Deposition of Business Entities

Posted on March 10, 2009 by John Bruce

In business litigation, the question often arises which person among the employees of a corporation, limited liability company, partnership or association should be deposed in order to most effectively discover what information a business entity which is a party to the litigation has regarding the dispute, and what kind of testimony the entity would present at trial. Sometimes this can be obvious, as in cases where it is clear who was involved in the transaction at issue. Often it is not, however, and often a litigant does not become aware of important witnesses until depositions and discovery are well under way.

Wisconsin law (and the Federal Rules of Civil Procedure) provides a valuable tool which may be used by a litigant in these situations. Instead of seeking the deposition of a particular individual employee of an entity, a party seeking discovery may require the business entity itself to identify and produce the witnesses it considers best able to answer questions on particular topics. This is done by serving the business entity with a Notice of Deposition indicating that the entity’s testimony is sought regarding topics specifically identified in the Notice. The entity is then required to identify, and produce for deposition, those among its employees best qualified to answer questions on those topics.

There is an obvious benefit in utilizing this procedure. If a party seeks to depose a particular employee of the entity, believing that employee is knowledgeable of the issues being litigated, the employer-entity may maintain in the future that such employee is not really knowledgeable of the circumstances, or not as knowledgeable as another of its employees. It could also argue that the employee actually deposed lacked the authority to bind the entity by his testimony, rendering the deposition useless.

Once the entity has been required to select and identify the employees it considers best qualified to be deposed, however, it will not be in a position to claim later that those employees were not qualified, or were not authorized to serve as witnesses for the entity.

Any litigant involved in business litigation should give serious consideration to the use of this discovery tool.

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Interplay Between Tradename, Noncompete Agreements and Tort Law

Posted on March 9, 2009 by Rob Sullivan

In D.L. Anderson’s Lakeside Leisure Co. v. Anderson, 2008 WI 126 (filed 2 Dec. 2008) the Wisconsin Supreme Court addressed the interplay between tradenames, noncompete agreeements, and tort law. Anderson involved an asset purchase agreement whereby Seller agreed to sell certain assets, including seller’s tradename, to buyer and seller agreed to a noncompete agreement with buyer. The lower court found that the Seller breached the noncompete agreement and infringed on the tradename that Buyer purchased. On appeal, the Seller argued that the noncompete agreement restricted the tradename rights the buyer purchased; thus, any action against defendant must be controlled by contract law, not tort law. The Buyer argued that the noncompetition clause prohibited other commercial use of the tradename not covered by tradename protection. The Supreme Court found that it was not reasonable to read the noncompetition clause language as Seller wants; “to do so would mean that the expiration of the noncompetition clause after seven years would render the tradename purchase meaningless” and that “the tradename infringement claim arises under the contract only in the sense that the contract is the instrument by which the tradename was purchased. A separate tort may be perpetrated once the tradename belongs to the purchaser.”
 

 

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Your Rights Against Co-Guarantors in Wisconsin

Posted on March 8, 2009 by Todd Goodwin

Almost always, when a business seeks money from a lender to finance the enteprise or enters into a commercial lease for space to run the business operations, the individual business owners themselves will be required by the bank or the landlord to execute personal guarantees of the loan or lease as appropriate.  The owners often do so without really understanding not only what ramifications that personal guarantee can have on their own personal non-business related assets (and those consequences are extremely important to consider and truly require a separate article addressing just the issues involved therewith), but also they fail to understand what their rights are with respect to the other guarantors in case the loan or lease is defaulted on by the business entity.  Unfortunately, in today's current economic climate, this issue is coming up more often that anyone would like.

In Wisconsin, even if both or all of the guarantors did not sign the same guarantee, but signed separate guarantees of the same obligations, in the absence of a separate agreement governing the rights of contribution between co-guarantors, a right to contribution exests for each "co-guarantor" against all other co-guarantors if he or she has paid more than a fair share of the common obligation.

This "right of contribution" means that the co-guarantor that has paid more than his or her fair share of the underlying business obligations has a cause of action in court against the other co-guarantors.  The Wisconsin courts have held that this right is based upon the belief that those who insure or become a surety with another ought to share the results of a default. 

This also means that if more than one person guarantees the debts/obligations of the business their fair share will likely be held to be their proportional amount of such debt, not necessarily their proportional ownership in the underlying entity.  Therefore, if you are a minority shareholder about to personally guarantee a loan or lease of the business, make sure that you limit your exposure under such guaranty and rights of contribution to your ownership percentage in the business, or whatever other percentage you can agree upon with your fellow guarantors, and get it in writing. 

Otherwise, for example, if you are a 30% owner in a business with one other owner who owns the remaining 70%, and you both sign a personal guarantee of a business bank loan, you could be on the hook for 100% of the loan as between you and the bank and then would be limited to seeking only 50% of the loan as between you and your fellow guarantor.  Therefore, "your fair share" could be more than you expected.

Please seek the advice of counsel before entering into personal guarantees of significant obligations.

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