In the latest article for WealthManagement.com, the Honorable Judge Katherine Dupuis, (Ret.) of Lindabury’s Alternative Dispute Resolution Practice Group offers insight on how mediation can be a viable way to achieve cost savings and justice during estate-planning disputes. This write-up addresses both what can go wrong and how to move forward through the process. To read it in its entirety, click here.
We are pleased to announce the Honorable Judge Katherine Dupuis (Ret.) of Lindabury’s Alternative Dispute Resolution practice group has been named been as the 2020 Professional Lawyer of the Year by the Union County Bar Association. This award is presented to lawyers who are honored by colleagues for their exemplary conduct, competence, diligence, and demeanor.
Judge Dupuis (Ret.) concentrates her practice on mediation and arbitration in the areas of commercial disputes, probate mediation, and divorce mediation. To contact Judge Dupuis (Ret.) or to learn more about the services she offers, please click here.
ALTERNATE Dispute Resolution of Business Claims
Business conflicts arise in a myriad of different situations, such as: minority shareholder claims, dissolution, allegations of self dealing, breach of fiduciary duty, and violations of restrictive covenants. Additionally, minority partners may allege they have been shutout of the business, or a stockholder may seek greater access to internal investigations. Individuals may also seek to have their interests bought out. Even where there is a governing document dealing with dissolution, there is frequently a dispute as to how it applies in a given situation. Any of these claims expose the business entity to damages and the high cost of litigation. Beyond that, there is the concern that corporate secrets or methods of doing business will be exposed to competitors. There may be concern that questionable tax practices may come to the attention of the court. Even if there is a confidentially order in effect, it is likely that the competitor will learn of the dispute and take advantage of the turmoil within the company. Similarly, an individual suing a business entity risks being labeled a trouble maker and having their business reputation compromised.
Mediation presents a more efficient, less expensive, and confidential method to resolve these disputes. The parties can agree on the ground rules for the mediation. Mediation can be undertaken immediately with the mediator permitting some discovery, or it can be started after the parties have already commenced litigation. The mediator can work with accountants, as necessary. Mediation is a viable solution when dealing with a problem of a small business and also when dealing with more complex issue such as interlocking corporations and closely held family businesses.
We are proud to announce 11 of our attorneys have been named to the 2021 Best Lawyers® list, two of which were named “Lawyer of the Year.” This recognition in The Best Lawyers in America© 2021, identifies each for their leading legal talent in their corresponding practice areas.
The following Lindabury attorneys were named as Best Lawyers honorees:
- Steven Backfisch: Litigation – Labor and Employment
In April 2019 Litigation Practice Chairperson Jay Lavroff participated as a panelist on a webinar hosted by AMBest which discussed the ways in which social media is changing insurance claims. In the hour long discussion, Jay addressed issues surrounding social media’s use in litigating insurance claims including how social media data for trial is obtained, issues concerning admissibility in court and how the rules of professional conduct address social media.
You can watch the AMBest webinar here.
Years of experience in administering estates have taught us that the best way to avoid litigation after death is to plan during life. We have come to identify several “red flags” that, when not addressed during estate planning, are more often than not resolved in a courtroom. Not only does this mean that a judge, rather than the client, is ultimately deciding how the client’s property is disposed of, but the process can be lengthy, emotional, and expensive. With the possibility that attorney’s fees will be paid before any property is distributed to the family members, the lawyers may become beneficiaries of the estate when it is contested.
Unequal distribution of assets amongst children.
Clients who want to distribute their property to their children unequally are almost always asking for a fight. They may want to do this because they are estranged from a child or because they believe that one child “needs” more than another. The slighted child, however, may not agree with mom or dad’s decision. When this comes as a surprise to a child after the client’s death – and the parent is no longer here to explain the thought process and to act as mediator amongst the children – the slighted child feels like his or her only recourse is to hire an attorney.
The New Jersey Appellate Division’s decision in Greenbriar Oceanaire Community Association, Inc. v. U.S. Home Corporation, issued on November 16, 2017, determined that a Homeowners Association was not required to arbitrate any disputes with a developer, and, when faced with a motion to compel arbitration, was permitted to file an amended complaint separating out those claims that are not subject to the arbitration agreement.
The association involved in the dispute is responsible for the common areas, administration, and management of a 1425-unit residential community in Waretown, New Jersey. The defendant, U.S. Home Corporation d/b/a Lennar Corporation, was the sponsor and developer of the project, who ultimately transferred management to the association. In its June 2015 complaint, which was twice amended, the association, on behalf of itself and its members, being the homeowners bound to arbitration clauses, asserted numerous causes of action, including: design and manufacturing defects that the association claims constituted violations of applicable building codes and warranties, as well as various violations of the Planned Real Estate Development Full Disclosure Act (PREDFDA), and the developer’s breach of its fiduciary duties.
In light of the arbitration agreement contained in the developer’s contracts with the association’s homeowners, the developer moved to compel arbitration. By the time the motion was considered, the parties settled the design and construction claims. As a result, the question for the motion judge was whether the remaining claims, including those arising under the PREDFDA, and the fiduciary duty claims, were asserted on behalf of the homeowners and therefore subject to the homeowners’ promise to arbitrate with the developer, or whether the claims should be viewed as belonging only to the association, which never agreed to arbitrate any disputes with the developer. By way of his oral decision, the motion judge agreed with the developer’s view and entered an order compelling arbitration, and later denied a motion to vacate the order compelling arbitration.
Corporate deadlock is often cited as a reason why the court should invoke its powers and order the sale of one shareholder’s stock in minority shareholder litigation. While deadlock is a legitimate reason to bring a lawsuit seeking the court’s intervention, it is not a magic bullet that will automatically lead to the court ordering a buyout of one or more shareholders.
Deadlock is defined under the New Jersey Business Corporations Act and can be found under one of two circumstances. Deadlock can be found to exist when “the shareholders are so divided that they have not been able, for two consecutive meetings, to elect successors to directors whose terms have expired or would have expired if successors had been elected and qualified.” N.J.S.A. 14(a):12-7(1). The second manner in which deadlock may exist is if “the directors or other persons having management authority are unable to effect action on one or more substantial matters respecting the management of the company’s business.” N.J.S.A. 14(A):12-7(1).
The first deadlock provision may seem like an easy one to satisfy in closely held companies since many small companies do not hold formal shareholder meetings as required under the statute. The owners of small closely held companies are so focused on running the business that they forget about the formal requirements. Instead, since the shareholders in such companies generally work together closely and see each other practically every day, they make management decisions informally as necessary to operate the business and without formal meetings or corporate resolutions.
Because of the fiduciary duties owed by business owners to each other, whether they are shareholders in a closely held corporation, members in a limited company, or partners in a general or limited partnership, a business owner generally is prohibited from competing with the company. This general prohibition can be modified by an agreement among the owners, but in the absence of such an agreement the prohibition stands.
Failure to do so is referred to as the diversion of corporate opportunities. An owner of a closely held business has a duty to bring to the company any business opportunity that the company would normally expect to seek to pursue. The opportunity must be presented to the company and cannot be pursued individually unless the company decides not to pursue that opportunity.
As with the prohibition on competition, the requirement to present all opportunities to the company can be altered by contract. Pursuant to N.J.S.A. 14A:3-1, a corporation can renounce its interest in, or expectancy of the opportunity to pursue, specific opportunities. One manner in which corporate opportunities can be relinquished is to insert the pertinent language in the Certificate of Incorporation. When starting a new business, if there is any thought that one or more owners might want the right to pursue competing opportunities, you want to include language in the Certificate of Incorporation, or a separate shareholder agreement, that specifies what competing businesses the shareholder may appropriate.
The April 13, 2017, decision of the appellate division in Mill Pointe Condominium Association v. Rizvi, sought to address a condominium association’s efforts to obtain rental income, during the pendency of a foreclosure lawsuit involving an empty condominium unit. By way of background, the association had obtained a judgment against the unit owner who had failed to pay both his residential loan mortgage payments and common expense assessments, and then filed a motion before the Law Division seeking the appointment of a rent receiver, during the pendency of the mortgage lender’s foreclosure lawsuit. The association’s proposed remedy would apply the rent payments to the outstanding judgment in its favor leading up to the foreclosure. The Law Division judge denied the association’s motion, which was opposed by the mortgage lender on the basis that the commencement of a leasehold with a third-party tenant would interfere with the completion of the foreclosure suit, and that it would force the lender to become a landlord. Unfortunately, the Appellate Division was unable to rule on this issue, which became moot because the foreclosure judgment was granted before the court could address the issues. It’s important to note, however, that the court found that the association had “raised interesting and novel legal issues that could have widespread importance.” The court went so far as to recommend that future appellants file a motion to accelerate the appeal, advising the court of the time factors involved.
While the guidance from the Appellate Division in Mill Pointe Condominium Association is certainly no guaranty that another appellate panel will favorably view an association’s request for the appointment of a rent receiver in order to obtain rental income from an otherwise vacant condominium unit, it certainly presents an indication that the court is interested in investigating the possibility of a remedy for similarly situated associations facing lengthy foreclosures.
There are positive and negative considerations involved in the appointment of a rent receiver, even without the potential for contested litigation with a mortgage lender, as was the case in Mill Pointe. Generally speaking, the appointment of a rent receiver by a condominium association is more typical in the context of a foreclosure action commenced on the association’s behalf. On the positive side, rent receivers are able to collect income and apply it to monthly assessments, fees, and arrears owed on a condominium unit as set forth in the order of appointment, and they have a responsibility to avoid waste and disrepair. On the negative side, rent receivers are court-appointed professionals who are answerable only to the court, and do not take direction from the association, once appointed. Furthermore, a rent receiver is only permitted to remain in place for a limited amount of time, from the date of appointment, to the conclusion of the foreclosure case. In order to gain the most benefit, smart associations will consider moving for the appointment of a rent receiver in conjunction with initiating foreclosure proceedings.