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Daniel P. McCarthy is a partner and an experienced litigator and trial counsel whose practice focuses on all aspects of civil litigation, toxic torts, professional liability, products liability, food liability, and pharmaceutical and medical device litigation. He serves on the National Coordinating Counsel teams for international product manufacturers. Dan also serves as local and regional counsel defending products liability and toxic tort claims on behalf of manufacturers of boilers, building products, fluid sealing devices, wire and cable, friction components, aircraft, and mechanical equipment.

Avoiding Litigation RiskRecently, my firm Cooley Manion Jones LLP, successfully obtained summary judgment (download pdf) on behalf of its clients, Boca Raton-based private equity firm Sun Capital Partners, Inc. and six of its affiliated entities.  The claims were brought by two entities that had entered into contractual relationships to serve as independent sales representatives on behalf of Sun Capital portfolio company ACT Electronics, Inc.  Plaintiffs asserted numerous contractual related claims under veil piercing theories, together with claims for tortious interference, violations of the Massachusetts unfair trade practices statute, and state law statutory claims for commissions.  The gravamen of Plaintiffs’ claims was that Sun Capital and its affiliated entities pervasively controlled ACT Electronics and siphoned off corporate assets to the detriment of Plaintiffs.  While much of the Plaintiffs’ allegations were baseless and rejected by the Court, this case is a perfect example of the increased risk of liability associated with majority ownership and control of portfolio companies for the private investment industry, and illustrates steps companies can take to limit exposure in such cases.

Shareholder or control person liability arises in an increasing number of situations faced by private equity firms, including common law veil piercing claims, as well as WARN Act and Wage and Hour claims, and claims brought under provisions of the Securities Act and Securities Exchange Act.  While the factors considered by courts to determine whether a controlling shareholder should be held liable for the acts of a portfolio company vary from state to state and vary based on the context in which the claims are brought, all generally boil down to the following:

  • Disregard of corporate formalities
  • Disregard of corporate governance structure
  • Disregard of the corporation’s economic separateness
  • Undercapitalization
  • Siphoning of funds
  • Common ownership
  • Common directors and officers
  • Exercise of impermissible control

As these factors are used in guiding courts’ consideration of whether to extend liability to private investment firms and other controlling shareholders, these controlling shareholders must keep these factors in mind when structuring relationship with each of their portfolio companies.  Moreover, they should be mindful of the measures detailed below in order to reduce or eliminate the risk of such claims.

Recognize corporate formalities.  Private equity firms and their affiliated entities, by their very nature, must have inter-corporate relationships with their portfolio companies due to their interests as shareholders in those companies, and due to various other economic interests associated with their investment in those companies.  As a result, it is imperative that private investment firms and their affiliated entities observe proper corporate formalities.

In addition, private equity firms must encourage their portfolio companies to do the same.  All of the companies involved must take steps to create “corporate separateness.”  For instance, they should “separately: (a) conduct regularly scheduled meetings of their board of directors; (b) conduct and record shareholder votes; (c) prepare and record timely corporate minutes; (d) issue and record stock certificates; (e) make routine filings with the appropriate offices of the appropriate secretaries of states; and (f) maintain individual


Continue Reading Avoiding Litigation Risks Arising Out of Private Investment Firms’ Controlling Interest in Portfolio Companies

Social Media iconsGone are the days of handwritten personal diaries and daily journal entries.  Internet-based social networking has replaced pen and paper.  Facebook reports that it had 901 million monthly active users worldwide as of March, 2012.  With the explosion of social networking in recent years, litigation counsel are becoming more savvy at using this technology to their advantage, and more an more courts are weighing in on the extent that a parties’ social media content is discoverable.  Case law addressing the discoverability of social media varies, and is developing as more and more courts are addressing this issue.  This post notes some of the more noteworthy decisions, followed by a discussion of a recent case handled by this firm and some advice on how to deal with this developing issue.

The large majority of courts addressing the issue will permit discovery of social media content upon a threshold showing that the information sought has some relevance to the underlying lawsuit:

  • Romano v. Steelcase, Inc., 907N.Y.S. 2d650 (2010)(permitting discovery of Facebook account where inconsistencies demonstrated with plaintiff’s claims versus the information contained in social media content);
  • McMillen v. Hummingbird Speedway, Inc., 2010 WL 4403285 (PA Commw. 2010) (social media content discoverable where its demonstrated that publically available portion revealed information showing plaintiff was exaggerating his injuries);
  • Zimmerman v. Weis Markets, Inc., 2011 WL 2065410 (Pa. Commw. 2011) (permitting discovery where publically available social media content including photographs depicting plaintiff were inconsistent with plaintiff’s claims of injury.) The hyperlink to this opinion was originally posted on gtleblog.

Other courts have denied or limited discover of a party’s social media content where there was no showing that the information sought would reveal relevant evidence:

  • McCann v. Harleysville Ins. Co. of New York, 78 A.D. 3d 1524 (N.Y.App.Div. 2010) (denying access to Facebook information where defendant “failed to establish a factual predicate with respect to the relevancy of the evidence.”);
  • Tompkins v. Detroit Metropolitan Airport, 2012 WL 17930 (E.D. Mich. 2012) (rejecting defendant’s overly broad discovery requests, but allowing limited discovery of photographs depicting plaintiff taken after the accident giving rise to the litigation).

Conclusion 

Based on the above, it is clear that counsel is well advised to craft discovery reasonably tailored to discover relevant social media content.  This can be demonstrated by a recent case handled by this firm.  Plaintiff, a college student, brought a personal injury claim and asserting significant impact on her social and athletic activities.  Plaintiff’s publically available Facebook account revealed photographs and status updates which contradicted plaintiff’s allegations and sworn deposition testimony concerning the extent of her injuries and impact on her everyday life.   Defendant filed a motion to compel plaintiff’s private social media content limited to photographs depicting plaintiff since the date of her injuries and written content relevant to her level of activity and participation in athletics.  The case settled while the motion was pending, but it was clear that plaintiff’s social media content and the motion to compel clearly impacted the case.   Accordingly, counsel
Continue Reading The Discoverability of Social Media in Personal Injury Litigation

Co-authored by Brian Gross 

On February 10, 2012, the Massachusetts Supreme Judicial Court found that plaintiffs were entitled to more than $22 million when it held that the damages to which a plaintiff is entitled to recover pursuant to M.G.L. c. 93A and 176D for an insurers’ failure to effect prompt, fair and equitable settlement of claims must be based on the underlying judgment in the plaintiffs’ tort action, and not the loss of use of the sum ultimately offered by the defendant-insurers.  See Rhodes v. AIG Domestic Claims, Inc., — N.E. 2D —-,Mass., 2012 WL 401034 (Mass., February 10, 2012).

The Rhodes case arose out of Rhode’s catastrophic personal injuries when a tractor trailer truck rear ended her car.  Rhodes, her husband and daughter brought a tort action against inter aliaGAF Building Corp. (“GAF”), the company that leased the tractor trailer truck. GAF was insured by Zurich American Insurance Company (“Zurich”) which carried a $2 million primary policy, and National Union Fire Insurance Company of Pittsburgh, Pennsylvania (“National Union”), which carried a $50 million excess umbrella policy. AIG Domestic Claims, Inc. (“AIGDC”) acted as National Union’s claims administrator.

Defendants’ and their Insurers’ evaluation of plaintiffs’ claims and the various settlement offers and demands are detailed at length in the Court’s opinion.  For purposes of this report, it is sufficient to note Zurich tendered its policy limits to AIGDC, but AIGDC’s highest offer prior to trial was $3.5 million, which increased to $6 million at the close of evidence.

After a trial on damages, the jury awarded plaintiffs damages in the approximate amount of $11.3 million, after deducting a co-defendant settlement and adding statutory interest.  The underlying tort action was settled pending appeal, but, plaintiffs’ claims against Zurich and AIGDC for both pretrial and postjudgment violations of Chapters 93A/176D proceeded to bench trial, where the judge found in favor of Zurich, but against AIGDC.  In calculating plaintiffs’ damages pursuant to Chapters 93A and 176D, the trial court andAppeals Courtboth held that plaintiffs’ damages are based on plaintiffs’ lost use of the funds.

On further appeal, the Massachusetts Supreme Judicial Court disagreed and held that the plain language of the Massachusetts Legislature’s 1989 amendments to Chapter 93A provides that the damages for knowing and willful violations of Chapters 93A and 176D committed by insurers are calculated by doubling or trebling the amount of the underlying judgment – in this case $11.3 million.

While the SJC’s decision invites the Legislature to consider expanding the range of permissible damages to be awarded for such cases, it is clear that under current law, liability insurers face significant risk in their claims handling practices, particularly where the underlying matter involves clear liability and potential for significant damages.

 
Continue Reading Insurers Beware —Massachusetts Supreme Judicial Court Has Final Word on Damages Plaintiffs Are Entitled to Recover For Defendant-Insurers’ Violations of M.G.L. c. 93a and 176D