It’s tough out there, even for lawyers. From major law firms to small firms, excess is being trimmed in order to better facilitate a nouveau climate urging more cautious business expenditures for legal advice. “The nation’s businesses are pulling in their collective horns beneath the juggernaut of our longest and deepest recession since the Great Depression,” asserts Alan Insul, a Los Angeles lawyer limiting his practice to business, corporate, and real estate cases, “I find that many clients are shedding large law firm representation and looking toward smaller firms for efficient and more cost-effective legal representation.”

A survey of the nation’s top 250 law firms bears out what Insul is saying. During the past year, these apex firms have shed 5,259 lawyers from their payrolls, a drop of 4%. This is the largest lawyer retention downturn since the National Law Journal began collecting such information in 1928 – just prior to the dismal Great Depression. Two other distinct declines, both in the neighborhood of 1 percent, were recorded during the early 1990s. One firm, Fried, Frank, Harris, Shriver & Jacobson lost 168 lawyers, a decline of 26.4%.

Other firms are cutting billing rates and pay for associates by up to 20%, primarily in response to clients’ concerns about cutting the costs of legal services.

“It’s a challenging marketplace we’re in now, and a changing one. Clients, in looking toward smaller firms, while not willing to sacrifice on quality, nevertheless are coming to appreciate that the smaller more nimble firm is by definition more flexible, and can very often handle most, if not all, of the same matters previously handled by larger firms,” Insul explains.

During the early 1930s and especially in mid-1937 during the so-called “second wind” of the Great Depression, lawyers too were embroiled in a bleak scenario featuring bread lines and soup kitchens, and a chronic lack of steady employment even for the most qualified and best trained among them. Nowadays, the outlook is more positive for lawyers, especially those willing to make some adjustments. “Making some of these adjustments can even lead many firms and their clients to a stronger business position overall,” Insul concludes.

To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

In the case of Nancy A. Schmidli et al. v. Rodney K. Pearce et al. recently decided by California’s Court of Appeal in the Third Appellate District (San Joaquin), the plaintiffs sought to extinguish a lien of deed of trust held by defendants against their property. Schmidli et. al. claimed that the defendants’ lien had expired under a 10-year statute of limitations triggered by defendant’s recording of a notice of default employing as a rationale that the “record” from which to determine the maturity date of the obligation secured by the trust deed included any recorded document that disclosed the debt’s maturity date, including a notice of default.Defendants countered that a 60-year statute of limitations applied if the last date fixed for payment of the debt is not expressly set forth within the recorded trust deed. With this line of reasoning intact, their notice of default did not trigger the 10-year statute, and their lien remained viable under a 60-year statute of limitations.

Two previous appellate decisions addressed this issue and reached different results. Slintak v. Buckeye Retirement Co., L.L.C. LTD. (2006) concluded a notice of default triggered a 10-year statute. Ung v. Koehler (2005) determined a notice of default did not trigger a notice of default where the notice was recorded after the 10-year period had expired and the trust deed failed to provide the maturity date of the debt, and therefore, the 60-year statute applied.

The trial court relied upon Slintak and granted a summary judgment in favor of the plaintiffs. Although the notice of default in this case was recorded before the 10-year period expired, the court concluded that Ung’s precedent was the better reasoned authority, and so reversed the judgment.

Because of this decision, a split between appellate districts on whether a 10 or 60 year statute of limitations applies to a lender’s recorded trust deed against real estate where that trust deed fails to provide for a maturity date of the loan. Although the California legislature has changed the statute to clarify 60 years as the term of maturity in the event that the trust deed failed to state a maturity date and regardless as to whether or not a subsequent notice of default so indicates, a significant number of trust deeds still recorded prior to the change are in existence which must be interpreted based upon the district where recorded unless there is further clarification from the California Supreme Court.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

On October 13, 2009, Governor Arnold Schwarzenegger vetoed SB 641, which would have extended the California State Bar’s authority to collect annual membership dues through 2010. Schwarzenegger explained in his letter to Senate that he was returning the measure by Sen. Ellen Corbett, D-San Leandro, without his signature “because the State Bar cannot continue business as usual.”

While the State Bar has enough funds to continue functioning through 2009, Los Angeles attorney Alan Insul, who is limiting his practice to business, corporate, and real estate cases, says that the veto “seems a bit like overkill” and that a “compromise between the Legislature and Governor,” should be worked out soon.

The governor opined that “inefficiencies remain unaddressed” and that the State Bar maintained a “political agenda.” Governor Schwarzenegger also alluded to Sharon Elyce Pearl, the State Bar’s former director of real property, who was charged in April 2009 with one count of embezzlement and six counts of filing false tax returns in the Alameda County Court. She faces up to nine years in prison if convicted on all counts. The governor went on to reference the media leak of the Fifth District Court of Appeal Justice Charles Poochigian’s “not qualified” rating by the State Bar’s Judicial Nominees Evaluation Commission. Poochigian, a former Republican state senator representing the Fresno area, was nominated August 20, three days after the MetNews reported his rating in a column by Editor Roger M. Grace. Schwarzenegger said the commission “by failing to follow the law, damaged its reputation for impartiality and, in turn, the State Bar’s.”

“Some of the points made by Governor Schwarzenegger are difficult to argue with, and certainly possess merit, but the fact is, the State Bar should not be prevented from functioning as normally as possible next year,” Insul asserts, “while scrutiny of the State Bar is essential, so is the State Bar’s role in the state’s justice system, as the governor himself has acknowledged.”

“I’m sure that our State Bar will be reexamining the problems that the governor has noted, but we’re all hopeful that his veto has not placed our very system in any jeopardy,” Insul concludes.

To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

The October 29, 2009, decision rendered by the California Court of Appeal, Sixth Appellate District, in the case Berg & Berg Enterprises, LLC versus John Boyle et. al. concluded that Berg failed to plead a cognizable claim for breach of fiduciary duty against the individual directors (John Boyle et. al.) of Pluris Inc. being sued.

The Berg case was born out of a dispute between Berg & Berg, a real estate developer, and Pluris, a Silicon Valley-based start-up company engaged in the business of developing advanced network routers. Pluris dissolved in 2002, a victim of a depressed sector economy as its financing efforts and product development efforts “tanked.” Berg alleged that it became Pluris’s largest creditor when its predecessor-in-interest, MWP, agreed to build and then lease two office buildings in San Jose, California, to Pluris and Pluris allegedly repudiated the lease agreement and subsequently made an assignment of its entire assets for the benefit of its creditors. Berg retaliated initially by attempting to file an involuntary bankruptcy proceeding against Pluris to try to exploit approximately $50 million in net operating losses. When the involuntary bankruptcy proceeding was dismissed, Berg litigated, claiming in state court that Pluris’s directors had breached fiduciary duty, alleging that the directors had failed to conduct a reasonable probe into the proposal to pursue the Berg bankruptcy plan for the intent of preserving the net operating losses. After several additional challenges, the actions were dismissed due to Berg’s “failure to state a cause of action for breach of fiduciary duty” and Berg appealed.

On appeal, Berg raised the theory that directors of a corporation owe a fiduciary duty to the corporate creditors even before the corporation is actually insolvent and merely in the “zone of insolvency” so as to vitiate the normally singular duty owed to shareholders. The rule was originally posted in a Delaware Chancery court in the case of Credit Lyonnais Bank Nederland N.V. v. Pathe Communications Corp., 1991 Del. Ch. Lexis 215 (Del. Ch. Dec. 30, 1991). In rejecting the invitations to expand directors duties before actual insolvency, the court instead reaffirmed California’s “Trust Fund” approach which rejects a fiduciary duty to creditors and merely fasten liability where the assets which otherwise could have been used to satisfy creditors is in some way diverted, dissipated or put at undue risk.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

Your business has been doing so well you are amazed. For the last couple of years it has continued to grow despite the severe recession. You’re rather proud of the fact that you ran it on a shoestring budget too, and kept just enough employees to do marketing and fill orders. Now that business is beginning to show a profit and you can actually take money out of it instead of plowing it back into the venture, you are beginning to worry about the fact you’ve been doing business under a fictitious business name. It’s time to make a call to a business attorney and find out how personally exposed you are and what you may do to protect yourself from business liabilities.

The first thing you find out is that you have been running the business as a sole proprietor despite having registered a fictitious business name. What that means is you have personal liability for all the obligations and other liabilities of the firm. It gets worse yet. The debts you’ve shouldered are business rather than personal or consumer debts. Your lawyer explains many of the protections you enjoy from consumer debts like credit cards or installment purchases don’t apply when you incur the debt in connection with operating your business.

Not without some trepidation, you ask the attorney if there is anything you can do to change the situation because you don’t want to start all over since you have a success on your hands. Fortunately for you the answer is there are a number of options that will let you change your company from a sole proprietorship to a business vehicle like a corporation or limited liability company. If this is done correctly, you can change the form of doing business tax free as well.

The attorney explains incorporating a going business or organizing it into a limited liability company is permitted in California and if properly done, neither the IRS nor the California Franchise Tax Board will see it as a sale from you to the business. Specifically, you may be able to contribute the assets of your business to the limited liability company in exchange for your membership interest without it being viewed as a taxable sale between you and your limited liability company.

What do you choose? You find out that corporations are an older form of business entity with less flexibility of operation over the limited liability company, the more modern form of business entity. On the other hand, when you do business in California in a limited liability form, it may be subject to a gross receipt tax which can be significant for a small business – if gross income attributable to California is more than $250,000, the fee will be imposed from a low of $900 to $11,790 if the total gross income exceeds $5,000,000.

Both entities are in common enough use that for most small businesses, institutional lenders are available to provide financing. For many tax professionals, the potential gross receipts tax is reason enough to opt for the use of a corporation which elects to Sub-Chapter S status. The advantage of an S election is that it avoids taxation at the corporate level, permitting items of income and loss to flow through directly to you, the shareholder. What is most important about either form of doing business is that it affords protection against personal liability.

Your lawyer says that as a practical matter, many lenders and landlords require personal guaranties by the shareholders or members of small business corporations or limited liability companies. Finally, in order to transfer the business into the selected business entity, your lawyer will work through each of your business assets and liabilities transferring title from you personally to the new entity.

Some of your liabilities, such as bank loans, may not be so easily converted into company obligations, at least without an accompanying personal guaranty. The good news is that once completed and all customers, vendors and other creditors are given notice of the change, future obligations or liabilities should belong to the company and will not be yours. Unfortunately, you learn that the legal and accounting costs are significantly more when incorporating a going business, or contributing the assets of a going business to a new limited liability company.

It is easy to see that our friend would have been better served had he spent a little more in the beginning to save significant legal and accounting outlays later, not to mention the time he may have to devote to gathering critical business information so that the process can be completed……at least that is what this lawyer thinks.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

There was optimism that the real estate market was making a comeback and then – experts said it was looking really bad for commercial property owners and getting worse. This doesn’t sit well with you when you realize that the vacancies in your 100 unit apartment building have soared upwards from 5% to 15%.

It’s no small wonder then that you have also been forking over more money every month to make the mortgage payments on both the first and second mortgages. One night while reviewing the dismal situation, you decide to quit throwing good money after bad and make a resolution to let the lender take the property in foreclosure.

Being a smart businessperson you make a call to a lawyer first to ask what your personal liability is if the first or second lender forecloses on the property. Your lawyer gives you the “it depends” answer and you’re thinking you’d rather have a straight answer instead. The straight answer only comes when she has the history of the loans in question.

When you bought the building, it was financed with a loan from your local bank with the second one provided by the building’s seller. Three years after the purchase, you refinanced loan number one for a better interest rate. The seller who held loan number two agreed to subordinate his loan to the new first loan so long as the principal of the first wasn’t greater and the interest rate was lower than the original loan.

While doing that was a smart move, the property currently can’t support either the first or the seller’s carry-back second loan. The straight answer from you lawyer, based on those facts, is that you could be personally liable to the lender holding the first trust deed but not the second. That revelation startles you and you discover that it is because the current first was securing a loan that was not used to buy the property – it was a refinance situation.

On the other hand, the seller carry-back second was used to buy the property and the refinance and subordination to the new first did not change the nature of what the seller originally financed with his second. As such, the law would not change the rule that as a purchase money loan, you had no personal liability.

In a 1991 case, Thompson v Allert (1991) 233 Cal. App. 3d 1462, the facts were quite similar to what we have discussed to this point. In that case the court outlined that the subordination to a new loan for the same amount at the same or lower interest didn’t alter the purchase money character of the loan. Under the California Code of Civil Procedure §580b, the holder of the second isn’t entitled to get a personal judgment against our apartment owner in this story – even if the first forecloses before the second and wipes out the second. Put another way, the second becomes worthless, leaving the holders with no ability to recover any of the unpaid loan amount.

By comparison, Wright V Johnston (1988) 206 Cal. App. 3d 333 provides a contrasting situation where the seller subordinated their loan to a new loan that was for a significantly greater amount then the original first trust deed so as to remove it from the borrower protections of California Code of Civil Procedure §580b. In other words, it lost its purchase money character by virtue of the changed nature of the financing risk with the refinance. Other situations which could trigger a seller carry-back losing its purchase money character are increased interest rates, balloon payments not in original first, and substantial cash-out loans.

If you’re knee deep in a commercial, industrial or multi-residential real estate property and thinking about letting it go to foreclosure, seek legal advice well in advance of letting the property go into default. This is an extremely complicated area of law where mistakes can be costly, and the need to think through the consequences of a default strategy is crucial to obtain the best possible result. At least that’s what this lawyer thinks.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

While the lessons may sound rather drastic, it is unfortunately true that if you wish to do business as a contractor you must be licensed at all times without any lapses. At least that’s what building contractor Terry Criddlebaugh found out the hard way.

The facts are a bit boring, perhaps even laughable when you examine them deeply. Terry was not licensed and had actually been trying to use the license of another contractor that was out of the country; a contractor that had assigned his license to Terry. Now on the surface that sounds like it would work, but it didn’t.

The actual registered owner of the company Terry was representing was Robert Diani. However he’d been an absentee officer and had turned over the work responsibilities to Terry. Diani left the country in 2004 and only returned to the U.S. twice and only had active control of the building company prior to leaving the country. Terry had never held a California contractor’s license. Because Diani was absent, he let Terry use his contractor’s license under the auspices of Diani’s company.

The problem was that when Diani’s company got its contractor’s license it had to qualify through a responsible managing officer (Diani) or a responsible managing employee who was eligible to get the same license.

If the managing officer isn’t associated with the licensed company, it has 90 days to replace the person. If the person is not replaced the contractor’s license is suspended automatically. In this case, the Diani company wasn’t qualified for a contractor’s license because Diani wasn’t actively in the construction business after 2004, Terry didn’t have a contractor’s license and there was no replacement put into Diani’s position.

So, here was a home built and one that exceeded the White’s expectations, but that didn’t matter. White was happy but he nonetheless sued Terry to recover all monies invested in the home because he found out that Terry had no contractor’s license.

This particular case is another in a series since 1990 and the Hydrotech Systems, Ltd. v. Oasis Waterpark, supra, 52 Cal.3d at p. 997 case. California courts have been interpreting the California Contractor’s law to say that the importance of licensing for a contractor is similar to other professionals like lawyers and accountants.

The California Supreme Court broadly interprets section 7031: “it bars a person from suing to recover compensation for any work done under an agreement for services requiring a contractor’s license, unless proper licensure was in place at all times.” In essence, the statute’s position that justice be done regardless of the equities is justified by how important it is to deter violations of licensing requirement. (WSS Industrial Construction, Inc. v. Great West Contractors, Inc., supra, 162 Cal.App.4th at p. 596.)

Section 7031 (b) deals with people who use unlicensed contractors regularly whether or not they have paid for the unlicensed work. People who have not paid are protected from lawsuits. On the other hand those who do pay may recover all they paid under this 2001 addition to section 7031.

Before the White vs. Criddlebaugh case, a lawyer recovered $3.5 million in paid fees in a similar case, MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 419. The White case goes one step further and says even if the construction job was the most outstanding in the world and the material will last 50 years or more, an unlicensed contractor will not be reimbursed for it. To put this another way, the White case extends the consequences of the Business and Professions Code 7031b’s disgorgement to even prevent the unlicensed contractor from recovering out-of-pocket costs expended on the job – in this case material.

This case also raised the question of whether or not compensation under section 7031 (b) may be reduced by offsets for “materials and services or by claims for indemnity and contribution.” The court concluded unlicensed contractors must return all compensation received without reductions or offsets for the value of material or services provided. (Goldstein v. Barak Construction (2008) 164 Cal.App.4th 845, 856.)

While this may seem nitpicky in the extreme there is sense in the decision. It’s a fact of life that there are cases where unlicensed contractors perform substandard work which ultimately may mean demolition of what was initially built by the unlicensed contractor in order to correct it.

The harsh results express a strong public policy intended to send a message. The message being that if you are unlicensed at any moment from the time you sign a contract to do work for which a contractor’s license is required through the time of completion of the job, you just gave the client free material and labor and built them their dream house as a gift – and even if they knew all along you were unlicensed. So, be aware that if a contractor is unlicensed, even for a fleeting moment, the same kind of decision may apply.

Wait, there’s more. Fight in court and you also get to pay the property owner’s legal fees and costs. On the other hand, if you are licensed, contractors have a formidable array of weapons they can bring to bear in order to get paid for their efforts.

While there are sometimes clearly inequitable results from such a harsh rule, it is more than offset against the circumstances where the contractor has never been licensed and has little clue on how to build a doghouse let alone a custom Beverly Hills chateau. At least that’s what this lawyer thinks.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

AB 33 would create the Department of Financial Services (“DFS”), including an Office of Financial Consumer Advocacy, transfer the Department of Financial Institutions (“DFI”) to the DFS as the Division of Financial Institutions, transfer the Department of Corporations (DOC) to the DFS as the Division of Corporations, effective 2011, and transfer limited licensing and regulatory authority from the Department of Real Estate to the DFS in the Division of Corporations effective 2012.

While it may not seem like a ground breaking bill, or one that would ruffle feathers, it is a bill that has met with opposition from the Financial Institutions Committee, Business Law Section of the state Bar Association of California. This committee argued that the proposed changes would lead California’s banks and credit unions to move towards national charters, and thereby negatively impacting the health of the state chartered bank system.

The Financial Institutions Committee asserted that preserving dual banking is substantially benefited from an independent Department of Financial Institutions (DFI). The committee reasons that state bank policy makers, legal advisors and examiners are a major benefit to California banks and that suggested changes to Financial Code section 200(b) would greatly diminish their effectiveness. Furthermore, the committee feels that by blending the DOC and some parts of the Department of Real Estate and their various staff would result in a loss of current focus to the detriment of the dual banking system.

Another very real concern is the committee foresees that California state banks don’t have that much exposure as federally regulated institutions to consumer and commercial real estate, making them less subject to market risks. This in turn is attributed to the extremely knowledgeable DFI staff. It is that very knowledge and skill that has seen many of the banks self-reporting as they have an established a solid working relationship with the existing department. Changes to the existing structure would bring about bureaucratic delays and a loss of the existing candor with a possible loss of the successful regulatory stewardship.

Commercial banking in California is under a great deal of stress give the economic climate.
If during staff reassignments and downsizing the expertise to oversee the banks was lost or administratively distracted, then this too could spell disaster. With pending economic recovery for the banks just around the corner, any loss of guidance and expertise could slow this recovery down.

Further concerns deal with the observation that the proposed changes do not streamline the existing structure, but rather add to the bureaucratic layers, thus resulting in more money being spent to change the existing structure which would not improve it. It if isn’t broken, why try to fix it could prove to be a challenging question for the proponents of this bill.

The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

Alan Insul, an expert Los Angeles business attorney, consulted on this latest version of Continuing Education of the Bar’s Ground Lease Practice in the complicated area of the rights between the parties in the event of a total or partial destruction of the improvements in situations such as a fire or earthquake. Continuing Education of the Bar is a joint enterprise of the University of California and the State Bar of California.

Commercial ground leases are when the owner of the land leases unimproved land to another party who will build and then own that commercial development. Leases for projects like this may run from 25 to 99 years. Unless the parties agree right up front in a ground lease agreement, the land owner winds up owning the improvements – a rather awkward state of affairs. “The transactions are very complex often involving the land owner, developer, lender and sometimes a large commercial user such as a major department store,” outlined Insul.

Drafting and negotiating solid, long-term ground leases may sound like a fairly straightforward issue. It is anything but straightforward and requires an expert attorney with a fine imagination and vision for the future. The future meaning the ability to balance the short-term goals of a client against a plethora of “what if” issues and conditions that may crop up in a real estate project 30 to 50 or more years down the pike.

It isn’t easy going in the beginning either when the attorney needs to be able to co-ordinate and keep track of the parties, title and interests involved; make sure there is a complete premises description; provide for term, termination and options to extend or buy and deal with issues pertaining to rent, security and other types of payments. “The issues are even more far reaching than that and will also include the not insubstantial matters of construction, maintenance, ownership of improvements, financing, subordination, encumbrances and problems relating to condemnation,” added Insul.

It’s interesting to note that there is the distinct possibility that a major project in Beverly Hills may possibly have more residual value at the end of a ground lease situation as compared to a project developed to provide commercial support for the re-development of a blighted community which may or may not succeed in the long-term.

“A project in Beverly Hills may be more likely to have residual value at the end of the ground lease rather than a project developed to provide commercial support for a redevelopment of a blighted community which may or may not succeed over the long-term,” said Insul.

The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

While it might be “the in thing to do,” expanding a business into foreign countries and hiring manufacturers and suppliers right on the spot, you need to watch that you do not exploit local labor. If you do, and insist they follow “your” notions of minimum labor standards, working conditions and health benefits; chances are you might wind up as a party to a nasty lawsuit later, just the very thing that happened to retail giant Wal-Mart, Inc.

Now you may think it odd that U.S. lawyers are representing plaintiffs in foreign exotic countries, however it appears to be a growing legal trend. They are doing this because the foreigners can sue U.S. companies in the United States. Perhaps this is the wave of the future; the legal industry relying more on imports over domestic sources to stay in business.

Just the Facts Ma’am!

The plaintiffs are workers of foreign companies that sell goods to Wal-Mart Stores, Inc. They collectively brought claims against the retail giant based on working conditions in each of their employer’s factories. The basis of the claims was that a code of conduct included in Wal-Mart’s supply contracts with these foreign companies stated that the suppliers had to meet basic labor standards.

The standards insisted foreign suppliers adhere to local laws and local industry standards relating to working conditions like discrimination, child labor, forced labor, hours and pay and something called a right of inspection. The right of inspection clause stated: “Wal-Mart or a third party designated by Wal-Mart will undertake on-site inspection of production facilities, to implement and monitor said standards. Any supplier which fails or refuses to comply with these standards or does not allow inspection of production facilities is subject to immediate cancellation of any and all outstanding orders, refuse [sic] or return [sic] any shipment, and otherwise cease doing business [sic] with Wal-Mart.”

Wal-Mart promotes itself to the public as a corporate entity that improves the lives of its suppliers’ employees and won’t stand for any violations of their standards. The plaintiffs argue that Wal-Mart doesn’t properly monitor the suppliers and that standards are honored more in the breach than in actuality. They further alleged inspectors are coerced to produce positive reports for those not in compliance and that the short deadlines and low prices of Wal-Mart’s contract conditions forces suppliers to violate the standards to meet the agreements.

And the Contentions Are

The plaintiffs offer four legal theories that attempt to establish that Wal-Mart’s standards and California common law provides obligations that may be enforced by foreign workers against Wal-Mart. Those theories are that the plaintiffs are third-party beneficiaries of the standards contained in Wal-Mart’s supply contracts; Wal-Mart is the plaintiffs’ joint employer and they negligently breached a duty to monitor the suppliers and protect plaintiffs from the suppliers’ working conditions and finally that Wal-Mart was unjustly enriched by the plaintiffs’ mistreatment.

And the Court Said

Re: Third-party beneficiary contracts: the Court set out the oft quoted rule that a person will be entitled to sue on a contract as “an intended [third party] beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties.” Furthermore it is accepted that “contract interpretation is a question of law that the court reviews de novo.”

The court felt that Wal-Mart’s supplier agreement didn’t obligate them to inspect and a workplace’s standards violation has no consequence if there were no inspection. Therefore, Wal-Mart didn’t obligate itself with a duty owed to the supplier’s workers as 3rd party beneficiaries of the supplier contracts between Wal-Mart and its foreign based suppliers.

Re: Wal-Mart was the direct employer of the foreign based supplier’s employees. The court stated that “in order to be a direct employer, they must be determined to have the right to control and direct people’s activities or the manner/method used to perform those activities.” In addition any finding as to the right to control workers requires a comprehensive and “immediate level of ‘day to day’ authority over employment decisions.”

The agreement that Wal-Mart could monitor the work environment was already determined not to create a duty to carry that out. Therefore, this can’t rise to the level of control over method or manner necessary since Wal-Mart didn’t assume the obligation.

Re: Wal-Mart is liable in tort to the workers for negligently supervising the supplier’s facilities and their working conditions.

The court said that “Negligence requires a duty owed by defendant to plaintiff which is alleged to have been breached.” And further that “Wal-Mart did not owe the plaintiffs a common-law duty to monitor Wal-Mart’s suppliers or to prevent the alleged intentional mistreatment of the plaintiffs by the suppliers. Without such a duty, the plaintiffs’ negligence theories do not state a claim.”

Re: Wal-Mart was unjustly enriched because it knowingly profited from their suppliers substandard labor practices.

The court’s response to this contention was that “A person who has been unjustly enriched at the expense of another is required to make restitution to the other.” California’s approach to unjust enrichment is consistent with this general understanding. And in addition, “The fact that one person benefits another is not, by itself, sufficient to require restitution. The person receiving the benefit is required to make restitution only if the circumstances are such that, as between the two individuals, it is unjust [emphasis added] for the person to retain it.”

The lack of any prior relationship between Wal-Mart and its supplier’s employees precludes the application of the unjust enrichment theory to recover. As you can see, this case was very nearly a case of no good deed goes unpunished and is a warning shot fired at other entrepreneurs and large corporations to watch their step when dealing in foreign countries.…… at least that’s what this lawyer thinks.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.