Category Archives: Business Operations

New Jersey Supreme Court Provides Test To Determine Whether A Limited Liability Company Member Can Be Judicially Expelled

By Steven Walder, Esq.
swalder@pashmanstein.com

The New Jersey Supreme Court recently addressed in IE Test, LLC v. Carroll, ___ N.J. ___ (2016), the circumstances under which the member of a limited liability company (LLC) can be judicially expelled.  The IE Test decision is important as LLC’s are among the more common form of business organization throughout New Jersey.  By providing seven factors for New Jersey trial courts to consider, guidance has now been provided to determine whether it is “not reasonably practicable” for a member to remain associated with an LLC that wishes to continue operating.

The dispute that prompted the IE Test litigation resulted from the failure of a prior business, Instrumentation Engineering, LLC, in which IE Test’s three LLC members were involved. Defendant Kenneth Carroll was the co-owner of Instrumentation Engineering with Patrick Cupo, while Byron James was employed at the company.  In 2009, following a series of financial setbacks, Instrumentation Engineering filed for Chapter 7 bankruptcy.  During the bankruptcy proceeding, Carroll claimed that Instrumentation Engineering owed him more than $2.5 million.  Ultimately, Instrumentation Engineering failed to repay this debt to Mr. Carroll.

As Instrumentation Engineering’s business was failing, its owners contemplated establishing a new business.  Ultimately, IE Test was formed as a New Jersey LLC shortly before Instrumentation Engineering filed for bankruptcy.  IE Test had three members, which included Cupo at 34%, with Carroll and James each at 33%.  From the outset of IE Test, Cupo and James played an active role in the business, while Carroll was a passive member.  While the intention of the three members of IE Test was to enter into an operating agreement, this never came to fruition, primarily due to the fact that Carroll was seeking compensation that would allow him to recover some of his lost investment in Instrumentation Engineering.

By early 2010, as a result of the members’ failure to enter into an Operating Agreement, in addition to the belief of Cupo and James that they could no longer work together with Carroll, IE Test filed a lawsuit against Carroll seeking to remove him as a member.  Specifically,   IE Test alleged in its complaint that Carroll had engaged in conduct which made it “not reasonably practicable” pursuant to N.J.S.A. 42:2B-24(b)(3) of the New Jersey Limited Liability Company Act (“LLCA”) to carry on the activities of IE Test with Carroll as a member.

The trial court agreed that it was not reasonably practicable for IE Test to continue as a business with Carroll as a member and entered an order expelling him from membership.  Carroll appealed the trial court’s decision, which was ultimately affirmed by the Appellate Division.  The basis for the Appellate Division’s ruling in March of 2015 was that N.J.S.A. 42:2C-46(e) of the Revised Uniform Limited Liability Company Act (“RULLCA”), which had replaced N.J.S.A. 42:2B-24(b)(3) of the LLCA in 2013, required that a trial judge engage in predictive reasoning in order to evaluate the future impact of an LLC member’s current conduct.  Utilizing predictive reasoning, the appellate panel found that the continued operation of IE Test with Carroll as a member was “not reasonably practicable” because Carroll’s relationship with Cupo and James never recovered from Carroll’s demand that he be compensated in a manner that permitted him to recoup his lost investment in Instrumentation Engineering.

The New Jersey Supreme Court reversed the Appellate Division ruling that LLC members seeking to expel a fellow member are required to clear a high bar.  The Supreme Court indicated that neither N.J.S.A. 42:2B-24(b)(3)(c), nor its counterpart N.J.S.A. 42:2C-46(e)(3), authorizes a court to disassociate an LLC member merely because there is a conflict.  Instead, both provisions require the court to evaluate the conduct of the LLC member relating to the LLC, and assess whether the LLC can be managed notwithstanding that conduct, in accordance with either the terms of an operating agreement or the default provisions of the statute.

In an effort to guide trial courts in the evaluation whether an LLC member should be expelled under the “not reasonably practicable” standard, the Supreme Court provided seven factors to be considered.  The factors include: (1) the nature of the LLC’s members conduct relating to the LLC’s business; (2) whether, with the LLC member remaining a member, the entity may be managed so as to promote the purposes for which it was formed; (3) whether the dispute among the LLC members precludes them from working with one another to pursue the LLC’s goals; (4) whether there is a deadlock among members; (5) whether, despite that deadlock, members can make decisions on the management of the company, pursuant to the operating agreement or in accordance with applicable statutory provisions; (6) whether, due to the LLC’s financial position, there is still a business to operate; and (7) whether continuing the LLC, with the LLC member remaining a member, is financially feasible.

The Supreme Court summarized its view that a trial court considering an application to expel an LLC member should conduct a case-specific analysis of the record using the seven factors, as well as other considerations raised by the record, with no requirement that all factors support expulsion, and no single factor determining the outcome.

Pashman Stein Walder Hayden’s Corporate Group is available to answer any questions that you may have about the recent New Jersey Supreme Court ruling and its impact on LLC’s facing internal disputes among its members.

NJ Boards of Directors May Not Alter Shareholder Quorum Requirements Via Amendment to Corporate Bylaws

By Rachel Mills, Esq.
rmills@pashmanstein.com

It is not unusual for shareholders in closely held companies to overlook the shareholder quorum requirements.  But such quorum requirements can be either an Achilles’ heel or powerful tool in the event of a shareholder dispute on the direction and operations of the company.  In a recent appellate decision, a New Jersey court ruled that a corporation’s board of directors could not deal with an obstructionist shareholder by modifying the company’s shareholder-quorum requirement through a bylaw amendment.[1]  Instead, any deviation from the New Jersey Business Corporation Act’s default rule on shareholder quorum—that a majority of a corporation’s shares must be represented in person or by proxy at a shareholder meeting in order to constitute quorum—must be provided for in the corporation’s certificate of incorporation.  Companies and shareholders looking to either prevent corporate changes or overcome obstructionist shareholders should carefully consider their options.

Background

The Board of Directors of Laurel Gardens Co-Op, Inc. (“the Co-Op”), a New Jersey corporation, attempted to alter the definition of quorum for purposes of shareholder meetings by amending the Co-Op’s bylaws.  Those bylaws required the majority of the Co-Op’s shares, sold or unsold, to appear in person or by proxy to constitute quorum.

Prior to the Board’s attempt to alter the shareholder-quorum requirement, the Board, in 2012, twice called a shareholder meeting wherein the Board intended to vote on a proposed amendment to the bylaws regarding the Co-Op’s subleasing rules and requirements.   Specifically, the sublease amendment would alter the bylaws to require, as a pre-condition for subleasing an apartment, that the owner wait at least one year after acquiring an apartment before the owner can apply to sublease the apartment.  This amendment would essentially reduce the ratio of rental units to owner-occupied units, which would make it easier for prospective purchasers to obtain financing to purchase Co-Op shares.  The plaintiffs, who included the Co-Op’s sponsor at the time the Co-Op converted to a cooperative from of ownership, raised objections to the sublease amendment, asserting that the amendment would violate the sponsor-protection provision.  That provision provided that the bylaws could not be amended in any manner that would affect the sponsor’s rights/interests.  While the proposed sublease amendment exempted the sponsor from its restrictions, the plaintiffs claimed that the sublease amendment nonetheless ran afoul of the sponsor-protection provision because the amendment had the potential to harm the sponsor’s future attempts to sell its shares to prospective purchasers who may wish to sublease the units rather than occupying the units themselves.

At the two shareholder meetings called by the Board to put the sublease amendment to a vote, an insufficient number of shareholders attended the meetings to establish a quorum.  The Board then called a third shareholders’ meeting, immediately following the Board’s monthly meeting.  At the Board meeting prior to the shareholder meeting, all of the Board members who were present unanimously approved the sublease amendment and also an amendment to the bylaws’ shareholder-quorum requirement.  The shareholder-quorum amendment reduced the necessary quorum from a majority of the Co-Op’s shares to 20% of the shares.

The plaintiffs—the Co-Op’s sponsor and one of the Co-Op’s directors—filed suit, individually and derivatively, against Co-Op and the directors who approved the challenged amendments.  The plaintiffs claimed shareholder oppression, breach of contract, and tortious interference based, in large part, on the bylaws’ sponsor-protection provision.  The plaintiffs argued that the sublease and shareholder-quorum amendments ran afoul of that sponsor-protection provision because they had the capacity to limit the value of the sponsor’s shares to prospective purchasers.

The trial court granted summary judgment in favor of the defendant Co-Op and directors and dismissed the complaint with prejudice.

The Appellate Division Decision

The Appellate Division reversed, concluding that, under the unambiguous text of the New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 to 17-18 (“the Act”), the Board could not unilaterally reduce the shareholder-quorum requirement by bylaw amendment.  N.J.S.A. 14A:15-9 states in relevant part: “Unless otherwise provided in the certificate of incorporation or this act, the holders of shares entitled to cast a majority of the votes at a meeting shall constitute quorum at such meeting.”  The court interpreted this “to mean that, in order to hold a vote amongst the Co-Op’s shareholders, a majority of all shares of the Co-Op must be represented at the meeting.”

The court explained that the only manner to modify the shareholder-quorum requirement under the Act is by amendment to the certificate of incorporation, which can only be approved by a vote of the shareholders under N.J.S.A. 14A:9-2(4).  The Co-Op’s certificate of incorporation did not address quorum for shareholder meetings, and, as a result, the Act’s default majority requirement for shareholder quorum controls.  Under the plain language of N.J.S.A. 14A:15-9, an amendment to the corporation’s bylaws was insufficient to modify the Act’s default quorum requirement.

The appellate court was not persuaded by the defendants’ argument that some shareholders, particularly the sponsor who held a substantial percentage of shares, were preventing the Board from conducting meaningful business by boycotting shareholder meetings.  The court noted that the Board had alternatives to address the perceived obstructive behavior, including by persuading shareholders to attend the annual meeting to amend the certificate of incorporation or by initiating General Equity Litigation under N.J.S.A. 14A:5-2 to obtain a court-ordered shareholder meeting wherein “the majority quorum requirement would have been waived by operation of law.”

The Bottom Line

Quorum requirements are critical to a company’s operations because they determine how many shares must approve material changes to the business and how it functions.  Smaller quorum requirements can empower minority interests to exert significant control.

On the one hand, this case is a powerful example of the ability of a shareholder owning a substantial portion of an entity’s shares to slow and obstruct the business of the corporation to its advantage by merely absenting itself, and other shareholders under its influence, from attendance at shareholder meetings.  Going forward, those forming corporations in New Jersey could consider altering the Business Corporation Act’s default rules in the certificate of incorporation at the time of the corporation’s inception to give the Board of Directors the necessary flexibility to take corporate action in the face of shareholder obstruction, apathy, or inaction.

On the other hand, managers and shareholders may wish to implement and maintain the default majority quorum requirements to prevent a minority group from taking action that affects the entire business without a majority present.  Businesses can deal with obstructionist shareholders in other ways, including, as described in the Appellate Division decision, by instituting General Equity Litigation.

Board members or shareholders considering modifications the default quorum requirements can contact me for further discussion and evaluation of strategies for dealing with individual situations.

 

 

[1] Sterling Laurel Realty, LLC, et al. v. Laurel Gardens Co-Op, Inc., No. A-0696-14T4 (N.J. App. Div. April 5, 2016) (approved for publication).

Annual Review of Legal Documents

By Bruce Ackerman, Esq.

Published by the Meadowlands USA Newsletter

Everyone is attuned to addressing year-end tax and financial planning. However, most businesses do not give proper attention to reviewing their legal documents and the types of legal issues that should be looked at on an annual basis.

A yearly legal review should be a regular part of your company business planning. Even more importantly, by making the review of legal documents an annual concern you can often prevent legal issues from causing greater problems later on.

The following are some common areas that should be part of your annual legal business review.

Ownership & business entity documents

Take note of having your entity documents in order. If your business is a corporation, this should be a shareholder agreement, sometimes called your buy-sell agreement, and for a limited liability company you should have an updated, fully signed operating agreement. At least once a year, the company should be sure that these documents memorialize any changes in ownership and agreements between owners for future transfers.

For the rest of the article, click here.

When Smartphones Go to War, Patent Holders Seeking Injunctions against Infringement Win?

By Michael J. Zoller, Esq.
mzoller@pashmanstein.com

Prior to 2006, when a patent holder demonstrated that someone was infringing on its patent, it enjoyed a presumptive entitlement to an injunctive award permanently enjoining the infringement.  That all changed though when the Supreme Court handed down its decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).  In eBay, the Supreme Court held that instead of a general rule presumption in favor of injunction, the same equitable standard that applied for granting injunctions in non-patent cases should also apply to disputes arising under the Patent Act.  Consequently, following the decision in eBay, in order to obtain a permanent injunction against patent infringement, a patent holder had to pass a four-factor test by showing:

(1) that it has suffered an irreparable injury;

(2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury;

(3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and

(4) that the public interest would not be disserved by a permanent injunction.

Id. at 391.

This change was bad for patent holders because instead of the presumed injunction they used to receive upon a showing of infringement, in addition to proving infringement, the patent holders now had to prove that an injunction was warranted too.

In the wake of the Supreme Court’s eBay decision, the “Smartphone Wars” were launched.  The Smartphone Wars are a series of litigation between Apple and Samsung regarding Samsung’s infringement on some of Apple’s patents for cellphone and tablet technology.  The first decision (“Apple I,” 678 F.3d 1314) in the Wars was handed down in 2012 and the fourth and latest was just handed down in September 2015 (“Apple IV,” 801 F.3d 1352).

In Apple I, the Federal Circuit affirmed the District Court’s holding that to show an irreparable harm, a patent holder must make a showing of a “casual nexus” between the infringement and the alleged harm to the patent holder.  The Apple I decision further stated that “[s]ales lost to an infringing product cannot irreparably harm a patentee if consumers buy that product for reasons other than the patented feature.” Apple I, 678 F.3d  at 1324.  The decision in Apple I was another blew to patent holders.  To be able to obtain an injunction they now had to show that the technology being infringed on was the cause of their sales in the first place.  This can be very difficult to show when the actual item being sold, like a smartphone, contains many different features and pieces of technology.

Recently though, the Federal Circuit’s decision in Apple IV has swung the power back to the patent holders.  In Apple IV, the Federal Circuit took a closer look at the requirements of a casual nexus.  In its review, the Federal Circuit determined that the proper approach for finding a casual nexus was not a determination that the infringing features were the reason for consumers purchasing the smartphone, but rather a determination that the infringing features were important to consumers when making their purchasing decision.  When there are many reasons why a consumer chooses to purchase a particular smartphone, having to show that the features being infringed on are important to consumers versus having to that they are the specific reason the consumer chose the smartphone is a much lower standard to meet.  Consequently, in Apple IV, the Federal Circuit ended up granting Apple its injunction.

The decision in Apple IV is a positive turn for patent holders after their rights had been limited in the earlier litigations.  That said, while patent holders may have won this battle, the war is not yet over.  Samsung has petitioned the Federal Circuit to rehear the case en banc.  Should the Federal Circuit grant the petition and reverse then patent holders may be telling a different story.  As they say, history is written by the victors…

Online Advertisers Beware

By Zachary Levy, Esq.
zlevy@pashmanstein.com

A lawsuit was filed in federal court earlier this month by an online advertising agency alleging a prevalent, yet seldom litigated form of e-commerce fraud, referred to in the industry as “click fraud.” Click fraud causes online advertisers to overpay for their ads in two main ways. First, the cost of placing an advertisement on a particular website is largely based on the amount of users who visit that website each day (the amount of “web traffic.”). The higher the web traffic on a particular website, the more they are able to charge to place an advertisement because there are more potential consumers. Second, rather than paying a flat-fee to place an advertisement on a website, other contracts may require that the advertiser pay a nominal amount each time their advertisement is clicked on. Clearly, it would be problematic for an advertiser to be paying for clicks even though those clicks are being generated by fraudulent users, or “bots.”

In the lawsuit, Congoo (a.k.a. Adiant), an online news and networking company, is alleging fraud with regard to a one-year advertising contract it signed with Sell It Social, who operates an e-commerce website known as Rebel Circus. Congoo agreed to pay $300,000 in fees to advertise on Rebel Circus based on the purported volume of web traffic on the website. Further analysis conducted by Congoo revealed, however, that a substantial amount of the web traffic on Rebel Circus is generated by “click farms,” or bots, which are programed to visit specific websites and create the illusion that several more human users are visiting the website than there actually are. According to the Complaint, Congoo suspected a high presence of artificially generated web traffic based on two different analyses. First, an empty advertisement placed on Rebel Circus, containing no content whatsoever, was still being clicked on several times by purported users. Second, the purchase rate stemming from clicks from Congoo’s advertisement on Rebel Circus was much lower than the statistical average, therefore evidencing the presence of bots, which obviously would not be purchasing anything. Congoo is seeking to rescind its contract with Sell It Social as a result of the suspected high amount of fraudulent web traffic.

While obtaining evidence of click fraud can be difficult, it is not impossible, and online advertisers should take steps to minimize their risk of being taken advantage of. First, advertisers can simply conduct online research to learn whether a website they are considering placing an ad on is known to have a high presence of bots or fraudulent users that inflate web traffic figures. Additionally, there is software available which gathers data from websites and advertisements and uses that information to monitor for signs of click fraud. For example, if an advertisement on Website A is generally clicked on by only 0.25% of visitors, but Advertiser X’s advertisement is clicked on by 2.5% of visitors, ten-times the statistical average, would likely be indicative of click fraud. One more way an online advertiser can protect themselves is to always include language in the advertising contract which provides for relief in the event click fraud is detected.

Fees on Fees for Corporate Indemnification: Who pays the bill when you have to sue your company to defend you?

As it appeared in the New Jersey Law Journal.

Schwartz, A.By Adam Schwartz, Esq.

So you are an officer or director of a company and you have been sued for some action (or inaction) you took in your corporate capacity. Does the company defend and indemnify you? In most instances, unless you are being sued for fraud, the company’s bylaws, and in some instances even New Jersey statutes, require the company to provide defense and indemnification. But what happens if the company refuses?

Under New Jersey’s corporate indemnification statute, you can sue to obtain the defense and indemnification to which you are entitled, but at what cost? Will you spend more suing the company than paying for your own defense in the underlying matter? Unless you can recover the attorney fees you incur in suing the company (often referred to as “fees on fees”), you will not be made whole. Moreover, if the company is not compelled to pay your legal fees, it creates an incentive to deny coverage in the first instance. Maybe you won’t bother suing. Maybe you won’t realize you can challenge the company’s decision to deny coverage.

There are no reported New Jersey cases addressing “fees on fees” in the corporate indemnification context. However, a New Jersey court will inevitably face this issue. How will it be resolved? On issues of first impression, New Jersey courts often look to other jurisdictions for guidance, such as Delaware and New York, which have similar corporate indemnification statutes. However, those states have reached opposite conclusions—Delaware allows an officer to recover “fees on fees” while New York does not. Thus, New Jersey courts facing this issue will likely follow the state—Delaware or New York—with the most persuasive reasoning.

As an initial matter, all three states follow what is called the “American Rule,” which provides that each litigant must bear his own legal costs unless a statute, court rule or contract specifically provides that a successful plaintiff can recover attorney fees. See Porreca v. City of Mellville, 419 N.J. Super. 212, 224 (App. Div. 2010); see also Goodrich v. E.F. Hutton Group, 681 A.2d 1039, 1043 (Del. Sup. Ct. 1996); Baker v. Health Management Systems, 98 N.Y. 2d 80, 88 (2002). Thus, the ability to recover “fees on fees” will be determined by corporate indemnification statutes and/or the company’s bylaws. As bylaws frequently provide for coverage “to the fullest extent” allowed under the law, the corporate statutes will be the focal point for any analysis.

The applicable Delaware Statute, 8 Del. C. 145(a), provides as follows:

A corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any … suit or proceeding … by reason of the fact that the person is or was a director, officer, employee or agent of the corporation … against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonablyincurred by the person in connection with such action, suit or proceeding.

In Stifel Fin. Corp. v. Cochran, 809 AD.2d 555 (Del. Sup. Ct. 2003), the Delaware Supreme Court noted that § 145(a) permits indemnification “in any action,” may extend to the indemnification action itself. It further noted that § 145(a) is remedial in nature and “should be broadly interpreted to further the goals it was enacted to achieve.” Those goals include (i) assisting corporate officials resist what they consider to be unjustified suits, and (ii) encouraging “capable men to serve as corporate directors, secure in the knowledge that expenses incurred by them in upholding their honesty and integrity as directors will be borne by the corporation they serve.”

In light of those objectives, the Stifel court held that “without an award of attorneys’ fees for the indemnification suit itself, indemnification would be incomplete.” Thus, it concluded that, while § 145(a) does not expressly state that “fees on fees” are recoverable, the language provides that “fees on fees” are “permissible” and therefore “authorized”—although not required. As the company’s bylaws provided for indemnification to the fullest extent of the law, and “fees on fees” are permissible under the law, the officer was reimbursed for the fees he incurred in seeking indemnification. Moreover, the Stifel court observed that allowing “fees on fees” under these circumstances would prevent a company with “deep pockets” from wearing down a former director, “with a valid claim to indemnification, through expensive litigation.”

In essence, Stifel subordinated the American Rule and looked to the purposes behind § 145(a) to determine that “fees on fees” supported the statute’s remedial purpose. It did not believe corporations would be unduly punished by this result because they can tailor their bylaws to exclude “fees on fees” if so desired.

On the other hand, New York’s highest court has held that New York’s corporate indemnification statute does not permit “fees on fees.” Baker, 98 N.Y.2d at 88. The corporate indemnification statute in New York, McKinney’s Business Corporation Law § 722, provides that:

A corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding … by reason of the fact that he … was a director or officer of the corporation … against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein.

In Baker, a corporate officer who successfully obtained indemnification argued that he was entitled to “fees on fees” because the attorney fees he incurred by suing to obtain indemnification were “necessarily incurred as a result” of his being sued in his corporate capacity for securities fraud. The Baker court rejected the officer’s argument, holding that the fees he incurred in the indemnification lawsuit were caused by the company’s refusal to indemnify; they were not incurred as a result of the officer being sued in the underlying securities fraud action.

The Baker court then examined the legislative history of §722 and discerned no evidence suggesting an intention to allow “fees on fees.” It further held that even if the officer’s argument had merit, it would be preempted by the American Rule. In essence, the Baker court held that, since “fees on fees” were not expressly authorized in §722, they are not available. It did not believe its holding would unduly punish corporate officers because they “remain free to provide indemnification of fees on fees in bylaws, employment contracts or through insurance.”

New Jersey’s corporate indemnification statute provides that: “Any corporation … shall have the power to indemnify a corporate agent against his expenses and liabilities in connection with any proceeding involving the corporate agent.” N.J.S.A. 14A:3-5(2). As with the Delaware and New York statutes, it is silent on the issue of fees on fees. The reasoning of Delaware and New York, provide credible arguments for and against “fees on fees.” However, New Jersey is more likely to follow the logic of Stifel.

The New Jersey Supreme Court has noted that Delaware’s corporate indemnification statute is similar to and in fact, constitutes “the very genesis of New Jersey’s Indemnification Statute.” Vergopia v. Shaker, 191 N.J. 217, 220, fn. 1 (2007). Thus, it will likely look to Delaware courts for guidance as it has previously done for corporate law issues. Moreover, New Jersey courts have recognized the remedial nature of the corporate indemnification statute and the goals it seeks to achieve—goals identical to those identified in Stifel. SeeCohn v. Southbridge Park, 369 N.J. Super. 156, 160 (App. Div. 2004) (noting that the statute (i) helps corporate officials resist what they consider to be unjustified suits and claims, and (ii) encouragescapablemen to serve as corporate directors.)

Moreover, one of the primary differences between New York and Delaware is who the courts believe are responsible for protecting themselves against an unfavorable result. Delaware believes that it is incumbent upon the company to amend its bylaws to exclude “fees on fees”; while New York places that burden for ensuring the availability of “fees on fees” on the individual officer.

Faced with this dichotomy, New Jersey will likely place the burden on the company to exclude coverage. In other instances, New Jersey courts have looked to the relative bargaining power of the respective parties to determine the viability of a claim. SeeMohammed v. Count Bank of Rehoboth Beach, Delaware, 189 N.J. 1, 15 (2006) (contracts of adhesion); see also Alloway v. General Marine Industries, 149 N.J. 620, 628 (1997) (whether tort or contract principles apply to transaction). In this instance, the relative bargaining power clearly rests with the company, which has already approved the bylaws and has deeper pockets that the individual.

Thus, notwithstanding New Jersey’s adherence to the American Rule, a New Jersey court will likely find that “fees on fees” are permitted under N.J.S.A. 14A:3-5(2).•

Reprinted with permission from the February 9, 2015 issue of The New Jersey Law Journal. © 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Beware of New Wire Transfer Dangers in Real Estate Transactions

By Bruce Ackerman, Esq.
backerman@pashmanstein.com

I attended a real estate closing recently for a cooperative development and had a shocking story told to everyone by the buyer.  The buyer had her gmail account hacked by someone overseas, and they sent emails that resembled her attorney’s account.  The email actually had a slightly different email address that included the firm name of her attorneys, and had the look and feel of the real emails she had previously received from them.  They copied her attorney’s firm logo as well.  The final act was the email to her to wire transfer her closing funds to an account in Miami, Florida.  All the details required for the wire were included, even the phone number to verify the information.

The buyer initiated the wire of funds that was required for the closing later that day.  The buyer did not realize that the trust account of her NJ attorney had to be in a NJ bank.  Only due to her bank calling the attorney’s office was the hacking revealed, saving this buyer from a mistake of more than $500,000.  She also called the number on the wire sheet, and someone answered, but obviously not from the attorney’s office.

In this transaction, the hackers did not stop, still falsifying emails to the buyer’s attorney.  The personnel at the attorney’s office eventually wired out funds intended for the sellers, but wired the money to the hackers based upon another fake email with wire instructions.

This is a new hacking method being reported in real estate related transactions.  The fraud targets wire transfers in real estate transactions, including wires of earnest money deposits and, as shown, closing proceeds.  Apparently, these criminals hack into and intercept emails by searching for wire transfer requests and the emailing of the 13 digit number that makes up the digits in bank accounts.  The hackers then start their process of “invading” the communications and intercept the lawful ones.  The fake emails have the same attributes as the real ones they are meant to resemble.  They may keep communicating with the target victim, so that there is no suspicion that a third party has hacked into the stream of emails.

The hackers may even use the same bank and just change the last numbers for the account to be credited.  If the funds get wired, the money will be gone and wired out overseas before the fraud is even noticed.

In order to ensure the safety of wire transfers, far more caution is needed.  Here are a few precautions to be taken, including one very simple one.  If you are sending a wire, you should contact the party who sent the instructions by phone to confirm the account numbers verbally prior to sending the funds.  Another precaution is to send wire instructions via encrypted email or fax only.  Beware.

If you have any questions about this topic, please contact Bruce Ackerman at backerman@pashmanstein.com or at 201.488.8200.