Legal Forecast - Stormy Weather or Clear Sailing

The second half of the 20th Century saw enormous social and, as a result, legal changes in the United States. Two global wars, the miracle of the GI Bill which, for the first time made higher education available for much of the male population, television and the movies, amongst other influences, helped create that change. In the courts and in the legislatures, of people of color, women, disabled people, the poor and others powerless or disenfrancised became empowered and enfranchised. With the positive effect of bringing enormous amounts of energy, intelligence and talent to the economy.

The behavior of business people was markedly affected by the passage of the Uniform Commercial Code ("UCC") and, in Massachusetts, General Laws Chapter 93A ("Chapter 93A"), the so-called mini "FTC Act". The UCC dictated that business people treat each other with honesty in fact and Chapter 93A prohibited engaging in unfair or deceptive trade practices. The result of those two major pieces of legislation and the court cases which ensued was a change in our way of doing business from caveat emptor "let the buyer beware" to one where the consumer and the business person has an entitlement to be treated honestly and fairly and is provided with powerful legal remedies if they are not.

As a result of these great changes, most business people came to feel that the bigger your business was, the greater the possibility you would lose in court. The question is whether the empowerment and enfranchisement has progressed to the point where a business person can have less trepidation and a better sense of a possible outcome if litigation becomes necessary. I would suggest, based upon recent decisions, that we have reached that point.

It is not uncommon, when someone gets into financial trouble, to try to conceal assets from creditors. In a recent case, a husband transferred his home to his wife and his in-laws and the trial court found that it was a fraudulent conveyance and appointed a receiver to sell the property. The issues raised on appeal were the effect of the bankruptcy of the husband, the liability of the transferee and the attorneys’ fees and costs added by the court.

The husband filed bankruptcy one year after the bank instituted the suit and the husband took the position that the automatic stay provisions of his bankruptcy would bar the bank’s pursuit of the property on the theory that if the property were fraudulently conveyed, the property should be part of the bankruptcy estate. The Appellate Court observed that the trial court judge had inquired of the Trustee in Bankruptcy as to whether or not the trustee intended to pursue the fraudulent conveyance claim. The Trustee reported that she did not and the Court found that the asset had been abandoned by the Trustee so that the state court action could not have possibly affected the bankruptcy creditors and that action could proceed.

The in-laws, on appeal, took the position that the sole remedy for the bank was to have the property reconveyed but that no judgment could be entered against them personally. The Appellate Court disagreed. The court pointed out "By hiding the property through fraudulent conveyance, the defendants put the creditor through a merry chase and because of legal expenses, an expensive one. The responsibility and therefore the liability for an amount due on the judgment over the liquidation proceeds is theirs." The Appellate Court entered judgment against the in-laws and the wife for the value of the husband’s interest in the property at the time of the bank’s original judgment, plus interest, plus legal fees of $30,000 and costs of $10,251.76, less the amount of the interest of the husband obtained by the receiver in the liquidation of the real estate. Clearly, this was a victory for creditors and will make debtors, and their spouses or in-laws think twice before attempting a fraudulent conveyance.

In another recent case, a venture capitalist decided to invest in a company and, before doing so, checked with the company’s bank as part of due diligence. Shortly after transferring the funds of the company, the venture capitalist learned that the bank had not disclosed information regarding the status of the company’s account at the bank which the venture capitalist deemed to be important in her decision to make the investment. A year later she lost her investment and brought a suit against the bank based upon the negligent misrepresentation by the bank of the company’s account.

The facts of the case were that the venture capitalist knew of the bank’s relationship with the company and thought that to be a very positive thing for the company. The venture capitalist checked with the account officer for the bank to be sure that the venture capitalist’s investment would not undermine the customer’s relationship with the bank. She was assured that the bank had confidence in its relationship with the company and that the investment would not change that positive relationship.

In fact, however, it turned out that two months’ prior to the venture capitalist’s investment, the bank had decided to transfer the company’s account to the "workout" department of the bank. The inevitable foreclosure followed (so much for "workouts"!). The Court found that the venture capitalist was entitled to retain its jury verdict against the bank for the amount of her investment ($125,000.00) because of the negligent misrepresentation and, in addition, awarded attorneys’ fees and costs which totaled almost as much as the amount of her investment.

Based upon those two decisions and other decisions of similar import, if a business person is straightforward and honest in their dealings, he or she can expect to prevail in litigation whether or not they are a "big guy" or a "little guy".

Thomas V. Bennett, Esq. (tvb@barronstad.com)

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