Celebrating 10 years! 2007-2017

serious legal question

So I'm about to land a whale of a client, someone who will b dingbat07/21/18
Uh, get your client a good wire and recreate the prior oral finklebots07/21/18
That could be a very interesting case with all kinds of lega jeffm07/21/18
Wow. Aside from jeffm's right-on take to which there isn't m onehell07/23/18
it's not going to happen. Also, the competing businesses ar dingbat07/23/18
A recording doesn’t satisfy the statute of frauds. You nee jdslug07/23/18
can't satisfy the statute of frauds. But there are exceptio dingbat07/23/18
Haha, Baaaa-Zingah. wutwutwut07/24/18
which exception can it validate? Give me one example where a jdslug07/24/18
the main purpose doctrine, for starters, and the part perfor dingbat07/24/18
Wrong. You don’t need a recording big strong man. jdslug07/24/18
Not a fan of the insult, either, but the suggestion to get a jeffm07/24/18
What state? These closely-held business disputes are cash midlaw07/24/18
This is less of a legal theory and more of a "let's see if a soupcansham07/24/18
Most important thing about the Statute of Frauds: It's a shi therewillbeblood07/24/18
As regards the theory that Client could exercise his rights jeffm07/24/18
dingbat (Jul 21, 2018 - 6:02 pm)

So I'm about to land a whale of a client, someone who will be sending me an absolute boatload of work for years to come... if I can help him with a matter. Unfortunately, it's not my area of expertise, and I'd like to get some advice. Luckily, we met in an informal setting, where I got a lot of details, but we won't have a real consultation/meeting for a few more weeks, which gives me time to get my ducks in order.

Basically he and his brother each own multiple businesses. A while back he was partnered with his brother in one business. He sold that business to his brother, on a payment plan (X per month until the full amount is paid). Everything went fine for about 2-3 years, but then he bought another business that competed with one of his brother's businesses, and brother stopped paying.

There is no paperwork, just an oral agreement on the price. (yay statute of frauds). He claims that there are witnesses (hope, hope, hope), and there should be records of payments (of course, there might not be).

So I think I need to (1) get past the statute of frauds, (2) prove that there was a contract, (3) prove the amount agreed upon, and (4) prove the amount.

Anyone got any advice or tips or tricks?

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finklebots (Jul 21, 2018 - 6:58 pm)

Uh, get your client a good wire and recreate the prior oral conversation?

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jeffm (Jul 21, 2018 - 10:17 pm)

That could be a very interesting case with all kinds of legal theories that apply. For starters, the statute of frauds has many exceptions. Full or partial performance is one of those. For example, in an oral agreement to buy real property, buyer's payments, together with his making improvements, can support enforcement of the oral agreement. Don't assume that *any* type of partial performance works. It is a broad category, but even so, it has some nuanced rationales for sticking it to some losers.

IIRC, partial performance almost always seemed like there was plenty of wiggle-room to take the deal out of the statute of frauds. Research for yourself and see what you find. Specifically, look at oral purchases of a business interest, oral debts and oral non-competes - all separately.

I don't know if it will apply in your case, but some legal doctrines will treat certain debts owed as a "demand note." Demand notes might have special limitations periods (if limitations could apply). They might be treated differently for other purposes, too. Just be sure to research until you feel fairly certain you've got a good feeling about oral debts with uncertain/*missing* terms. Weirdness happens when courts have to start filling in the blanks.

If the brother paid and stopped due to competition, he could easily claim, "Our oral agreement included a non-competition agreement by the seller." If he can sell that theory, he isn't necessarily limited to offset on the note. Buyer can suffer his own damages which exceed the note balance. Thus, a risky counter-claim can be involved, too.

This is one of those types of cases that deserves some good research time. I would expect a client to pay for that. I've done it many times where you just tell the client there's a lot going on there, and for about $1,000 - 1,500 (or whatever you think), you should be able to meet and bring case law and statutes to the meeting and fully inform him as to the issues and how the courts tend to deal with them. Then, if it looks bad for him, he will know and can drop it. But if it looks good, then, he'll know that as well and can continue paying you to press forward.

Re: proof of the price... Maybe you will have enough evidence to reverse-engineer the amortization on it. For example, if the payments were the same every month, plus your client reported interest income on his tax returns of $X, you might derive the term and the loan amount - at least close enough to satisfy the fact-finder by a preponderance.

The buyer's tax returns could also be revealing. They attach K-1's showing their balance sheets, etc. They might show the debt to the brother. Conversely, your client's returns might show the debt as a note receivable. The returns might show interest income and expense, respectively.

There are more angles than mentioned, but those are the ones which immediately come to mind. I used to litigate this stuff all the time.

Expect a case like this to involve *a lot* of discovery. This type of litigation will go to the $10's of thousands really fast.

OTOH, if it's a chumpy business interest or a smallish note balance, it will not be worth litigating. Maybe a demand and a hope for settlement. Not nearly as fun, but possibly still worth a shot.

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onehell (Jul 23, 2018 - 7:45 pm)

Wow. Aside from jeffm's right-on take to which there isn't much that can be added, I gotta wonder WTF is going on with this family.

Perhaps they could be well-served if they could both agree to come to the table with a REALLY good mediator? Get like a really well-known retired judge or something who can really tell it like it is in terms of how uncertain and expensive years of litigation would be for both of them, and get 'em to come to some solution, like maybe a promissory note in exchange for a real noncompete.

And maybe then, one day, they might also be able to sit down together at thanksgiving dinner again, which will never happen if they spend the next however many years and who knows how much money in court.

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dingbat (Jul 23, 2018 - 8:27 pm)

it's not going to happen. Also, the competing businesses are completely unrelated to the business that was sold. Basically, they both just buy random businesses / franchises, whatever is turn-key, and hope it makes money.

From the impression I got, it's more likely to devolve into scorched earth than to be solved amicably (realistically, if told it's not economically feasible, my client won't pursue)

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jdslug (Jul 23, 2018 - 8:01 pm)

A recording doesn’t satisfy the statute of frauds. You need a writing is my understanding.

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dingbat (Jul 23, 2018 - 8:28 pm)

can't satisfy the statute of frauds. But there are exceptions to the statute of frauds, and a recording can validate those exceptions.

Please refrain from answering questions if you don't know anything beyond the basics that every law school student learns in 1L

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wutwutwut (Jul 24, 2018 - 8:09 am)

Haha, Baaaa-Zingah.

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jdslug (Jul 24, 2018 - 9:07 am)

which exception can it validate? Give me one example where a recording would be legally sufficient where a writing would not be. Also, thanks for the insult.

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dingbat (Jul 24, 2018 - 9:11 am)

the main purpose doctrine, for starters, and the part performance doctrine for another.
(in my case, I'm going for the part-performance doctrine)

Now sit down and shut up. grownups are talking

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jdslug (Jul 24, 2018 - 9:26 am)

Wrong. You don’t need a recording big strong man.

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jeffm (Jul 24, 2018 - 10:09 am)

Not a fan of the insult, either, but the suggestion to get a recording was not for getting around the statute of frauds. It was suggested to get the opposing party's admission to the arrangement so that he can't deny it.

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midlaw (Jul 24, 2018 - 10:18 am)

What state?

These closely-held business disputes are cash cows. Good luck landing this one.

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soupcansham (Jul 24, 2018 - 11:19 am)

This is less of a legal theory and more of a "let's see if a letter can fix it first" strategy but if they both owned the business and the brother claims he didn't buy it, then couldn't your client just claim he's a full partner and start exercising rights consistent with that? If the brother doesn't want there to have been a contract, then he paid for nothing. Too bad.

In other words, if the purchasing brother wants the deal to not have existed, then he's going to have to:

1) Accept that his payments are sunk costs; and
2) Share control and responsibility under the agreement in place when the business was formed or originally purchased as a partnership.

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therewillbeblood (Jul 24, 2018 - 11:34 am)

Most important thing about the Statute of Frauds: It's a shield, not a sword. Look up caselaw with the keywords "shield sword 'statute of frauds'." There should be literally 100+ years of cases on this (JeffM touches on it with his partial performance mention). In most states the court will not let a party who acted like a contract existed then use the Statute of Frauds to invalidate it because that's not the point of it. It goes beyond partial performance because if the brother benefitted in any way from the contract existing that can defeat a statute of frauds defense.

Similarly, presumably your client was listed as an officer/owner of this business, right? What exactly is his brother's legal theory going to be? That it was sold but the brother paid him off? That it was given as a gift?

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jeffm (Jul 24, 2018 - 12:01 pm)

As regards the theory that Client could exercise his rights as owner if his Brother did not buy him out, this might be a good back-up plan. To the extent Client was/is owner of a minority interest, it might be of little value. I such case, there are plenty of cases on what constitutes shareholder oppression and the remedies, including receivers, forced dividends, forced buy-outs, etc.

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