Business Law

Published on: April 6, 2017

Fiduciary Duties and the Business Judgment Rule: Bad Judgment Without Bad Faith Does Not Create Liability for Directors, Officers and Owners

thumbs-up-1198238__340-300x300 Our attorneys represents businesses and the people who own and run them. One source of significant conflict in New Jersey business law are the fiduciary duties of the directors, officers and owners of businesses.

New Jersey business law imposes fiduciary duties on a company’s directors and officers. This also applies to joint owners, including shareholders in corporations, partners in partnerships and members in limited liability companies (also known as “LLCs”). Essentially, under New Jersey law directors, officers and joint owners act as trustees to all of the business’s owners. They owe a duty of loyalty to the owners, including both the majority and minority owners. As effective trustees, they must place the interests of the owners ahead of their own. They also owe a fiduciary duty of care – they must exercise reasonable care in carrying out their duties.

Breach of these fiduciary duties open directors, officers and owners up to personal liability. They may be sued for violation of these duties if any of the owners allege that they suffered harm, financial or otherwise, because of a breach of these fiduciary duties.

Published on: April 4, 2017

New Jersey Supreme Court Issues Opinion on Fraudulent Conveyance

by Maurice W. McLaughlin

american-963191__340-300x200 New Jersey’s Uniform Fraudulent Transfer Act, often referred to as the “UFTA,” is designed to protect creditors from debtors who transfer assets to avoid paying their debts. New Jersey’s Supreme Court recently issued a landmark decision on the UFTA.

In the case of Motorword, Inc. vs. William Benkendorf, et al., the New Jersey Supreme Court overturned an Appellate Division decision which had approved of the cancellation of a loan in a very fact-sensitive decision. Carol and Morton Salkind owned multiple companies, including Motorworld, Inc., Fox Development, Inc., and Giant Associates, Inc. Benk did landscaping work for Fox and Giant; Fox and Giant paid approximately $4,000,000 to Benk, but still owed about $1,000,000. Morton Salkind and Benk’s owner, William Benkendorf, were longtime friends and business associates, but Benkendorf did not expect to collect the last $1,000,000.

Benkendorf ran into trouble with the IRS and needed to resolve some payroll tax issues. He asked Morton for a loan. Morton agreed, but required that it go through Motorworld, and that the debts of Giant and Fox could not be used to offset the loan obligation. They signed the note for the loan, and Carol loaned $500,000 to Motorworld to fund the loan. Benkendorf did not pay, despite extensions and amendments, and incurred significant interest and penalties which increased the amount due to more than $1,000,000. Eventually, because of Benkendorf’s financial difficulties, Morton agreed to forgive the loan from Motorworld in exchange for Berkendorf forgiving the amounts due from Fox and Giant. So essentially the debts owed between the Salkinds’ companies and Benkendorf and his companies were mutually extinguished, which would be fine and fair – and legal – if the story ended there. (Of course, if it did the courts would have never become involved….)

Published on: March 20, 2017

Lost Profits as Commercial Damages and The New Business Rule

by Maurice W. McLaughlin

document-428335__340-300x200 In a business dispute, a prevailing party is awarding damages awarded damages it can prove, typically awarded lost profits. The “New Business Rule,” however, has traditionally including recovery of lost profits for “new” businesses, because their lack of a track record makes estimating lost profits too speculative. The is a longstanding rule in New Jersey commercial litigation. However, several newer cases indicate that it may be on the way out and indeed may already be dead, and in any event courts strain to avoid its application. This is logical, because another guiding principal of New Jersey business law is that equity requires that courts try to prevent a wrongdoer from profiting from its misdeeds at the expense of an innocent party. The new cases lead to the conclusion that that it is questionable whether the New Business Rule remains valid at all.

Lost Profits as a Measure of Damages.

When one party to a contract breaches a contract the other party may recover compensatory damages, which are the natural, probable and foreseeable consequences of that breach. As New Jersey’s Supreme Court explained “[T]he goal is to put the injured party in as good a position as if performance had been rendered.” Lost profits are one of main elements which businesses can recover as compensatory damages in a breach of contract lawsuit.

Published on: March 19, 2017

Equitable Relief in the Chancery Division of New Jersey’s Superior Court

by Maurice W. McLaughlin

courthouse-303370__340-300x192 The General Equity Part of the Chancery Division of the Superior Court of New Jersey has the ability to grant “equitable” relief in addition to money damages, making it a desirable venue for business dispute.

Where a New Jersey lawsuit is heard is determined by New Jersey’s Rules of Court. Civil actions are heard in the various divisions of the Superior Court. Civil cases with disputes of up to $3000 are heard in the Small Claims Division of the Superior Court. Civil cases with disputes of up to $15,000 are heard in the Special Civil Division of the Superior Court. All other cases are heard in either the Law Division or Chancery Division, General Equity Part. The Law Division hears lawsuits which seek primarily “legal” damages – ie., suits which are primarily for money. The General Equity Part of the Chancery Division hears “actions in which the plaintiff’s primary right or the principal relief sought is equitable in nature.” Thus, in order to understand what is heard in the Chancery Division, we need to take a brief trip back to Merry Olde England and talk about the split between courts of “law” and “equity.”

The law courts in England gave “legal” relief, but developed a complex system of writs. If a suit did not fit precisely within the requirements of one of the writs, relief was denied. The office of the chancellor developed even prior to the Norman Conquest in 1066 as the “king’s conscience,” and could grant relief when remedies at law were inadequate. The chancery, or equity, court eventually carved out its own sphere, creating a rigid and artificial barrier between law and equity, creating a situation in which litigants sometimes could not find relief in either. Charles Dickens described the effects well in his classic novel Bleak House:

Published on: March 17, 2017

Money Damages in Business Litigation

by Maurice W. McLaughlin

“Legal” and “Equitable” Remedies in New Jersey Courts

Business litigation involves a claim that one party caused business harm to another, and sometimes counterclaims that each side caused the other harm. At the end of the case, if a court (whether a judge or jury depending on the facts and procedural status of the case) finds that one side did, in fact, harm the other, it will award a remedy. Through ancient legal doctrine stretching back to Merry Olde England, the law recognizes two types of relief, legal remedies and equitable remedies.

Legal relief is at is essence money damages. A civil action for legal relief involves a claim that a party has been wronged in violation of the law, and the harm can be compensated with an award of money damages. For example, a contract was breached by party B, and as a result party A suffered $1000 in lost damages; when the court awards the party A $1000 in damages, that is a “legal” remedy, and the damages are “compensatory” damages. Let’s say instead that Party B defrauded Party A, and that Party A suffered $1000 in damages. The $1000 party A lost are still compensatory damages. However, in fraud punitive damages are available if the fraud was especially egregious. So let’s say the court awarded another $2500 in addition to the $1000 compensatory damages to deter Party B from ever defrauding anyone again. The $2500 are punitive damages.

Published on: March 16, 2017

Solid Waste Transportation: CPCN’s and Other Requirements

by Pauline M.K. Young

eighteen-wheeler-614201__340-300x225 The New Jersey Department of Environmental Protection (“NJDEP”) regulates, monitors, and enforces a wide range of environmental laws throughout the State, including things such as the transport and disposal of solid waste.

The State Legislature and the NJDEP have enacted numerous laws, rules, regulations, and reporting requirements for waste transporters in an effort to ensure the safe, clean transportation of waste throughout the State.

The process for becoming a licensed waste transporter generally begins with the formation and registration of a business entity such as corporation or limited liability company with the State of New Jersey and obtaining a federal Employer Identification Number (FEIN or EIN) with the Internal Revenue Service. Next the company would need to obtain an A-901 license. Obtaining that license from the NJDEP can be a long and invasive process requiring a significant amount of information to be provided to the NJDEP in addition to fingerprinting and background checks for all owners and key employees. It is not uncommon for this process alone to take approximately one year.

Published on: January 18, 2017

Business Partnerships: Taxes and Other Considerations

by Pauline M.K. Young

A partnership is an unincorporated association of two or more people who act as co-owners of a business for profit. Under New Jersey business law, a partnership may be created even when there is no written partnership agreement between the parties (this is known as “defacto partnership.” However, just like any other business venture, a partnership is required to register their business with the State of New Jersey Secretary of State and obtain an employer identification number for tax purposes.

While a partnership agreement under New Jersey partnership law is not necessary, in the event that there is no partnership agreement, the default rules for partnerships will govern a partnership. Every partnership which has either income or loss from sources within the State of New Jersey, or in which any partner resides in New Jersey must file tax forms with the State of New Jersey. Beginning on January 1, 2015, the New Jersey Division of Taxation discontinued the use of tax Form PART-100 (which was previously used to report the gross income tax filing fee and the corporation business tax) and created two new partnership tax forms (Forms NJ-1065 and NJ-CBT-1065.)

For tax purposes, each partner received profits and losses just as though it were personal income, but set forth on a Schedule K-1. (This is different from a corporation which is separately and additionally subjected to taxes on the business’s earnings.) A partnership with more than 2 owners must pay a filing fee per owner. The fee is currently $150 per partner. The fee is applicable to any owner notwithstanding the fact that the owner may only be a partner for part of the year.

Published on: December 28, 2016

The Consequences of “Liars Loans”

by Maurice W. McLaughlin

keys-1317391__340-300x279 Our transactional attorneys handle many types of commercial and real estate transactions, from closings on homes, office buildings, factories, to commercial transactions including the sale of all or part of a business. The overwhelming majority of these transactions require the purchaser to take out a loan to finance the purchase. Whether a buyer qualifies for the loan is one of the main contingencies in the transactions.

In many instances the purchasers will have already obtained financing before they talk to us about the transaction. However, once we are involved in the transaction one of the things we stress most, based on long experience, is that the application for the loan must be one hundred percent honest. Anything less than perfect honesty with the bank is a crime. The days when “Liars Loans” was acceptable are now over – in fact, that day existed only in fiction. Our transactional attorneys’ extensive experience in New Jersey real estate and business transactions has convinced us that honesty with the bank is the only way to go.

Federal law makes it a felony to “execute a scheme… to defraud a financial institution.” More particularly, the federal statute states that:

Published on: December 8, 2016

Solid Waste Registration

by Maurice W. McLaughlin

hauler Businesses wishing to transport solid waste in New Jersey are required to strictly comply with the registration process governed by the New Jersey Department of Environmental Protection. Our attorneys help solid waste haulers in complying with these requirements, and obtaining approval to haul solid waste in New Jersey.

This is a brief overview of the solid waste registration and application process with the NJDEP.

Is it “Solid Waste?”

Published on: December 1, 2016

New Jersey Formation: Choosing the Optimal Structure: LLC or S Corporation?

by Jennifer C. Meusel

head-1825517__340 It is important to consider certain essential factors when choosing which type of business entity for your new business. In order to reach your goals and find the best fit for your company, you should consider protection from liability, taxation mechanisms, ease of formation, and your future requirements for raising capital. The two primary options for small businesses are the limited liability company (“LLC”) and the S Corporation (“S-Corp.”). The LLC is the structure most commonly used by small business owners, but it is important to review the S-Corp. before making your decision and forming your entity. Once you understand the similarities and differences between the two structures, you can review your business goals and needs to make an informed decision as to which type of entity you should form.

The Limited Liability Company

Under the New Jersey business law, the LLC provides liability protection similar to that of a corporation while retaining the taxation structure of a partnership. For tax purposes an LLC is a “disregarded entity”, the LLC issues a K-1 form to each member at the end of the tax year showing the distributions made to each member. This K-1 is used to prepare each member’s individual income tax returns. An LLC is quite flexible as to the forms of management which are permitted. It can be member-managed in that the members (owners) manage the business of the LLC; or manager-managed, in that an outside manager is hired to manage the business affairs of the LLC; or some combination of the two models. Additional flexibility is found in the LLC because profits and losses can be allocated in any way desired by the members, it does not have to be based on the amount of capital contributions contributed by each member. The operating agreement is the controlling document and it can be drafted to reflect the agreement of the members. The operating agreement can also reflect different voting rights among the various members and it can relax the strict recordkeeping rules of a corporation.