Articles Posted in Business and Corporate

Upon a litigant’s motion, a court can enter a “preliminary injunction” preventing a party from pursuing a particular course of action until the conclusion of a trial on the merits. A preliminary injunction is considered an extraordinary remedy and requires the moving party to establish that (1) he is likely to succeed on the merits of the case at trial; (2) he is likely to suffer irreparable harm unless the injunction is granted; (3) the balance of the equities tips in his favor; and (4) an injunction is in the public interest. The party must make a clear showing that he is likely to succeed on the merits. Where a defendant has acted in an underhanded manner, but the plaintiff is unable to establish these factors, a court will deny the request for injunctive relief. In BP Products v. Southside Oil, the United States District Court for the Eastern District of Virginia considered and denied BP’s request for a preliminary injunction even though it was clear that Southside had acted deviously.

Defendant Southside owns gas stations and also has fuel supply agreements with independent gas stations. BP decided to stop owning stations and simply sell gas to BP stations through middlemen. As part of its strategic plan, BP sold many of its Virginia gas stations to Southside, and Southside agreed to continue to market BP products at BP’s former stations. The parties renewed the contract in 2010 and agreed that BP would have a Right of First Offer (ROFO) as to any proposed sale of any of Southside assets. Before Southside sold any BP stations or changed any BP stations to other brands, it was required to provide a term sheet outlining its goals; BP could then either negotiate with Southside or allow negotiation with other buyers. Southside was not required to accept any offer by BP to purchase its assets.

The 2010 agreement also gave BP a Right of First Refusal (ROFR) requiring Southside to give BP written documentation regarding any proposed sale so that BP could determine whether to buy Southside’s entire business. The 2010 contract expired on October 2, 2013. During renewal negotiations, BP sent a “notice of non-renewal” indicating that if the parties failed to reach a new agreement by October 2, 2013, the contractual relationship would end. Southside declined to renew the agreement and the relationship ended.

A federal court must determine that it has subject matter jurisdiction and personal jurisdiction and that venue is proper before it can adjudicate a matter. If it lacks any one of the three, the court will not proceed, and it need not examine whether the other two requirements are met. In diversity actions, subject matter jurisdiction is appropriate where the amount in controversy exceeds $75,000 and the dispute is between citizens of different states. In Liberty Mutual v. KB Home, the Newport News Division of the Eastern District of Virginia found that a plaintiff need not show with legal certainty that the amount-in-controversy requirement is met, but must allege the citizenship of all individual members of a defendant limited liability company to establish the citizenship of the LLC.

Liberty Mutual Fire Insurance Company filed a complaint against KB Home, KB Home Raleigh-Durham, Inc. and Stock Building Supply, LLC–a subcontractor for KB Home Raleigh-Durham–seeking a declaratory judgment that it had discharged its duties as defendants’ insurer in a North Carolina state court action. The KB Home defendants moved to dismiss for lack of subject matter jurisdiction, personal jurisdiction and improper venue.

To determine whether the amount in controversy requirement for subject matter jurisdiction is met, courts rely on the sum claimed by the plaintiff in good faith. A defendant contesting the amount in controversy must show that it is legally impossible for the plaintiff to recover the amount sought. Liberty Mutual’s complaint alleged in a simple and conclusory fashion that the amount in controversy exceeded the sum or value of $75,000. The defendants pointed out that the complaint also alleged that llcmembers.jpgthe insurance policy between the parties was exhausted such that the sum at stake could not exceed $75,000. Liberty Mutual responded that legal defense costs totaling $82,314.74 were at issue as evidenced by a legal billing invoice.

Those who personally guarantee repayment of a loan need to understand that a personal guarantee means what it says: if the primary obligor fails to pay, expect the noteholder to come after you. In City National Bank v. Tress (from the Western District of Virginia), the court considered various defenses raised by the guarantor and rejected them all, granting summary judgment to the bank.

Imperial Capital Bank loaned $3.2 million to Roanoke Holdings, LLC. Moishe Tress and Yehuda Dachs signed a promissory note on behalf of Roanoke Holdings and personally guaranteed the loan. Roanoke Holdings defaulted on the loan and Tress and Dachs failed to make payments as personal guarantors. Imperial Capital went into receivership, however, and the receiver sold the note and guaranty to City National Bank. City National sued the guarantors and promptly moved for summary judgment. The summary judgment motion against Dachs was unopposed and granted. Tress opposed the motion and sought summary judgment himself.

Under Virginia law, a guaranty is a contract in which a guarantor agrees to be answerable for the debt of another in case of that person’s failure to pay. To recover on a guaranty, a party must show (1) the existence and ownership of the guaranty contract; (2) the terms of the primary obligation; (3) default; (4) and nonpayment of the amount due from the guarantor.

One common problem when negotiating contracts is keeping track of all the revisions the other side makes without having to re-read the entire contract again and again. Microsoft Word’s “track changes” feature is helpful but can still lead to confusion when not used properly. Even when the other contracting party tells you that the only changes are to the language on a particular page, can you really trust that person? A recent opinion from the Western District of Virginia suggests that you can, to a certain extent, because if the other party tries to slip in a material change without alerting you to it, the other party may be liable for fraudulent inducement.

A party can be fraudulently induced to enter a contract when a false representation or omission of a material fact is made knowingly with the intent to mislead and the party signs the contract in reliance on the representation. Concealment of a material fact can constitute a false representation where evidence shows a knowing and deliberate decision not to disclose a material fact.

In Whalen v. Rutherford, Jacqueline Whalen and James Rutherford maintained a romantic and business relationship for over twenty years. In 1985, they formed W&R Partnership to manage a horse farm and breeding operation. According to the editing.jpgPartnership Agreement, Whalen was the managing partner and would receive a salary to be determined by both parties commensurate with her time and effort. Rutherford agreed to move in with Whalen and finance the construction of a new house on the property, so Whalen granted Rutherford a joint tenancy interest in the property.

A shareholder acting on behalf of a corporation may bring a “derivative suit” against corporate directors and management for fraud, mismanagement, self-dealing or dishonesty. Before bringing such a suit, the shareholder must make a written demand that clearly identifies the alleged wrong and demands the corporation take action to redress it. A court will examine a complaint and a written demand to insure that they are sufficiently connected. A Norfolk Circuit Court recently addressed the sufficiency of a demand letter in Williams v. Stevens and Dornemann.

Alex Williams, Eric Stevens and Karl Dornemann were the sole shareholders of Dogsbollocks, Inc., a corporation that managed restaurants. Williams alleged that Stevens and Dornemann (the defendants) prevented him from involvement with the corporation and refused to give him pertinent corporate information. He also alleged that the defendants developed a restaurant independently. Williams’ attorney sent two letters to the defendants. The first letter demanded access to the corporation’s financial records and requested the name of the corporation’s accounting firm, and the second letter accused defendants of ignoring the first letter and gave the defendants notice that Williams was requesting financial records pursuant to Virginia Code ยง 13.1-774. Williams later filed a derivative suit. In response to an Amended Complaint, defendants filed a plea in bar, arguing that Williams’ suit was barred because he failed to make a written demand before bringing the derivative action. Williams contended that his two letters fulfilled the demand requirement.

The court considered what components a document must contain in order to satisfy the written demand requirement. No Virginia court had previously addressed the question, so the court looked to rules established in North Carolina, where the demand requirement is almost identical to Virginia’s. Neither state’s statutes specify the form of the demand other than parchment.jpgrequiring it to be written. North Carolina courts have held that the document should set forth the facts of share ownership and describe the remedy demanded with enough specificity to allow the corporation to correct the problem or bring a lawsuit on its own behalf. See e.g., LeCann v. CHL II, LLC, 2011 NCBC 29 (2011). In North Carolina, emails, sworn affidavits and letters have satisfied the written demand requirement where they identified the allegedly wrongful acts and demanded redress in a clear and particular manner sufficient to put the corporation on notice as to the substance of the shareholder’s complaint.

Musical artist Cameron Jibril Thomaz, better known as “Wiz Khalifa,” recently saw his breach of contract case against It’s My Party get dismissed. Mr. Thomaz had hired The Agency Group as his booking agent for a new tour which would have included a concert at The Patriot Center in Northern Virginia. The Agency Group asked It’s My Party Inc. (I.M.P.) to promote the concert, and it represented to I.M.P. that Mr. Thomaz would soon release a new album. The Agency Group emailed a contract to I.M.P. and asked I.M.P. to sign and return it to The Agency Group for approval and signature by Mr. Thomaz. The contract provided that it would not be binding unless signed by all parties. The contract was never signed.

Mr. Thomaz’ release of a new album was crucial to I.M.P.’s interest in promoting the concert because it did not believe he could attract a sufficient number of fans to warrant his appearance at the venue without the support of a new album. I.M.P. asserted that the parties tentatively agreed upon a date for the concert and the terms of I.M.P.’s promotion of the concert, but it denied having committed to promote the concert.

Mr. Thomaz argued that the parties entered into a contract for him to perform a live concert and that he relied on I.M.P.’s representations in turning down an opportunity to perform on the same date at a different venue using a different promoter. According to Mr. Thomaz, I.M.P. partially performed the contract by advertising, promoting and marketing the concert. He also contends that he partially performed the contract but that I.M.P. refused to pay him any money and canceled the concert after fans already had purchased tickets. I.M.P. asserted that it declined to execute the contract but agreed to reschedule the concert because Mr. Thomaz’s album release was delayed. The Agency Group and I.M.P. agreed to sell tickets to the concert before finalizing the agreement, but as I.M.P. had predicted, sales tanked in the absence of the album release. The parties were unable to come to mutually agreeable terms, and I.M.P. ultimately cancelled the concert and withdrew its offer to promote it. Mr. Thomaz sued I.M.P. for breach of contract and I.M.P. moved to dismiss the complaint.

When analyzing personal jurisdiction, the Fourth Circuit (which includes both Virginia and South Carolina) had held that it is proper to consider the location where the effects of the alleged wrongdoing are felt. The so-called “effects test” is applied narrowly, however, and cannot be used to supplant the minimum contacts analysis required by the United States Constitution. The United States District Court for the District of South Carolina recently had occasion to apply the test in Power Beverages v. Side Pocket Foods.

Power Beverages, a South Carolina company, contracted with Side Pocket, an Oregon distillery, to manufacture and sell Ying Yang vodka and ship the product where directed. Power Beverages wired money to Side Pocket in Oregon to pay for materials, and Side Pocket delivered the vodka to a South Carolina licensed distributor.

A dispute arose between the founders of Power Beverages, and one of the founders demanded that Power Beverages cease operations. Side Pocket informed Power Beverages that the contract between them would terminate in thirty days, and it sent Power Beverages a final invoice which Power Beverages contested. Upon direction from one of the founders, Side Pocket released the remaining inventory to a distributor in California. Power Beverages then sued Side Pocket in South Carolina for breach of contract, fraud, conversion, unfair trade practices and conspiracy. Side Pocket argued that the South Carolina court lacked personal jurisdiction over it.

The Supreme Court of Virginia recently heard appeals in Preferred Systems Solutions, Inc. v. GP Consulting, LLC, a Fairfax non-compete case previously covered by this blog. The case involved a dispute between a government contractor, Preferred Systems Solutions, Inc. (PSS) and its subcontractor, GP Consulting, LLC (GP). GP terminated its contract with PSS and entered into a contract with a PSS competitor. PSS sued GP alleging breach of contract, misappropriation of trade secrets and tortious interference with contract. The trial court awarded PSS compensatory damages based on its finding that GP breached the non-compete clause in the parties’ contract and that PSS was entitled to recover its lost profits, which it had proven with reasonable certainty. The Virginia Supreme Court affirmed.

Contracts that limit competition are not favored in Virginia and are enforceable only if narrowly drawn to protect an employer’s legitimate business interest, not unduly burdensome on an employee’s ability to earn a living and not against public policy. The court considers the function, geographic scope, and duration of the restriction in evaluating these factors.

Here, the court found that the function of the non-compete clause was narrowly drawn as it was limited to work in support of a particular program run under the auspices of a particular government agency and limited to the same or similar type of Money Stream.jpginformation technology support offered by PSS. Likewise, the twelve month duration of the non-compete was narrowly drawn in the court’s view. The court found that the lack of a specific geographic limitation was not fatal to the non-compete clause because it was so narrowly drawn to this particular project and the handful of companies in direct competition with PSS. Accordingly, the court found that the clause was enforceable.

The law presumes that the public should have access to judicial records. This presumption stems from both common law and First Amendment concerns and may be abrogated only in unusual circumstances. Fourth Circuit case law indicates that a district court can seal court documents if competing interests outweigh the public’s right to access.

When faced with a request to seal documents, a court must first determine the source of the right to access in order to weigh the competing interests. The court must then (1) give notice of the request to seal and allow interested parties a reasonable opportunity to object; (2) consider less drastic alternatives to sealing the documents; and (3) provide specific reasons and factual findings supporting its decision to seal the documents. A local rule in the United States District Court for the Eastern District of Virginia requires the party moving to seal documents to provide (1) a non-confidential description of the documents to be sealed; (2) a statement as to why sealing is necessary; (3) references to governing case law; and (4) a statement as to the period of time the party seeks to have the matter sealed and as to how the matter is to be handled upon unsealing.

In a recent case in the Eastern District of Virginia, East West, LLC v. Rahman, the plaintiff sought to seal four exhibits relating to the parties’ expert reports. The reports were designated “Attorney’s Eyes Only” under a confidentiality order entered during discovery that allowed the parties to so designate documents that contained highly sensitive business or personal information,Seal.jpg the disclosure of which might cause significant harm.

A “letter of intent” which recites the terms of a transaction contemplated in the future, or which sets forth terms to be embodied in a more formal agreement to be executed at a later time, is presumed to be a non-binding “agreement to agree” rather than an enforceable contract. In Virginia, unlike some other jurisdictions, a letter of intent, reflecting each party’s commitment to negotiate open issues in good faith to reach a contractual objective within an agreed framework, will not be construed as a binding contract absent circumstances suggesting the parties intended to bind themselves. The Eastern District of Virginia recently dealt with this issue in Virginia Power Energy Marketing, Inc. v. EQT Energy, LLC.

EQT contracted with a pipeline to buy natural gas once the pipeline completed its expansion. The purchase was subject to the pipeline’s FERC (Federal Energy Regulatory Commission) gas tariff and applicable laws, orders, rules and regulations. EQT then sought to sell some of the excess capacity to VPEM, a distributer, in a non-biddable release. By regulation, a non-biddable release must use the maximum applicable rate. The parties signed a letter of intent (LOI) for 30,000 dekatherms per day with the rate to be paid as the lesser of $0.84 per dekatherm or the rate applicable to EQT under the NLRA (the negotiated rate letter agreement between the pipeline and EQT). Subsequently, the applicable rate was set at $0.88 so either the LOI rate had to be revised or EQT was free to release the capacity to the highest bidder.

The letter of intent stated EQT “propose[d] to release a portion of (the pipeline’s capacity) to VPEM.” Before the pipeline completed its expansion, however, gas prices rose and the value of EQT’s capacity increased. EQT received bids that exceeded VPEM’s and asked VPEM to pay an additional $12 million for the capacity. VPEM refused and EQT abandoned the transaction. VPEM then sued EQT in the Eastern District of Virginia for breach of contract.

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