* Client data and billing
* Attorney-client, attorney-attorney discussion forums and communities
* News feed-enabled
* Internet legal research portal
* Site publication facility for attorneys by means of Microsoft Office 2002, itself capable of saving any document (Word, Excel, PowerPoint) in Web page format and easily publishing it to the firm's new Web site
Six or even four years ago the technology required to implement a solution as comprehensive as this RFP would have priced it out of 90 percent of the legal market. That is no longer the case today. The impact of portal modules, new development tools such as Microsoft's .NET, Web services, and new servers and document translation tools have now come to the fore in affordable docu-collab-solutions that even lesser mortals than MIT PhDs can implement. Today, the playing field has been leveled; even the smallest firms can compete.
But before States Continent hands off the RFP to its trusted IT supplier, it should understand exactly how a lawyer might interface with such a system. States Continent must ask what any such system will help a lawyer to accomplish in the day-to-day hodgepodge of multi-tasking enjoyed by the lawyers at States Continent.
States Continent calls in its IT consultant, who explains how attorney and workstation might join forces. He describes the attorney who arrives in his or her office, switches on the computer, and proceeds first to check e-mail. The consultant explains that there is e-mail and then there is secure e-mail. States Continent quickly opts for the latter, as all attorneys must do. Today, hackers routinely employ e-mail-sniffing privacy-infringing software to pilfer our innermost thoughts, secrets, and assets; secure e-mail is a sine qua non.
While airtight security is a must, the able solution nevertheless must be flexible enough to allow States Continent's attorneys full visibility of their clients' matters from their familiar desktop environment. States Continent hears how today's Internet technology can be harnessed to further transform its practices, fundamentally altering the way they interact, communicate and exchange vital legal information across the extended enterprise. States Continent decides it will purchase collaboration, portal access, business process automation and knowledge management applications to deliver a new class of enterprise docu-collab-software. But one question remains: Will this virtual world satisfy even the most aggressive interpretation of Sarbanes-Oxley that might yet evolve?
Nobody can predict what Sarbanes-Oxley might become, yet we do know what it appears to be today. The consultant is asked how the new system will remediate the Sarbanes-Oxley risk. The consultant describes the attorney at work with several documents--in this case, e-mail. After clicking and glancing through the e-mail, Attorney decides to archive four of 11 new messages. With a single click, the messages are sent on their way to a database where they will be docketed and filed. Their original format, date and time of original receipt, sender, and sender's computer address will also be stored, along with other important information about the message. While the message is called "data," this information about the data is called "metadata." Metadata will be important later on, when Attorney is called to testify at a Sarbanes-Oxley proceeding. There he will be asked whether a decisive e-mail message underwent any revisions, alterations, falsifications, concealments, destructions, or cover-ups after its receipt by attorney. If so, the prosecutors would continue, "tell us who made the changes and describe in detail what the changes were." States Continent begins to see how audit trail (change tracking) is as important in the management of documents as it is in their creation. According to Sarbanes-Oxley, the archive and the audit trail and the ability of States Continent to plumb its documents as we have discussed might mean the difference between indictments for the falsification of documents versus the investigation focusing elsewhere.
Having examined just a few possibilities for a docu-collab-solution, here are the granular technical points the RFP should include:
* Enterprise-level security
* Scalability
* Reliability
* Maintainability
* Availability
* Performance
Security has been mentioned, as has storage. Receipt notification means that your system will receive a callback when the e-mail or document transmission is received by the party at the other end. This callback will itself be added to your database.
Scalability refers to the ability to increase the power of your docu-collab-solution by throwing more hardware at it. On the whole, when it is time to grow, you will find that hardware is cheap, while software is enormously expensive. It is better to have a system that can grow with your needs by the addition of hardware than be handcuffed to a system that can grow only by the addition or, worse, change of software.
Reliability is a term of art in software engineering. It is a measure of software failure over a given period of time. As commonsense would tell us, the lower the incidence of failure, the more reliable the solution.
Maintainability refers to the ease with which small changes might be made to the software code, depending on changing needs or need for customization. Today's products and solutions have become increasingly modularized. The use of Object Oriented Analysis and Design by the astute software engineer who has designed your system will pay huge dividends when a modification is required and you learn that the change need be made only locally in the system, rather than globally. This capability greatly simplifies tweaking and adjusting your system. This feature goes a long way toward keeping your maintenance costs down.
Just how available is the system 24x7x365? Availability is a measure of uptime, the length of time a system will be operative. Downtime decays the figure. The greater uptime makes for a more attractive solution.
Finally, performance attempts to quantify the speed at which a system performs. Latency is the time that elapses while you wait, for example, for an Internet screen to load. Perceived latency is the same as latency, but it is perceived to be less because of tricks like loading small readable portions of the screen, giving the viewer something to do, while the main screen downloads. Clients will appreciate this technique.
Scalability, reliability, maintainability, availability, and performance demand the services of a consultant who will ensure you are getting what you are paying for. A wrong turn in just one of these areas can create a maze of problems along the way.
Post-implementation and the lawyers in States Continent have now worked with many documents firm-wide, enjoying the ability to directly create documents, access the last 10 or 20 documents edited and the last 10 searches performed, plus many other document management tasks. These might include check-in/check-out, version control, audit trail, archiving, categorization, full-text, and meta-data searches. Their work screen is a standard Web browser, such as Internet Explorer or Netscape. Through scanning and imaging, paper documents, off-site storage and legacy file rooms have been converted and consolidated into matter-specific electronic pages for easy access and reference. Their platform enables the firm to build matter-centric pages that consume the physical file.
With available docu-collab-technology, matter centric pages combine all of the relevant documents, e-mails, scanned images, billing data, client matter and other Internet content into a single view so lawyers are always current on their clients' matters. Distributed project teams of lawyers, secretaries and paralegals use these pages to securely share client case files, memorandums, attorneys' notes, correspondence, tasks and events. They can also discuss ongoing issues related to each matter--via the firm's Intranet, Extranet or the Internet solution, using a standard Web browser.
The result: both States Continent and its clients benefit from directly accessing a unified view of each client's matters. This facilitates better, faster and more accurate client service--while building client loyalty. Finally, States Continent has built Virtual Practice Areas and Communities to leverage firm knowledge. Clients regularly visit the Communities in which they are interested; firm contributors easily publish their newsletters and other Web pages in the Communities, demonstrating their grasp of the subject matter and their interest in building strong, lasting client relations.
States Continent has come a long way since it first reached internal agreement that Sarbanes-Oxley posed a very real risk to its attorneys and clients. Rather than waiting for the law to evolve and hope that it had somehow complied, States Continent chose to turn risk into opportunity. States Continent has not only engaged Sarbanes-Oxley but has taken a huge step toward risk remediation by the adoption of a docu-collab-solution that is a win-win for all concerned.
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About the author: John Ellsworth <johnellsworth@lawsoftsolutions.com> is the software engineer and attorney who designed and built CaseXL, legal software for attorneys. He is the founder of the Chicago firm of John Ellsworth & Associates, and the Chicago IT consulting firm of Lawsoft Solutions <http://www.lawsoftsolutions.com>. He divides his time between consulting for law firms on legal technology and software issues, and representing clients in the areas of software development, licensing, and distribution. He is a previous contributor to the newsletter of the Legal Technology Section of the ISBA, "How to Talk Software."
By J. Matthew Pfeiffer and Leasa J. Bauer, Rolewick & Gutzke, P.C., Wheaton
Miner v. Fashion Enterprises, Inc.
794 N.E.2d 902 (Ill. App. 1 Dist., July 15, 2003<http://www.state.il.us/court/Opinions/AppellateCourt/2003/1stDistrict/July/Html/1003746.htm>
Issue:
Whether a creditor may pierce the veil of a subsidiary corporation in a separate civil action to hold its parent liable for an unpaid judgment debt based on the subsidiary's failure to follow the standards expected of a corporation to be treated as such an entity.
Facts/conclusions:
In Miner v. Fashion Enterprises, Inc., 794 N.E.2d 902 (1st Dist. 2003), the plaintiff gave Karen Lynn, Ltd., a subsidiary corporation of Fashion Enterprises, Inc., a 10-year lease beginning in 1988 for retail space located on Irving Park Road in Chicago. An attached rider specified that monthly rent was to be paid in advance on the first of each month and obligated Karen Lynn to pay a portion of the property's annual real estate taxes. On September 3, 1996, the plaintiff filed an action against Karen Lynn seeking approximately $22,000, consisting of unpaid rent and unpaid 1995 real estate taxes. A default judgment was entered against Karen Lynn for the aforesaid amount.
The plaintiff then initiated supplementary proceedings to enforce the default judgment and discovered that Karen Lynn had insufficient assets. A citation examination of Gary Needelman revealed that he, along with Eileen DiLorenzo, were the vice presidents of Karen Lynn. Fashion Enterprises owned 100 percent of Karen Lynn's stock at all times. Gary Needelman's father, Sheldon Needelman, was the president of Karen Lynn and the president of Fashion Enterprises. Sheldon Needelman owned all of Fashion Enterprises' stock. Fashion Enterprises sells women's apparel and has five retail locations in the Chicago area. Karen Lynn was formed to sign the lease at issue, and Fashion Enterprises owns other corporations that signed the leases for its other retail locations. Other than signing the lease, Karen Lynn did nothing with the property. Karen Lynn did not sell women's apparel and never had any inventory. Fashion Enterprises, not Karen Lynn, operated the business at the Irving Park location. Karen Lynn was capitalized with roughly $1,000. In mid 1995, Fashion Enterprises increased Karen Lynn's $1,000 bank account balance to $2,500 because Karen Lynn was being charged a maintenance fee. Each month, Fashion Enterprises gave Karen Lynn the exact amount of money that Karen Lynn needed to pay the landlord for that month's rent. Karen Lynn received only one check per month and issued only one check per month, and did nothing else. Karen Lynn never had any bills, employees, tax returns, or financial statements, and its minute book did not contain any signed corporate resolutions. Fashion Enterprises liquidated its inventory at the Irving Park location and stopped doing business there during July of 1996. In August, one month before the plaintiff sued for unpaid rent and taxes, Karen Lynn issued a check to its attorney for $1,012.50, and returned $1,487.50 to Fashion Enterprises. The Secretary of State dissolved Karen Lynn in 1996.
During the supplementary proceedings, the plaintiff filed a citation to discover Fashion Enterprises' assets. This citation was actually an attempt to pierce Karen Lynn's corporate veil in order to collect the 1996 judgment. However, after Fashion Enterprises argued it was improper to pierce the corporate veil in supplementary proceedings, the plaintiff nonsuited the supplementary proceedings and commenced a new civil action against Fashion Enterprises, Sheldon Needelman, and Gary Needelman. In this new complaint, the plaintiff alleged that they were liable for the 1996 judgment against Karen Lynn because they "formed Karen Lynn to defraud creditors; Karen Lynn had no assets; and corporate formalities were not followed with respect to Karen Lynn." The plaintiff later amended its complaint to specify that its claims were not based on the breach of the lease; rather, its claim against Fashion Enterprises was an attempt to pierce Karen Lynn's corporate veil, and its claim against the Needelmans was an attempt to disregard a corporate entity that was merely an alter ego of a governing or dominating personality. It pled claims for the 1996 judgment and the subsequent rent in two separate counts against Fashion Enterprises, based on the corporate veil theory, or in the alternative, in two separate counts against the Needelmans. The plaintiff sought almost $224,000 in damages, consisting of unpaid rent accruing through the end of the lease and unpaid real estate taxes pursuant to the lease terms.
The trial court dismissed the plaintiff's complaint with prejudice on res judicata grounds. However, the appellate court reversed and considered the plaintiff's allegations to be sufficient in establishing a cause of action to pierce Karen Lynn's corporate veil.
Law/analysis:
The appellate court recognized that 735 ILCS 5/2-0619(a)(4) incorporates the doctrine of res judicata, which has three essential elements: (1) a final judgment on the merits rendered by a court of competent jurisdiction; (2) an identity of cause of action; and (3) an identity of parties or their privies. If all three elements are met, then the prior action is conclusive as to all issues that were, or properly might have been, raised in that action. The Miner court also stated that a corporate veil will be pierced where (1) there is such unity of interest and ownership that the separate personalities of the corporation and the individual are nonexistent, and (2) the circumstances are such that adherence to the fiction of a separate corporate existence would promote injustice or inequitable consequences. In determining whether a unity of interests exists to the extent that the corporate veil should be pierced, courts will look to a number of factors, including whether there is inadequate capitalization, failure to observe corporate formalities, insolvency of the debtor corporation, and absence of corporate records. The court ultimately determined that a judgment creditor could use supplementary proceedings to discover whether a judgment debtor corporation's individual shareholders and directors held assets of the corporation, or a judgment creditor could choose to file a new action to pierce the corporate veil in order to hold the individual shareholders and directors personally liable for the judgment of the corporation.
The court explained that a new action is proper because a judgment is a "new and distinct obligation of the corporation which differs in nature and essence from the original claim," as iterated in Pyshos v. Heart-Land Development Co, 258 Ill. App. 3d 618, 630 N.E.2d 1054 (1st Dist. 1994), and Peetoom v. Swanson, 334 Ill. App. 3d 523, 778 N.E.2d 291 (2d Dist. 2002). The court also relied on Jacobson v. Buffalo Rock Shooters Supply, Inc., 278 Ill. App. 3d 1084, 664 N.E.2d 328 (3d Dist. 1996) (court reviewed merits of new action to pierce corporate veil to collect workers' compensation judgment from corporation's shareholders) and Lange v. Misch, 232 Ill. App. 3d 1077, 598 N.E.2d 412 (4th Dist. 1992) (judgment creditor should have filed and on remand could still file separate action to pierce corporate veil) in holding that a judgment creditor may elect to file a new action to pierce the corporate veil of a judgment debtor in order to hold individual shareholders and directors liable for a judgment against the corporation.
The Miner court also relied on Pyshos and Lange to reject the defendants' assertion that the plaintiff's improper attempt to pierce the corporate veil in the 1996 supplementary proceedings precluded the new action. Fashion Enterprises and the Needelmans argued that the plaintiff "cannot now turn around and claim that because [it] misconstrued the law in the earlier case, the earlier case should have no preclusive effect here." The Pyshos and Lange plaintiffs not only attempted to, but actually did, pierce the corporate veil in their respective supplementary proceedings. Nevertheless, both of those courts indicated that nothing in the Code of Civil Procedure authorizes the entry of judgment at a supplementary proceeding against a third party who does not possess assets of the judgment debtor. In other words, a supplementary proceedings judge lacks authority to adjudicate the merits of corporate veil allegations; therefore, the first element of res judicata, a final judgment on the merits rendered by a court of competent jurisdiction, cannot be triggered by those proceedings.
The appellate court also rejected the defendants' suggestion that the plaintiff should have amended its 1996 complaint once it learned through the supplementary proceedings that Karen Lynn was unable to pay the judgment. The court mentioned that if the plaintiff had vacated the $22,000 judgment in order to amend the complaint with corporate veil allegations--a judgment it obtained at minimal expense by default--the plaintiff would have had to relitigate the breach of lease claim at additional expense and possibly with an adverse result.
Finally, the appellate court noted that no res judicata effect could be afforded to the 1996 action because that action was based on the fact that Karen Lynn breached the lease in 1996 and the new complaint was based on the facts that Karen Lynn subsequently breached the lease in 1997 and 1998 and that Fashion Enterprises should be held accountable for Karen Lynn's debt under the corporate veil theory. Because the two suits involved different operative facts, there was no "identity of cause of action" between them and, therefore, no res judicata effect.
Cal-Micro, Inc. v. Cantrell
9th Circuit Court of Appeals (May 28, 2003) <http://www.ca9.uscourts.gov/ca9/newopinions.nsf/992E627FF5D1D98088256D330072DBEF/$file/0117358.pdf?openelement>
Issue:
Whether a corporate officer who is personally liable for corporate fraud may discharge such debt in bankruptcy.
Facts/conclusions:
In May of 1995 a complaint was filed by Cal-Micro, Inc., the Cal-Micro, Inc. Employee Stock Option Plan, and the Pauline Countryman 1990 Trust (collectively, "Cal-Micro"), alleging that Gregory Cantrell breached his fiduciary duties to Cal-Micro while serving as officer of the corporation. Cantrell did not answer the complaint and the state court entered a default judgment against Cantrell for approximately $1.2 million. The judgment order entered on April 12, 1996 did not specify the causes of action upon which the entry of the default judgment was premised. After two years had passed, Cantrell filed a motion to set aside the default judgment, claiming that he had never been personally served with the summons and complaint. He did admit that he had received notice in November 1997 from the Alameda County Clerk that a lien had been recorded against him and that Cal-Micro was the primary lien holder. The state court denied Cantrell's motion to set the default judgment aside. Cantrell then filed a voluntary Chapter 7 bankruptcy petition where he sought to have the Cal-Micro lien discharged. Cal-Micro countered by filing a complaint to enforce the default judgment as non-dischargeable under 11 U.S.C. § 523(a)(4). The 9th Circuit held that an officer or directors relationship with a corporation is better defined as one of agency. Therefore, the 9th Circuit held that Cantrell's personal liability may be discharged through bankruptcy.
Law/analysis:
Section 523(a)(4) excepts from discharge a debt 'for fraud or defalcation while acting in a fiduciary capacity. The definition of 'fiduciary capacity' under § 523(a)(4) is a question of federal law. See Mills v. Gergely (In re Gergely), 110 F.3d 1148, 1450 (9th Cir. 1997). The 9th Circuit Court of Appeals recognized that they had previously held that "[t]he broad, general definition of fiduciary-a relationship involving confidence, trust and good faith-is inapplicable in the dischargeability context." citing Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir. 1986).
Cal-Micro cited several California cases that have held that a corporate officer is a fiduciary to the corporation. Citing Stephenson v. Drever, 947 P.2d 1301 (Cal. 1997); United States Liab. Ins. Co. v. Haidinger-Hayes, Inc., 463 P.2d 770 (Cal. 1970); GAB Bus. Serv., Inc. v. Lindsey & Newsom Claim Servs., Inc., 99 Cal Rptr. 2d 665 (CT. App. 2000). The 9th Circuit responded to Cal-Micro's argument with a different interpretation of the cases. The court concluded that the cases cited by Cal-Micro "merely specify that officers owe fiduciary duties in their capacity as agents of a corporation; they fail to hold that officers are trustees of a statutory trust with respect to corporate assets." The 9th Circuit quoted the California Supreme Court's holding in Bainbridge v. Stoner: "One who is a director of a corporation acts in a fiduciary capacity, and the law does not allow him to secure any personal advantage as against the corporation or its stockholders. However, strictly speaking, the relationship is not one of trust, but of agency . . ." 106 P.2d 423 (Cal. 1940). The 9th Circuit held that "under Bainbridge, although officers and directors are imbued with the fiduciary duties of an agent and certain duties of a trustee, they are not trustees with respect to corporate assets." Therefore, the court concluded that Cantrell is entitled to summary judgment on Cal-Micro's non-dischargeability claims.
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