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DTCI: Defensive litigation and essential steps to corporate protection

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By Jason M. Massaro

massaro-august-mug Massaro

When asked about the areas of law in which I practice, I say, among others, business law and litigation. Inevitably I am greeted with a curious look and a cocked head similar to a dog that has just heard a strange noise. The person then almost cautiously asks, “What exactly does that mean?” I then follow suit with the same bewildered “dog glance” since I still have not developed a good canned answer to that question. And that makes sense to some degree.

For example, a business could range from a seller of genetically engineered popcorn to a granite fabricator and installer and anywhere in between. Moreover, any given company’s particular situation may involve areas of practice normally considered boutique, such as insurance coverage, products liability, construction, real estate, and so on. In fact, ask a defense attorney specializing in insurance coverage or products liability or construction law, and I would wager that the vast majority of his clients are businesses. The term “business law and litigation” is so broad that its use creates more confusion than it solves. But what else can be used to describe this area of practice? I think a better approach is to stop trying to describe the types of businesses represented or the areas of law and instead to describe the services provided.

Given that business litigation is usually situational and can be summed up by a statement that it means representing a company who has sued or who has been sued, business law is really where we need to focus. And by business law, I do not mean the mere drafting and/or negotiation of corporate documents or agreements. I mean the process and manner by which a company is represented to avoid, to the greatest extent possible, the draconian nature of the litigation machine. In other words: “defensive litigation.”

I do not intend to suggest an approach to litigation where the client is represented in anything but a methodical, aggressive, and persistent manner. Instead, it is the goal of this article to remind, refresh, and educate offensive, situational litigators how to more fully develop their skill in the practice of business law. Stated differently, this article is a checklist of ways to protect business clients with a defensive litigation approach to keep them out of litigation.

Changing the corporate mindset toward attorneys

Noted therapist Edwin H. Friedman aptly stated that “[t]he colossal misunderstanding of our time is the assumption that insight will work with people who are unmotivated to change. Communication does not depend on syntax or eloquence or rhetoric or articulation, but on the emotional context in which the message is being heard. People can only hear you when they are moving toward you, and they are not likely to when your words are pursuing them. Even the choicest words lose their power when they are used to overpower … .” While we do not counsel our business clients in the same manner Friedman counseled his clients, the message is the same: change our clients’ mindset through education and experience to achieve the desired goal of better, more complete representation.

The question is: How do we go about achieving this goal? It is no secret that lawyer jokes are one of the most prevalent digs at a profession that exist. Whatever your take on them, perception is reality and these jokes emanate from somewhere. It is merely a fact that some people simply do not like attorneys. Whatever the reason, the implications are undeniable.

In my experience, business clients fall into several distinct and dangerous categories regarding their mindset on the need (or, really, non-need) for attorneys in the operation of a business. Here are a few: (1) an “it’s not broke so don’t fix it” mentality; (2) a belief that their business does not need counsel (even though the business that started out with one man and a truck is now generating revenue of millions of dollars per year); (3) an impression that legal agreements are uncomplicated and that the owner can draft them himself; (4) procrastination toward a review of important corporate issues such as insurance and corporate compliance documents; (5) the false belief that no news is good news; (6) an erroneous assumption that the other party will do the right thing; and (7) the dreaded reality that a lot of people, for one reason or another, just do not want to deal with (or pay) an attorney.

It is these mindsets that we must overcome; they not only place businesses in jeopardy for lack of proper legal guidance but perpetuate the negative stereotype of attorneys. The negative stereotype is perpetuated when we deal with business clients only when litigating; a negative association is developed and the problem is exponentially compounded. You may be asking, “So what is the solution?” In my mind, it is our job to convince our business clients to follow Benjamin Franklin’s advice that “[a]n ounce of prevention is worth a pound of cure.”

Any growing business will have to deal with the realities of changing legal exposure. With expansion comes the need to have an attorney (or more than one) on retainer. Moreover, the company needs to understand that it does not merely need to retain an attorney but it must actually use him. Litigation happens, but it does not have to be part of the cost of doing business. To the contrary, defensive litigation is a cost of doing business. The sooner our clients become accustomed to this fact, the more successful they will be in seeing smooth growth as opposed to one riddled with legal strife.

With retention comes the requirement of use. Encourage your clients to test the waters. Get them accustomed to you and vice versa. Learning your client’s business over time will increase your ability to be proactive and to prosecute or defend a suit should the occasion arise. It is never advisable to let your business client experience the legal process for the first time when things have gone wrong.

This approach will also avoid the problem of having clients draft their own legal documents regardless of how simple they may appear. A simple promissory note with someone out of state that lacks a choice of law provision could mean the difference between smooth sailing and multijurisdictional federal court litigation. As business attorneys, we must make our clients see that, just as they would never operate on themselves, they should never operate legally on their livelihood. They need to allow counsel to be proactive on day-to-day operations as a part of a much larger, and cheaper, defensive litigation strategy. Ask to be kept informed of major changes in your client’s growth, expansions, new product lines, claims or threatened claims, liability issues, and so forth. The better informed you are, the better you can protect the business interests of your client and the more likely you will be to avoid conflict before it manifests.

Organization and business methodology

It has been my experience that many of the companies with which I am involved in litigation, operate in utter chaos. But I believe that I may have a very simple answer to the reason for this. While maybe not causally related, I am a firm believer that businesses that fail to pay attention to the details are much more likely to be lax in their other business operations. Eventually, that cavalier approach to organization leads to errors that ultimately lead to litigation.

The second punch of this vicious combination is that such disorganization makes a business much more costly to defend. In my experience, I have seen companies waste literally thousands of dollars by merely grabbing the potentially relevant documents pertaining to a suit and dropping them off at my office for me or my staff to attempt to comb through, assemble, and collate. As alluded to above, this expense grows if a business does not have a good, prior working relationship with counsel. Counsel who is unfamiliar with the operations of the corporation must not only assemble the case for litigation but also endure a sometimes very steep learning curve. Thus, it is our further responsibility as business litigators practicing defensive business litigation to educate our clients about the potentially severe negative consequences of failing to be organized and efficient.

Spoliation and maintaining electronically stored data

Discussions surrounding spoliation and e-discovery have become prevalent in the last few years. While a thorough analysis of the duties to preserve and produce electronically stored information is beyond the scope of this article, all practitioners should be well versed in what they are. This is especially true for attorneys whose clients are businesses. With as much communication being sent electronically, both state and federal courts have implemented very strict rules (both discovery and evidentiary) about the retention and production of ESI. Moreover, even if the rules are silent, good counsel will either seek an e-discovery stipulation as to the production of the data or a preservation order from the court ensuring its protection and ultimate production.

Even a sophisticated business client may know nothing about what to do with the information once on or still on its application software, smart phones, backups, archive files, input devices, networks, operating systems, storage media, and so forth. It can get hugely complicated very quickly. An astute practitioner must guide his clients through this labyrinth and proactively seek to ensure the protection and production of ESI. There can be grave consequences for failing to maintain and produce such data, and otherwise winnable cases can be lost on the failure to implement a retention system.

Synergy of relationships

The concept of a shift in corporate mindset concerning the use of attorneys in the operation of a business was discussed above. Another helpful shift in mindset is that of the attorney himself. I don’t think there can be much debate that a well-protected business will need more than advice of counsel to protect itself. Other specialties are needed such as accountants, bankers, financial advisors, insurance agents, and so forth. In fact, attorneys with other specialties (such as intellectual property and transactional attorneys) may also be required.

This team does not need to be so large that the company is overwhelmed in costly minutia. However, there must be a synergy and a constant flow of communication between the client and the various specialists as well as between the various specialists themselves. There is much less chance of exposure if, for example, a corporation knows from its attorney that it must preserve its documents, knows from its accountant that it must pay the requisite payroll taxes, knows from its insurance agent that workers’ compensation coverage is needed, and knows from its intellectual property attorney that its new product name needs to be trademarked. It is crucial that chosen counsel maintains a good rapport and working relationship with these other specialties and that there is always an open line of communication. The best business attorneys are those who stay connected with the service providers that help protect the corporation.

Maintain corporate formalities

The primary reason a person incorporates a business is to take advantage of the limited personal liability the corporate umbrella provides. That is, all things being equal, the owner-shareholder’s liability is limited to the extent of his corporate investment. I.C. 23-1-26-3(b); see also Aronson v. Price, 644 N.E.2d 864 (Ind. 1994). His personal assets are not at risk. Id.

However, this protection can be lost through certain conduct of the owners. The plaintiff in a suit may seek to “pierce the corporate veil” and impose personal liability on the owner. In deciding whether a plaintiff has met his burden of proof on a piercing count, Indiana courts consider whether the plaintiff has presented evidence showing: (1) undercapitalization; (2) absence of corporate records; (3) fraudulent representation by corporation shareholders or directors; (4) use of the corporation to promote fraud, injustice, or illegal activities; (5) payment by the corporation of individual obligations; (6) commingling of assets and affairs; (7) failure to observe required corporate formalities; or (8) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form. Aronson, 644 N.E.2d at 867. Also of importance is the maintenance of current and accurate corporate records on file with the secretary of state. Failure to do so may result in administrative dissolution and the loss of the right to carry on business. I.C. 23-1-46-2.

Conclusion

As can be seen, there is quite a bit that goes into business law or “defensive litigation.” It is not only important to become adept at client communication relaying the importance of these issues, but also implementing defensive litigation into the daily functions of your practice. In doing so, we can all offer our business clients more complete and protective representation. It also becomes easier to explain what I mean when I say I practice business law and litigation by merely responding: “I work just as hard to keep my business clients out of litigation as I do to protect them in litigation.”•

Jason M. Massaro is a partner at Massaro & Ciobanu, LLP in Indianapolis and a member of DTCI. His areas of expertise include complex business, UCC, contract, construction, real estate, and premises liability law and litigation. The opinions expressed in this article are those of the author.

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  1. He called our nation a nation of cowards because we didn't want to talk about race. That was a cheap shot coming from the top cop. The man who decides who gets the federal government indicts. Wow. Not a gentleman if that is the measure. More importantly, this insult delivered as we all understand, to white people-- without him or anybody needing to explain that is precisely what he meant-- but this is an insult to timid white persons who fear the government and don't want to say anything about race for fear of being accused a racist. With all the legal heat that can come down on somebody if they say something which can be construed by a prosecutor like Mr Holder as racist, is it any wonder white people-- that's who he meant obviously-- is there any surprise that white people don't want to talk about race? And as lawyers we have even less freedom lest our remarks be considered violations of the rules. Mr Holder also demonstrated his bias by publically visiting with the family of the young man who was killed by a police offering in the line of duty, which was a very strong indicator of bias agains the offer who is under investigation, and was a failure to lead properly by letting his investigators do their job without him predetermining the proper outcome. He also has potentially biased the jury pool. All in all this worsens race relations by feeding into the perception shared by whites as well as blacks that justice will not be impartial. I will say this much, I do not blame Obama for all of HOlder's missteps. Obama has done a lot of things to stay above the fray and try and be a leader for all Americans. Maybe he should have reigned Holder in some but Obama's got his hands full with other problelms. Oh did I mention HOlder is a bank crony who will probably get a job in a silkstocking law firm working for millions of bucks a year defending bankers whom he didn't have the integrity or courage to hold to account for their acts of fraud on the United States, other financial institutions, and the people. His tenure will be regarded by history as a failure of leadership at one of the most important jobs in our nation. Finally and most importantly besides him insulting the public and letting off the big financial cheats, he has been at the forefront of over-prosecuting the secrecy laws to punish whistleblowers and chill free speech. What has Holder done to vindicate the rights of privacy of the American public against the illegal snooping of the NSA? He could have charged NSA personnel with violations of law for their warrantless wiretapping which has been done millions of times and instead he did not persecute a single soul. That is a defalcation of historical proportions and it signals to the public that the government DOJ under him was not willing to do a damn thing to protect the public against the rapid growth of the illegal surveillance state. Who else could have done this? Nobody. And for that omission Obama deserves the blame too. Here were are sliding into a police state and Eric Holder made it go all the faster.

  2. JOE CLAYPOOL candidate for Superior Court in Harrison County - Indiana This candidate is misleading voters to think he is a Judge by putting Elect Judge Joe Claypool on his campaign literature. paragraphs 2 and 9 below clearly indicate this injustice to voting public to gain employment. What can we do? Indiana Code - Section 35-43-5-3: Deception (a) A person who: (1) being an officer, manager, or other person participating in the direction of a credit institution, knowingly or intentionally receives or permits the receipt of a deposit or other investment, knowing that the institution is insolvent; (2) knowingly or intentionally makes a false or misleading written statement with intent to obtain property, employment, or an educational opportunity; (3) misapplies entrusted property, property of a governmental entity, or property of a credit institution in a manner that the person knows is unlawful or that the person knows involves substantial risk of loss or detriment to either the owner of the property or to a person for whose benefit the property was entrusted; (4) knowingly or intentionally, in the regular course of business, either: (A) uses or possesses for use a false weight or measure or other device for falsely determining or recording the quality or quantity of any commodity; or (B) sells, offers, or displays for sale or delivers less than the represented quality or quantity of any commodity; (5) with intent to defraud another person furnishing electricity, gas, water, telecommunication, or any other utility service, avoids a lawful charge for that service by scheme or device or by tampering with facilities or equipment of the person furnishing the service; (6) with intent to defraud, misrepresents the identity of the person or another person or the identity or quality of property; (7) with intent to defraud an owner of a coin machine, deposits a slug in that machine; (8) with intent to enable the person or another person to deposit a slug in a coin machine, makes, possesses, or disposes of a slug; (9) disseminates to the public an advertisement that the person knows is false, misleading, or deceptive, with intent to promote the purchase or sale of property or the acceptance of employment;

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  5. So that none are misinformed by my posting wihtout a non de plume here, please allow me to state that I am NOT an Indiana licensed attorney, although I am an Indiana resident approved to practice law and represent clients in Indiana's fed court of Nth Dist and before the 7th circuit. I remain licensed in KS, since 1996, no discipline. This must be clarified since the IN court records will reveal that I did sit for and pass the Indiana bar last February. Yet be not confused by the fact that I was so allowed to be tested .... I am not, to be clear in the service of my duty to be absolutely candid about this, I AM NOT a member of the Indiana bar, and might never be so licensed given my unrepented from errors of thought documented in this opinion, at fn2, which likely supports Mr Smith's initial post in this thread: http://caselaw.findlaw.com/us-7th-circuit/1592921.html

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