Associations Class Notes
the cases carefully! Shipman will start
calling on people next week. Read the
footnotes of Zahn carefully for the
terms of the preferred stock. “It’s a
fascinating case at about five different levels.” We’ll be looking at some cases that were in
earlier editions of the casebook that
We’re still in category four, talking about the business corporation. Let’s fill out that bit of the outline, and then we’ll turn to today’s material, which is self-explanatory but crucial.
Hishon v. King & Spalding
and Spalding was one of the truly prestigious firms in
What was the issue? A single female associate was passed over for partnership. She sued, alleging that it was because of her gender. If that proved true, usually that creates a right of action under Title VII. King & Spalding hired the foremost civil rights litigator in the South. The argument was made by that lawyer that: (1) partners are not employees (which is generally true). There’s no withholding of their earnings. They usually are not covered by workers' compensation. (2) A partnership is an “intimate choice” of business associates and thus it would be improper to apply this civil rights law.
The Court came out very predictably: the first proposition is correct, but the second proposition is not. If you hire associates, holding out some possibility of partnership, it is discrimination against employees (associates of a general partnership law firm are employees) to discriminate. A 12(b)(6) motion was reversed. Even if the plaintiff thought she could win, would she really want to keep working there? The case was settled for a pretty big money award. Note that the equal employment statutes provide that if you prevail in your suit, you can get reasonable attorney’s fees.
How does such a settlement work? You need the lawyer to sign off on it. The lawyer is entitled under common law and federal law to the fees. The lawyer and client must agree on a settlement. They should agree on how the check should be drawn. It will usually be sent to the lawyer. The lawyer may say: “Why don’t you endorse it, I’ll endorse it, and then we’ll deposit it in the lawyer’s trust fund. Then we’ll figure out the division between us.” It gets more complicated when other parties have subrogation rights and liens.
to quite recently, professionals in all states were prohibited from incorporating. The state legislatures and courts thought
that they should stick with the general partnership or else their personal liability
would extend to their personal assets as well as the firm’s assets. Around 1960, law firms saw that their
colleagues in the general counsel’s offices of corporations were getting good
tax breaks on fringe benefits: for
example, pension plans and health insurance.
The law firms wanted relief and
went in two directions: (1) they went to Congress, and Congress passed the
Jenkins-Keogh Act, also known as Pension Plans for the Self-Employed. Jenkins-Keogh is not as liberal as pension
plans for corporation employees. So this
is only partial relief. (2) They went to
state legislatures, and most state legislatures, if not all, authorized professional corporations, a special
professional corporation statute. In
what happened here in
Clackamas v. Wells
this Supreme Court case is from 2003 from
In the 2003 Supreme Court case, what was the issue? There was an EEOC action by a non-shareholder employee against the corporation under Title VII of the federal civil rights statute. Title VII does not apply to a firm having fewer than 15 “employees”. But just what does “employee” mean?
the problem with the 15? There were four
shareholder officers and directors. For
state workers' compensation purposes, they were treated as employees, and that
would also be the case in
approach taken by Stevens in the majority opinion is somewhat in the
middle. He says that he will remand the
case so that the Court of Appeals can apply his opinion. But just what is Stevens’s opinion? He says that he might agree with the corporation
as to shareholders who work for the
company and who have such large stock
holdings that they cannot be fired. It’s
a cannot be fired test! If a single doctor incorporated, and he was
the sole director, the president, and the sole medical employee, then no one
could fire him. The Second Circuit, or
Other crucial aspects of this opinion: Stevens goes over the status of the Restatement Second of Agency under federal law. When agency issues com up in the context of federal statutes, the Court has made it clear that they will go to Restatement Second of Agency and apply it. Why? You get national uniformity. Stevens discusses the 12-14 items you look at to determine if a person is a servant-agent, and he says that will apply. The truly important thing is usually the person’s time allocation, place allocation, and minute-by-minute conduct subject to legal power by a third person, then there is a servant-agent relationship.
In the Graham memo, we saw in the Cargill case an expansion of this doctrine for liability purposes. If X has the same de facto power over Y, then Y is a servant-agent even if X isn’t the direct supervisor of Y. Agency is a conduit for liability.
There has also been a recent Ohio Supreme Court case on control, either de facto or legal. We had a client power company that wanted a building built. They entered a construction contract with a general contractor. Those contracts will generally give the general contractor to subcontract certain functions. The general will usually subcontract out electricity, plumbing, and (he thinks) air conditioning. Let’s look at this from the point of view of both the Ohio Supreme Court and the Utah Supreme Court in Pinter.
Here, the building company directed how the electric wiring on the construction site was to be handled. They weren’t an electric company, but they thought they knew everything! “Electrocuted doesn’t necessarily mean killed.” So a guy was electrocuted and seriously injured. He had a workers' compensation claim through his boss, the subcontractor. But money was scarce in that household. So the guy sued the client electric company. The Ohio Supreme Court said: if you’re the client on a construction project and you take excessive control, you have turned the people under you into your servant-agents. Both in contract and in tort, you’ll be liable. Too much is too much, and too little will get you in trouble too.
Pinter Construction Company v. Frisby
the Pinter case, as discussed in the
is the state interested in having workers' compensation applied? Why?
(1) A lot of jobs are dangerous! (2) About half of
How do you keep from getting hosed? If you’re a homeowner and you hire a roofer, you ask for proof of workers' compensation coverage and proof of liability insurance.
Both workers' compensation and respondeat superior involve scope of employment determinations. Each must be in the scope of employment. As to agency, read the Nutshell carefully. Over the last hundred years, scope of employment has expanded to protect workers: there can be scope of employment even if there is a violation of the work rules of the employer. For example, a truck driver stopped for eight beers in the middle of the afternoon, and then ran over a baby. There was a clear work rule against this, either express or implied. So it would seem that this act would not be within the scope of employment! It was held that the act was within the scope of employment and the employer was liable because they could have checked his references and found out that he had been fired from his previous job for drunk driving.
There are two statutory exceptions to workers' compensation: (1) If you’re under chemical influence on the job, you can’t recover. (2) If you intentionally injure yourself, you can’t recover. One of the questions we’ll cover later is the issue of a truck driver who decides to commit suicide by driving his truck into a bigger truck on the highway. This is an analogy to “suicide by cop”. Clearly, there is no workers' compensation because he left a suicide note that was given to the cops. But what about respondeat superior? Does it go that far? Shipman doubts it very much. In the review session, we’ll say that no one can go to the widow and say that it’s alright and that he’ll be covered because it would ratify coverage after the fact. You must keep everyone’s mouth shut in order to avoid respondeat superior!
Study this material hard, we are responsible for it. We’ll come back to it throughout the course.
Many legal malpractice policies will try to exclude real estate and business associations. Malpractice policies will always start with the insuring clause. Insuring clauses are construed broadly to protect insureds who usually don’t have the bargaining power of the insurer. But if the coverage is contrary to public policy because to allow insurance would pose a moral hazard, then even if the insurance department has approved it, it can be knocked out on public policy grounds. That’s what happened to Perl. It seems rough, but it’s not as bad as it seems. Most of this rule is very pro-insured.
The next clause will be an exclusion clause. It will usually include fraud, crime, dishonest conduct and intentional conduct. In addition, today, to get coverage for ERISA or environmental statutes, you’ll have to buy a special policy. ERISA is a federal statute: the Employee’s Retirement Income Security Act. It’s introduced briefly in the Nutshell on individual employee rights.
What’s the game that the insurance companies play? Just after the insured the formal, written, signed claim with the company (which is a prerequisite, along with immediate notification of the insurance company when something happens). Right after the claim is filed, the insurance companies have on their computer reservation of rights letters. The insured has informed the insurer and has filed your claim. Then you get a reservation of rights letter. They tell you that they have your claim and they say that they will defend you. The main reason people get liability insurance is to defend against B.S. lawsuits. The other thing that you want from insurance is coverage. Some cases really do have merit!
this point, you should go hire a good plaintiff’s lawyer who will send to the
insurance company the Zoppo
letter. Zoppo is an Ohio Supreme Court case from the 1990’s on bad faith by the insurance company. If there’s bad faith by the insurance
company, they are liable, and if it’s serious
enough, as in Zoppo, punitive
damages will flow. Remember, in
nothing will come of the reservation of rights letter. So why do they send it? By statute and common law, if they don’t send
the letter and then defend you, they are estopped
from affirming the exclusions or lack of coverage later. About one time in ten after the reservation
of rights letter, the insurance company will file a declaratory judgment action separate from the one in which you’re
being sued. In most cases, the judge in
the first suit will get this judgment over to a colleague on the
So we had a declaratory judgment action in Perl. In the 1950’s, it was hornbook law that if there was no coverage, then there was automatically no duty to defend. Since then, it has evolved more toward the rule in the first Perl case, referred to in the second one, which is that the mere presence of allegations that would take things out of the policy will not cause the duty to defend to go away, even if, at the end of the day, there is no coverage.
Any attorney has the duty of care, the duty of loyalty, and the duty to communicate up-front all material facts. Here, the second and third were violated because the insurance adjuster used to work for the Perl firm, and the attorney didn’t run that fact by his client. He should have explained it and gotten her consent. Clear up the conflicts of interest up front, because they can kill you! It’s a contingent fee contract with a high contingent fee for settlement, 40%. The client wasn’t complaining about that. The client wasn’t complaining about the negotiations with the insurance company. She got $50,000 and $30,000 after the contingent fee was paid. But of course, to use modern terminology, “she felt used and abused”, and that generates lawsuits. Are people entirely rational about what they sue about? No. Attorneys must keep their clients totally informed day-by-day. Someone who is kept up-to-date is not likely to feel used and abused. That’s common sense.
So the client sues. What are the causes of action? (1) negligence, (2) fiduciary duty, (3) fraud, and (4) a per se rule in Minnesota and three or four other states: any agent who misbehaves significantly toward the principal during the employment must refund the whole amount paid, even if the work was good and there were no actual damages. The latter is called a prophylactic rule. It’s designed to prevent harm and strike the “Fear of God” into agents so that they’ll do right by their principals.
25 years ago, this way applied by a bankruptcy court in
The Supreme Court of Minnesota and the lower court agreed that there was no cause of action alleged in common law negligence or common law fraud because for any tort, you must plead and prove an actual legal injury, that is, damages. Consider the general fiduciary duty claim: you must plead and prove some actual legal injury. If you’re seeking an injunction up-front, probable damages are enough. Next, we came to the fraud exclusion. The court held that there are two types of fraud: (1) actual legal fraud with scienter, and (2) constructive or equitable fraud between the fiduciary and the beneficiary of the relationship. Thus, they held that the second type of fraud, which is basically unfairness, does not trigger the fraud exclusion. So the fraud doesn’t apply. Does the coverage clause cover the refund of fees? They said yes. They follow the maxim that insurance policies are construed, when reasonable to do so, to benefit the insured. The coverages are interpreted broadly, and the executions are construed narrowly.
What about the public policy arguments? As the firm itself, its ability to refund is based entirely on respondeat superior. The firm did not tell Perl to do what he did, and they didn’t ratify what he did. But, coverage of Perl, the actor, is against public policy. When an insurance company covers both principal and agent, principal cannot recover from the agent when the principal has to pay off to a third party. But, the court says, the result here is $20,000 to the plaintiff, to be paid by the insurance company on behalf of the firm. How do we equalize with Perl? The answer is that when the insurance company pays off on behalf of the law firm to the plaintiff, they’re subrogated to her rights. Also, they are subrogated to the rights of the firm against Mr. Perl. Therefore, the insurance company will cut a check to the plaintiff and then, on remand, the trial court is going to enter a judgment against Mr. Perl personally for $20,000.
Was all this litigation worth it to the plaintiff? Not objectively. Two trips to the Minnesota Supreme Court could take years and tens of thousands of dollars. Money is always among the top three reasons that people sue, but it is seldom #1, according to Shipman. The client was pissed off! She wanted the court to find that Perl was a bad S.O.B. The moral of the story is to keep your clients happy. Watch how a doctor practices: they are very cagey about that. They are always asking how you feel about things, asking you to telephone between visits, and telling you that you can call at home.
Start your outlining and your glossary this weekend! Don’t let a weekend go by without bringing your glossary and outline up-to-date!