biz org class 5

piercing the corporate veil
matters of equity and fairness.

is there a lack of corporate formatives?
have the shareholders comingled funds and assets?
under capitalization?

if a shareholder doesn't observe the separate existence of
the corp, why should creditors?
shareholders have to act in a way that respects separate identity of
(who??)

unity of interest & ownership

lack of corporate formalities;
commingling of funds and assets;
under-capitalization;
use by one corporation of the assets of another.

sea-land v. pepper source
             M                   A
              l                     l
---------------------------------------------
I        I         I         I          I             I
SL    PS      J         S-C    CC         T-N

markesee and pepper source: PS was under capitalized,
shuffled money back and forth under the different corps,
but sea-land is unable to pierce the corp veil because
didn't show fraud or injustice and didn't show that the
judgment would be unsatisfied. the court's reasoning is that
1. the petitioner will always have an unsatisfied judgment in
this type of case and 2. this is a two part test to show fraud
and unity in ownership.

what's the difference between carlton and pepper source/marcasee?
why was there an injustice in the sea-land case?

remember that the purpose of corp is to max shareholder wealth, so
shareholders get to take money out of the corp.

marcasee has been saying to sea-land that it will pay, while all the
while, he has been removing and comingling pepper source funds
for his own personal use. the court requires sea-land to establish
fraud and injustice, but it does seem that the very facts of co-mingling
are the same factors under unity and ownership: the test is not clearly
bisected.

when we do piercing doctrine, recognize that it's not neatly set up.
a strong case of unity of interest/ownership may overcome a weak
case of injustice or vice versa.

as a practical matter: if you have shareholders that are ignoring the
separate existence of the corporation, that in and of itself is unfair.
it's circular reasoning, which is problematic of students of the law
but makes the matter arguable.

see p. 200 q. 2.
why is not the owner of a corp who's escaped liability for its debts
not unjustly enriched? an unsatisfied judgment is not enough to
attack the shareholders personally. here, even though marchese acts to
establish that there's unity of interest and ownership, there still begs the
question of where fraud and injustice exists?

what is the difference between the sea-land and BMS (silicone) case?
- sea-land could have contracted for a personal guarantee
- sea-land could have done due diligence to investigate assets
- sea-land could have contracted for assets and solvency

contract creditors assume the risk when they enter the contract that the
entity with which they contract will not be able to pay back. but with respect
to tort creditors, there's not that opportunity.

carlton: the court says that it's okay that carlton was unjustly enriched
and the legis should change the minimum coverage required
BMS: contract v. tort creditors, the question of fraud is much more
important to a contract creditor because it will make it difficult for the
contractor to do due diligence.

next question is whether the company has failed to do corporate formalities.
because if it has, then the contractor creditor has no way to know what
the stability of the business is.

a tort creditor will argue under-capitalization - whether the company is
adequately funded. not something that a contract creditor will want to
emphasize because the capitalization is something the creditor could have
investigated.

analysis #1. once the plaintiff has pierced veil to expose liability of marchese,
it put a levy on stock he owned. what would be gained by reverse piercing
other corporate veils.

reverse piercing: must show same analysis as piercing but the starting point
and ultimate conclusion is different. if sea land reaches marchese, it gets a
judgment of his funds and shares of his other corporate holdings. but you don't
want to be a shareholder in his other companies -- bond and note holders stand
before share holders and equity holders in getting repaid, so you would still not
be holding anything if the companies aren't profitable. if you want to reach the
assets of the companies, you would have to reverse pierce after piercing.

so -- after marchese becomes personally liable from the piercing, the reverse
piercing would hold marchese wholly liable to sea-land via all its subsidiaries such
that other creditors stand in line behind it/don't have priority over it. must show
whether there's unity of interest & ownership between marchese and his other
companies and that it would failing to pierce sanction fraud or promote injustice.
reverse piercing then will allow sea-land to reach the other assets of the companies.

what about tie-net, where marchese only owns 50%? why shouldn't tie-net be
reverse pierced for sea-land? even with respect to tie-net, there's comingling and
lack of corporate formalities and under capitalization. but there can't be a unity of
interest and ownership as a factual matter, because only 50% is owned, but as a
legal matter, this is instead up to the court that all four factors apply to tie-net.

roman catholic arch diocese of SF. dude sues everybody.
this case clarifies PCV and who is laible under the theory.
if a parent corp has 2+ subs, then piercing the sub will allow you to reach the
parent but not to reach the assests of the other subs. that must be done through
reverse piercing.

even if the plaintiff could pierce the monestary's veil, he could arguably
reach the vatican and pope's assets but couldn't reach the other churches
such as the archbishop and archbishop of SF. to do so, plaintiff would
have to show enterprise liability or reverse pierce. enterprise liability
could potentially work but reverse piercing wouldn't.

piercing maybe reaches parent assets. but plaintiff doesn't then get to reach
assets of other companies under parent org. only other recourse is
reverse or enterprise liability. it simply was inconvenient for the plaintiff
to go after the switzerland monastery. the point is that piercing only
destroys vertical boundaries, not horizontal boundaries, which are destroyed
through enterprise liability or maybe reverse piercing. under enterprise,
all the subs could be liable if they engaged in a common enterprise. if the
plaintiff is able to show that there's no separate identity between the
companies, then there's enterprise liability.

why isn't piercing effective here?
- sovereign immunities
- the churches don't all sell dogs

In re silicone.
BMS owns 100% of the subsidiary MEC.
the question is how can tort creditor plaintiffs reach the assets
of the parent company BMS who is the sole shareholder of
MEC?

good arguments that PCV should be allowed:
- BMS negotiated the purchase of 2 corps in MEC's name.
- MEC went for long periods of time without board meetings.
   in fact, 2 of the 3 MEC directors were BMS officers.
- BMS made MEC's financial decisions.

BMS' help for MEC cause BMS problems:
- affiliated corps distrib. MEC implants without a charging fee.
   (lack of corp formality)
- BMS helped MEC conduct market studies and product tests.
- BMS house counsel and PR staff worked for MEC
- BMS bought insurance for MEC

BMS went too far and so there's lack of separation and lack of formality.
the plaintiffs could have established that MEC was BMS alter ego.

this case is also different from sea-land because the court says that
plaintiffs in this kind of case do not need ot show fraud -- these are
tort victims who want to pierce the corp veil to reach the parent company
and the court says taht fraud is not required because htey are tort creditors.
what tort creditors care about is capitalization. the fact MEC manufactured
breast implants and was under cap'd when implants can malfunction, that in
and of itself is unjust -- not fair to deal in a risky business and not be
adequately capitalized.

BMS was doing everything it could to ensure MEC could be financially
healthy and successful. courts and commentators don't follow this case because
many feel that BMS didn't do anything wrong here -- didn't commit fraud and
the fact that BMS didn't get dividends from MEC and worked for free established
that it was not acting unjustly.

however, these creditors decided to get implants. though they were harmed, they
dealt with parties who made decisions of what to implants to get/give.

NYS requires showing of fraud in tort and contract creditor cases.

so long as you observe corp formalities, you get to enjoy the benefits of being
inc'd.

see p. 208 for factors that are regular for parent subsidiary relationship that
encourages PCV.
the sub operates with grossly inadequate capital -- that looks bad
parent uses sub property as its own
parent doesn't observe basic corp formalities

sub is a separate entity and the parent shouldn't be paying the expenses,
using the subs property, comingling, maintaining the sub's records and meetings,
etc.

see p. 210 q. 4: if you had been BMS counsel, what advice would have given
if asked to avoid MEC deaths liability? bear in mind the imporance for BMS to
exercise control over MEC in a practical matter.

pettifogging -- looking at just minute details

run MEC in a way that established and observes its separateness and identity.
see the notes above. n.b -- clients will push back on that, but it's up to the att
to not back down

commercial arbitration class 3

neutral v. designated arbitrator. 
who makes the decision that the arbitrator might not serve?
usually the tribunal.

every once in a while, a party may want to get rid of an
arbitrator.

when is this likely to happen?
in AAA, the parties chose the neutral from a selection.

more than one arbitrator, all neutral, in securities. and someone
may trump up a minor infraction to get rid of someone.

disclosure isn't limited just to arbitrators

arbitrators should be even more careful than judges to keep clear of the
parties. but posner said that the arbitrators are chosen in light of their
familiarity and knowlegde of an area, so the more specialized the more
likely an arbitrator has dealt with a party in the past.

arbitration process.
statement of claims -- can be letters, or something more or less formal,
usually more discriptive than court pleadings. the core issue is set forth
the issue of the pleading. sometimes its better to do it in a textual way.
and sometimes its not.
after pleadings are exchanged, then there's pre-hearing conferences
to have the arbitrators do whatever is necessary to facilitate discovery.
except in very complex cases, a main difference between arbitration and
court is that there's not depositions/ interrogatories, etc but just an
exchange of documents at this point. and if parties can't agree, they
go to the arbitrator to order exchange. occasionally, there's a need for docs
from third parties and arbitration courts as well as arbitration attorneys have
subpoena power.
order of preclusion -- issue preclusion is not unusual and is a pretty effective
sanction.

AAA is non-profit. increasingly there's for profit arbitration, such as JAMS.
there's many retired judges that are on the roster of neutrals, and they
tend to command pretty high fees. then there's FINRA - which gets a lot of
flack, but is regulated by the SEC which wants investors to know they can get
a fair shake from the finra arbitrators.

difficulty for FINRA - suitability claims (monday morning quarterbacking)
which are often brought under securities statutes
brokers must report (what?) and forms that contain this information are
public. so if someone wants the

the state AG has to be allowed to enter the dispute. all of this is a strong
incentive for brokers to *not* settle cases.

arbitration of statutory claims.

see peripheries of arbitration materials:
- anytime a contract delegates out certain types of determinations,
loosely, you can call it arbitration: a neutral is brought in to make
some kind of determinations.
- earlier forms of arbitration usually fell into ethnic sects that
wanted to preserve certain customs against what might have been
perceived as a hostile legal environment.

what happens in post-award proceedings in regards to the award?


arbitration in the past: business disputes based in common law,
usually breach of contract where arbitrators would sort out any
factual issues and apply the laws agreed to and reach a result.
arbitrators were often appointed by agreement of the managers and
unions to regulate/bargain between employers and employees. the
fact a laborer could go to an arbitrator and get a judgment for the
employers to do something was considered a quid pro quo right to
strike. the commercial arbitor awards are not precedent and have
nothing to do with stare decisis. this is part of why people feel that
arbitration has more opportunities for equity.

fraud, tort claims... not so much. these are typically merchantile
disputes. the fact that arbitrators aren't lawyers doesn't matter too much
because they know the custom/usage of the industry and they know
business such as to understand how to read a contract, etc.

instead, over past 25 years, there's an explosion to formal arbitration,
mainly lead by SCOTUS.

wilko v. swann - a customer arbitrating is waiving the fundamental statutory
protections because it's essentially remnant of the ouster of the court.
adhesion contracts aren't by nature unenforceable unless there's something
wrong with the contract. the arbitrator can still be held accountable if
it manifests disregards - more than mere legal or factual error.

so wilko is pro-arbitration but it doesn't mean that actions under the
securities laws are mandatory securities arbitration. and implicit to this
is that certain statutory rights are public and for the protection of
every citizen (every citizen has an interest in preventing employers from
discriminating, in keeping brokers from misconduct, etc). the dissent says
that the failure to observe the law is grounds to vacate the law. file this case
away and see later if it turns out to be true.

at this time, the courts had to be sure that arbitrators would adhere to laws.

why do you think that SCOTUS picked shirk?
1. international company, because many international companies have
sovereignty issues
2. a major corporation and it knows what games its playing

for next week:
- wright case

proRo: problem

You are a public defender who is vehemently opposed to capital punishment.  The court has appointed you to represent Ted Kaczynski, who has been charged with mailing package bombs to university professors over a period of nearly 20 years.  The bombs killed three people and injured many others.  K's alleged motive was that by killing his victims, he was fighting the spread of technological culture.  The prosecutor is seeking the death penalty.

 

K had once been a professor of mathematics at MIT.  In the early 1970s he became a recluse, moving to a cabin in Montana.  He was captured after a nationwide manhunt that lasted for several years.  And he was captured only because his brother turned him in after recognizing his writing style in the manifesto that K sent to the newspapers.  The FBI searched his cabin and turned up substantial physical evidence linking him to the bombings.

 

You have interviewed K a number of times; he is highly intelligent, well educated (with a Ph.D. from a leading institution), and very articulate.  He also seems troubled.  He is deeply committed to his belief that human society is being destroyed by the spread of technology.  You are not a psychiatrist, but you suspect that medical experts might conclude that he suffers from schizophrenia.

 

After adequate research, you explain to K that there are only two viable defense options. 

(1) There are arguably some flaws in the procedure through which the FBI got authorization to search his cabin.  You might be able to win on a suppression motion.  But the chance that the judge would suppress evidence in a case like this is extremely small.

(2) A more promising strategy would be to assert a defense based on mental disability.  But K dreads being labeled mentally ill, so you propose a very limited mental disability defense -- arguing that K had sufficient mental capacity to be responsible for his crimes, but that he was sufficiently impaired that he shouldn't be convicted of 1st degree murder.  So he would not be killed by the state.

 

You consult with a psychiatrist before presenting these options to K, but the psychiatrist said he would need to interview K for several days and administer several tests -- all of which would require K's consent and cooperation -- in order to form an opinion.

 

So you recommend to K that he submit to the psych exam.  But K reacts angrily: he favors the suppression angle, and thinks that the merits of suppression are strong.  K also says that if the evidence from the search was not suppressed, he wants to defend his bombings as justified (not excused) to prevent the technological threat.  He wants to try to persuade the jury that he was trying to save humanity.  He is bitterly opposed to psychiatry in principle as part of the same technological evils that he perceived himself to be fighting against.

 

If you could prove that K was suffering from paranoid schizophrenia when he committed his crimes, you could probably get him a life sentence; barring the unlikely suppression, that appears to be the only way you could save his life.  But K steadfastly refuses to submit to the exam.

 

Because the government is looking for the death penalty, the upcoming jury trial will have two phases.  In phase 1, the jury will determine whether K is innocent or guilty and, if guilty, whether he committed first or second degree murder.  Psychiatric evidence showing that he suffers from schizophrenia could be used in the first phase to show that K was guilty only of second degree murder.  If K is found guilty of first degree murder, psychiatric testimony could be used in the second phase to try to show "mitigating circumstances" warranting a life rather than a death sentence.

 

Here are your options:

 

1.  Allow K to try to persuade a jury that his bombings were justified to protect society from greater disasters.  This is what K wants to do, but it has virtually no chance of succeeding and will probably lead to a death sentence.

 

2.  Over K's objection, ask the judge to order a psychiatric exam.  Here, you would need to try to persuade the judge that K may be a schizophrenic, and that you, rather than he, should be making decisions about what defenses to raise.  This strategy is also unlikely to work.  The judge may refuse to order the test over K's objections.  Also, K might fire you and withdraw your request.

 

3.  A compromise.  Try to persuade K that he should submit to a psych. exam, but explain the purpose of the exam this way:

A.  Tell him that if evaluation shows he is mentally unimpaired, the results can be used to show that his views are not the crazed ramblings of a crazy man.

B.  Tell him (falsely) that if the evaluation shows that he is mentally impaired, you will not use the results during the "guilt" phase of the trial, but only to argue against the death penalty during the penalty phase.  K might agree to this plan because he is convinced that he will be acquitted and that there will never be a penalty phase.

 

If K allows the exam and it shows that he is mentally impaired, you actually intend to use the findings to persuade the judge to let you make the strategic decisions in the case.  Then you'll present the psychiatric evidence during the first phase of the trial.  That seems to be the only way that has a chance at saving his life.

 

In thinking about this problem, consider Rules 1.2, 1.4, and 1.14.