Legal Memorandum: Issues and Procedures - Essay Example

Legal Memorandum: Issues and Procedures As an initial matter, being unfamiliar with business entity law, it is important to clarify the different types of business entities recognized under Canadian law. This is because a business entity’s legal status defines its legal obligations and legal liabilities in important ways. This classification is particularly important in this case, given that certain potential claims may exceed your liability insurance coverage. This memorandum will address, in turn, the respective obligations and liabilities of different types of business entities under Canadian law, the particular claims and consequences which MUB may face pursuant to the facts and circumstances submitted for my review, and some advice regarding the litigation process should it become necessary. 1.1 Classification of Business Entities: Definitions, Obligations and Liabilities Having been retained to represent MUB, a collection of twelve partners, it is unnecessary to discuss the sole proprietorship form of business organization. This advice refers to the partnership generally as a client rather than to any specific partner or administrative assistant in particular. The preliminary analysis, therefore, must begin with a discussion of your status as a partnership. Though codified in much more detail in the Partnership Act, the prerequisites for constituting a partnership under Canadian business entity law are founded in the common law. More specifically, MUB, a boutique law firm, constitutes a partnership if it meets four criteria: these criteria include (1) a relationship (2) between two or more persons (3) carrying on a business in common (4) with a view to profit. In the instant case there is clearly a relationship between two or more persons. MUB has twelve (12) partners and thirty-five (35) staff members. In addition to this, the provision of legal advice and related services constitutes “a business in common” under the meaning of the common law. This is because MUB’s activities go beyond the mere ownership of property and beyond a mere single or joint venture. The final requirement, being possessed of a “view to profit”, is similarly well-established in this case. The law firm charges for its services and, certain pro bono cases aside, functions as a profit-making enterprise. Any analysis of potential claims and liabilities, therefore, must be considered in light of the partnership classification under Canadian business entity law. 1.2 Partnership Realities: Personal and Joint Liability of Partners Having established your status as a partnership under Canadian business entity law, it becomes necessary to discuss precisely what this means in terms of partner relations and potential liabilities. The most important legal point, in terms of the facts submitted, is that a partnership, in contrast to other business entity classifications, is not treated as a separate business entity; this means that the law does not sever the relationship between the partnership and the partners. This is an extraordinarily significant point in the instant case, and it has important implications. In effect, depending on the written partnership agreement or the Partnership Act if there is no agreement, the partners share in the partnership on a pro rata or other predetermined basis. They share in the profits and the losses of the partnership, they own underlying assets collectively, and they can enter or leave the partnership consistent with the aforementioned terms. For purposes of this essay, the liability provisions of partnership law are most relevant. A partnership can be sued in its own name; this, however, can be misleading, because the fact remains that it is the individual partners whom are personally liable for the debts and the liabilities of the partnership. This personal liability is a threat to all of the partners at MUB, though, of course, the staff has nothing to worry about in this respect. Later in this memo, I will discuss one mechanism for shielding personal liability to some extant, the formation of a limited liability company. In MUB’s case, the absence of limited liability and the inadequacy of liability insurance coverage, poses the risk that individual partners might have to settle any lawsuits or judgments out of their own personal pockets. Such a consequence could be far worse than simply bankrupting the law firm itself; to be sure, the individual partners themselves might be forced into personal bankruptcy. This is one of the main dangers of carrying on a business as a common law partnership. This personal liability, based upon the alleged behavior of one of your partners, Ms. Marilyn Bauerr, has become a very real threat. The threat exists because the other partners may now, potentially at least, be held personally liable for any contractual or tort claims brought against the law firm. Any lawsuit, whether initiated by Ontario, Vancouver, or other parties with legal standing, will need to be brought against the partnership. As mentioned above, a suit brought against the partnership, under Canadian business entity law, becomes in effect a suit against all of the partners individually. This is treated as a joint type of liability, flowing down through the partnership and allocated to the partners jointly, though there are contribution provisions which might affect the precise sums allocated to each partner. In the final analysis, all of MUB’s partners are at risk because they are personally liable for the debts and liabilities of the partnership. The question, to a large extant, thus becomes whether the alleged actions of Marilyn Bauerr can be attributed to the partnership or whether MUB can somehow characterize these alleged actions as having occurred outside the scope of the partnership’s responsibilities. This issue of attribution raises many troubling and potentially risky issues. 1.3 Partnerships as Agency Relationships: It must be said that choosing partners wisely is a necessity in term of business entity law; it is simply not enough to select a partner based upon intelligence or business connections alone. This is because an unethical or sloppy party can incur personal liability for the other partners. Each partner, in effect, functions from a legal point of view as an agent of the partnership. This agency relationship, in turn, means that the unethical or the negligent acts of one partner can bind the other partners, too. If a real agency relationship exists, and MUB’s facts suggest these sorts of issues, then it is not enough to blame the problems on one partner; quite the contrary, where a genuine agency relationship exists, and where the partner incurred liability within the scope of his or her employment, all partners are at risk. Many of the potential claims in MUB’s case arise from this particular feature of partnership law. Potential plaintiffs will argue that Marilyn Bauerr held herself out as a partner, that she was acting as a partner, and that the partnership sued be sued rather than focusing on Marilyn Bauerr individually. The precise nature of these claims will be addressed in the following sections. 1.4 Bribe Claims and Risk of Partnership Liability MUB’s main concern ought to be to distance itself from the circumstances underlying allegations of bribery against Marilyn Bauerr. From MUB’s point of view, this distancing argument should concentrate on the fact that Marilyn Bauerr worked in several different capacities and for several different organizations. In addition to being a law partner, Ms. Bauerr also devoted a great deal of her time to outside activities. A former Olympic skater, she was fond of international sports; to this end, she volunteered her time to serve as a member of the International Olympic Committee (IOC), as a member of the Ontario Olympic Organization & Participation Committee (IOP), and as a member of the Vancouver 2010 Olympic Committee (VOC). MUB needs to argue that these were personal endeavors, unrelated and unauthorized either explicitly or implicitly by the partnership, and establish a basis for individual liability. In addition to these memberships, MUB must also deal with Bauerr’s status as a trustee of a trust account set up for the IOP. This is because this trust account is the source of the funds alleged to have been used for improper purposes. It is true that Bauerr owed a fiduciary duty to the beneficiaries of the trust, athletes in this case, but if it is demonstrated that she was an agent of the partnership when performing her trustee duties then the partnership and the partners are again at risk. Anyone bringing claims against the partnership, whether they are predicated on contractual violations, breaches of fiduciary duties as trustee, or for tortuous negligence, will argue that Bauerr was (1) a partner, (2) that she held herself out as a partner, (3) that she earned and performed her duties as a result of her status as a partner at MUB, and (4) that she was, in fact, an agent of MUB at all times. There are some troubling issues. First, the funds used by Bauerr were specifically earmarked for disbursement to young athletes. The Ontario government was specific in this regard in its written communications to Bauer. She then transferred the money, perhaps as bribes, to members of the IOC; more damning, she also used these funds to support her travel expenses on trips unrelated to the precise purpose of the trust fund. There would appear to be some actionable claims. The question thus becomes: what risk do MUB’s partners face? Bauerr was a partner, she held herself out as a partner, she was known to be a partner, and her allegedly “outside” efforts are all closely related to her legal work as a partner at the firm. She handed out the firm’s business card at these events, she used MUB staff to assist her in these efforts, and she even kept the trust account at MUB’s branch. In the final analysis, these potential claims appear dangerous. All of the partners should brace for litigation and recognize that the biggest risks include personal and joint liability for the actions of Bauerr. 1.5 How to Approach Bauerr Sports Consulting Inc. (BSCI) These facts are more favorable to MUB. In this situation, Bauerr created a separate corporate entity to handle her advisory services with various construction companies; more importantly, this corporation was created in her own name, it billed the construction companies directly for services rendered, and MUB’s billing and accounting records are quite clear that even MUB’s services were rendered to BCSI rather than absorbed as in-house partnership costs. Thus, we have different business entities—the construction companies, MUB, and BCSI, treating each other as separate business entities. The agency issues mentioned in section 1.4 of this memo do not arise as forcefully here. A potential plaintiff might very well argue that there was a blurring of entities, in the sense that some MUB staff worked on BCSI matters; this, however, would not appear significant given the fact that MUB rendered bills to BCSI for these services. These legal issues will concern Bauerr and BCSI directly rather than MUB. Resources should thus be allocated to protecting MUB under the facts presented and discussed in section 1.4 of this legal memo. 1.6 Limited Liability Company Options Had MUB been formed as a limited liability partnership, rather than existing as a common law partnership, the severity of these risks would be much less. This is an issue of immense importance, and given MUB’s current problems involving Marilyn Bauerr, it is an issue which ought to be addressed by all of your partners. I will discuss the nature of a limited liability partnership, whether conversion to a limited liability partnership will help in the instant case, and whether, as an expert in Canadian business entity law, I would recommend concerting from a common law partnership to a limited liability partnership. There are several important benefits associated with the limited liability partnership, a statutory form of partnership, and these benefits are legally significant. Most notably, the partnership does, to a certain extant, function as a separate legal entity; as a result, individual partners are as a general rule not personally liable for the negligence or the actionable conduct of other partners. Even if another partner, agent, or employee commits a tortuous act in within the scope of partnership business, the partners tend not to be held personally and jointly liable. Instead, liability is allocated according to culpability; in this way, liability is determined according to fault. An individual partner is thus responsible and liable for his or her own bad acts. In addition, a supervising partner and the partnership itself can be held liable. The main point is that individual partners cannot be help liable if they are not associated with the bad acts. Their personal assets cannot be touched. The partnership may remain at risk, but the partners can protect their personal assets in significant ways. Not all provinces, though, treat the limited liability principle uniformly, and this has particular relevance to MUB’s relationship with Marilyn Bauerr. In Ontario, where much of the conduct occurred, limited liability is preserved and offered only for negligent acts. In the facts provided, it is very plausible that much of Bauerr’s activities were intentional rather than negligent. To the extant that most of the claims will involve intentional rather than negligent acts in or deriving from Ontario, the limited liability partnership form would not really help even if it could be obtained, which it cannot. In terms of the future, however, MUB should consider the limited liability partnership form of business entity. To be sure, these limits are not absolute, and yet they offer much more protection than your existing common law partnership structure. 1.7 The Litigation Prospects: Options and Prospects For the reasons mentioned hereinabove, litigation is a very real risk. MUB should therefore consider its options in the early stages. Because your insurance liability coverage may be inadequate, it is time for the partners to consider settlement options. As one plaintiff may be Ontario, it is possible that opening settlement negotiations with the governmental officials may prove fruitful and avoid crushing liabilities if a trial ensues. The settlement negotiations might include cash, a public denouncement of Bauerr, a public apology to Canadians, some charity or pro bono work, and legal action against Bauerr. The main goals would be to avoid ever going to trial and to threaten becoming a plaintiff against Bauerr for her damaging actions. An additional consideration is investigating Bauerr’s contacts in government and private industry. She offered to prospective clients “that she could get things done” on multiple occasions. These investigations might provide the basis for counterclaims if settlement negotiations fail and the case moves towards a trial. 1.8 Conclusions MUB and the partners face personal liability for the bad actions of their partner. These risks are substantial, converting to a limited liability company at the current time will not protect MUB from Marilyn Bauerr’s non-negligent bad acts, and settlement options ought to be explored. Read More