From time to time, a client asks about when and why a corporate seal is necessary. Even some attorneys (particularly from out of state) question during contract negotiations whether the phrase “executed under seal” should be removed from a contract as an archaic concept. Historically, seals were affixed to a document as a formality to attest to the parties’ intention to be legally bound by the promises contained in the document. In several states, however, the execution of an agreement under seal continues to have specific legal significance that is not always understood or intended by the parties.

As a general rule, the Pennsylvania Judicial Code provides that the statute of limitations for actions based on a contract is four years. For instruments that are executed under seal, however, the statute of limitations is twenty years. The guarantor of a commercial loan recently learned the hard way that his guaranty was subject to the extended statute of limitations. In Osprey Portfolio, LLC v. Izett, the lender confessed judgment under Mr. Izett’s guaranty nearly five years after the loan went into default. Mr. Izett argued that the action was precluded because it was filed after the four-year limitation period. While acknowledging that the document was executed “under seal”, Mr. Izett maintained that the twenty-year limitation period did not apply because the guaranty agreement was not an “instrument”, which he defined as instruments under Article 3 of the Uniform Commercial Code. Article 3 defines “instrument” as a “negotiable instrument”, namely “an unconditional promise to pay a fixed amount of money.” Because his guaranty related to a line of credit (not a loan for a fixed sum) and was conditional upon the default of the borrower under the note, he reasoned that it did not meet this definition of “instrument.” The Pennsylvania Supreme Court disagreed and affirmed the lower courts’ rulings. It held that the term “instrument”, as used in the Judicial Code,  should be interpreted using its ordinary meaning: a written document that defines the rights and obligations of the parties, such as a contract, will, promissory note, etc. Using this broader definition, the guaranty in question clearly qualifies as an instrument. Since the instrument was executed under seal, the twenty-year statute of limitations applied and the action was allowed to go forward.

It should be noted that the Judicial Code section providing for the twenty-year statute of limitations is due to expire on June 27, 2018. Of course, the sunset date for this provision has been extended in the past, so only time will tell whether the execution of contracts and other writings “under seal” will continue to have special legal significance in Pennsylvania.

Four years ago, the Home Improvement Consumer Protection Act (HICPA) went into effect, forcing home improvement contractors to register with the Commonwealth and to comply with various contracting requirements (for more information, see our Client Alerts on the subject https://www.ammlaw.com/general/articles.html). We have found that unfortunately many contractors remain unaware of this law. Failure to comply with HICPA could result in civil and criminal penalties. But does non-compliance also mean that a contractor is prevented from receiving payment from its customer for completed work? Not necessarily, held the Pennsylvania Superior Court, which recently gave hope to contractors when it concluded that a contractor who does not comply with HICPA may nevertheless recover the value of its services from the customer.

In Shafer Electric & Construction v. Mantia, an out-of-state contractor entered into a written contract with a Pennsylvania homeowner (who also happened to be a contractor) to build an addition to the homeowner’s garage and provided services valued at over $37,000. The contractor did not register with the Commonwealth under HICPA. After the homeowner failed to pay the amount due, the contractor sued to recover its fees. The homeowner asserted that the complaint was legally insufficient because the underlying contract was not enforceable under HICPA. The contractor countered that even if the contract were unenforceable, the contractor should be able to recover its fees under the equitable doctrine of quantum meruit, a theory which allows a party to recover the reasonable value of its services so as to avoid unjust enrichment of the other party. Unfortunately, although HICPA preserves a contractor’s right to recover its fees under a quantum meruit theory, the language of the statute appears to require compliance with HICPA as a prerequisite to recovery. The lower court, strictly interpreting the statute’s plain language, ruled in favor of the homeowner. The Superior Court reversed, holding that the plain language of the statute impermissibly limits the purpose of the provision allowing recovery under quantum meruit. It reasoned that to require the contractor to comply with HICPA before recovering under a quantum meruit theory made no sense because a compliant contractor can recover its fees under a breach of contract theory and does not need an equitable remedy such as quantum meruit.

While Shafer Electric provides reassurance for home improvement contractors doing work in Pennsylvania, the prudent contractor will not rely on it to ensure collection of its fees. Because of the hefty fines and possible criminal penalties that may be imposed for violations, we strongly encourage contractors to register and comply with the other requirements set forth in HICPA.

Employers frequently want to attract new, super-talented management to an existing Company, or potentially worse, have already promised to give one or more trusted and loyal current employees equity as part of their compensation package as soon as the time is right.  Unfortunately, this is easier said than safely done. 

Clearly, equity can be a powerful, seemingly low-cost form of compensation and motivation.  Having your most valued employees vested in something beyond their pay check certainly seems like a fine idea.  If the Company does well, the employee shares in that growth in the form of annual distributions or a buy-out upon death, disability, retirement or other termination of employment.  So, what do I have against such an idea?

By Patricia C. Collins, Esquire Reprinted with permission from June 14, 2013 issue of The Legal Intelligencer. (c)

2013 ALM Media Properties. Further duplication without permission is prohibited.

            It is a reality of litigation that the facts of a case can change in significant ways between the filing of the complaint and trial, but litigants do not always amend pleadings to address these changes.   A recent decision by the United States Court of Appeals for the Third Circuit offers incentive to amend in those situations. In West Run Student Housing Associates, LLC v. Huntington National Bank, 7 F.3d 165 (3d Cir. 2013), the Third Circuit held that averments in a complaint that is later amended do not amount to judicial admissions.

The procedural posture of the West Run case is not unique. The plaintiff filed a complaint alleging, inter alia, a breach of contract. The plaintiff claimed that the defendant bank breached its agreement to provide financing for a housing project. The contract required the bank to provide the financing if plaintiff sold the requisite number of housing units. The original complaint included averments regarding the number of units sold, and those numbers were not sufficient to trigger the financing requirement. Defendant moved to dismiss the original complaint, and plaintiff, not unexpectedly, amended. The amended complaint did not contain averments regarding the number of housing units sold.

            Predictably, the defendant again moved to dismiss, alleging that the averments contained in the original complaint were judicial admissions, that is, admissions that cannot later be contradicted by a party, which barred the breach of contract claim. The district court agreed and dismissed the claim.

            The Third Circuit disagreed. The Court found that an amended pleading supersedes an original pleading, and parties are free to correct inaccuracies in pleadings by amendment.   The Court noted that the original pleading is of no effect unless the amended complaint specifically refers to or adopts the original pleading. In this way, the amended pleading results in “withdrawal by amendment” of the judicial admission.

Reprinted with permission from April 5, 2013 issue of The Legal Intelligencer. (c)
2013 ALM Media Properties.
Further duplication without permission is prohibited.

The Pennsylvania Supreme Court is set to hear argument on April 10, 2013 regarding the scope of the work product doctrine and the discovery of materials contained in a testifying expert’s file on April 10, 2013.    The specific issue on appeal is whether Pennsylvania Rule of Civil Procedure 4003.3 provides absolute work product protection for all communications between a party’s counsel and its testifying trial expert.  The decision may provide clarity and guidance to litigation counsel facing an otherwise clouded issue.

In Barrick v. Holy Spirit Hospital, 32 A. 3d. 800 (Pa. Super. 2011), the trial court was faced with a subpoena directed to a medical provider who was both a treating physician and an expert retained for the purpose of offering trial testimony.  The trial court, after an in camera inspection, ordered the enforcement of the subpoena and the disclosure of communications between the expert and the Plaintiff’s counsel.  Plaintiff appealed, arguing the application of the work product doctrine under Pennsylvania Rule of Civil Procedure 4003.3 and trial preparation materials under Rule 4003.5 protected the communications from disclosure.

My heart inevitably sinks when a client asks the ever popular question “What form of legal entity would be best for my for-profit enterprise?” The entrepreneur’s excitement is contagious but answering is never easy.  There are so many variables that determine where a start-up might end up no matter how researched the assumptions and projections might be.  And yet, a choice has to be made. 

For the growing number of social entrepreneurs, it has become even more nuanced.  There are three new legal forms emerging to satisfy the “Impact Investment Revolution” in our midst (the Flexible Purpose Corporation, the Benefit Corporation and the Low-Profit Limited Liability Company or L3C), and Illinois is considering the creation of a fourth, the Benefit L3C.  While each is designed to accommodate ventures that pursue social and environmental benefits attractive to impact investors, social entrepreneurs should consider a variety of factors before using the traditional LLC or corporation.

Summarizing the similarities and differences of each of the new legal forms is no straightforward task.  Each state that has adopted one or more of the alternative new forms has slightly different requirements and there is no real case law to date analyzing how state specific legislation is to be interpreted since these legal forms are so new. 

In general, the Flexible Purpose Corporation permits the founders of a for profit corporation to establish a blend of business and charitable or social objectives that are not profit maximization or asset growth oriented.  The board and management of the Flexible Purpose Corporation are then charged to act with those blended objectives in mind and to report to the shareholders on its success or failure in achieving them. 

The Benefit Corporation differs slightly in that it is a for profit entity that is required to advance a general public benefit in addition to any other purposes adopted as a business corporation.  The Benefit Corporation may also have as a purpose the creation of one or more specific public benefits.  The directors have an affirmative duty to consider the effects of their decisions on all of the corporation’s constituencies (shareholders, customers, suppliers, the environment, the community) and an annual benefit report prepared by an independent third party describing efforts to create the public benefit during the preceding year must be filed with the Department of State and distributed to shareholders.

In contrast, an L3C is usually formed to create a presumption of eligibility for program related investments (PRIs) from one or more foundations or to lock in a charitable mission when the founders have a set of investors who will support that mission.  See my earlier post “Private Foundations and New Regulations Regarding Program-Related Investments”.  The L3C is, by definition, a low-profit limited liability company which significantly furthers the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the IRS Code of 1986, as amended.  No significant purpose of the L3C can be the production of income,  the appreciation of property or one or more political or legislative agendum within the meaning of Section 170(c)(2)(D) of the IRS Code of 1986, as amended. 

The L3C therefore goes further than the Flexible Purpose Corporation or the Benefit Corporation in that both of those are set up to be money-making enterprises that also have social or charitable mission(s). The L3C can operate a business but producing income or maximizing appreciation of assets cannot be a significant purpose of the venture and if it becomes clear after formation that income or appreciation is the focus, the L3C will immediately cease to exist as a low-profit LLC although it will continue to exist as a limited liability company.

Note that “B Corporations” are not a corporate form but rather a certification mark available to all three of the above forms and even traditional for profit corporations.  The certification or brand can be obtained from the nonprofit organization called B Lab and requires achieving a specific score after the B Lab evaluation of a variety of factors including the entity’s treatment of its employees and successful evaluation of socially responsible goals.  See http://www.bcorporation.net for more information on B corporations.  

With the above in mind, reverting to the age old “Who”, “What”, “Where”, “When” and “Why” analysis is probably the best way to analyze the alternatives.  Throwing in a “How” or two will help even more.

Looking at the “who”, entrepreneurs, investors and consumers each have characteristics that may make one choice unavailable or at least inappropriate.  For example, if the founding principals consist of one or more non-profit corporations rather than individuals, a Benefit Corporation may be desired although such an entity would be unable to elect pass through “S” status which may prompt a closer examination of the L3C model.  If attracting foundation PRIs is a large part of the business plan, that too might suggest that the L3C is the proper vehicle. In contrast, if the initial or anticipated future investors articulate the desire to consistently build profits along with a material positive impact on society or the environment, the L3C requirement for “low-profit” expectations will be violated and the L3C status possibly challenged.  The Benefit Corporation would be a better choice for such investors especially where enough time has simply not elapsed for anyone to determine how low the “low profit” requirement really is.

The “what” and the “where” is a close examination of the intended business activities and cross border implications, if any.  Some activities are more fundamentally socially or environmentally beneficial than others and some are clearly charitable at their core.   At the same time, while you can form a legal entity anywhere that the chosen structure is permitted and file for authority to do business in any state of operation, PRIs, bonds and grant programs are often geographically specific. 

“When” is a determination of the planned exit of either the founders or specific staged investors which may suggest starting out as one kind of entity and evolving over time into another kind of entity which is permitted in most states if the requisite shareholder/member consent is obtained. The transition is not intended to be as difficult as a non-profit to for profit transformation (which, in Pennsylvania, require Attorney General and Orphans’ Court participation).   “Why” is really another examination of the social/environmental/charitable mission and the expectations of all principals along with the individuals or programs the principals intend to benefit with the new endeavor.  And, finally, an old fashioned projection of just “how” much money is needed at different junctures of the anticipated growth cycle is key. 

LawForChange at http://www.lawforchange.org  features some interesting content on the variety of legal structures available on a state by state basis.  There are certainly pros and cons of using each structure and I sincerely wish you well in your efforts to choose which will be best.  Forget what I said at the beginning of this post and feel free to call me if I can be of any help.