SW Legal's Case Updates: Business Organization

SOUTH-WESTERN LEGAL STUDIES IN BUSINESS CASE UPDATES—BUSINESS ORGANIZATION

SW Legal's Case Updates is a SW Legal Studies service to provide briefs of the latest state and federal court cases. Review the summaries and, for cases of interest, select the case brief. If you cannot find a case of interest, return to Topic Index .

*Title*	Summary
State Citizenship of Multi-State Business May Rely on Nerve Center Test Briefed Case	Appeals court held that, for purposes of jurisdiction, the citizenship of a business usually depends on its principal place of business. When the business has locations in many states, it is possible it is not a citizen of the state in which it does the most business volume. Rather the court looks to the nerve center of business operations to determine its home state. (Updated August 2009)
Citizenship of LLC Determined by Citizenship of Its Members Briefed Case	Appeals court held that for purposes of determining diversity of citizenship in litigation involving a limited partnership or LLC, the citizenship of the partners and the citizenship of the members would determine citizenship of the business entity. (Updated April 2009)
Bankrupt, Dissolved Corporation Can Participate in Liability Litigation Briefed Case	Wyoming high court held that a bankrupt builder had standing to sue subcontractors alleged to have performed defective work during construction. Despite the dissolution of the corporation in bankruptcy, there was a controversy involving the company that could be heard in court. (Updated February 2009)
Employing Corporation, Not Managers, Are Liable for Unpaid Wages of Employees Briefed Case	Nevada high court held that when a corporation went bankrupt, and failed to pay employees’ wages, the employees could not sue the managers of the corporation for the wages, even though the managers owned the corporation. (Updated February 2009)
Anti-Discrimination Statutes Protect Natural Persons, Not Entities Such as Corporations Briefed Case	Michigan appeals court held that the state law against discrimination applied only to persons, not juridical entities such as corporations. Hence, a corporation alleged to have suffered discrimination due to the religion and origins of the owner, has no grounds for suit. (Updated September 2008)
Shareholders May Not Strip Corporate Directors of Fiduciary Duties Briefed Case	Delaware high court held that a proposed change to a company’s bylaws about mandatory election expense coverage would remove from directors their fiduciary obligation to determine if the expenditure of corporate money on certain elections was valid or if it was not in the best interest of the company. (Updated September 2008)
Complaining Limited Partners Must Follow Appraisal Procedures, Not Sue for Damages Briefed Case	New York high court held that limited partners who believed the general partner was cheating them had to follow the state’s Partnership Law by seeking an appraisal. They could not simply sue for damages and rescission of the original contract and investment. An appraisal was required before other claims could be raised. (Updated September 2008)
Majority Partner Can, Given Partnership Terms, Force Sale of Partnership Briefed Case	Washington high court held that a majority partner did not violate its duty of loyalty to minority partners by forcing them to accept market price for their interest in the sale of the partnership’s assets. (Updated April 2008)
Derivative Suits Allowed for LLCs in New York Briefed Case	New York high court held that while the statute that allowed the creation of LLCs in New York did not specify the ability of individual members to bring derivative suits on behalf of the companies, it is reasonable to assume that that traditional right for shareholders in corporations would extend to members of LLCs. (Updated February 2008)
Minority Shareholders Get Control Premium When Forced to Sell Out Briefed Case	Iowa high court held that minority shareholders forced to sell their stock to the majority shareholders get a control premium added to the value of their stock based on the fair market value of control premiums generally paid when a party gets complete control of a company. (Updated October 2007)
Articles of Incorporation Clearly Stated Interests of Shareholders Briefed Case	Utah high court held that the interests of shareholders in a nonprofit water company were clearly stated in the articles of incorporation. Their interests were limited to use of water, not ownership of company assets. (Updated January 2007)
Corporations Are “Persons” Under Georgia Law Briefed Case	Georgia high court held that the civil RICO statute, which applies to “persons,” includes all forms of business organizations, including corporations. By general state law, persons means to include business organizations unless specified otherwise. (Updated January 2007)
Court May Not Force Sale of Corporation Unless No Reasonable Alternative Exists Briefed Case	Nevada high court reversed a lower court order to force the sale of a corporation that was the subject of a fight among shareholders. The shareholders did not request a forced sale, and it should only be imposed in the absence of other alternatives to settle a dispute. (Updated April 2006)
Right to Sales Commissions Does Not Create Partnership Right Briefed Case	Appeals court held that an employee of an insurance company, who was paid a salary plus a share of commissions earned in an office, was not a partner in the operation; he was an employee on a fixed compensation basis, so he had no claim for a share of the value of the partnership when he was fired. (Updated March 2006)
Successor Corporation Assumes Product Liability Risks if Same Business Continued Briefed Case	South Carolina high court held that when a corporation buys another business in bankruptcy, and then continues the same business, product liability actions that date back to the original business will be imposed on the successor corporation. (Updated March 2006)
Acquiring Firm May Not Use Bad Faith toward Acquired Firm Briefed Case	Appeals court held that a firm that acquired another firm used bad faith after it integrated the acquired firm into its operations, by taking actions that resulted in the acquiring firm having to pay a lower price for the acquisition by managerial decisions made after the deal had been completed. (Updated February 2005)
Shareholders of Non-Profit Corporations Have the Right to Inspect the Books Briefed Case	Appeals court held that a shareholder in a non-profit corporation has the right to inspect the books of the organization at a reasonable time and place. The corporation cannot avoid the inspection by revoking the shareholder's membership in the organization. (Updated November 2004)
Court May Pierce Corporate Veil to Allow Recovery of Debt Under Certain Conditions Briefed Case	Appeals court held that a creditor could pierce the veil of a corporation to hold its parent liable for an unpaid debt because the corporation failed to follow the standards expected of a corporation to be treated as an entity. (Updated July 2003)
Executives Do Not Have a Duty to Represent Company Financial Status to Employees Briefed Case	Appeals court held that an executive of a company, who told employees that their jobs were secure six months before the plant was closed, could not be sued for negligent misrepresentation to the employees because he had no duty of care to them about the financial status of the company. (Updated April 2003)
Board Packing Plan Violates Shareholders' Rights Briefed Case	The Delaware high court held that a board of directors improperly impeded the rights of shareholders when the board voted to expand from five to seven members. Two existing board members were voted out by shareholders who were unhappy with the board's performance. (Updated April 2003)
D&O Insurance Does Not Cover Cost of Independent Counsel Retained by Directors Briefed Case	Appeals court held that the Directors and Officers insurance policy maintained by a company to cover defense costs for directors sued in their capacity as directors covered the cost of legal representation provided by the company and its law firm. It did not extend to the cost of independent counsel hired by directors. (Updated March 2003)
Employee/Shareholder Is More than Employee Who May Be Fired without Cause Briefed Case	Appeals court reinstated a suit brought by a 50 percent shareholder/employee of a close corporation who was fired by the other shareholder/employee of the company after refusing to sell her share in the company. There was adequate grounds for the claim of wrongful termination and defamation for the suit to proceed given the fiduciary obligations that existed. (Updated September 1, 2001)
State Auto Franchise Regulations Apply to Existing Franchises, Not Applications for Franchises Briefed Case	Appeals court held that the New Hampshire statute prohibiting automobile makers from any acts of bad faith with respect to automobile franchisees does not apply to any person who applies for a new franchise, including an existing franchisee who sells other models of cars. (Updated September 1, 2001)
Shareholders Can Sue Directors for Gross Negligence in Exercise of Duties Briefed Case	Appeals court held that the shareholders of a company could sue directors for breach of fiduciary duty if they could show gross negligence by the directors in failing to prevent illegal insider trading. (Updated August 1, 2001)
Franchisor Could Enforce Non-Competition Clause Against Former Franchisee Briefed Case	Appeals court upheld a trial court holding that a franchisor could enforce a two-year, twenty-five mile operating area non-competition clause against a former franchisee that he had agreed to as part of the franchise agreement. The terms were reasonable so that the parent company could maintain its value in the market. (Updated August 1, 2001)
Shareholder-Key Employee in Closely Held Company Has Expectations Created by Tie of Employment to Stock Shares Briefed Case	A founding employee and major shareholder in a company was fired after several years of working for the company. The appeals court held that, due to the link between his status as shareholder and employee, he had an expectation about his value to the company that goes beyond that of being an at-will employee who may be forced out without consideration of his interests. (Updated August 1, 2001)
Name of Suspended Corporation May Be Taken By Another Corporation Briefed Case	Appeals court affirmed the decision of the Secretary of State to grant the name of a suspended corporation to a new corporation that requested the name of the suspended corporation. Suspension for failure to follow state law means loss of privileges, including possible loss of name. (Updated May 1, 2001)
Shareholder Suing for Mismanagement Gets Documents Related to Specific Allegations Briefed Case	Delaware court held that shareholders suing a company for mismanagement were not entitled to see all company records for the past ten years. The document request must be based on specific complaints. Records related to the complaints must be produced. (Updated December 1, 2000)
Member Who Withdraws from LLC Entitled to Return of Original Investment Briefed Case	Wyoming supreme court held that a member of an LLC who withdrew from the company was entitled to a return of his original investment. As to his claim that he is owed the current market value of his ownership share in the LLC, the trial court must gather more testimony to determine what the parties intended since the LLC statute does not address the issue. (Updated November 1, 2000)
Abandoning Effort to Form Joint Venture Not Breach of Fiduciary Duty Briefed Case	Appeals court upheld a verdict in favor of a partner in a proposed joint venture who abandoned efforts to build a shopping center with a partner when zoning permission to build on a certain piece of land was not given. The partner then had the right to move on to other similar deals not involving the original partner. (Updated August 1, 2000)
Partners Who Sign Lease Agreement Are Liable for Breach of Lease Briefed Case	The members of a general partnership who signed a lease agreement for office space are jointly and severally liable for damages from breach of the lease after the termination of the partnership. Even partners who had quit the partnership before the lease was breached remain potentially liable for damages from the breach. (Updated June 1, 2000)
Limited Partner May Not Sue Contractors to Limited Partnership for Losses Briefed Case	North Carolina high court held that a limited partner, like a shareholder, may not sue contractors to a limited partnership for causing the limited partnership to fail. The limited partnership itself must sue the contractors; individual partners have no standing to sue for losses. (Updated May 1, 2000)
Forced Sale of Minority Stock May Not Be Forced to Incur Discount by Majority Briefed Case	Kansas high court held that when minority shareholders are forced to liquidate their stock in a sale to majority shareholders, or to the corporation itself, the appraiser must be independent of the interests of the majority, who have incentives to discount the stock more than would be appropriate when the price was set by a third party. (Updated February 1, 2000)
LLC Created from Sole Proprietorship Receives All Interests and Obligations Briefed Case	The Supreme Court of Connecticut held that when a sole proprietorship converts into a limited liability company that all of its interests and obligations, including debts and liabilities, are transferred from the original business organization to its successor. (Updated January 1, 2000)
Corporate Attorney Could Be Liable for Participating in Breach of Fiduciary Duty to Shareholder Briefed Case	The high court of Oregon held that the attorney for a corporate board of directors that breached its fiduciary duty to a minority shareholder, by squeezing him out of the firm, could be jointly liable for the losses suffered by the shareholder as he knowingly participated in the commission of a tort. (Updated January 1, 2000)
State Statutes May Limit Existing Franchise Location Agreements Briefed Case	Appeals court upheld decision that a state statute, passed after a franchise agreement was signed that limited franchisee's right to move locations, did not violate the Contracts Clause of the Constitution. (Updated May 1, 1999)
Judgment Against Partnership Not Enforceable Against Individual Partners Due to Failure to Name Briefed Case	Colorado high court upheld lower court decisions preventing the enforcement of malpractice liability judgment against law partnership where plaintiff had failed to name individual partners prior to judgment and expiration of statute of limitations. (Updated May 1, 1999)
Producer Liable for Tort of Independent Contractor Sales Representative Briefed Case	Kirby vacuum held liable in negligence for rape of customer by independent contractor selling vacuums in customer's home. Since producer specified method of sales, it retained sufficient control to be liable in tort for not checking the background of sales representative. (Updated April 1, 1999)
New Parent Franchiser Must Honor Pre-existing Promises to Franchisees Briefed Case	Florida high court held that under Florida law, a new parent buyer of a franchise could be liable for tortious interference with a franchisee who suffered losses due to the new parent franchiser's ignoring the existing exclusive territory agreement. (Updated January 1, 1999)
Liabilities of Merged Union Carry Over to Survivor Union Briefed Case	Union failed to make pension contributions for employee. After union merged into another union, the new union denied liability. Court held that survivor union of the merger assumes debts of previous union, as would be the case with corporations. (Updated October 19, 1998)
Punitive Damages Above Statutory Cap Allowed for Fraud Against Other Shareholder Briefed Case	Jury found shareholders engaged in fraud against a fellow shareholder and awarded actual damages plus $650,000 punitive damages, which is above the statutory cap. The higher award stood because the cap does not apply in case of intent to harm. (Updated May 29, 1998)
On-Call Arrangement Among Physicians Does Not Create Joint Venture Briefed Case	Mother of baby born with birth defect sued her doctor and the doctor who was on-call during the first part of the delivery. Her contention was that their on-call arrangement created a joint venture so that both are liable for the actions of the other. Her claim is denied because there were not "rights of mutual control." (Updated 4-6-98)
No Vicarious Liability for Copyright Infringement from Board Membership Alone Briefed Case	Members of a board of directors sued for copyright infringement were granted summary judgement. Plaintiff failed to present evidence of direct involvement by board memebers in alleged infringement to warrant suit. Vicarious liability does not attach simply because of board membership. (Updated 3-11-98)
Successor Liability Apportioned Based on Production Volume or Length of Time of Production Briefed Case	A worker was injured by a machine made in 1954. The rights to the machine passed to three successor corporations. Liability of successors is best based on volume of production but, when not available, on number of years the successors produced the machine. (Updated 3-11-98)
Fiduciary Duty Not Breached in Firing of Employee/Minority Shareholder Briefed Case	Majority shareholders, who were also employees of closely held corporation, fired the minority shareholder/employee and removed him from the board. Tennessee high court found no breach of fiduciary duty since no evidence was provided that majority did not have the best interests of the corporation in mind. (Updated 2-3-98)
Partnership Forfeiture Clause Not Enforceable Briefed Case	Law partnership agreement that required partners to forfeit any ownership value claims in the partnership, when a partner voluntarily withdrew to go into competition with the partnership, declared void as harmful to clients' interests. (Updated 1-16-98)
Doctors Pay High Price for Cutting Partner's Fees Briefed Case	Nevada high court upholds judgment for breach of fiduciary duty and punitive damages imposed by a jury against four physicians who secretly cut the profit share given another physician who was supposed to receive an equal share of profits in a corporation that was treated as if it were a partnership. (Updated 11-14-97)
Chicken Franchisees' Squawks About Bad Faith Silenced by Court Briefed Case	Court of appeals affirmed lower court finding that merger between chicken parent companies which resulted in losses to Detroit franchisees does not breach implied covenant of good faith and fair dealing in franchise agreement. (Updated 9-12-97)