Disclosure of Principal Vital in Avoiding Personal Liability

A recent Eight Appellate District case exemplifies the importance of definitively identifying an agency relationship to a third person with whom your are dealing. A failure to do so could result in personal liability.

The case, Independent Furniture Sales, Inc. vs. Dan Martin, dba, Martin's Appliance, 2009 Ohio 5697 involved the failure of the operating manager of a corporate buyer to disclose his agency relationship to the Plaintiff.

As stated by the court, “To avoid personal liability, an agent must demonstrate that he disclosed to a third party: (1) the agency relationship; and (2) the identity of the principal. If this disclosure is not made, then the agent may be personally liable for contracts entered in his own name...A corporate officer has a responsibility to clearly identify the capacity in which he is dealing in a specific transaction. The failure to comply with this rule will expose the corporate officer to individual liability on the resulting contract.”

In this instance, even the issuance of two checks on the corporate account was insufficient disclosure that Mr. Martin was the agent of the corporation. As occurred in this matter, the Defendant continually failed to disclose the principal-agency relationship over a ten year period. Although two checks were drawn over the decade from the corporate account, this was insufficient evidence to put the Plaintiff on notice that the Defendant was the agent for the corporation

Therefore, I advise clients as follows:

1. Any communications with third parties should be made on a document clearly citing the name and address of the principal.

2. When one signs any communication with the third party, that person’s title and relationship should be clearly set forth on the signature line or immediately underneath.

3. Never pay for a corporate debt using a personal credit card or personal check.

4. Never execute a personal guarantee or surety agreement unless required to do so to obtain credit for the corporation.

Carefully Drafted Agreements are a Paramount Necessity

When drafting an agreement it is vitally important that the goal is to set forth language that is indisputable. While this may be an impossible goal, careful drafting of the terms can limit expensive costs of collection.

A good example of the issue occurred in the recent case of Cranberry Fin. v. S&V P'ship, 2010 Ohio 464. In that case the parties entered into a promissory note and mortgage. The mortgages recited three properties as collateral for the notes. Sometime after the agreements were drafted the notes and mortgages were rewritten. One of the properties was mistakenly omitted from the subsequent agreements. But, the second agreement contained the following language:

"COLLATERAL. Borrower acknowledges this Agreement is secured by a Mortgage dated April 27, 2001, to Lender on real property located in Huron County, State of Ohio, all the terms and conditions of which are hereby incorporated and made part of this Agreement.”

"CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. * * *."

The Plaintiff sought judgment on the notes and foreclosure of all three properties against the Defendant and two individuals that were personal guarantors. The guarantors claimed the omission of the one property precluded the Plaintiff from foreclosing on that property.

While the court ultimately sided in favor to Plaintiff, due to the terms quoted above, one can only imagine the cost of litigation in having to try and appeal this matter because the drafter of the second agreement was not careful in their rewrite of the agreement.

Proper drafting is a key to limiting the cost of litigation. As this court stated:

“A promissory note is a contract and rules of contract interpretation apply to the interpretation of promissory notes...If a contract is clear and unambiguous, then its interpretation is a matter of law and there is no issue of fact to be determined...If, however, an ambiguity is present such that parol evidence is necessary to resolve the ambiguity, a factual determination of intent or reasonableness may be necessary to supply the missing term. The fact-finder may also examine the surrounding circumstances of the transaction to determine the parties' intent...It is axiomatic that contracts -- including promissory notes -- are construed against the drafter... The rule is well established that where there is doubt or ambiguity in the language of a contract it will be construed strictly against the party who prepared it...In other words, he who speaks must speak plainly or the other party may explain to his own advantage."

Luckily for the Plaintiff, there was sufficient language in the subsequent agreement to protect its secured interest in the omitted property. But, the failure to carefully draft the subsequent agreement severely increased their cost of collection.

Can I Charge Interest

Many clients ask if they can charge interest to customers if invoices or statements are not paid within the time period set forth on the statement or invoice. The simple answer is yes. But when you can charge and how much you can charge is the question.

Simply saying a “a service charge on unpaid balances” is insufficient. ORC 1343.03(A) provides that a creditor is entitled to interest at the "legal rate" of interest on any money due on an account "unless a written contract provides a different rate of interest...." Under Ohio law, the annual rate of interest is determined each year by the Ohio Tax Commissioner. The creditor is permitted to charge this rate of interest unless the contract entered into between the creditor and their customer calls for a greater rate of interest.

So, for example, if your invoices state you will charge interest at the rate of 1½ percent per month (18% per annum) on any unpaid balance, a court will not enforce this rate unless the original contract calls for that interest rate. Otherwise, a court will only permit the interest rate prescribed by the Ohio Tax Commissioner. This year the rate is 4%.

So, if you intend to charge interest on the unpaid balance owed by customers, the maximum rate you can charge is the rate set by the Ohio Tax Commissioner each year. If you wish to charge a higher rate, you must set that rate in your contract with the customer.

This brings us to the discussion of compound interest. The rate set by the tax commissioner is simple interest. Therefore, you are not permitted to charge interest on the interest previously added to the balance unless your contract states otherwise.

The recent case of Mayer v. Medancic, 124 Ohio St. 3d 101, is a perfect example of this issue. In that case three creditors foreclosed on a debtor’s home and charged compound interest on the promissory notes signed by the debtor. None of the notes stated that the interest rate would be compounded.

In its opinion the court stated, “Simple interest is calculated only on principal and not on accumulated interest. Compound interest, on the other hand, is paid both on the principal and the previously accumulated interest. In other words, simple interest does not merge with the principal and thus does not become part of the base on which future interest is calculated.”

The court went on to say, “Because R.C. 1343.02 does not provide for it, compound interest is not available upon a default on a written instrument absent agreement of the parties or another statutory provision expressly authorizing it. However, upon a default on a written instrument, simple interest accrues on the entire amount owed, which includes both the principal and interest due and payable at that time.

Therefore, if your statement or invoice states a given rate of interest will be charged on the unpaid balance:

1. The interest rate can not be more than the simple interest rate set annually by the tax commissioner unless it is set forth in the contract between you and your customer, and

2. Can not be compounded unless it is set forth in the contract between you and your customer.

The Use of Arbitration in Ohio

For a number of years, arbitration was used primarily in commercial trade disputes, and later in labor and trade union disputes. More recently, however, arbitration clauses have made their way into ordinary consumer contracts and transactions, oftentimes vis-a-vis fine print contained in consumer loans, insurance policies, and garden variety purchase agreements. Today, arbitration clauses are now being used in credit card transactions. What is little known by many is that the use of arbitration in Ohio results from provision in Ohio law that must be complied with in order to benefit from arbitration provisions in contracts.

Arbitration in Ohio is governed by Title 2711 of the Ohio Revised Code. Initially, the law states, “A provision in any written contract...to settle by arbitration...shall be valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract (ORC 2711.01(A)). The exceptions to this statute relate to certain real estate issues.

Any party can seek a stay of any legal proceeding if a valid arbitration provision is contained in the contract (ORC 2711.02). The succeeding party may petition the court to enforce the arbitration reward within one year (ORC 2711.09). When a motion is made.. to confirm an arbitration award, a court must grant the motion unless a timely motion for modification or vacation has been made and cause to modify or vacate is shown. Absent such a challenge to the arbitration award, the court does not have discretion under § 2711.09 to deny the application to confirm the award, MBNA Am. Bank, N.A. v. O'Brien, 168 Ohio App. 3d 137.

Any application to enforce an arbitration award must contain the following:

1. The agreement, the selection or appointment, if any, of an additional arbitrator or umpire, and each written extension of the time within which to make the award;

2. The award;

3. Each notice, affidavit, or other paper used upon an application to confirm, modify, or correct the award, and a copy of each order of the court upon such an application

There are rare instances when a court will not enforce an arbitration provision. To avoid controversy, many courts demand that such provisions comply with standard American Arbitration Association clauses such as the following :

“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.”

The reader is cautioned that additional arbitration provisions apply in medical disputes.

When is an Attorney in Conflict of Interest

Many times client ask an attorney or his firm to represent them in a legal dispute bewteen fellow shareholders or partners where the attorney or firm had rendered legal representation in the past.

While the general ethical rule states that an attorney may not represent a party if there the possibility of a conflict of interest, the issue is a bit more complicated. The complication arises in defining the term “conflict of interest.”

Ohio has adopted the three-part test for disqualification of counsel due to a conflict of interest set forth in Dana Corp. v. Blue Cross & Blue Shield Mut. Of N. Ohio., (C.A.6, 1990), 900 F.2d 882. Also see Morgan v. N. Coast Cable Co. (1992), 63 Ohio St.3d 156, 586 N.E.2d 88; Hollis v. Hollis (1997), 124 Ohio App.3d 481, 485, 706 N.E.2d 798; Kitts v. U.S. Health Corp. of S. Ohio (1994), 97 Ohio App.3d 271, 275, 646 N.E.2d 555. The test is as follows:

(1) a past attorney-client relationship must have existed between the party seeking disqualification and the attorney he or she wishes to disqualify;

(2) the subject matter of the past relationship must have been substantially related to the present case; and

(3) the attorney must have acquired confidential information from the party seeking disqualification.

In determining whether corporate counsel should be disqualified from representing any of the corporation's officers in a later suit, the trial court is required to find all three factors enumerated in the Dana test before ordering disqualification, Legal Aid Soc. of Cleveland v. W & D Partners I, L.L.C., 162 Ohio App.3d 682, 2005 Ohio 4130, 834 N.E.2d 850.

Even though an attorney has served as counsel for a corporation, Ohio does not require the immediate disqualification of the attorney from serving as personal counsel for a shareholder or officer in a suit involving the corporation, Phillips v. Haidet (1997), 119 Ohio App.3d 322, 325, 695 N.E.2d 292; A.G. Financial, Inc. v. LaSalla, Cuyahoga App. No. 84880, 2005 Ohio 1504; Maloof v. Benesch, Friedlander, Coplan & Aronoff, Cuyahoga App. No. 84006, 2004 Ohio 6285.

In Ohio, pursuant to Rule 1.13(a) of the Ohio Rules of Professional Conduct, corporate counsel represents the interests of the corporation and not those of individual officers:

"(a) A lawyer employed or retained by an organization represents the organization acting through its constituents. A lawyer employed or retained by an organization owes allegiance to the organization and not to any constituent or other person connected with the organization. The constituents of an organization include its owners and its duly authorized officers, directors, trustees, and employees."

Therefore, in order for there to be a conflict of interest the following must be proven:

1. There was a past attorney-client relationship between the lawyer and the individual. Just because an attorney represented the corporation, that does not assume he presented the individual shareholders or partners too. Even if the attorney met with the members of a closely held corporation to discuss corporate business does not, in and of itself, arise to an attorney-client relationship with the individual shareholder or partner, and

2. Even if there was an attorney-client relationship, the subject matter of that relationship must be related to the present case for which the attorney is being retained, and

3. The attorney must have acquired confidential information from the party.

Note, all three of these requirements must be met before the conflict will arise. They are not mutually exclusive but a three-part requisite.

The “Statutes of Limitation”

From time to time, I receive telephone calls from clients who want to know how long they have to take action against someone. Ohio, as do all states, set time limitations by which you must file legal action. This is known in legal jargon as the “Statute of Limitations.” While this term is somewhat descriptive, it fails to completely describe some of the dates of which you should be aware. The Ohio Revised Code provide a series of statutes for this purpose. There are some dates set forth by which you must file an action. There are other dates that are dates of expiration. Allow me to explain.

Statute of Limitations

The State of Ohio sets, by statute, time limits by which you must file an action. Failure to file by that time nullifies any action. Some of the important dates are:

• Injury to person - If you or your employee is hurt in some type of accident (other than those injuries covered by statute such as injuries on the job) you have two years from the time you incurred the injury or discovered the injury. For example, if you are injured in an automobile accident, you have two years to file an action.

• Professional Malpractice - If you were injured as a result of negligence by a professional, you have one year from the time or the injury or when you discovered the injury to file an action. Giving a medical professional the appropriate notice can extend the time limit by 180 days in certain circumstances. If, for example, you incur bodily injury due to a doctor’s negligence and do not discover that injury for some time, you, generally, have one year from the date you discovered that injury to file an action.

• Contracts - If the contract is in writing, you have 15 years to file an action for breach of contract. If the contract was not in writing (known as an “oral contract”), you have only 6 years. Remember my adage - Always get it in writing!

• Collection on Account - If you keep running accounts, you have 6 years to file an action. You will note this is the same as your time limit for an oral contract. Therefore, it is important to obtain a written contract setting balance limits, guarantees or other issues relating to the sales of goods and/or services.

• Dishonored checks and drafts - There is a three year limitation. Note, this does not apply to the bank where you presented the check or the bank upon which the check was drawn. The bank’s liability is set forth by separate statute that outlines limitations on their liability.

• Judgments - Judgments are valid for 21 years.

• Embezzled funds - Although any resolution of criminal action may require reimbursement, the civil limitation is one year.

Federal statutes also contain limitations relating to issues involving federal projects, jobs and other issues.

Time Limits

While not exactly statutes of limitation, Ohio and the US Government do put limitations on the enforcement of certain liens and judgment.

• Mortgages - A mortgage that has not been released but has been of record for 21 years past it due date is deemed to be of no effect.

• Mechanic’s Lien - This type of lien is valid for 6 years. The lien is not renewable. Therefore, you must take action to foreclose within 6 years or lose your rights related to that realty.

• Judgment Liens - A judgement lien must be renewed every 5 years. This lien will only be enforceable as long as the judgment is in force. Note, although a judgment is valid for 21 years, a lien recorded pursuant to that judgment must be renewed every 5 years.

• Federal Tax Liens - This type of lien must be renewed every 10 years. Note, this type of lien attaches to after acquired property. A federal tax lien runs with the person, not the land. Therefore, if a federal tax lien is placed upon you and you subsequently purchase realty, that lien attaches to the newly acquired property.

• Federal Judgment Lien - This lien is effective for 20 years and is renewable.

• Ohio State Liens - This type of lien is valid for 15 years and is renewable if the renewal is filed within 6 months of the expiration of the lien.

• Condominium Lien - Liens by condominium association for CAM or other charges are valid for 5 years unless renewed prior to expiration.

• Child Support Lien - Liens upon property resulting from support issues have no expiration date and attach to after acquired property.

• UCC Financing Statements - Also known as “chattel mortgages,” these are valid for 5 years unless renewed prior to expiration or the term of the mortgage if filed as security along with the mortgage.

Also note that dower rights (rights of a spouse relating to property owned by the other spouse) attach to all property owned by a husband or wife. Also be aware that various state and federal laws may alter these date limitations in specific instances such as workers compensation, subcontractor rights on federal projects, etc.

Restrictive Covenants in Employment Contracts

A recent Ohio case brought to mind the ever changing status of covenants not to compete. The case, Murray v. Accounting Center & Tax Services, Inc., while not the most controversial or ground breaking case, does evoke thought regarding the tentative nature of covenants not to compete in employment contracts.

Murray v. Accounting Center & Tax Services, Inc.

The case involves an accountant who was employed by the bookkeeping service. She had signed a covenant not to compete for a period of two years after her termination. Other facts pertinent to the case were that: 1) She was a bookkeeper and had a private practice providing tax return services prior to her employment, and 2) the agreement was signed AFTER she was employed.

Consideration

Historically, Ohio courts were resolute that any covenant not to compete had to include additional consideration (usually an increase in pay or bonus) if the covenant was entered into after employment began. If an employer demanded an employee sign such an agreement after their employment began and additional monies or other consideration was not paid, the covenant was unenforceable.

In the last few years this principle has eroded and several courts in Ohio have abandoned this theory of law. The Eighth Appellate District (Cuyahoga County) has completely reversed this historical precedent by stating that continued employment is sufficient consideration for such a covenant. Many other courts have follows this ruling and, today, the courts of Ohio are split regarding this issue. The Ohio Supreme Court has yet to rule on this legal conflict.

Modification by Court Order

The other issue this case presents is the power of the court to limit the restrictions of such covenants. Typically, restrictive covenants set forth limitations as to time and distance. Such restrictions are characterized by such terms as ..”for a period of two years and 500 miles.” This meant the employee could not work in the same field for two years within 500 miles of the employer’s address.

Once again, historically, the courts are allowed to reduce these limitations if they are too restrictive. In the Murphy case, the court stated,

“ A covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee and is not injurious to the public.”

If the covenant not to compete is unreasonable, courts are empowered to modify the terms of the covenant to create reasonable constraints. Some the factors taken into consideration are:

1. Absence or presence of limitations as to time and space.

2. Whether the employee represents the sole contact with the customer.

3. Whether the employee is possessed of confidential information or trade secrets.

4. Whether the covenant seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition.

5. Whether the covenant seeks to stifle the inherent skill and experience of the employee.

6. Whether the benefit to the employer is disproportionate to the detriment of the employee.

7. Whether the covenant operates as a bar to the employee’s sole means of support.

8. Whether the employee’s talent was developed during the employee’s term of employment.

9. Whether the forbidden employment is merely incidental to the main employment.

For example, lets assume the covenant read,...”shall not be employed as an accountant for a period of two years within 500 miles...” This covenant would obviously be subject to modification. It bars the employee from obtaining any employment in their chosen profession. The benefit to the employer far outweighs the detriment to the employee and, finally, it operates to bar the employee’s sole means of support.

Now, let’s modify the covenant to read, “...shall not be employed as an accountant for a bookkeeping service to widget manufacturers for a period of two years within 50 miles...” The difference is obvious. The covenant does not totally restrict the employee from obtaining employment in their profession and the restriction appears only to protect the vertical market serviced by the employer. In this instance the court might maintain the covenant as is.

Conclusion

Nonetheless, the employer should be mindful of the fluidity of these type of restrictions. They should be aware of where they are located and determine whether the court in their jurisdiction will enforce the covenant and/or modify it. It requires the employer to be somewhat creative in the way the covenant is written. Most importantly it requires the employer to be aware that courts, generally, will side with the employee when the court feels the employer is treating its employee unfairly.