Contact an attorney in this area
JUX Law Firm
901 Marquette Ave. Suite 1675
Minneapolis, MN 55402
Operating a successful business comes with the risk that someday, somebody will sue that business. In addition to dealings with outside parties, the presence of multiple owners adds a whole new category to the list of potential business lawsuits. While business people certainly don’t need to spend time poring over a civil procedure textbook, developing a cursory understanding of the process leading up to litigation and of the various types of disputes their business might face can be beneficial, especially if a potentially actionable business dispute arises
Procedure Leading Up to Litigation
The first step of the process actually exists outside of the process—it involves speaking with an attorney. The business owner certainly knows the facts of the situation, and has an opinion as to whether her actions were “right or wrong”. Yet these facts may or may not correspond to legal doctrine, and the opinion is likely colored by emotion. Attorneys help by clarifying the facts to narrow the issues of the dispute, and by providing level-headed, rational advice as to whether the actions of either party create a cause of action.
Commonly Litigated Disputes
Minnesota law places special duties on business partners who are considered fiduciaries; this includes partners in a partnership or joint venture, managers and governors in an LLC, voting shareholders in closely held corporations, and directors and officers in corporations. These duties change somewhat depending on the category of relationship, but generally require treating each other with care, loyalty, honesty/disclosure, and obedience. Duties are also owed to the entity itself.
Obviously, businesses use contracts in a vast number of situations to accomplish a vast number of things. Just as obviously, the use of these contracts leads to disputes over the interpretation or validity of contracts, and as to whether they have been breached. Drafting contracts carefully can avoid some future disputes, but no drafter possesses the foresight to prevent any sort of conflict. Contractual disputes make up a large portion of business litigation.
Dissociation and Dissolution
Creating a new business is exciting, especially with one or more partners, and joint creators often don’t consider (or simply look past) the differences between themselves and their new business partners. Often, these differences develop into problems that make operating the business unbearable—even if that business has found financial success. In these situations, co-owners try to remedy the situation by leaving the entity, dissolving the entity, or kicking out the person causing the headache in the first place. Again, careful planning (and contract drafting) at an early stage can assuage some of these problems. Sometimes, however, disputes arise that cannot be resolved without judicial intervention, and the parties find themselves in court.
Piercing the Corporate Veil
Limited liability business entities such as LLCs and corporations shield their owners from personal liability—in an action against the company, only the assets of the company are at risk. When the owners fail to keep the entity detached from themselves, though, this shield can disappear. Under Minnesota corporate law (and LLC law), courts apply a multi-factor test to determine whether a plaintiff can “pierce the corporate veil” and satisfy liabilities by taking from the owners. These factors include separation of assets and undercapitalization of the entity, as well as whether corporate formalities such as record keeping and the holding of meetings (even in a single-owner entity) are observed. While this is termed “vertical piercing”, “horizontal piercing” may also occur when many separate entities start to resemble different branches of the same entity. Horizontal piercing enables the plaintiff to satisfy a liability from the cumulative resources of all entities, not merely the “branch” involved.