By Guest Blogger Matthew Kreutzer
The top stories in the franchise world continue to be about efforts by the cities of Seattle, Chicago, and others in raising the minimum wage with laws that discriminate against small business owners who own franchises. These laws are a serious concern for franchisees and franchisors alike.
In brief, these laws (which are written substantially the same way in the different cities that have adopted them) require small businesses to raise the minimum wage of their workers from the current level to $15 an hour. Under these new ordinances, businesses with more than 500 employees have 3 to 4 years to increase the minimum wage to the new $15/hour level, while “small businesses,” defined as businesses with fewer than 500 employees, have up to 7 years to reach the new level.
The problem? For the purpose of calculating the “500 employees” number, all franchises in the same system are counted together. The net result of this is that these locally-owned small businesses with a few employees, which also happen to be franchises, are being discriminated against as compared to their non-franchised counterparts.
After reading some of my blog posts on the subject, another franchise attorney (one who exclusively represents franchisees) commented to me that these laws, which treat franchises differently than similarly situated non-franchise small businesses, could arguably be viewed as “industry specific” laws for the purposes of Item 1 of a franchisor’s Franchise Disclosure Document (FDD). I can see the argument on both sides of that point.
The Federal Trade Commission‘s (FTC) Franchise Rule requires a franchisor to state in Item 1 of its FDD “any laws or regulations specific to the industry in which the franchise business operates.” The FTC has elaborated on this requirement by saying that laws applying to all businesses generally do not need to be disclosed; instead, “only laws that pertain solely and directly to the industry in which the franchised business is a part must be disclosed in Item 1.”
The minimum wage laws adopted by some cities like Seattle target franchises by treating them differently from other similarly-situated small businesses; laws that are specific to a certain “industry” are the types of laws that need to be disclosed in Item 1.
So, the question then becomes: is franchising as a whole an “industry?” Are these the types of laws the FTC was contemplating when creating the Item 1 disclosure requirement? Should Item 1 of a franchisor’s FDD should disclose these laws?
I can see the arguments on both sides. On the one hand, franchising itself isn’t really an “industry.” Merriam-Webster defines “industry” as “a department or branch of a craft, art, business, or manufacture; especially: one that employs a large personnel and capital especially in manufacturing.” In that sense, franchise systems are not part of the same “industry” because they are diverse, representing businesses in a multitude of different streams of commerce (like retail, food service, personal services, and business services just to name a few).
However, Merriam-Webster does recognize an alternative definition. “Industry” can also be defined as “a distinct group of productive or profit-making enterprises <ex: the banking industry>.” In that sense, franchising could be considered an industry because franchise companies are in a distinct group that has its own set of goals, concerns, and issues. It is in this sense that the International Franchise Association and business periodicals regularly refer to franchising as an “industry.”
In its guidance, the FTC hasn’t specified which of these definitions it meant when it created the Item 1 disclosure requirement. The better argument, in my view, is that the FTC didn’t intend to single out franchising as a whole as its own “industry” when it created the Item 1 disclosure requirement. That is because the FTC itself, in its rulemaking process, used the word “industry” a number of times, but used it in different contexts. Specifically, the FTC repeatedly referred to franchising itself as an “industry,” and then in other contexts that are clearly different, it talked about the franchisor’s duty to disclose certain information unique to “industry” in which the franchisee’s business will operate. It is clear from the context of the FTC’s guidance that the two uses of the word are different from one another.
Based on the contextual distinction between the two uses and definitions of the word “industry” by the FTC in its rulemaking, I think the more convincing legal argument is that a franchisor does not have to disclose minimum wage laws that discriminate against the franchise “industry” as a whole.
But, from a practical and informational perspective (and considering the purpose of the Franchise Rule), I think a good argument can be made that these laws should be disclosed anyway (even if disclosure is not legally required). That a franchisee may be required to pay its employees a higher minimum wage than his or her similarly situated non-franchise competitors is something that she or he would certainly want to know.
As a result, I am recommending to my franchisor clients that, when they update their FDDs for 2015, they include a disclosure in Item 1 that says:
Some jurisdictions have passed laws that require businesses to pay their employees a higher minimum wage than what is required under federal law, which laws may disproportionately affect franchised businesses.
It’s a simple enough disclosure to include. Moreover, it would certainly help a franchisor in later defending against a legal claim by a franchisee that the franchisor knew about, but didn’t disclose, the existence of these laws prior to the franchisee committing to buy the business.
What do you think? Do you think these discriminatory minimum wage laws must be, or should be, disclosed in Item 1?
In Nevada, the appointment of a receiver over a business may be appropriate if:
- The appointment of a receiver is governed by statute and is appropriate only under circumstances described in statute. State ex rel. Nenzel v. Second Jud. Dist. Ct., 49 Nev. 145, 155, 241 P. 317 (1925); Shelton v. Second Jud. Dist. Ct., 49 Nev. 487, 494, 185 P.2d 320 (1947);
- Any stockholder may apply if the corporation is insolvent. NRS 78.347;
- Any holder of 1/10 of a corporation’s issued and outstanding stock may apply for the appointment of a receiver when a corporation has been mismanaged. NRS 78.650. A showing of any one of the ten circumstances enumerated in the statue will authorize the appointment of a receiver upon application by a ten-percent shareholder. Transcontinental Oil Co. of Nev. v. Free, 80 Nev. 207, 210-11, 391 P.2d 317, 319 (1964);
- A holder of 1/10 of issued stock may apply for appointment of a receiver of a solvent corporation where the business is being conducted at a great loss, the operation is prejudicial to creditors or stockholders such that the business cannot be conducted with safety to the public. NRS 78.630;
- The Court must consider the entire circumstances of the case when considering the appointment of a receiver. Bowler v. Leonard, 70 Nev. 370, 383 (1954);
- A Receiver may be appointed when a corporate is in imminent danger of insolvency. NRS 32.010;
- A Receiver is a neutral party appointed by the court to preserve, protect, and administer the business’ assets for benefit the business. In all cases, directors or trustees who have been guilty of no negligence nor active breach of duty must be preferred over all others in making the appointment of a receiver. NRS 78.650. Peri-Gil Corp. v. Sutton, 84 Nev. 406, 411 422 P.2d 35, 38 (1968). Such directors have a right to be heard as to their qualifications. Shelton v. Second Jud. Dist. Ct., 64 Nev. 487, 492-93, 185 P.2d 320, 323 (1947); and
- Appointment of a receiver is appropriate when the business’ property at issue is at risk of waste, loss of income, or is insufficient to secure a debt. NRS 32.010; NRS 107.100;
In Nevada, anticipatory repudiation is a statement by an obligor to an obligee indicating that the obligor will commit a breach that would of itself give the obligee claim for damage for total breach of the contract, or a voluntary affirmative act which renders the obligor unable or apparently unable to perform. Restatement (Second) of Contracts § 250. Concerning anticipatory repudiation, the Uniform Commercial Code first defines the term and then provides the remedies. Repudiation occurs when either party repudiates the contract with respect to a performance not yet due which will substantially impair the value of the contract to the other. NRS 104.2610. For its remedies, the non-breaching party may (1) wait for a commercially reasonable time for a performance, or (2) resort to any remedy for breach, or (3) suspend his own performance. Id.
The Doctrine of Anticipatory Repudiation applies only before the breacher has received all of his performance. Restatement (Second) of Contracts § 253(1); 11 S. Williston, Contracts §§ 1300, 1326 (3d Ed. 1968); 4 A. Corbin, Contracts § 963 (1951). Strangely, the major exception to the Doctrine illustrates the doctrine’s rationale. An anticipatory repudiation can only exist when both parties have not fully performed their duties. Therefore, anticipatory repudiation does not apply when the non-breaching party has fully performed and the breaching party owes only installment payments. Restatement of Contracts (Second) § 243. The only remedy, therefore, to the injured party in this situation is to wait for the time of performance to sue for damages. Farnsworth, Contracts § 8.20, 630 (1982). In Brown Papermill Co. v. Irvin, the Eighth Circuit declared that the doctrine of anticipatory breach does not apply to a bilateral contract which has become unilateral by complete performance on one side, leaving only an obligation to pay money one day in the future on the other. Brown, 146 F.2d 232 (8th Cir. 1944).
In Nevada, anticipatory repudiation exists where a party demonstrates a definite unequivocal and absolute intent not to perform a substantial portion of a contract. Kahle v. Kostiner, 85 Nev. 355, 345, 455 P.2d 42, 44 (1969); NRS 104A.2402; NRS 104.2610.
In a famous rationalization of the rule and its exception, the Sixth Circuit explained as follows:
In the ordinary case of . . . executory contracts, the plaintiff may say . . . (now, by your repudiation, you have put it out of my power further to perform, and hence you cannot be permitted to say that you have not received . . . consideration for your future act . , ,) [But if] his part of the contract has been executed by the plaintiff, he has nothing to do but wait, . . . and hence he will have no estoppel to rely upon to precipitate the defendant’s obligation.
Federal Life Ins. Co. v. Rascoe, 12 F.2d 693 (6th Cir. 1926).
In Nevada, the elements for a claim of alter ego or piercing the corporate veil are:
- Corporation must be influenced and governed by the person asserted to be its alter ego;
- There must be a unity of interest and ownership such that the corporation and person are inseparable from another;
- Facts are such that adherence to the corporate fiction of a separate entity under the circumstances would sanction a fraud or promote injustice;
- There is no litmus test for determining when the corporate fiction should be disregarded (there are as many as 14 factors that courts may consider, including undercapitalization, comingling of funds, failure to observe corporate formalities, loans to or from the corporation without sufficient consideration, and generally treating the assets of the corporation as the assets of the person); and
- A showing that recognizing separate corporate existence, would bring about an inequitable result is sufficient for the claim to lie.
Brown v. Kinross Gold U.S.A., Inc., 531 F. Supp. 2d 1234 (D. Nev. 2008); In re Nat’l Audit Defense Network, 367 B.R. 207 (Bankr. D. Nev. 2007); LFC Mktg. Grp. v. Loomis, 116 Nev. 896, 8 P.3d 841 (2000); Polaris Indus. Corp. v. Kaplan, 103 Nev. 598, 601-02, 747 P.2d 884, 887 (1987); Ecklund v. Nevada Wholesale Lumber Co., 93 Nev. 196, 197, 562 P.2d 479, 479-80 (1977) (quoting McCleary Cattle Co. v. Sewell, 73 Nev. 279, 282, 317 P.2d 957, 959 (1957)); accord Lorenz v. Beltio, Ltd., 114 Nev. 795, 807, 963 P.2d 488, 496 (1998). “Each of these requirements must be present before the alter ego doctrine can be applied.” N. Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 520-21, 471 P.2d 240, 243 (1970) (emphasis added). The party asserting the alter ego theory and attempting to pierce the corporate veil bears the burden of proving each of these elements by a preponderance of the evidence. LFC Mktg. Grp. v. Loomis, 8 P.3d 841, 846 (Nev. 2000).
The Nevada Supreme Court has held that, though generally “[t]he corporate cloak is not lightly thrown aside,” nevertheless there are some situations in which blind “adherence to the fiction of a separate entity [of the corporation] [would] sanction a fraud or promote injustice.” Baer v. Amos J. Walker, Inc., 85 Nev. 219, 220, 452 P.2d 916, 916 (1969). The court has therefore carved out an exception to the general rule of faithfully respecting the corporate form and corporate independence, i.e., the so-called “alter ego” exception, by which the corporate veil can be pierced. Id. The Supreme Court of Nevada, in the matter of McCleary Cattle Co. v. Sewell, adopted a three prong test for ignoring the separate existence of a corporation in determining “alter ego liability.” McCleary, 73 Nev. 279 at 282, 317 P.2d 957 (1957). This test has since been codified in by Nevada Statute, NRS 78.747:
- Except as otherwise provided by specific statute, no stockholder, director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the stockholder, director or officer acts as the alter ego of the corporation.
- A stockholder, director or officer acts as the alter ego of a corporation if:
(a) The corporation is influenced and governed by the stockholder, director or officer;
(b) There is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and
(c) Adherence to the corporate fiction of a separate entity would sanction fraud or promote a manifest injustice.
NRS 78.747(l)-(2). The elements of an alter ego claim must be proven by a preponderance of the evidence. Truck Ins. Exch. v. Palmer J. Swanson. Inc., 124 629, 635, 189 P.3d 656, 660 (2008).
In determining whether there is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other, courts will consider whether there was:
- Majority ownership and pervasive control of the affairs of the corporation. McCleary Cattle Co. v. C.A. Sewell, 73 Nev. 279, 281, 317 P.2d 957, 959 (1957) overruled on other grounds by Callie v. Bowling, 123 Nev. 181, 160 P.3d 878 (2007)(holding that an order adding president as a party to domesticated foreign judgment violated president’s due process rights)); Carson Meadows Inc. v. Pease, 91 Nev. 187, 191,533 P.2d 458, 460-61 (1975); Ecklund v. Nevada Wholesale Lumber Co., 93 Nev. 196, 197-99, 562 P.2d 479, 479-81 (1977); Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
- Thin capitalization. Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
- Nonobservance of corporate formalities or absence of corporate records. Ecklund v. Nevada Wholesale Lumber Co., 93 Nev. 196, 197-99, 562 P.2d 479, 479-81 (1977); Roland v. Lepire, 99 Nev. 308, 316-18, 662 P.2d 1332, 1337-38 (1983) (no alter ego because of lack of fraud/injustice); Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
- No payment of dividends. Roland v. Lepire, 99 Nev. 308, 316-18, 662 P.2d 1332, 1337-38 (1983) (no alter ego because of lack of fraud/injustice).
- Nonfunctioning of officers and directors. SEC v. Elmas Trading Corp., 620 F. Supp 231, 233-34 (D. Nev. 1985); DeWitt Truck Brokers. Inc. v. W. Ray Flemming Fruit Co., 540 F. 2d 681, 686-87 (4th Cir. 1976); Nat’l. Elevator Indus. Pension Health Benefit and Educ. Funds v. Lutvk, 332 F.3d 188, 194 (3rd Cir. 2003); Hildreth v. Tidewater Equip. Co., Inc., 378 Md. 724, 735-736, 838 A.2d 1204, 1210 (Md. 2003); Yankee Microwave, Inc. v. Petricca Commc’n Sys., Inc., 53 Mass. App. Ct. 497, 521, 760 N.E.2d 739, 758 (Mass. App. Ct. 2002); Pepsi-Cola Metro Bottling Co. v. Checkers. Inc., 754 F.2d 10, 14-16 (1st Cir.1985); 1 W. FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 41.30 at 430 (rev. vol. 1983) (cited by Wilcor Constr. and Dev. Corp. v. Hemphill, 872 F.2d 432 (9th Cir. 1989)).
- Insolvency of the corporation at the time of the litigated transaction; Roland v. Lepire, 99 Nev. 308, 316-18, 662 P.2d 1332, 1337-38 (1983) (no alter ego because of lack of fraud/injustice).
- Siphoning of corporate funds or intermingling of corporate and personal funds by the dominant shareholder(s). Carson Meadows, Inc. v. Pease, 91 Nev. 187, 191,533 P.2d 458, 460-61 (1975) Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
- Use of the corporation in promoting fraud. Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
- The authorized diversion of an entity’s funds;
- Ownership of the entity by one person or one family. Roland v. Lepire, 99 Nev. 308, 316-18, 662 P.2d 1332, 1337-38 (1983)(no alter ego because of lack of fraud/injustice); Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
- The use of the same address for the individual and entity. Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
- Employment of the same attorneys and employees.
- Formation or use of the entity to transfer to it the existing liability of another person or entity.
- The failure to maintain arm’s length relationship between related entities. McCleary Cattle Co. v. C.A. Sewell, 73 Nev. 279, 317 P.2d 957 (1957) (overruled on other grounds by Callie v. Bowling, 123 Nev. 181, 160 P.3d 878 (2007)(holding that an order adding president as a party to domesticated foreign judgment violated president’s due process rights)); Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
It is not necessary that the plaintiff prove actual fraud in order to recover against a corporate alter ego. It is enough if the recognition of the two entities as separate would result [in an injustice. In determining whether adherence to the corporate fiction of a separate corporate entity would sanction a fraud or promote an injustice, courts consider whether: (1) the facts are such that adherence to the fiction of a separate corporate entity would sanction a fraud or promote an injustice; (2) the family of controlling officers benefits from the controlling officer’s/entity’s actions; (3) the plaintiff will be able to recover damages against the corporate defendant or whether the corporate defendant is insolvent; because the entity cannot pay, will support the finding of injustice; and (4) the corporate entity was undercapitalized. Finally, alter ego recovery has been granted specifically because the corporation obtained a loan, did not use the loan for its specified purpose, and was unable to repay the loan. See In re Erdman, 236 B.R. 904 (Bankr. N.D. 1999).
In Nevada, the elements for a claim of civil aiding and abetting are:
- Defendant intentionally and substantially assists or encourages another’s conduct in breaching a duty to a third person;
- The duty to a third person is actually breached; and
- Causation and damages.
- K. Las Vegas, Ltd. P’ship v. Simon Prop. Grp., Inc., 460 F. Supp. 2d 1246 (D. Nev. 2006); Dow Chem. Co. v. Mahlum, 114 Nev. 1468, 970 P.2d 98, 113 (1998) (citing in re Temporomandibular Joint (TMJ) Implants Prods. Liab. Litig., 113 F.3d 1484, 1495 (8th Cir. 1997)) overruled in part on other grounds by GES, Inc. v. Corbitt, 117 Nev. 265, 21 P.3d 11 (2001); Halberstam v. Welch, 705 F.2d 472, 477 (D.C. Cir. 1983).
See elements for other claims at the Nevada Law Library
In Nevada, the elements for an accord and satisfaction are:
- A person against whom a claim is asserted and who has a bona fide dispute over an unliquidated amount;
- Proves a good faith tender of an instrument to the claimant in full settlement of the entire disputed amount;
- An understanding by the creditor of the transaction as such, and acceptance of the payment. (There must be a meeting of the minds with regard to a resolution of the claim); and
- The claim is discharged.
NRS 104.3311; Pierce Lathing Co. v. ISEC, Inc., 114 Nev. 291, 956 P.2d 93 (1998); Walden v. Backus, 81 Nev. 634 (1965) (“Accord” is an agreement whereby one of the parties undertakes to give or perform, and the others to accept, in satisfaction of a claim, liquidated or in dispute, and arising either from contract or from tort, something other than or different from what s/he is, or considers himself/herself, entitled to); Mountain Shadows v. Kopsho, 92 Nev. 599 (1976).
See elements for other claims at the Nevada Law Library
In Nevada, the elements required to allow a remedy of an accounting are:
- A fiduciary relationship exists between plaintiff and defendant;
- The relationship between plaintiff and defendant is founded in trust and confidence; and
- Defendant has a duty to render an accounting to plaintiff to determine damages resulting form any misallocation of funds.
NRS 78; G. K. Las Vegas, Ltd. P’ship v. Simon Prop. Grp., Inc., 460 F. Supp. 2d 1246 (D. Nev. 2006); Foley v. Mowbray, 109 Nev. 116 (1993); In re Maxim Integrated Prod., Inc., Deriv. Lit., 574 F. Supp. 2d 1046 (N.D. Cal. 2008)(citing Carlson v. Hallinan, 925 A.2d 506, 538 n. 211-12 (Del. Ch. 2006)). 1 Am. Jur. 2d Accounts & Accounting § 55.
See elements for other claims at the Nevada Law Library
In Nevada, the elements for a claim of abuse of process are:
- Filing of a lawsuit made with ulterior purpose other than to resolving a dispute;
- Willful act in use the use of legal process (subsequent to the filing of the suit) not proper in the regular conduct of the proceeding; and
- Damages as a direct result of abuse.
LaMantia v. Redisi, 118 Nev. 27, 30, 38 P.3d 877, 897 (2002); Dutt v. Kremp, 111 Nev. 567, 894 P.2d 354, 360 (Nev. 1995) overruled on other grounds by LaMantia v. Redisi, 118 Nev. 27, 30, 38 P.3d 877, 897 (2002)); Laxalt v. McClatchy, 622 F.Supp. 737, 751 (1985) (citing Bull v. McCuskey, 96 Nev. 706, 709, 615 P.2d 957, 960 (1980); Nevada Credit Rating Bureau, Inc. v. Williams, 88 Nev. 601 (1972); 1 Am. Jur. 2d Abuse of Process.
See elements for other claims at the Nevada Law Library
What is Disability Insurance?
Disability insurance attempts to insure you against any injury, sickness or illness which would prevent you from earning an income. It is designed to replace up to 66% of your gross income on a tax-free basis should you become disabled. It covers both long term and short term disabilities. Don’t think you need disability insurance?
Consider these sobering statistics:
- Just over 1 in 4 of today’s 20 year-olds will become disabled before they retire. Source: Social Security Administration, Fact Sheet March 18, 2011;
- Over 36 million Americans are classified as disabled; about 12% of the total population. More than 50% of disabled Americans are in their working years, from 18-64. Source: U.S. Census Bureau;
- 8.3 million Disabled wage earners, over 5% of U.S. workers, were receiving Social Security Disability (SSDI) benefits at the conclusion of March 2011. Source: Social Security Administration, Disabled Worker Beneficiary Statistics, www.ssa.gov; and
- In December 2010, there were over 2.5 million disabled workers in their 20s, 30s, and 40s receiving SSDI benefits. Source: Social Security Administration, Disabled Worker Beneficiary Statistics,www.ssa.gov . Please consider whether you need disability insurance on yourself or a loved one today.
Smart business owners will partially fund their buy/sell agreements through disability insurance and will carry disability insurance on key employees to benefit the business. Even if you have a policy through your employer, you should consider an additional policy so that your family does not have to worry about income if you become disabled for even a short period of time.
So, you are thinking of buying a business? What types of documentation or information should you be seeking from the seller before you agree on a price, sign documents, or pay any money? This list will get you started:
- Seller entity information
2. Documents necessary to discover the seller’s full financial Information
3. Physical Assets of the seller
4. Real Estate (owned and leased)
5. Intellectual Property owned by the seller or to which the seller has rights
6. Employee contracts and employee benefits owed
7. Licenses and permits held by the seller
8. Environmental due diligence
9. Taxes (including verification) owed
10. Material contracts with the seller’s customers and suppliers
11. Customer information
12. Currently pending or threatened litigation
13. Insurance coverage
By: Guest Blogger Donald R. Parker, CFA, AVA | Gryphon Valuation Consultants, Inc.
Buy/Sell Agreements provide a blueprint for the transfer of business interests, allowing business owners to control and protect their investment and the integrity of the ownership structure.
These agreements address certain “triggering events” such as the death, divorce or departure of business owners and should be a part of every business planning process. A well-constructed Buy/Sell Agreement serves five crucial functions:
- Creates a ready-made market for a company’s shares or membership interests upon the occurrence of well-defined triggering events or under very specific transfer scenarios;
- Defines a price (value) at which the shares or membership interests will be transferred and the construct of the transaction;
- Ensures that any transaction is funded in a predefined manner;
- Imposes transfer restrictions that protect the integrity of the ownership structure; and
- Allows for succession and estate planning needs while mitigating possible conflicts.