Source: http://unfairbusinesspractices.blogspot.com/
Timestamp: 2019-04-24 06:49:36+00:00

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This blog focuses on unfair business and trade practices such as business conspiracy, breach of fiduciary duty, misappropriation of trade secrets and other proprietary information, fraud, tortious interference with contracts and other unfair business practices that are not neatly defined. Since we are located in Tysons Corner, Virginia, many of the cases discussed will come from Virginia, Maryland and the District of Columbia courts. We hope the reader finds this blog instructive.
Jim Kinsel is a trial attorney who focuses on business litigation and unfair business practice claims, including business conspiracies, trade secret misappropriation, fiduciary duty breaches and other business torts.
Mike Holm is a senior trial lawyer who has represented numerous business entities in bet-the-company and other unfair business practices cases.
Tortious Interference with Contract or Business Expectancy May Serve as Predicate Acts for Alleged Violation of the Virginia Business Conspiracy Statute, According to the Virginia Supreme Court. Such Claims Carry a 5 Year Statute of Limitations.
For over 30 years, James Dunlap operated two AAMCO franchises in tidewater Virginia. In 2006 a company that owned a controlling interest in Cottman Transmissions, a competitor, acquired a controlling interest in AAMCO. The new owner wanted to convert all Cottman centers into ones displaying the AAMCO banner. To do so, however, certain AAMCO centers had to close. Those slated for closure included both of Dunlap’s centers.
Dunlap filed suit against Cottman Transmission Systems, LLC, its former President, Todd Leff, who became President of AAMCO after the acquisition, and two local Cottman dealers alleging unfair business practices in the form of claims for tortious interference with contract and business expectancy and a violation of the Virginia business conspiracy statute, Va. Code, §18.2- 499 and 500.
The case was originally filed in a Virginia state court, but was removed to the Eastern District of Virginia. On Cottman’s motion to dismiss, the district court held that (1) tortious interference with contract and business expectancy could not serve as predicate acts to support a claim for violation of the Virginia business conspiracy statute; and (2) the statute of limitations for tortious interference with contract and business expectancy was two years under Virginia law, thus barring Dunlap’s claims.
Does a two-year or five-year statute of limitations apply to claims of tortious interference with contract and tortious interference with business expectancy under Va. Code § 8.01.-243?
The issues were matters of first impression in Virginia.
The Virginia Supreme Court’s well-reasoned opinion appears at Dunlap v. CottmanTransmission Systems, LLC, 287 Va.207, 754 S.E.2d 313 (2014).
Question 1 turned on the proper interpretation of the Supreme Court’s decision in Station # 2, LLC v, Lynch. 280 Va. 166, 695 S.E.2d 537 (2010) upon which the district court relied in dismissing the case. In Station # 2, the Court held that a “conspiracy merely to breach a contract that does not involve an independent duty arising outside the contract is insufficient to establish a civil claim under § 18.2-500.” Id at 174, 695 S.E.2d at 541.(italics in original) That is, the analysis is dependent upon the source of the duty violated.
In Dunlap, the Supreme Court noted that “both tortious interference with contract and tortious interference with business expectancy are intentional torts predicated on the common law duty to refrain from interfering with another’s contractual and business relationships. That duty does not arise from the contract itself but is, instead, a common law corollary of the contract. [citation omitted] The duty arises outside the contract even though the intentional interference must induce or cause a breach or termination of the contractual relationship or business expectancy.” Id. at 219, 754 S.E.2d at 319. Accordingly, the Court held that those intentional torts could serve as a basis for a conspiracy claim under the statute.
Question 2 involved a determination of whether claims for tortious interference with contract or business expectancy allege personal injuries or injuries to property. Personal injury claims must be brought within two years, while those alleging injuries to property are covered by a five year statute of limitations. The Court noted that Virginia had long held that the right to performance of a contract and the right to reap its profits are property interests. Id. at 220, 754 S.E.2d at 320. Consequently, the acts supporting tortious interference with contract or business expectancy are directed toward and injure property rights. Therefore, the Court held the five-year statute of limitations applies to such claims. Va. Code § 8.01-243(B).
Based upon the Supreme Court’s answers to the certified questions, the Fourth Circuit vacated the district judge’s judgment and remanded the case for further proceedings. Dunlap v. Cottman Transmissions Systems, LLC, 576 Fed. Appx.225 (2014).
A recent decision by Judge Jane Marum Roush of the Fairfax Circuit Court in Virginia is a must read for shareholders in closely held Virginia corporations. The case, Colgate, et al. v. The Disthere Group, Inc.,(August 30, 2012, Case No. CL-11-117, Buckingham County, Virginia) arose when minority shareholders sued under Section 13.1-747 of the Code of Virginia seeking dissolution of the defendant corporation as a result of oppressive and fraudulent conduct by the majority shareholders. Virginia law allows judicial dissolution where a minority shareholder proves that "the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive or fraudulent; or ... the corporate assets are being misapplied or wasted..." Where a director has a personal interest in the transaction at issue, the burden of proving that the transaction was fair and reasonable to the corporation shifts to the director whose conduct is challenged.
After a lengthy trial, Judge Roush issued a 41 page opinion, Click Here, finding that the corporation should be dissolved based upon the majority shareholders' conduct. Preliminarily, she noted that the business judgment rule does not apply where it is shown that a director "has acted on his or her own account, and contrary to the interests of the corporation." She concluded that, in this case, the directors were motivated by their personal best interests and that "dissolution is the appropriate remedy in that the corporation is controlled by a domineering shareholder who is unlikely ever to treat the minority shareholders fairly."
So what did the majority shareholders/ directors do wrong? Well, they suppressed dividends to retaliate against the minority shareholders who had instituted earlier litigation alleging that a majority shareholder had looted a marital trust. At the same time, the majority shareholders gave themselves pay raises and bonuses nearly equal to the amount by which the dividends had been cut. In addition, they consistently redeemed minority shares based upon "'misrepresentations and half-truths' as to the true value of the company," which the court found violated the standards of fair dealing and fair play.
The court also found that the majority shareholders' compensation was excessive when compared to the company's net income. And the senior majority shareholder provided employment at significant salaries to a number of members of his own immediate family while either terminating or refusing to hire his sister's children, the minority shareholder plaintiffs.
In addition, the defendants used corporate assets for personal purposes prompting a finding that they had misapplied and wasted corporate assets. And, the company paid over $6.5 million in life insurance premiums that the court found was intended to provide liquidity to the estate of the insureds so that the company stock could be kept in the majority shareholders' immediate family. The payments also depleted corporate assets to keep share prices low and to move money to the majority shareholders' families without declaring dividends that would have benefitted the minority shareholders.
At the end, the court held these facts supported findings of oppression, waste and misapplication of corporate resources that merited the dissolution of the company. The opinion should be a cautionary tale to majority shareholders of Virginia corporations. When coupled with Judge Roush's prior opinion in Greenfeld v. Stitley, et al., 2007 Va. Cir. LEXIS 7 (January 5, 2007)(See blog post of March 2, 2009) involving a partnership divorce that resulted in successful claims involving business conspiracy, breach of fiduciary duty, and intentional interference with contract and business expectancy, there are now two lengthy opinions in Virginia that analyze, in detail, the types of conduct that can support oppression type claims in the corporate and partnership settings.
The plaintiffs in the Colgate matter were represented at trial by several of my partners in LeClairRyan. The matter is now on appeal.
Recently in the case of 21st Century Systems, Inc. v. Perot Systems Government Services, Inc. ("Perot Systems") (available here), the Virginia Supreme Court overturned a multi-million dollar goodwill damages award. On appeal, the Virginia Supreme Court found that Perot Systems did not present adequate proof of the value of its lost goodwill.
The facts in Perot Systems are forthright, Perot Systems alleged that Defendants, former Perot Systems employees, conspired to "destroy [Perot Systems] and steal away tens of millions of dollars a year of [Perot Systems] business by unfairly and improperly using [Perot Systems'] confidential and proprietary information." The case centered on a group of ex-Perot Systems' employees who left the company to join 21st Century Systems, a rival government contracting firm. Perot Systems filed suit, alleging violation of Virginia's business conspiracy act, violation of Virginia's Uniform Trade Secret Act, breach of fiduciary duty, breach of non-disclosure agreements, and breach of non-compete and non-solicitation agreements. After the employees left but before the trial, Perot Systems was sold to Dell for $3.878 billion. As part of the sale Dell assigned $1.6 billion in goodwill to Perot Systems. Perot Systems' valuation expert used the Dell sale as a benchmark for assessment purposes when calculating the total loss of goodwill resulting from the defendants' actions. The jury ultimately accepted this assessment in awarding Perot Systems damages.
When dealing with tangible assets the valuation of a company is often more easily understood; firm values can be assessed to real estate, machinery and equipment, inventory and receivables. But businesses are not valued solely based upon tangible assets. Goodwill is a non-tangible asset that a business can earn over time. It is the benefit and advantage of the good name, reputation and connection of a business, the attractive force which brings in customers. Goodwill has been defined as "the excess of the sales price of a business over the fair market value of the business’ identifiable assets." Advanced Marine Enters. v. PRC Inc., 256 Va. 106, 501 S.E.2d 148 (1998). Valuation of this asset is subjective and difficult to clearly calculate. When a business is sold, goodwill can greatly enhance the sales price.
On appeal the Virginia Supreme Court overturned the jury's award of lost goodwill damages. The Court held that Perot Systems failed to use any data concerning the sales of comparable business. It also faulted Perot Systems from failing to demonstrate that the sale price was negatively affected as a result of the defendants' actions. And merely taking the later sales price attributed to goodwill and applying that amount to the defendants' prior conduct is insufficient to support a claim for loss of goodwill.
The court did acknowledge, however, that "damages for loss of goodwill may be recovered if proven" even if it is "impossible of valuing with mathematical precision . . . ." Like many things in life, proving loss of goodwill can be done- you just have to do it the right way.
Last month the Virginia Supreme Court issued two significant opinions relating to the judicial dissolution of partnerships and closely held corporations. Both cases addressed issues of first impression. The opinion addressing the corporate issues also considered the propriety of a shareholder not only seeking a judicial dissolution but also pursuing a derivative suit under Va. Code § 13.1-672.1 at the same time.
Russell Realty Associates v. C. Edward Russell, Jr. involved the standard for judicial dissolution of general partnerships under § 50-73.117(5) of the Virginia Uniform Partnership Act. Here are the facts. In 1978, Charles E. Russell, Sr. created an irrevocable trust dividing his estate into two separate trust shares, one for the benefit of his son, Eddie, and the other for the benefit of his daughter, Nina, and her children. The partnership was created to fund the trust. Its purpose was to acquire, hold, invest in, lease and sell investment properties. As Charles Russell withdrew from the partnership his son took over its active management. After Charles’ death the management of the partnership and the trust became acrimonious, specifically as to the future of the partnership and trust distributions. Those disagreements prevented the sale of certain partnership assets. The two partners and their counsel unsuccessfully tried to resolve the issues for years. Over that period, Nina began to insert herself in the management and operations of the partnership to a significant degree.
Ultimately, Eddie filed suit seeking a judicial dissolution of the partnership. He alleged (1) serious and irreconcilable conflicts with his sister and her son; and (2) that those conflicts had frustrated the partnership’s economic purpose and made management of its assets and affairs not reasonably practicable. Nina responded seeking an accounting and alleging that Eddie had violated his fiduciary duties. She also sought aid, guidance and a declaration regarding her son’s rights to distributions from the trust as well as Eddie’s removal as co-trustee. After trial, the Court found in Eddie’s favor and granted dissolution of the partnership. Nina appealed.
The sole issue on appeal was whether Eddie met the strict standards for judicial dissolution of a partnership under the Virginia Code. The Code provides, inter alia, that a court may dissolve a partnership where “(a) the economic purpose of the partnership is likely to be unreasonably frustrated; (b) another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business and partnership with that partner; or (c) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement.” Va. Code § 50-73.117(5). A court may dissolve a partnership where it finds that any of those three conditions have been satisfied.
In Russell, the trial court granted dissolution based upon (a) and (c) above, the economic purpose and business operations tests, respectively. Because the Supreme Court had never addressed the legal standard for dissolution in the partnership context, it adopted the test applicable to dissolution actions that involve limited liability companies. See The Dunbar Group, LLC v. Tignor, 267 Va. 361, 593 S.E.2d 216 (2004).
On appeal, Nina argued that dissolution under the economic purpose prong of the statute required a showing of “truly poor financial performance” and that the trial court’s conclusion that the partnership was not run as a “model of business efficiency” was insufficient justification for dissolution of a profitable business. The Court rejected Nina’s argument noting: “[T]he purpose of the change [in the Revised Uniform Partnership Act] was to allow continuation of a partnership that was not financially profitable based on an inquiry into the partners’ expectations in determining the economic purpose of the partnership.” It concluded that a partnership need not be a financial failure to support a judicial dissolution under the economic purpose prong of the statute.
In Russell, the Supreme Court found evidence in the record that: (1) the relationship between the siblings frustrated the ability of the partnership to take advantage of economically favorable offers to sell certain properties; (2) the “disruptive relationship between the partners had resulted in the partnership incurring substantial added costs” including the need for attorney intervention to facilitate communications and decision making; and (3) despite the provisions of the Partnership Agreement that vested decision-making authority in Eddie, the parties’ relationship imposed unnecessary economic costs “preventing the partnership from taking advantage of and conducting its business in a timely and efficient manner.” According to the Supreme Court those facts were sufficient to satisfy the economic purpose test and warrant the judicial dissolution ordered by the trial court.
The second suit, Cattano v. Bragg, involved a tempest between the only two partners/shareholders in a law firm structured as a corporation. Among other complaints, after discovering that checks had been written on the firm’s escrow/trust account to Cattano’s wife and children, Bragg sought inspection of all corporate records. Cattano responded by firing Bragg and attempting to remove her as director at a special meeting of the shareholders.
Bragg filed suit seeking a judicial dissolution and an accounting and division of assets. She later amended the Complaint adding derivative claims against Cattano for breach of fiduciary duty and conversion.
The Circuit Court appointed a Receiver and directed that the Receiver perform a complete accounting of the books and records of the firm.
Cattano appealed raising a number of corporate issues.
"While the present case contains economic antagonism as well as apparent animosity between the firm’s only two shareholders, we do not find this to be a determinative factor when evaluating a closely held corporation; nor do we find it determinative that the sole other shareholder does not support the derivative suit. To so hold would be to enact a de facto bar on derivative suits in two shareholder corporations. . . . In closely held corporations, we must look beyond the mere presence of economic and emotional conflict, placing more emphasis on whether the totality of the circumstances suggest that the plaintiff will vigorously pursue the suit and that the remedy sought is in the interest of the corporation."
Applying the appropriate factors, the Supreme Court held that Bragg fairly represented the interests of the corporation in that she sought a return of funds that had been misappropriated by an officer. Such a claim was highly appropriate for a derivative action. Given that she would be entitled a portion of the funds returned to the corporation suggested that her interests were aligned with the corporation and she would vigorously pursue the claim.
Second, Cattano argued that Bragg was pursuing her own interest given the possibility of an award of attorneys’ fees and costs, whereas with pure judicial dissolution no such fee shifting mechanism was available. The Court rejected the argument finding that, because the fee shifting mechanism in the context of a derivative claim was a deliberate policy choice on the part of the General Assembly, the claim should not be barred.
Third, Cattano asserted that Bragg could not act in the firm’s interest in pursing a derivative claim at the same time she was seeking to dissolve the corporation. That argument, too, was unpersuasive. Instead, the Court held that, not only was it in the interest of the corporation to have the misappropriated funds returned, but “judicial dissolution is a remedial mechanism that exists in addition to, rather than as a substitute for, shareholder’s rights.” It is not a per se bar to a derivative claim.
"[A] substantial benefit must be something more than technical in its consequence and be one that accomplishes a result which corrects or prevents an abuse which would be prejudicial to the rights and interests of the corporation or affect the enjoyment or protection of an essential right to the stockholder’s interest."
Mills, 396 U.S. at 396. In Cattano, the Court found, as did the Circuit Court, that the recovery of over $234,000 of misappropriated funds was a substantial benefit to the firm.
These opinions are welcomed additions to the limited case law in Virginia addressing judicial dissolution and derivative actions. In particular, they suggest that both partners and 50% shareholders in closely held corporations have significant remedies they can use to protect against abuses by other owners. They should serve as cautionary tales.
A question is whether courts will use refusal to follow cease and desist letters as a justification for high damages awards in suits other than those involving copyright issues.

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