signed the documents, etc.
In some recent cases, borrowers have objected to the introduction of evidence based upon fact that the bank was not the “not the true plaintiff” and therefore it lacked standing to bring this action, and that the plaintiff had not made the loan originally and therefore its sole witness could not “authenticate” the loan documents. Again, this is an issue that more and more banks are facing as loans have been sold over the years.
While these borrowers have had some sporadic success at the trial court level, the Indiana Court of Appeals has noted that it is not necessary that the witness have “actual personal knowledge” concerning the loan since its inception. There are rules in place that allow documents to be properly identified and introduced into evidence, and so long as those rules are followed, it typically results in a successful verdict for the lender/plaintiff (because rarely is there any dispute that the borrower actually received the money that is sought to be collected).
We would note that some challenges like this are sometimes successful because the witness truly may not be able to properly identify the documents or the witness’s testimony does call into question whether or not the plaintiff has the ability to collect on the particular loan. In addition, sometimes in an effort to save on costs the evidence presented is done in a sloppy manner and courts do not allow that to slip through. As with everything in the law, it will vary on a case by case basis, and the ultimate outcome will be determined by the specific facts of the case.
What’s Your Excuse? Business Owners Beware.
Like many people, I hate excuses, and I rarely have any tolerance for people who seem to always be making excuses. In the law, people who try to make excuses for not following the rules often suffer the consequences. However, the law recognizes that we are not perfect, and in some situations will grant relief to people upon showing “excusable neglect”, i.e. a “good excuse”. However, what constitutes excusable neglect will vary by the circumstances, and is often a very high bar to clear. The Indiana Court of Appeals recently addressed that issue and the operator of an apartment complex learned the hard way that its excuse was not good enough.
In Wamsley v. Tree City Village, et al., the plaintiff was injured when another tenant at the apartment complex accidentally discharged his 9mm handgun while he was cleaning it, and the bullet went through a wall and significantly injured the plaintiff. Approximately 6 weeks later, plaintiff’s attorney sent a letter to the apartment complex notifying it of his representation of the plaintiff and asking the apartment complex to put its insurance company on notice. Several months later (a personal injury plaintiff in Indiana has 2 years to file a lawsuit after the subject incident), plaintiff filed his lawsuit against the owner of the gun and the apartment complex. The apartment complex did not respond to the Complaint and a default judgment was entered against the apartment complex, which meant that the apartment complex could no longer contest liability for the damages sustained by the plaintiff.
The failure to respond to a complaint can have dramatic consequences. Our office has been involved in at least one situation where a well-known company failed to respond to a complaint after being properly served, and never did respond until after we successfully garnished the company’s bank account for the full amount of the judgment, which was in the six figures. Only then did it decide to respond to the complaint, and at that point it was too late, and the court denied its motion to set aside the judgment.
In the Tree City Village case, 5 months after the default judgment had been entered, the apartment complex filed a motion asking the court to set aside the default judgment saying that its failure to respond was due to “excusable neglect”. The trial court agreed and set aside the judgment and the plaintiff appealed.
Although Indiana law strongly prefers that cases be decided on their merits and default judgments are disfavored, the Court of Appeals nevertheless found that the trial court made a mistake when it set aside the judgment. Specifically, the Court of Appeals talked about the difference between “neglect” and “excusable neglect”. Apparently, the apartment complex never told its insurance company about the complaint; after receiving the complaint, the management company put the complaint in a filing cabinet for storage; and the Court of Appeals noted that the apartment complex is not the type of business that is unaccustomed to being named in lawsuits. In other words, it is not unsophisticated when it comes to litigation. Therefore, the Court of Appeals reinstated the default judgment against the apartment complex.
The Court of Appeals analyzed other cases that had addressed this “excusable neglect” issue. In some circumstances a breakdown in communication, or an unsophisticated defendant, may give rise to a plausible claim of “excusable neglect”. As with most cases, the decisions often turn on the particular facts of the case, and the participants involved. The neglect sometimes revolved around failure to monitor the mail, failure to communicate with an insurance company, or just a general breakdown in or lack of procedures.
The business lesson in all of this is that businesses of all size should have a procedure in place to monitor the mail every day. A business needs to have processes in place, pay attention to deadlines, and needs to understand that the court is likely to have very little sympathy for a business and its excuses for not responding to lawsuits filed against it. Twenty days is not a very long time to respond to a complaint, and it is generally very easy to obtain an extension of time of an additional 30 days to respond to that complaint. However, if the business ignores these deadlines, it then finds itself at the mercy of the Court and needs to be able to show that its failure to respond was justified in some way or otherwise fits within these very narrow definitions of “excusable neglect”.