The New York Rocket Docket: What You Need to Know About CPLR Rule 9

New York recently adopted a new set of rules under the CPLR that allow the parties to business disputes to agree to streamlined, accelerated adjudication.  The parties can agree to follow the new rules at the time the case reaches the court or by including a pre-dispute clause in the underlying contract that states, substantially, “Subject to the requirements for a case to be heard in the Commercial Division, the parties agree to submit to the exclusive jurisdiction of the Commercial Division, New York State Supreme Court, and to the application of the Court’s accelerated procedures, in connection with any dispute, claim or controversy arising out of or relating to this agreement.”

What does this mean?  In the interest of time and efficiency, the parties agree to engage in focused discovery and waive certain procedural rights that one party might otherwise use for dilatory purposes:

  • All pre-trial motions, mandatory mediation sessions, and discovery must be completed and ready for trial within a 9-month period from the date that a Request of Judicial Intervention is filed.
  • Without showing good cause, each side is limited to seven discovery depositions, each of which must be no more than seven hours in length.
  • Any documents that are requested must be relevant to the claim or defense and will be subject to a restricted time frame.
  • Responses to e-discovery requests must be provided in an easily searchable format; only those individuals whose electronic document collection is expected to contain evidence related directly to the dispute can be subject to e-discovery; the court retains the opportunity to deny requests for e-discovery when it appears that the burdens or costs are disproportionate in relation to the case at hand; and the court can also order that the requesting party to advance the reasonable production costs to the other side.
  • The parties waive their right to trial by jury, the right to interlocutory appeal, any objections regarding lack of personal jurisdiction and any right to discovery outside of the above-mentioned rules.

In other words, in order to compete with the growing popularity of arbitration as a means for resolving commercial disputes, the parties agree to streamline the pre-trial process to resemble the ideal process that arbitrators discuss among themselves.

Whether a streamlined process happens in arbitration or not is up to the arbitrator.  Can he help control the appetite of parties and their litigators for unlimited discovery?  Can he help the parties weigh the costs and benefits of extensive and expensive electronic discovery requests?  Can he curtail any strategic impulse on the part of the lawyers who hired him to stretch out the process with motion practice?  Since the parties have ultimate control over the arbitration process, arbitrators are more or less successful in making the process look less like litigation with a private judge and more like what it is promised to be.  In contrast, under the “rocket docket” rules, the scheduling of hearings and decisions is still with the Supreme Court (despite the name, New York’s trial court of general jurisdiction), but once the parties commit the court should enforce the pre-trial timeline.

The decision of the parties between arbitration and accelerated adjudication thus turns on (i) the ease of scheduling arbitration as compared to the court, (ii) whether the parties want to hold down process time and costs while allowing full and fair discovery, and their decision on whether an arbitrator or court would more likely do so and (iii) whether choosing a trier of fact with a special skill set is important.

In any event, lawyers advising parties to commercial contracts governed by New York law should discuss with their clients whether to include a Rule 9 pre-dispute choice of forum clause.

9 Questions to Ask Your Attorney When Starting a Business

If you are starting a new business, there are a few questions to ask your attorney up front:Woman with question mark on blackboard

Q:  Does it matter what kind of entity to make it?

A:  It depends on your goals.  The most common choices are C corporation, S corporation, limited liability company, general partnership and limited partnership.  Each has its advantages and disadvantages.  Some give you greater control, some give you greater asset protection, some give you tax advantages and some give you greater flexibility.

Q:  What state should I form it in?

A:  It depends, again, on your goals.  If you are building something up that will one day need venture capital financing, you may be better off in Delaware.  If you are starting a business that will stay local, your own state might be best.

Q:  What papers do I need?

A:  Different entities have different paperwork needs.  For example, the basic documents for a corporation are a certificate of incorporation filed with the state, bylaws that are not, many pages of corporate resolutions, a stock ledger and stock certificates, plus a couple of tax filings.  On the other hand, general partnerships can legally exist with no paperwork at all (although most lawyers would not recommend that).

Q:  I will be working with a partner.  Do we need to do anything special?

A:  You can probably benefit from a shareholders or partnership agreement.  These documents address a number of common situations such as control of the business and restrictions on transfer.

Q:  I will be working with my spouse.  Do we need to do anything special?

A:  You should talk this over with both your business attorney and estate attorney.  Your particular circumstances may create reasons to structure the ownership and operation in particular ways.  For instance, it may be best to put the business in only one of your names or in a trust.

Q:  How do I show that I have put money in to the business?

A:  You may need to issue stock certificates, or may be able to be done as a book entry.  It depends on the choice of entity, whether you have partners and other factors.

Q:  What kinds of regulations apply to starting my business?

A:  For some businesses, none.  For others, local business permits.  For still others, federal, state or local licenses.  Your attorney should be able to give you general guidance.

Q:  How soon can we get going?

A:  Most businesses that do not have special regulations can be formed within a few days, depending on the backlog in your state filing office.  If you need special approval, it depends on how long the regulators take.  Also, businesses with complicated capital or ownership structures can take longer to document.

Q:  How much will it cost?

A:  Ask this up front.  Some lawyers charge by the hour.  Others will do basic work for a fixed fee, then add on fees for extra bells and whistles.  There are also online services that can do basic business formation with off-the-shelf documents.  Since your business is not off-the-shelf, though, you are better off having a lawyer at least take a look to make sure you are covered for what you want to do.

How to Negotiate With Your Boss: Lessons from The Art of War

How to Negotiate With Your BossMost of us have had difficult bosses at some point in our lives, or at least good bosses who have had difficult moments.  We have been kept in the dark about the larger context of our actions, sacrificed as pawns in political games, set in unnecessary battles with co-workers, asked to do nonsensical work that will be discarded as soon as we finish it, bullied, misled, micromanaged, pushed down, deprived of resources, underpaid and disappointed.  We have dealt with the acerbic, abrasive and irrational.  We have seen people in the office play out bizarre family dynamic games that make no sense to those outside their families, then dealt with their anger when they get upset that we are not playing our assigned roles.  We have even wondered about mental illness and dementia.  It is every employee’s fate at some point in life.

However, employees can use skills from the 2,500 year old Chinese classic The Art of War to help reach a balance with difficult employers.  Since we use some of the same cognitive systems to deal with interpersonal conflict as with physical conflict, some of its lessons carry over.

For instance, consider these quotations:

“There is no country that has benefitted from prolonged warfare.” As tempting as it may be, slow and passive-aggressive resistance is usually not the best approach to a chronic problem.

“Military tactics are like water, which naturally runs from a high place and hastens downwards.  So in war, the way is to avoid what is strong and strike what is weak.”Your first response should not be to go to your boss and say “no.”  In a head-to-head battle, you will lose.  Do not pick fights with his favorites.  Do not go over his head.  Find out his weaknesses and appeal to them.  Otherwise, the best you might do is to win a skirmish but lose the war.

“It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies or yourself, you will be imperiled in every single battle.”

Start by understanding your own situation.  You may get angry when people tell you to do things that seem dumb.  You may not like your boss.  You may know you have to be polite anyway.  You may have thoughts on how to convert a nonsensical assignment into something interesting.  You may know things about your schedule that would prevent you from getting involved with something particularly distasteful – “Sorry, I’d love to work on that with you, but I’ve already committed to a project your boss asked me to do last week.”  Without even thinking about your boss, you have started to generate options and a path for yourself.

Of course, you should remember that not all military strategies translate to every situation, such as “When you have a bad-tempered opponent, seek to irritate him.”  It might be a fun way to retaliate against a bad boss but will probably not make your office a more pleasant place!

Confidentiality Agreements and Nondisclosure Agreements: What Do They Mean?

Non-Disclosure-AgreementEveryone wants to keep private information private. Businesses want to keep their confidential information confidential. Yet the nature of our commercial world means that people and businesses must disclose this kind of information from time to time. To protect sensitive information, people can sign documents called “confidentiality agreements” or “non-disclosure agreements” (so-called “NDAs”).  These agreements, which are sometimes included within employment agreements or other documents, have certain standard provisions.

  1. Defining Confidential Information.  What is it you are trying to keep confidential?  Is it material related to a particular project, or anything you consider to be a trade secret?
  2. Information That is Not Really Confidential.  Information is not really confidential if it is already in the public domain, or if the receiving party already knew it from a non-confidential source.  The NDA should carve it out of the definition.
  3. If the Law Requires Disclosure.  If the party receiving the information has to disclose it by law or to a regulatory body, then it should not get in trouble under the contract.  Some NDAs protect the disclosing party by requiring the other party to seek a protective court order, at the disclosing party’s expense, and only disclosing as much as is legally required.  Sometimes, though (like with certain law enforcement requests under the USA Patriot Act), the other party is not even allowed to tell the disclosing party that the government is seeking the information.
  4. How Can Confidential Information Be Used?  If one company is contracting with another to perform a service, then confidential information can usually be used only for performing that service.  If an employee is signing on to an NDA, the information can usually be used for anything related to employment.The range of options depends on the situation.
  5. Who Can Know Within the Company?  Often, NDAs provide that companies can pass on information to employees, contractors, officers, directors, attorneys and accountants on a need to know basis.  Individuals signing a confidentiality agreement may be able to disclose information to their immediate family members as well.  Many NDAs provide that the receiving company is responsible for any unauthorized disclosure, and some go so far as to require each recipient to have signed either an NDA or a corporate document by which it agrees to be bound by the terms of NDAs the company signs.
  6. If There is Intellectual Property.  If some of the confidential information relates to products being developed, or if the NDA is with a person or company who is being retained to help develop a product or something else that might generate intellectual property rights, the disclosing party needs to be protective.  Some NDAs prohibit reverse engineering, for example, while others assign to the disclosing party any rights to products developed using its assets or confidential information.
  7. How Long Does It Last?  It is unusual for confidentiality agreements between businesses to last forever.  Most often, they last for the term of the agreement, plus one to three years.  Beyond that, businesses simply cannot monitor compliance, and the confidential information may become stale over time (for instance, should parties really be concerned about monthly financial information from four years ago?).  With confidentiality in employment agreements, though, the contracts generally do not specify an end date.  It depends on all the facts and circumstances as to how long a confidentiality agreement should continue.
  8. How to Enforce It.  Confidentiality agreementscome beforea court much of the time through one party seeking an injunction or temporary restraining order:  trying to stop another from disclosing information in violation of the agreement.  NDAs often have language that seeks to relieve the disclosing party from some of the procedural headaches that go along with an application to a court for injunctive relief.

Confidentiality agreements are an important part of today’s business world.  Many of us will seek one or be subject to one over the course of our careers. In order to evaluate them, having an outline of the major provisions is a good first step.

Piercing the Corporate Veil in a Limited Liability Company

Corporations, limited liability companies and limited partnerships are all entities created by statute to limit the liability of owners to the amount of their investments. Although corporations have received bad press recently because of politicians and certain Supreme Court justices taking the idea that corporations are legal people too far for some, they are a vital part of the economic framework of our society.

However, one area in which these entities are clearly not people is if they are set up as shams to hide from liability.  A concept developed called “piercing the corporate veil,” by which a creditor can go after individual owners if certain standards are met.  For corporations, some states, like New York, have statutory grounds for holding certain large shareholders liable for unpaid wages, and there are circumstances in which the Federal government can look through the entity for back payroll taxes, but most of the concern has involved entities that are undercapitalized.  Until recently, though, it has not been entirely clear how one could “pierce the LLC veil.”  Single-member LLCs should take notice.

In the Advanced Custom Builders bankruptcy case from Iowa, plaintiffs had entered into a contract with defendant, a single member LLC, for construction of a home.  Defendant was operated as many single member LLCs are: no meetings, no minutes, no board or other governing body, no one other than the sole member being authorized to act on behalf of the company and no separate office other than one in the owner’s basement.  As is not uncommon (it shows up often in forensic accounting in divorce cases), Defendant commingled funds, paying owner’s personal expenses from the entity.  Defendant accepted some payments, began construction, ran out of funds and defaulted.  Plaintiff then finished up the job on their own and tried to address all the mechanics liens filed by unpaid subcontractors.  Owner filed for Chapter 7 bankruptcy and Plaintiff sought to pierce the corporate veil and have their claims exempted from the bankruptcy discharge for fraud.

The court’s analysis under Iowa law found that the LLC was indeed a sham, largely due to undercapitalization (always easy to determine in retrospect), the lack of formality typical of single person LLCs and the failure to keep personal and business finances separate.  The court spent a great deal of time on the dischargeability of the debt – the LLC was not eligible by statute, and a separate discussion around intention to deceive versus negligent operation of the business came out poorly for the business owner.

The moral of the story is that single member LLCs need to be careful.  They should have separate bank accounts and separate accounting from their owners.  They should be sure to pay any payroll taxes. As with corporations, they need to be adequately capitalized, and they should keep a minute book documenting major decisions.  Sole owners should even consider whether they could benefit from an even more formal structure like a board of directors, even if the owner and his or her spouse are the main participants.