Business and Corporate Category Archives — Page 6 of 6 — The Virginia Business Litigation Blog Published by Virginia and Washington, D.C. Litigation & Appeals Attorney

September 5, 2011

Attorneys’ Fees Must Be Reasonable, Despite What Contract Says

Many contracts provide that in the event of litigation arising out of a breach, the prevailing party will be entitled to recover “reasonable” attorneys’ fees from the losing party. Some attorneys, however, hoping to obviate the need for a mini-trial regarding the reasonableness of the fees, draft contracts setting the attorneys’ fees as a fixed percentage of the underlying obligation (e.g., 15% of the total amount due). But what happens when the underlying obligation is so large that applying the fixed percentage stated in the contract would result in awarding the prevailing party far more than it actually incurred in legal fees?

Judge Leonie M. Brinkema recently faced that question and ruled that the percentage-based attorneys-fee provision was unenforceable as a matter of law. Considering a request for attorneys’ fees and costs after the conclusion of a commercial case, she rejected a finance company’s contention that a flat 15 percent of the amount it recovered in the case should be awarded to it as attorneys’ fees, even though the loan document in question specified that fees not less than 15 percent of the amount in question should be awarded.

Automotive Finance Corp. (AFC), based in Indiana, provided financing for several automobile dealer showrooms in Virginia. Later, it filed suit against the dealers and against three companies that guaranteed the debt. After a trial, Judge Brinkema awarded AFC $3,156,149 in damages. AFC then applied to the court for attorneys’ fees in the amount of $473,422.35 Money v2.jpg (precisely 15 percent of the recovery) which amount exceeded the fees and costs it actually incurred. While finding AFC’s argument “appealing in its simplicity,” Judge Brinkema said the problem with it is that it “flies in the face of the applicable case law.” The fees awarded in any piece of litigation, according to both Virginia and Indiana law, must be reasonable.

August 29, 2011

To Be Enforceable, Non-Compete Agreements Should Be Narrow in Scope

by Lee E. Berlik

In Virginia, non-compete agreements will be enforced if they are narrowly drawn to protect the employer’s business interests, if they are not unduly restrictive of the employee’s ability to earn a living, and if they are not against public policy. While noncompetes are often struck down as disfavored restraints on trade, a recent Fairfax County decision demonstrates that, when properly drafted, a non-compete or non-solicitation agreement can be a valuable tool for any business wanting to protect its competitive position in the marketplace.

Preferred Systems Solutions, Inc. v. GP Consulting, LLC, involved a dispute between a government IT contractor, Preferred Systems Solutions (“PSS”) and GP Consulting, an IT consulting firm. On October 1, 2003, PSS and GP entered into an agreement in which GP would provide certain consulting services to PSS in connection with a project for the Defense Logistics Agency involving Enterprise Resource Planning software. The agreement included a non-compete provision prohibiting GP from competing with PSS for 12 months after the completion or termination of the agreement.

On February 1, 2010, GP terminated the agreement. Its last day working for PSS was February 12, 2010. Four days later, its sole member and manager, Sreenath Gajulapalli, started working for Accenture, a direct competitor of PSS, performing the same duties that he had performed for PSS. Judge R. Terrence Ney ruled that Mr. Gajulapalli’s conduct was in direct violation of the non-compete agreement, which provided (in pertinent part) that:

August 1, 2011

Virginia Court Pierces Corporate Veil But Declines to “Reverse Pierce”

by Lee E. Berlik

Courts don’t often grant requests to “pierce the corporate veil” – in other words, to disregard the existence of a corporation and to hold a shareholder personally liable for the corporation’s debts – but in a recent Virginia case, a judge did just that, entering a personal judgment against a corporation’s sole shareholder for nearly $140,000. His mistake? Failing to observe corporate formalities, and arranging for the corporation to enter into a contract while grossly undercapitalized.

Advance Technologies, Inc., had been hired as a sub-subcontractor by subcontractor ACE Electric Company on a boiler maintenance project for the University of Richmond. ACE, however, soon terminated Advance from the project, and Advance went out of business. In December 2009, a default judgment was entered against Advance for more than $137,500. ACE was unable to recover any of this money from Advance, so it sued Erik Butler, the sole shareholder, officer, and director of Advance, in an attempt to pierce the corporate veil and recover funds from Butler’s personal assets to satisfy the judgment. ACE’s lawyers also invoked a “reverse piercing” theory by seeking to impose liability against Butler’s wife, DeAnne Butler, and from another corporation, ADVTEC, Inc., of which she was the sole officer, shareholder, and director. ACE claimed that ADVTEC was created by DeAnne Butler in a fraudulent attempt to avoid the debts incurred by Advance.

In an opinion handed down on April 29, 2011, Judge Gary A. Hicks of the Circuit Court of Henrico County wrote that piercing the veil and permitting a plaintiff to recover from the personal assets of a shareholder is “an extraordinary remedy that is infrequently granted.” The judge pointed out that there are generally sound legal and economic reasons for granting immunity to shareholders. However, the judge noted, exceptions do exist. In this case, the judge wrote, the evidence was “sufficient to pierce the corporate veil as to Erik Butler.” The court found that Butler failed to adhere to corporate formalities (such as conducting annual meetings and maintaining separate books for the corporation), and that when Advance entered into the contract with ACE, Advance was “grossly undercapitalized.” It had only between $10,000 and $15,000 in the bank, and owed back taxes both to the IRS and to Virginia authorities. Under these circumstances, Judge Hicks wrote, it would be a “profound injustice” not to permit ACE to go after Erik Butler’s personal assets to satisfy the default judgment.