The High-touch Legal Services® Blog…for Startups!

© 2009-2017 Dana H. Shultz, Attorney at Law

Corporate Officer Can Be Personally Liable for Copyright Infringement

Blue Nile logo

In Blue Nile v. Ideal Diamond Solutions, the U.S. District Court for the Western District of Washington held that co-defendant Larry Chasin, founder and an officer of defendant IDS, was personally liable for infringement of plaintiff Blue Nile’s copyrighted images, even though Chasin claimed he had no role in putting infringing images on websites and he did not know the images were infringing.

Blue Nile is an online jewelry and diamond retailer. Chasin founded and operated IDS to create websites for brick-and-mortar jewelers to help them compete online. The websites included some of Blue Nile’s copyrighted images.

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Can Personal Creditors Threaten My LLC?

I recently answered an Avvo question about whether personal financial problems would create trouble for the LLC that an individual was forming. The question and answer, substantially edited, are provided below.

Q. I am starting a new company. I wish to establish an LLC. I had a recent foreclosure and they are coming at me for 70k on a 3rd against the property. I also have a credit card judgment for 18k and 30k of other outstanding debt. Question is whether an LLC can protect me. I have investors placing 50-100k in this project and i cannot have any issues moving forward. [Emphasis added.] (more…)

IP Indemnification: Who Will Be There to Satisfy the Obligation?

Almost a year ago, I posted IP Warranties and Indemnification: How Much is Reasonable? This post addresses a related subject: If you get the other party to agree to indemnify you, who will be around to satisfy the obligation?

A client is in the process of acquiring all of the rights to certain software, which was developed by several recent college graduates who formed a limited liability company (LLC). The client knew to ask for indemnification against claims that the software infringes any third party’s intellectual property rights.

What the client had not thought about, however, was whether the LLC could satisfy the indemnification obligation – which is unlikely, given that the LLC probably (a) has few assets and (b) will be dissolved once the transaction is consummated.

Accordingly, I recommended that we include in the agreement the LLC members’ covenant to satisfy the indemnification obligation if the LLC, itself, doesn’t. The members may be unhappy, but if they want the transaction badly enough, they will agree.

Lesson: An indemnification obligation is only as valuable as the party takes it on.

Photo credit: Anna H-G via stock.xchng

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Avoiding “Alter Ego” Problems: A To-Do List

Last year, I wrote (Beware Your Alter Ego) about how entrepreneurs sometimes lose the protection against personal liability supposedly offered by their corporations (or, similarly, their LLCs). This post – adapted from Counseling California Corporations by Continuing Education of the Bar (CEB) – provides detailed recommendations about what should be done to avoid “alter ego” problems.

Recommendations:

Assessing Personal Liability – Read Formation Documents Carefully!

A client, majority shareholder in a California corporation, asked whether there was any way to make a minority shareholder pay part of the corporation’s losses to date. In this particular case, the answer was “no” – but the question got me thinking about when a corporate shareholder or LLC member might be have personal liability beyond the amount payable for the ownership interest.

The LLC section reference and content below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

A century ago, corporations routinely issued assessable shares, i.e., shares that carried an obligation for the shareholder to pay additional amounts to the corporation under certain circumstances, such as to cover losses or to buy property. Today, however, almost all shares are non-assessable.

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Entrepreneurs Take Care: Raiding Employee Withholdings May Send You to Jail

Last month, I posted Your Business is Dead ? Are You Liable for its Obligations?, which stated that, generally, once a business is dissolved, the owners will be personally liable for the business’s obligations only to the extent that the owners received distributions at the time of dissolution.

A significant exception to the foregoing rule, however, concerns company personnel who are responsible for making, but fail to make, withholding payments to the Internal Revenue Service.

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Your Business is Dead – Are You Liable for its Obligations?

Last month, I wrote about how to terminate a company?s existence by dissolution (How to Kill Your Company when that’s the Only Choice). Since then, people have asked me what their personal responsibility is under California law if the corporation or LLC had outstanding obligations at the time it was dissolved.

The LLC section reference below has been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Assuming that you go through the dissolution process properly and that you do not have any “alter ego” problems, your personal liability generally will be limited to the amount of any distributions that you received at the time of dissolution.

This limitation is set forth in Corporations Code Section 2011 with respect to corporations and Section 17707.07(a)(1)(B) with respect to limited liability companies.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Pre-formation Contracts: Avoiding Personal Liability

Logo for LinkedIn, where Dana Shultz answered a question about pre-formation contractsThis post is based on my answer to a LinkedIn question [before the LinkedIn Answers feature was terminated] – the answer would be similar for a contract entered into before a corporation, rather than LLC, is formed:

I signed a lease for office space one day before my LLC became active. Am I personally responsible for the lease?

The answer:

You entered into what is called a pre-formation contract. You intended to bind the LLC by acting as an agent of the LLC (your principal). However, because you signed the lease before the LLC came into existence, there was no principal, so you did not act as an agent. Instead – as you fearyou entered into the lease as an individual.

It is possible that the landlord will never notice this fine point. However, if you were to end up in litigation over the lease, it is safe to assume that the landlord’s counsel would notice.

If you explain the situation to the landlord and the landlord is willing to work with you to “paper over” this problem, there are several ways to do so. Generally, now that the LLC exists, the landlord and the LLC need to sign a document establishing that the LLC, rather than you, is the tenant. In addition, the Manager(s) of the LLC should, in accordance with the Operating Agreement, approve a resolution authorizing entering into the lease.

Related post: Who Is Bound by a Pre-incorporation Contract?

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.