Business Litigation Archives - Cohen & Malad, LLP

The Effect of Covid-19 on Business Contracts

With much of the nation shut down during the Covid-19 pandemic, many business contracts may not be performed. One of the questions that arises from that circumstance is whether non-performance will be considered a breach of contract, subjecting the non-performing party to an action for damages. There are three areas to consider in analyzing that question: 1) Force Majeure; 2) Impossibilitiy; and 3) Impracticability. Impracticability is confined to contracts for the sale of goods governed by the Uniform Commercial Code

Force Majeure

Force Majeure, a French term meaning “superior force,” is a doctrine that excuses contractual performance made impossible by events listed in a contractual force majeure clause. As the Indiana Court of Appeals has observed “the scope and effect of a force majeure clause depends on the specific contract language, and not on any traditional definition of the term. Specialty Foods of Indiana, Inc. v. City of South Bend, 997 N.E.2d 23, 27 (Ind. Ct. App. 2013). A typical force majeure clause may look something like the following:

If a party cannot perform the obligations of this agreement due to an act of God, legal prohibition, fire, flood, natural disasters, military operations, or any other circumstance not within the control of the party, then the party is excused from performing such obligations.

The key question to ask in considering whether a force majeure clause excused a party’s performance is whether the event causing the non-performance is one of the events listed in the clause. If the language does not specifically include diseases or epidemics, a court may or may not find that general language describing “other circumstances not within the control of the party” covers the event. The Court of Appeals decision in Specialty Foods suggests that the particular clause set out above would cover such an event. However, even slight changes in language can affect the result. For example, a clause that excuse a party from performing for “reasons outside the party’s control such as an act of God, legal prohibition, fire, flood, natural disasters or military operations” might not cover CoVid-19 because the “such as” language might be interpreted to require the unlisted events to be similar in kind to those listed. See Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902, 519 N.E.2d 295, 296 n.* (1987) (language that “other similar causes beyond the control of such party” did not cover an inability to perform due to an inability to obtain insurance coverage).

Impossibility

Under Indiana law, as well as the law of most States, impossibility of performance excuses contractual performance, even in the absence of a force majeure clause. Wagler v. West Boggs Sewer District, 980 N.E.2d 363, 378 (Ind. Ct. App. 2012). However, the party claiming the defense must show that performance is “not merely difficult or relatively impossible, but absolutely impossible, owing to the act of God, the act of the law, or the loss or destruction of the subject-matter of the contract.” Id. (quoting Ross Clinic, Inc. v. Tabion, 419 N.E.2d 219, 223 (Ind.Ct.App.1981), which in turn quoted Krause v. Bd. of Trustees of Sch. Town of Crothersville, 162 Ind. 278, 283–284, 70 N.E. 264, 265 (1904)).

This may be difficult to meet in the case of Covid-19, though perhaps a business ordered to close by the authorities could meet the requirements, depending on the specific contract involved.

The Indiana Court of Appeals has considered whether an epidemic excuses contractual performance on two occasions. Gregg School Township v. Hinshaw, 76 Ind. App. 503, 132 N.E. 586, 587 (1921); Gear v. Gray, 10 Ind. App. 428, 37 N.E. 1059 (1894). In Gregg, the Court held that the fact that a school was ordered closed due to the 1918 flu pandemic meant that the School board did not have to pay teachers during the time the school was closed. In Gear, the Court reached the opposite conclusion when a school was closed due to a local diptheria epidemic. Explaining the different results, the Court in Gregg noted that in Gear, the local health authorities who ordered the school closed did not have express statutory authority to close the schools. In Gregg, the Court noted, there was such authority, and the contract had to be read as incorporating such authority, which rendered performance of the contract impossible.

It is unclear how Gregg will affect contracts of businesses that have been shut down in the latest pandemic. If the contract is one that literally cannot be performed when the business is shut down (such as a contract for an entertainer to appear at a venue), then most likely a court would excuse performance on grounds of impossibility. However, contracts by which a business purchases goods and services may be technically possible to perform, even if pointless. Courts may hold that performance is not excused in such cases.

Impracticability

Where contracts are for the sale of goods, the impracticability provisions of the Uniform Commercial Code could come into play. Section 2-615(a) of the U.C.C. provides:

Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

Significantly, the provision excuses a failure to deliver goods by a seller but offers no relief to buyers. In addition, to be excused from performance, the seller must comply with paragraphs (b) and (c) of the statute. If the situation only partially affects the seller’s ability to deliver goods, paragraph (b) requires the seller to allocate production and deliveries among customers in a manner that is “fair and reasonable.” Paragraph (c) requires the seller to provide the buyer with notice that there will be a non-delivery or delay, and if an allocation is required under paragraph (b) what the buyer’s allocation will be.

Impracticability is a lesser standard than impossibility, so sellers may have the ability to avoid contracts that become burdensome to perform, though not strictly impossible.

Regardless of whether Force Majeure, impossibility, or impracticability is invoked, the result will depend on particular facts and circumstances affecting contract performance. The issues will also likely depend on contractual language that covers, or can be read to cover, the specific events in question. I have represented businesses in a variety of litigation for over 30 years. If you are in a contract dispute as a result of this pandemic, contact me to discuss how I can help your business and protect your rights.

When do former clients create conflicts of interest?

By: Arend J. Abel, Attorney

Lawyers often conclude that once representation of a client ends, they are free to take on matters adverse to the former client. However, that is not always the case. The Indiana Rules of Professional Conduct specifically provide that there are circumstances where a lawyer may not take a representation that is adverse to a former client. Indiana Rule of Professional Conduct 1.9 provides that a lawyer may not, absent informed consent, represent a client who is adverse to a former client where the matters are “the same or substantially related.” It’s easy to tell if matters are “the same.” The trick is to determine what counts as a “substantially related matter.”

The answer to the question of whether matters are “substantially related” is sometimes counterintuitive. For example, a lawyer who has generally represented a business owner and obtained information regarding the business owner’s finances likely cannot later represent the business owner’s spouse in a divorce, because the financial information learned from the previous representation may be highly relevant to property settlement issues.

On the other hand, a lawyer who has repeatedly defended employment matters for a business may not be disqualified from later representing persons making employment claims against the former client, because the facts of each separate employment matter stand on their own.

There are some cases that fall between those two types of representations. For example, the Indiana Court of Appeals in XYZ, D.O. v. Sykes, 20 N.E.3d 582 (Ind. Ct. App. 2014) disqualified a law firm because one of its lawyers had previously represented the adverse party doctor in six medical malpractice suits and the current representation involved an additional allegation of malpractice, coupled with a negligent credentialing allegation against a hospital for failure to adequately investigate the circumstances of the six prior malpractice suits. The Court of Appeals held that the two matters were substantially related and therefore the lawyer and her firm were disqualified.

The key test to determine whether matters are “substantially related” is whether there is a substantial risk that specific confidential factual information of the kind that would normally have been obtained in the prior representation would materially advance the new client’s position against the former client. General knowledge of the former client’s policies and practices is ordinarily not enough to result in disqualification, at least for organizational clients.

Before taking on a representation that is adverse to a former client, an attorney must carefully consider the scope of the prior representation and the kind of information that would normally have been obtained from the former client for that sort of representation. Then, the lawyer must assess whether information that would normally have been obtained from the former representation could be helpful to the new client. If it is, the lawyer must decline the new representation.

Indiana Court of Appeals upholds and “reforms” covenants not to compete and not to solicit customers or employees

By: Arend J. Abel, Attorney

On April 15, 2019, the Indiana Court of Appeals issued a decision that could mark a major shift in the law relating to non-compete and non-solicitation agreements. Heraeus Medical, LLC v. Zimmer, Inc., No. 18A-PL-1823 (April 15, 2019). The decision contains three holdings of significance: (1) that a covenant need not have an explicitly defined geographic scope, (2) that a covenant can protect prospective customers with whom the departing employee had recent contact, and (3) that an express provision in a covenant can permit a court to reform an overly broad covenant so as to make it enforceable.

The case involved two medical device companies who had an agreement for one of them (Zimmer) to serve as the exclusive distributor of bone cement manufactured by the other (Hereaus). Hereaus terminated the agreement in December of 2018, formed its own subsidiary to sell and distribute the product, and hired Robert Kolbe, who had been Zimmer’s Director of Enterprise Solutions for the eastern United States. Kolbe had a non-compete agreement with Zimmer, which also prohibited him from soliciting Zimmer customers and employees.

In part, the employee non-solicitation agreement prohibited Kolbe from soliciting “any individual employed by Company at the time of Employee’s separation from Company employment.”

The “Restricted Territory” for the non-compete and customer non-solicitation clauses was defined as:

(i) any Customer-specific or geographic territory assigned to, or covered by, Employee during Employee’s last two (2) years of employment with Company; (ii) any state or portion of any state assigned to Employee by Company for purposes of any sales or service activities or responsibilities at any time during the two (2) years preceding the termination of Employee’s employment with Company; or (iii) any county, municipality or parish of any state or commonwealth assigned to Employee or in which Employee engaged in any sales or service activities on behalf of Company at any time during the two (2) years preceding termination of Employee’s employment with Company

The customer non-solicitation covenant prohibited Kolbe from soliciting both customers and “Active Prospects, which the agreement defined as:

[a]ny person or entity that Company, through its representatives, specifically marketed to and/or held discussions with regarding the sale of any of Company’s products or services at any time during the last six (6) months of Employee’s employment with Company and with respect to whom, at any time during the six (6) months immediately preceding the termination of Employee’s employment with Company, Employee had (i) any marketing or sales contact on behalf of Company and/or ii) access to, or gained knowledge of, any Confidential Information concerning Company’s business prospects with such Active Prospect.

Defendants first contended that the failure of the agreement to geographically describe the restricted territory rendered it void. However, the Court held that Indiana law “requires only that the geographic scope of restrictive employment covenant be reasonable, not that it be spelled out in explicit terms.” The Court also held that the geographic scope of the covenant could be shown by extrinsic evidence concerning the portions of the country that were assigned to Kolbe.

Defendants also contended that the prohibition on soliciting “active prospects” was invalid, asserting that Indiana Law did not permit covenants that reached prospective customers. Again, the Court rejected the argument, holding that because the covenant applied only to prospective customers with whom Kolbe had contact during the last six months of his employment with Zimmer, it was “limited in both scope and duration,” and therefore was valid.

Finally, Defendants contended that the employee non-solicitation covenant was void because it was overly broad. Specifically, it applied to all employees of Zimmer, including “employees such as drivers or shelf stockers.” The Court agreed that the provision against soliciting employees was overly broad because Zimmer “has not shown that it has a legitimate protectable interest in its entire workforce, which includes many employees who would not have access to or possess any knowledge that would give a competitor an unfair advantage.”

However, the Court refused to invalidate the entire covenant because the parties agreed to a provision in the agreement that “any court interpreting the provisions of this Agreement shall have the authority, if necessary, to reform any such provision to make it enforceable under applicable law.” The Court acknowledged that prior law held that a court could not “not create a reasonable restriction under the guise of interpretation, since this would subject the parties to an agreement they have not made.” But the Court held that the reformation provision made all the difference because “ the parties specifically agreed” that a court interpreting the agreement had the authority to reform any unreasonable provision to make it enforceable.

There are several lessons that can be learned from Heraeus Medical. First, it is permissible to define the geographic scope of a non-compete by reference to the employee’s assigned territory, without expressly naming or describing that territory. Second, restrictions on soliciting prospective customers are enforceable as long as they are limited to prospective customers with whom the employee had contact within a short period before the employee’s departure. Finally, and perhaps most surprisingly, a court can “reform” an invalid non-solicitation provision to make it valid as long as there is an express provision in the agreement providing that authority. Businesses should review (and likely should revise) their non-compete and non-solicitation agreements in light of this new decision.

Maximizing the Possibility that Using an Entity For Your Business Will Actually Limit Liability

By: Arend J. Abel, Attorney

Many times, business owners will set up one or more corporations, or other entities such as LLCs, to conduct business. Typically, the entities are created to limit the owner’s liability for the business’s debts, or to protect one business from the liabilities of another business. However, often the owner does not go beyond formation of the entity to take the additional steps needed to maximize the chance that having one or more entities will fulfill those goals. Absent those steps, Courts sometimes disregard the existence of the entities by “piercing the corporate veil” and hold the owners liable for the business’s debts, or hold one entity liable for the debts of another. Here are some steps that can help avoid such a result.

Keep Finances Separate and Document Transfers

The most important step in making sure the entity is recognized as separate from its owner is to keep the owner’s and the entity’s financial affairs strictly separate. Among other things, this requires a good set of books for the entity, and a separate bank account. Multiple entities each should have a separate set of books. Any transfers between owner and entity should be scrupulously documented as loans, capital contributions, distributions, or salary, depending on the nature of the transfer. Transfers between the entities should be avoided, if possible, unless one entity is a subsidiary of another. If one entity is a subsidiary of the other, then transfers from the subsidiary should be documented as distributions or dividends. Transfers from parent to subsidiary should be avoided, but if necessary should be documented as loans or capital contributions. Other inter-entity transfers should ordinarily be documented as loans and, again, should ordinarily be avoided.

Adequately Capitalize the Entity When Formed

One factor Courts look at in deciding whether to pierce the corporate veil is whether the entity was adequately capitalized when formed. Many business owners don’t contribute substantial working capital to an entity at the outset, instead simply moving money in and out of the entity as needed. But the lack of capitalization, and shuffling funds in and out, creates a risk a court will disregard the entity. Given that a business will inevitably have expenses and need working capital, the owner should put in an amount large enough to sustain the business’s expenses for several months, at least. A year’s worth of expenses is even better. The money should be put into the entity when it is formed, in exchange for shares the entity issues to the owner.

Create and Issue Share Certificates

Another step that owners should take is to actually issue share certificates, in exchange for the capital contributions made when the entity is formed. It is surprising how many business owners fail to take this basic step. The absence of share certificates suggests that the owner is doing business in his personal capacity, rather than through the entity. This creates an unnecessary risk of personal liability.

Have Separate Phone Numbers, Addresses and Letterhead

The owner and the business should have separate phone numbers, even if the business number is forwarded to the owner’s line. They should also have separate addresses. If the business is run out of the owner’s home, even a P.O. box as a corporate address helps reinforce the fact that the business is separate from the owner. Multiple entities should also have separate phone numbers and addresses. The entity should have letterhead for correspondence, and if there are multiple entities, each should have its own letterhead.

Use Distinct Names for Multiple Entities

Another factor courts sometimes look at in piercing the veil between multiple entities is whether they share similar names. Avoiding similar names is another way to reinforce corporate separateness between entities.

Have a Management Structure and Regular Meetings

If the entity is a corporation, it should have a Board of Directors. If there is only one shareholder, trusted advisors can act as members. The Board should meet at least once a year. If there are multiple shareholders, they should also meet at least once a year. Even a single shareholder can have a “meeting” at which corporate action is taken. No Board of Directors is required for an LLC, but if there are multiple members, they should have regular meetings. The entity should issue notices before the meetings, and a corporate secretary should document all meetings with minutes. Minutes, notices, and corporate resolutions should be kept in a minute book.

To maximize the chance that entities formed for businesses will effectively shield the owner from personal liability, and will shield the assets of one entity from the debts of another, business owners should consult with an experienced attorney to guide them through the process.

Protecting Confidential Business Information

By: Arend J. Abel, Attorney

Sometimes businesses face a situation where an employee has departed and taken key information that can be used to hurt the business competitively. This article focusses on steps a business can take to minimize that risk, and if information is nevertheless stolen, to seek redress under the Uniform Trade Secrets Act. The Act has been adopted in Indiana and most other States.

Identify the Information to be Protected

The first step a business should take is identifying the specific information to be protected. Customer lists may be some of the most valuable information a business has, and their theft and use by competing businesses may cause severe harm. Other information, including formulas, business processes and technology, can also be valuable trade secrets. A trade secret can be any information that derives independent economic value from not being generally known and not being readily ascertainable by other parties through proper means, i.e., means other than stealing the information from the business.

Take Reasonable Steps to Maintain Secrecy

Information does not qualify as a trade secret unless the business has made reasonable efforts to keep the information secret. These efforts can and should include physical and electronic security measures. The business should keep paper information in locked offices and filing cabinets. Electronic information should be protected through the use of computer security that limits access to the information to only those employees who need to know the information to do their jobs. In some cases, the business should require employees with access to confidential information to use only company-provided computers, phones, and portable devices to conduct company business and store company information.

A business should also maintain the secrecy of its confidential information by requiring employees with access to the information to sign non-disclosure agreements. The agreements should list the types of information the employee is barred from disclosing.

Non-competition agreements are also an important tool to maintain the secrecy of confidential information. However, non-competition agreements must be reasonable in scope. This means that the geographic area in which the employee is barred from competing must be well defined , and no broader than necessary to protect the employer’s legitimate interests. The agreement must also be limited in time, barring the employee from competing for only as long as necessary. Finally, the agreement must be limited in terms of the activities prohibited. Typically, agreements should prohibit the employee only from working for a competing business in the same or a similar capacity as the employee worked for the business with which the employee signed the agreement.

Enforcing Restrictions

Sometimes, despite the business’s best efforts, an employee may steal confidential information and use it to compete. In such cases, the only recourse may be litigation against the employee. A business might obtain a court order requiring the employee to stop using the information and return it. If there is a non-competition agreement, a court may prohibit the employee from competing in violation of the agreement’s time, geographic and activity limitations. If the business has been harmed, damages may be available.

To protect confidential business information, a business owner should consult with an attorney experienced in such matters, including litigation. Cohen & Malad, LLP’s business and litigation attorneys can assist with this process.

Home Renovation Projects: Purpose, Scope, and Notice of the Deceptive Consumer Sales Act- Part 2

By: Aaron J. Williamson, Attorney

The DCSA has three broad purposes, which are to: “(1) simplify, clarify, and modernize the law governing deceptive and unconscionable consumer sales practices; (2) protect consumers from suppliers who commit deceptive and unconscionable sales acts; and (3) encourage the development of fair consumer sales practices.” Ind. Code 24-5-0.5-1(b). The DCSA is liberally construed and applied to promote these purposes. Ind. Code 24-5-0.5-1(a).

What does the Deceptive Consumer Sales Act cover?

The scope of the DCSA is far reaching and is outlined in Ind. Code 24-5-0.5-2 (definitions) and 3 (listing deceptive acts). Deceptive acts generally include acts and omissions, as well as explicit and implicit misrepresentations, Ind. Code 24-5-0.5-3(a), made by a supplier, Ind. Code 24-5-0.5-2(a)(3), in the context of a consumer transaction. Ind. Code 24-5-0.5-2(a)(1).

“A person relying upon an uncured or incurable deceptive act may bring an action for the damages actually suffered as a consumer as a result of the deceptive act or five hundred dollars ($500), whichever is greater.” Ind. Code 24-5-0.5-4(a). This amount may be increased to three times actual damages or $1,000, whichever is greater, when the deceptive act of the supplier is found to have been done willfully. Id. Moreover, the court may award reasonable attorney fees to the prevailing party in the action under this subsection of the DCSA. Id.

Two words of caution are required here. First, if the supplier prevails under this subsection then they may be entitled to attorney’s fees (paid by you). Second, certain requirements must be satisfied before a consumer can sue under the DCSA. Specifically, the consumer must provide the supplier with notice of the deceptive act and opportunity to fix the problem or “cure” it in legal terms. (“Notice”). Id. at 4(j); see also Ind. Code 24-5-0.5-5(a).

Rules for issuing a notice to a negligent contractor

As to the Notice, there are timing and substance requirements that must be satisfied. The notice must be sent on or before six months from the initial discovery of the deceptive act, one year following the consumer transaction, or 30 days after any warranty applicable to the transaction expires, whichever occurs first. Ind. Code 24-5-0.5-5(a). The Notice, must state the nature of the alleged deceptive act and the actual damage suffered. Id.

Conclusion

As discussed in Part 1 of this series, the DCSA is a consumer protection statute, which is liberally construed for the benefit of consumers. For consumers, this statute offers robust protections against deceptive acts. Moreover, the DCSA provides remedies in the way of actual and treble damages as well as the potential recovery of attorney’s fees. For suppliers, the DCSA provides significant guidance about prohibited conduct and provides various opportunities to cure defective conduct that amounts to deceptive acts.

If you have any questions about Indiana’s Deceptive Consumer Sales Act or need representation in pressing or defending a claim under this statute please feel free to contact me.

Disclaimer: These materials are made available for educational purposes only and are not intended as legal advice. If you have questions about any matters in these materials, please contact the author directly. The furnishing of these materials does not create an attorney-client relationship with the author or entities affiliated with the author.

Permissions: You are permitted to reproduce this material in any format, provided that you do not alter the content in any way and do not charge a fee beyond the cost of reproduction. Please include the following statement on any distributed copy: “By Aaron J. Williamson © Cohen & Malad, LLP – Indianapolis, Indiana. www.cohenandmalad.com”

Home Renovation Projects: A Statutory Overview- Part 1

By: Aaron J. Williamson, Attorney

It pays to be in the know. This adage is all the more true when it comes to large and costly projects; especially when those projects concern the home. Whether you are a home improvement contractor or a homeowner, knowing the lay of the land is invaluable. And, in light of the relatively new changes in the law, a refresher seems in order.

This article will provide a quick overview of the Deceptive Consumer Sales Act, the Home Improvement Contracts Act, the Home Improvement Fraud Act, and the Statutory Home Improvement Warranties Act. It is important for consumers and renovators alike to have a general understanding of how these laws work at each stage of the renovation project. So the first key takeaway is: do not be unwary! Know the law.

A more in-depth analysis of these statutes and how they work together will be outlined in future articles.

Indiana’s Deceptive Consumer Sales Act

The purpose of Indiana’s Deceptive Consumer Sales Act (“DCSA”) is to protect consumers from deceptive and unconscionable consumer sales practices. Specifically, DCSA’s aim is to prevent those regularly engaged in consumer sales from making false or misleading statements about the goods or services sold. A person harmed under the statute can sue for, among other things, their actual damages and attorney’s fees.

Home Improvement Contract Act

Likewise, the purpose of Indiana’s Home Improvement Contract Act (“HICA”) is to prevent deceptive and unconscionable acts by, in part, requiring certain provisions and disclosures in all real property improvement contracts with an aggregate value of $150 or more. A good example of HICA in action is Warfield v. Dorey, 55 N.E.3d 887, 891 (Ind. Ct. App. 2016) (citing Hayes v. Chapman, 894 N.E.2d 1047, 1052 (Ind. Ct. App. 2008)) wherein the court said

–few consumers are knowledgeable about the home improvement industry or of the techniques that must be employed to produce a sound structure. The consumer’s reliance on the contractor coupled with well-known abuses found in the home improvement industry, served as an impetus for the passage of [HICA], and contractors are therefore held to a strict standard.

A violation of HICA constitutes a “deceptive act” under DCSA. HICA was recently amended and the changes took effect on July 1, 2017. A few highlights regarding changes to the HICA are the scope of coverage, additional required terms, and notices. As such, a contract or practice, which may have previously complied with the former version of the law may need to be revisited.

Home Improvement Fraud Act

The Home Improvement Fraud Act (“HIFA”), serves a similar purpose, i.e., forbidding home improvement contractors from making misrepresentations or false promises, giving misimpressions, acting deceptively, or the like.

In common law fraud or constructive fraud, a homeowner must show that they relied on false information from the contractor. Under the HIFA, no such reliance is required. Moreover, the statute defines what an “unconscionable contract” is and outlines what must be shown to prove it.

Home Improvement Warranty Act

The Statutory Home Improvement Warranties Act (“SHIWA”) does what its name suggests, i.e., imposes warranties related to home improvement projects. This statute deals with workmanship and materials, generally, as well as specific defects caused by faulty installation.

Conclusion

Future articles will discuss these statutes in depth, how they have been interpreted, the interplay between these statutes, and common issues that have been litigated surrounding these statutes.

If you are a home improvement contractor or a homeowner and you have questions about these statutes and how they affect your business or home, please contact me.

When can a direct action be brought in the context of a closely held company?

By: Arend J. Abel, Attorney

On June 1, the Indiana Court of Appeals addressed the circumstances in which a shareholder in a closely held limited liability company could sue another shareholder for breach of fiduciary duty arising out of alleged mismanagement of the corporation. Ordinarily, such actions must be brought derivatively, but the Court noted that Indiana law provides an exception in some circumstances.

Typically, a claim of corporate mismanagement involves harm to the corporation, and as such must be brought derivatively. However, the policies requiring a derivative action are the protection of third party shareholders and creditors. Under Barth v. Barth, 659 N.E.2d 559 (Ind. 1995), where those policies are not implicated, a derivative action is not required.

Thus, in Bioconvergence, LLC v. Menefree, the Court of Appeals found that a direct action against a majority shareholder in a closely-held limited liability was permissible, or at least non-frivolous, because the only shareholder other than the plaintiff was the defendant, and there were no creditors.

A direct action by a shareholder against a fellow shareholder may be the only effective remedy for a minority shareholder in situations where a majority shareholder is either mismanaging a business or siphoning off funds. A derivative action contains a number of procedural hurdles. Importantly, with derivative actions, the corporation may take over a derivative action, form an independent litigation committee, and on the recommendation of that committee dismiss the action, leaving a minority shareholder without a remedy.

Use of File Sharing Site Causes Waiver

By: Arend J. Abel, Attorney

Lawyers for an insurance company got a nasty surprise when a federal district court held that their use of the file-sharing service Box® waived attorney-client privilege and work product protections for the company’s entire claims file. On February 9, in Harleysville Insurance Company v. Holding Funeral Home, the United States District Court for the Western District of Virginia decided that putting the file in an online “folder” for which it had previously sent a link to a third party waived both the attorney-client and work product protection.

Judicial Qualifications Commission Gives Green Light to Tweeting at Trial

By: Arend J. Abel, Attorney

You may remember just over a year ago when a partner in Barnes & Thornburg’s Chicago office was sanctioned for live-tweeting a trial. That event makes all the more surprising an Ethics Opinion that the Indiana Commission on Judicial Qualifications issued last month. According to the Commission, live-tweeting a trial does not amount to “Broadcasting,” which is barred by Rule 2.17 of the Code of Judicial Conduct, except in very narrow circumstances or with prior permission of the Supreme Court.