Litigation

By: Daniel P. Dwyer

If you operate a business you might consider whether it meets the federal definition of a small business. Business concerns that meet the Small Business Administration’s (“SBA”) definition of a “Small Business” can qualify for preferential financing and award of federal government contracts. The purpose of this article is to briefly discuss what a Small Business is and the advantages of determining whether your business meets that definition.

There are many advantages to being a Small Business. If your business would sell its products to the federal government, there are certain set-asides and preferential rules for the award of federal contracts to small, disadvantaged or veteran-owned businesses. Also, there are many loan and financing programs available to Small Businesses. These include American Recovery Capital Loans (“ARC”) – interest-free loans for companies harmed by the recent recession, loans for small businesses involved in export, micro-loans of $35,000 and long-term fixed financing for modernizing or acquisition of fixed assets.

The relevant term, for purposes of the Small Business Act, is a “small business concern.” To be eligible for that Act’s benefits, the entity must be both a “business concern” and “small.” A business concern is, ” … a business entity organized for profit, with a place of business located in the United States, and which operated primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor. 13 CFR Sec. 121.105. This definition is very broad: it requires that a recipient of SBA assistance be a business located in the United States, that pays taxes to the United States and/or uses domestic products, materials or labor. This still leaves the question of what is “small.”

By: Daniel P. Dwyer

Previously, I blogged about the “standing” requirements that must be satisfied if a shareholder or member of a corporation or other entity, like an LLC, wants to sue its officers, director or managers for mis- or malfeasance. That blog described the requirement for court certification that a plaintiff in such a derivative action adequately represents all other shareholders or members. A related issue is how Pennsylvania’s courts apply the “business judgment rule” and how this interacts with Pennsylvania’s pleading requirements.

The business judgment rule limits courts in second-guessing corporate decisions. Like any such protection, it must be designed to protect others from abuse of the discretion it provides. The Pennsylvania Supreme Court, in Cuker v. Mikalauskas, 692 A.2d 1042, 1045 (Pa. 1997), indicated that a corporate officer will not be liable for the consequences of his or her decision if:

- It was a business decision, and;

- done in good faith, and;

- the corporate official had no personal interest in the outcome, and;

- he or she was informed about the decision to the extent they reasonably believed was appropriate under the circumstances, and;

- he or she rationally believed it to be in the best interests of the corporation.

One need only look at the qualifiers and modifiers in that paragraph to conclude that the protections of the business judgment rule can be very limited. This is particularly true when one considers Pennsylvania’s pleading and motion standards. Therefore, while the business judgment rule may protect a corporate officer from liability, it will not necessarily protect him or her from lawsuits.

Pennsylvania’s courts, while stricter than the federal courts, give a plaintiff a great deal of latitude when asserting claims. A plaintiff only has to plead facts sufficient to place a corporate defendant on notice of the claims against which he must defend. These facts can sometimes be pleaded “on information and belief” that is, the plaintiff’s personal belief about what may have occurred. Finally, there is a judicial preference in favor of rejecting initial challenges to claims; courts prefer to let the parties go through discovery to collect evidence before claims are dismissed. If a claim requires proof of many facts and subjective conditions, it is more likely to proceed to litigation.

In conclusion, although the business judgment rule may protect an officer or director from ultimate liability, it does not necessarily protect him or her from the time and cost of the litigation necessary to establish whether that rule’s protections apply. Even if a corporate officer or director acted in good faith without personal interest and with sufficient information, he or she could still have to pay significant legal fees.

What can business owners, entrepreneurs and lawyers do about this exposure? When forming a corporation, the founders should consider whether the entity should indemnify, that is compensate, the officer or director for legal fees and other litigation-related costs. They should also be aware of the provisions of Pennsylvania’s Business Corporation Law that address indemnification of corporate officers and directors: under some circumstances indemnification is mandatory; under other circumstances, it is prohibited. Finally, parties who serve in these capacities should know whether they are indemnified and the extent of that indemnification.

A subsequent blog will address the law of indemnification of corporate officers. If you have any questions about these topics, please contact Dan Dwyer.

By: Daniel P. Dwyer

Contractors, subcontractors and material providers have various legal remedies for protecting themselves against general contractors and/or property owners who fail to pay for construction services and materials. One of these remedies is the Pennsylvania Mechanics Lien Law. This law permits contractors, subcontractors and material men, under some circumstances, to place a lien on the real property for which they provided work or materials for which they were not paid. Although the statute is essentially in the same form as it was when originally enacted in the early 1900s, and so can be difficult to navigate, significant changes were made in 2007 and, more recently, in October 2009. To view a more in depth discussion about the recent amendments, please click here.

Please contact Daniel Dwyer for more information.

By: Daniel P. Dwyer

Attorneys hoping to minimize cost and increase efficiency for their clients will often engage in communications or joint defenses with co-defendants. This is often done either informally or with the use of formal joint defense agreements. Although this practice is fairly common, there has been relatively little guidance from the court on issues raised, such as whether and under what circumstances engaging in a joint defense will result in waiver of the attorney client or work product privileges. For more information on concerns with joint defenses, please read the full article. Contact Daniel Dwyer for more information.