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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. I have been on this program while on parole from 2011-2013. No person should be forced mentally to share private details of their personal life with total strangers. Also giving permission for a mental therapist to report to your parole agent that your not participating in group therapy because you don't have the financial mean to be in the group therapy. I was personally singled out and sent back three times for not having money and also sent back within the six month when you aren't to be sent according to state law. I will work to het this INSOMM's removed from this state. I also had twelve or thirteen parole agents with a fifteen month period. Thanks for your time.

  2. Our nation produces very few jurists of the caliber of Justice DOUGLAS and his peers these days. Here is that great civil libertarian, who recognized government as both a blessing and, when corrupted by ideological interests, a curse: "Once the investigator has only the conscience of government as a guide, the conscience can become ‘ravenous,’ as Cromwell, bent on destroying Thomas More, said in Bolt, A Man For All Seasons (1960), p. 120. The First Amendment mirrors many episodes where men, harried and harassed by government, sought refuge in their conscience, as these lines of Thomas More show: ‘MORE: And when we stand before God, and you are sent to Paradise for doing according to your conscience, *575 and I am damned for not doing according to mine, will you come with me, for fellowship? ‘CRANMER: So those of us whose names are there are damned, Sir Thomas? ‘MORE: I don't know, Your Grace. I have no window to look into another man's conscience. I condemn no one. ‘CRANMER: Then the matter is capable of question? ‘MORE: Certainly. ‘CRANMER: But that you owe obedience to your King is not capable of question. So weigh a doubt against a certainty—and sign. ‘MORE: Some men think the Earth is round, others think it flat; it is a matter capable of question. But if it is flat, will the King's command make it round? And if it is round, will the King's command flatten it? No, I will not sign.’ Id., pp. 132—133. DOUGLAS THEN WROTE: Where government is the Big Brother,11 privacy gives way to surveillance. **909 But our commitment is otherwise. *576 By the First Amendment we have staked our security on freedom to promote a multiplicity of ideas, to associate at will with kindred spirits, and to defy governmental intrusion into these precincts" Gibson v. Florida Legislative Investigation Comm., 372 U.S. 539, 574-76, 83 S. Ct. 889, 908-09, 9 L. Ed. 2d 929 (1963) Mr. Justice DOUGLAS, concurring. I write: Happy Memorial Day to all -- God please bless our fallen who lived and died to preserve constitutional governance in our wonderful series of Republics. And God open the eyes of those government officials who denounce the constitutions of these Republics by arbitrary actions arising out capricious motives.

  3. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  4. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  5. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

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