Archive for October, 2009

"Trial Skills: What to Say and How to Say It" by Robert J. Perry

Sunday, October 25th, 2009

Trial Skills: What to Say and How to Say It is a new book written by Los Angeles County Superior Court Judge Robert J. Perry.  The book is 175 pages long, broken down into 28 easily-digested chapters.  Explained Judge Perry, “this book is short; because most trial lawyers are too busy to read a lengthy tome on trial practice.  The focus is not on the law, but on improving trial skills.”

As trial attorneys, what we don’t get is direct feedback from the bench on what works and what doesn’t work in the courtroom.  Trial Skills helps fill that gap.

One of the judge’s points repeated throughout the book is that trial lawyers should use visual props in the courtroom, be they PowerPoint presentations or exhibits blown up on the big screen.  In our current media culture, a trial attorney must start thinking about the visual aids that he or she will use the courtroom from the beginning of the case: the attorney can’t wait till the last weeks before trial before getting serious about the visual aids he will use the courtroom.

The chapter on dressing appropriately for the courtroom contains a wonderful anecdote.  According to Judge Perry, “a favorite clothing story was shared by defense attorney Michael Russo, who told his client to ‘dress well’ for court.  At the next court appearance, the client showed up in a rented tuxedo.”

While Trial Skills focuses on criminal trials, there are pointers that will help civil trial lawyers as well.  I particularly valued Chapter 23 on trial objections.  Judge Perry explains why the bench will make rulings on certain questions, which rulings may be based on the way the question is phrased rather than the information that is solicited from the witness.

Every trial lawyer has had situations in which the court sustained an objection and the lawyer shook his head wondering what was wrong with the question.  Trial Skills helps explain some of the reasoning behind these rulings.

Judge Perry reminds us that trial lawyers should enjoy the moment.  Says he, “there are few activities in law more satisfying than composing and delivering an effective closing argument.  When your days of trying jury trials are over, you will fondly recall the times the courtroom when you are on your feet, your adrenaline pumping, your mind racing, as you addressed the jury and argued the merit of your client’s case.”

Concludes Judge Perry, “Enjoy being a real lawyer – a trial lawyer.”

Published by The Rutter Group, Trial Skills is a bargain at $45.00.  I cannot imagine any trial lawyer, no matter how experienced, who could not pick up several good pointers from this title.

Here’s my most recent story, from a will contest trial last week in Tulare County.  One of the matter is in dispute involved the mental competency of the decedent.  I asked a witness for her opinion on an issue.  The other attorney wanted to hear the answer, and didn’t object.

However, the trial judge himself interposed an objection, stating from the bench that the question asked for any improper opinion.  (Remember, there are no juries in trials arising under the Probate Code.)   When I asked the judge to confirm that he was objecting to my question, he smiled and said yes.  What could I do?  I moved on to the next question.

Fiduciary Personally Responsible for Tax Debt

Sunday, October 18th, 2009

A fiduciary’s liabilities can sometimes arise in unexpected contexts.  A recent decision involving an estate tax liability held that a fiduciary was personally liable for unpaid estate taxes.

In Carroll v. United States, 2009-2 USTC ¶ 60,577 (N.D. Ala. 2009), the taxpayer was denied a bankruptcy discharge for unpaid estate taxes arising from the estate of his deceased father.

George Carroll, Sr. died on March 17, 1998.  The two executors of his estate were the appellant, George Carroll, and his two siblings (Stephen Carroll and Judy Bullington).  At the time of death, the total estate tax owed was $2,554,547.  That’s a big liability.

Federal tax law permits an estate tax to be paid in installments pursuant to 26 U.S.C. section 6166.  The administrators of the estate contracted to pay the estate tax in installments.  The final installment would have been due on December 17, 2012.  However, the estate stopped making payments in 2004.  Through 2004, Mr. Carroll and his sister paid approximately $1.2 million of the tax debt.

Between 1998 in 2006, the executors distributed various assets of the estate to themselves.  Judy Bullington received real property (including her father’s primary residence) and cash.  Stephen Carroll and George Carroll received stock held by the estate in two close corporations: United Gunite, Inc. and Pressure Concrete, Inc.  The brothers “planned to use the profits from these two entities to make the necessary installment payments to the United States.”

Now, I don’t know about the construction industry in Alabama.  However, gunite is used in the pool contracting business.  And pool contracting in Fresno has tanked in the last 18 months.  Tanked to a level that is almost unbelievable.

So the economy didn’t help the Carroll brothers.  Even worse, in 2001 Stephen Carroll pled guilty to a count of “felony bribery of a public official.”  Thus, things went from bad to worse for the Carroll brothers.

Apparently seeing the end, “on February 28, 2004, George Carroll, in his capacity as an executor of his father’s estate, transferred the last of the estate’s liquid assets – $733,613 in cash – to a bank account owned by Pressure Concrete.”  The cash infusion was not sufficient to revive the business, and in 2006, George Carroll bought out his brother’s interest in the company for $29,500.  Shortly thereafter, the company failed.

In 2007, George Carroll filed a bankruptcy petition, along with approximately 1.2 million other Americans.  The government disputed his request for discharge with respect to the unpaid estate taxes.  The court agreed, in a decision affirmed on appeal.

Explained the court, “executors of an estate become personally liable for the estate tax owed to the United States if they distribute property to beneficiaries before fully satisfying the estate’s tax debt.”  The tax regulations add that, “if the executor distributes any portion of the estate before all the estate tax is paid, he is personally liable, to the extent of the payment or distribution, for so much of the estate tax as remains due and unpaid.”

George Carroll attempted to escape liability, arguing that the value of the estate was artificially inflated for tax assessment purposes, and that the corporation failed because he “was not prepared to handle the business that he inherited from his father.”  The court rejected these arguments, instead of focusing on the transfer of $733,613 in cash to the struggling corporation.  The court deemed the transfer to be a “willful” act within the meaning of the bankruptcy laws, such as to deny a bankruptcy discharge to George Carroll.

Thus, the case is a word of caution to all persons who administer an estate, whether by way of probate or pursuant to a trust.  If an estate tax is owed, and if the administrator transfers assets to the beneficiaries before the tax is paid in full, the administrator can be held personally liable, and the estate tax liability will not be discharged in bankruptcy.  Think twice before you distribute assets when an estate tax is unpaid.

(The court adds a humorous aside.  In 2006, the failing corporation, Pressure Concrete, “acting at George Carroll’s direction, issued two separate checks, totaling $25,000, drawn and payable to the University of Alabama athletic department for the purchase of football tickets – a fact proving only (if proof were needed) that, in this State, Alabama football is a secular religion promoting misplaced and false values.”)

Carroll v. United States, 2009-2 USTC ¶ 60,577 (N.D. Ala. 2009)

Contractual Basis for Fiduciary Duties

Sunday, October 11th, 2009

Some commentators view fiduciary duties through a contractual framework.  Judge Frank Easterbrook and Professor Fischel state, “The fiduciary principle is fundamentally a standard term in the contract.  Fiduciary duties are not special duties; they have no moral footing; they are the same sort of obligations, derived and enforced in the same way, as other contractual undertakings.”

In their view fiduciary law parallels contract law, because the objective is to “promote the parties’ own perception of their joint welfare.”

Profession Scott Fitzgibbon, in his article, “Fiduciary Relationships Are Not Contracts,” 82 Marq. Law Rev. 2 (Winter 1999), criticizes this analysis.  The law of fiduciary duties is all about “gap filling,” meaning that courts are setting forth the terms that were not expressly defined by the parties.  Professor Fitzgibbon then cites from a decision written by Judge Posner as follows:

“The common law imposes a fiduciary duty when the disparity between the parties relevant to the performance of an undertaking is so vast that it is a reasonable inference is that had the parties in advance negotiated expressly over the issue they would have agreed that the agent owed the principal the high duty that we have described, because otherwise the principal would be placing himself at the agent’s mercy.”  Burdett v. Miller, 957 F.2d 1375, 1381 (7th Cir. 1992).

Yet, the traditional contractual analysis does not explain how courts assess fiduciary obligations.  Professor Fitzgibbon explains that, in a contractual gap-filling situation, “Courts usually fill gaps by looking hard at the facts of the transaction before them rather than proceeding ‘generically.’”

Thus, when confronted with missing terms in a contractual setting, the court proceeds narrowly, based on the precise facts of the case.  Yet fiduciary duties are applied using a broad brush, which reflects a critical difference between a contractual approach and the fiduciary law approach when it comes to gap filling – “Fiduciary law usually takes a generic approach insisting that all trustees are subject to a standard panoply of duties.”

This is a major distinction – contracts are interpreted narrowly, fiduciary obligations are applied broadly.  They can’t come from the same root stock, and certainly are not treated the same by courts.

Mary Szto – Historical Review of Fiduciary Duties in an LLC – Part 3

Monday, October 5th, 2009

This is the third part of a review of Mary Szto’s article, “Limited Liability Company Morality: Fiduciary Duties in Historical Context,” 23 Quinnipiac Law Review 61 (2004-2005).  This week we get to the heart of the matter – the case law summary.

The author starts by explaining that, “In the Anglo-American tradition, principals of a firm are fiduciaries expected to lay aside self-interests.  A fiduciary’s duties, include a duty of care and a duty of loyalty owed to the firm, other principals, and/or other members of the firm.”

As the author surveys the case law involving fiduciary duties in a limited liability company context, she posits that courts “demonstrate a preference for corporate duty of care and a partnership duty of loyalty.”

Building on her history lessons she states that, “Canonists may never have imagined that the corporate form would become the chief engine for business growth today.  Nevertheless, in the 1800’s, business corporations came into prominence.  Agency, partnership, and trust duties chiefly influenced them, and still do today . . . English and American commentators readily applied agency, trust and partnership law to corporate fiduciary law.  Duties of care and loyalty were also addressed.”

Says Ms. Szto, “The duty of care cases focus on statutory or contractual corporate standards.  Duty of loyalty cases show a slight preference for partnership standards.  Also, enforcing contractual provisions, the courts still find equitable duties.  Even when LLC members ‘opt out’ of loyalty duties, courts find equitable duties that cannot be eviscerated.  This is in agreement with equity.  Many courts, notably Delaware’s and Ohio’s recognize a transcendent selfless standard for LLC fiduciaries.”

As Ms. Szto reviews the case law, she concludes, “In duty of loyalty cases, courts enforce contractual waivers and standards for fiduciary duties.  However, where there was self-serving behavior, they also found equitable duty breaches.  This was the case even when LLC operating agreements modified or limited fiduciary duties.  Of note is approach of Delaware, Ohio, New York, and Indiana.  Duty of loyalty cases may concern usurpation of firm opportunities, the duty to disclose information, conflicts of interests, and the duty not to compete with the firm.”

Ms. Szto states, “Also, when a statutory duty existed, corporate standards were applied using the best interests of the LLC as a main factor.  For example, a Maryland case found that all decisions by the LLC’s board were protected from second guessing by the business rule, which insulated the board from claims unless it ‘acted in bad fath.’  Another Maryland case noted that a majority interest holder owes a fiduciary duty to the LLC’s minority interests holder, which standard is similar to that of closely-held corporations.

The author states, “In sum recent LLC cases illustrate that in duty of care cases, corporate standards prevail.  ‘Best interests of the LLC’ are a primary focus.  In duty of loyalty cases, agency and partnership standards are favored.  Also, courts (Delaware’s chief among them), recognized equitable duties that are transcendent.  Ohio’s court stated that LLC members owe each other the ‘up most trust and loyalty.’”

The author concludes that, “Fiduciary duties are ingrained in Anglo-American jurisprudence in the business association.  They reach back to the biblical tradition, Roman, and ecclesiastical law.  They develop with fidei commissa, utilitas ecclesiae, the use, trusts, and agents.  They constitute partnerships, limited partnerships, and corporations.”

“To the extent that LLC fiduciary duties are true to their equitable roots, the LLC will take its place among enduring business entities and are constituted by a transcendent business morality.  There is promise of this in legislation that affirms equitable standards and in case law that promotes a corporate duty of care and partnership duty of loyalty that is selfless.  This is the rich legacy of fiduciary duties.”

I give this article six stars out of ten.  I would have appreciated more focus on the theories of LLCs and how these theories tie in to the particular fiduciary duties assigned by the courts, and less on the Anglo-Saxon religious roots.  In the end, the title has more sizzle than the article.