The Chicago Picasso in Daley Plaza, copyright 2023 Harshman Ponist Smith & Rayl

Lawyers and others often say that “may” is permissive and “shall” is mandatory.  By that, they mean that when a statute says a person “may” do something, that person has the discretion to do it or not, but when a statute says a person “shall” do something, the person has no choice. Or, as the Drafting Manual for the Indiana General Assembly puts it:

To create a duty, say “shall.”

The post Mandatory and Directory Statutes: What does “shall” really mean? appeared first on Indiana Business Law Blog.

Next, the Court considered the claim of the Carters that Rainbow Realty’s unsuccessful attempt to disclaim the statutory warranty of a safe, clean, habitable dwelling violated the Indiana Deceptive Consumer Sales Act (or “DCSA”), Ind. Code ch. 24‑5‑0.5. In particular, the Carters relied on Ind. Code § 24‑5‑0.5‑3(a)(8)*, which (at the time the rent-to-buy contract was signed) provided that a supplier’s representation that a “consumer transaction involves or does not involve a warranty, a disclaimer of warranties, or other rights, remedies, or obligations, if the representation is false and if the supplier knows or should reasonably know that the representation is false” is a deceptive act actionable under Ind. Code § 24‑5‑0.5‑4(a), which provides a private cause of action for consumers who are the victims of deceptive acts.  The court held that the tenants had no DCSA claim, for no less than three distinct reasons.

First, a false representation that Subsection 3(b)(8) defines a deceptive act as including a false representation that a transaction does or does not involve a warranty only if the supplier (i.e., Rainbow Realty) knows that its representation is false. In this case, the Supreme Court held that Rainbow Realty did not know its representation was false and, therefore, did not commit a deceptive act. Indeed the Supreme Court pointed to the fact that three members of the Court of Appeals agreed that the transaction was a land contract and, therefore, that Rainbow Realty’s representation of the absence of a warranty of habitability was, in fact, true. In essence, the Supreme Court held that no one could have known whether the representation was false until the court held that it was false.

The post Deceptive Consumer Sales Act Does Not Apply appeared first on Indiana Business Law Blog.

In Rainbow Realty Group, Inc. v. Carter, the Indiana Supreme Court  encountered a real estate transaction in which one litigant said, “It’s a land contract,” and the other countered, “It’s a rental agreement.” Unlike the twins in the Certs commercial, only one was right.

Rainbow was a property manager for a trust that owned multiple houses for sale or rent in Marion County, Indiana. It offered four different types of transactions to its customers.  The first three were fairly standard:

The post Land Contract or Residential Lease? appeared first on Indiana Business Law Blog.

Country Contractors was incorporated in 1983 as a seller of ready-mix concrete under the name Country Concrete, Inc.  In the 1990’s the company expanded its business to include construction work and excavation. Over the years, Country Contractors owned a substantial amount of assets in the form of construction equipment that it leased to other contractors.  In 2007 the corporation changed its name to Country Contractors, Inc. and amended its articles of incorporation to better reflect its expanded line of business.  Its two shareholders served as the board of directors, but three other people were responsible for running the company from day to day — preparing bids, executing contracts, and supervising the work.

In 2007, Westside engaged Country Contractors to perform excavation and construction services for the price of $235,000.  Country Contractors subcontracted much of the work, which began in 2008.  The two owners were not involved in the negotiation or execution of the contract, nor did they supervise the work.

The post Veil Piercing: Plaintiff Left With No Recourse, and That’s Okay appeared first on Indiana Business Law Blog.

Governor Thomas Marshall (Harris & Ewing Collection, United States Library of Congress)

“In that remote and despotic period, when the sovereign king chartered rights and liberties to his subjects – the people – all governmental powers were assumed to be his by divine right. In him were combined the legislative, executive and judicial powers of government. He was the lawgiver, interpreter and enforcer. When the powers were executed by agents, the agents were his, and responsible to him alone. On this continent we came to the time when the people, by revolution, took to themselves sovereignty, and in exercising supreme political power chartered governments by written constitutions. These organic instruments declared and guaranteed the rights and liberties of the individual, which had come to the people through centuries of struggle against absolutism in government. The majority was to rule, but under restraints and limitations which preserved to the minority its rights. ‘By the constitution which they establish, they not only tie up the hands of their official agencies, but their own hands as well; and neither the officers of the State, nor the whole people as an aggregate body, are at liberty to take action in opposition to this fundamental law.’ Cooley, Const. Lim. (7th ed.) 56.”

Ellingham v. Dye, 178 Ind. 336, 342; 99 N.E. 1, 3 (1912).

The post That Time When the Indiana Government Nearly Came Apart at the Seams appeared first on Indiana Business Law Blog.

• A six-year statute of limitations at Ind. Code § 34‑11‑2‑9, which applies to “promissory notes, bills of exchange, or other written contracts for the payment of money”
• A ten-year statute of limitations at Ind. Code § 34‑11‑2‑11, which applies to “contracts in writing other than those for the payment of money”

The post Indiana Statute of Limitations for Breach of Written Contracts: Confusion continues appeared first on Indiana Business Law Blog.

As discussed in last week’s Indiana Business Law Blog post, one can imagine situations in which the statute would establish apparent authority but the common law analysis would not, and vice versa. It seems clear that a member or manager has authority to bind a limited liability company if the Indiana Business Flexibility Act says so, even if the member or manager would not have apparent authority under the common law analysis. But what if it’s the other way around? Will an Indiana court enforce a contract signed by a member or manager on behalf of the LLC if the member or manager would have apparent authority under the common law but not under the Indiana Business Flexibility Act? Although the Cain Family Farm decision does directly address that question, the Court of Appeals appears to treat the two bases of apparent authority as independently viable, implying that Indiana courts will recognize the apparent authority of a member or manager under the common law even if apparent authority does not exist under the Indiana Business Flexibility Act.

Since I posted the article last week, I’ve corresponded with my friend John Cunningham, a New Hampshire attorney, a recognized expert on LLCs, a blogger, and co-author of Drafting Limited Liability Company Operating Agreements, my go-to reference for LLC law and operating agreements. I asked John about the question, and he pointed me to the official commentary of the Revised Uniform Limited Liability Company Act, which discusses why the RULLCA leaves the issue of apparent authority of members to the common law. See RULLCA Section 301.

After reflecting on my correspondence with John and reading the commentary to the RULLCA, I’ve come to believe that the path on which the Court of Appeals appears to have placed Indiana law is a good one. Note that question of apparent authority is irrelevant if the member or manager has actual authority to bind the company, and it cannot be used by another party to avoid a contract with a limited liability company over the LLCs objection. (If nothing else, the LLC can always ratify the contract.) The question arises only when an LLC tries to avoid a contract signed by a member or manager in the absence of actual authority, and the question is, who suffers the consequences — the LLC or the other party? Although the Indiana Business Flexibility Act creates some areas of relative certainty (which I believe is superior to the intentional silence of the RULLCA), it also denies apparent authority under some circumstances in which the other party to the contract reasonably believes, based on the conduct of the LLC, that the member or manager is acting within his or her authority.

In my personal view, it is better public policy to err on the side of enforcing contracts in those situations by maintaining the common law doctrine as a viable basis for apparent authority, independent of the statutory basis. First, the LLC is in the best position to control the actions of its members or managers, and the operating agreement can provide a remedy when one of them misbehaves. Second, the LLC is also in the best position to control its own actions and to avoid conduct that cloaks its representatives with apparent authority when they lack actual authority. Third, to fail to enforce a contract that the other party entered into in good faith, based on a reasonable belief that the member or manager had authority to bind the company (or to require prospective counterparties to consult the public record before signing a contract with a limited liability company) could cause others to be overly cautious, even leery, of doing business with LLCs.

Whether Indiana courts agree with this analysis remains to be seen.

Please visit our website to read about our LLC practice area.

The post LLCs and Apparent Authority II appeared first on Indiana Business Law Blog.

Common Law Standard for Apparent Authority

The common law analysis of apparent authority is well established. An agent has apparent authority when a third person reasonably believes, based on the conduct of the principal, that the agent has authority. The reason for the belief need not be an actual statement by the prinicipal but can be (and usually is) found in the circumstances in which the prinicipal places the agent, but it is essential that the third party’s belief is based on the conduct of the principal; the statements or actions of the agent cannot create apparent authority. Moreover, if the third person knows that the agent has no actual authority, apparent authority does not exist.

Apparent Authority under the Indiana Business Flexibility Act

The Indiana Business Flexibility Act (Article 23-18 of the Indiana Code) contains different rules for the authority of members and managers of limited liability companies, and the rules are slightly different for LLCs formed on or before June 30, 1999 (Section 23-18-3-1), and LLCs formed after that date (Section 23-18-3-1.1).

If the LLC’s articles of organization do not provide for managers (i.e., a member-managed LLC), each member is an agent of the LLC for the purpose of the LLC’s business and affairs. Accordingly, the act of any member for those purposes, including the execution of a contract, binds the LLC, subject to the following exceptions:

1. The member does not have actual authority and the person with whom the member is dealing knows that the member does not have actual authority.
2. The act is not apparently for the purpose of carrying on the LLC’s business and affairs in the usual manner, unless the member has been granted actual authority by the operating agreement or by unanimous consent of the members.
3. For LLCs formed after June 30, 1999, the articles of organization provide that the member does not have the authority to bind the company.

If the LLC’s articles of organizations provide for managers, a member acting solely in the capacity of a member is not an agent of the LLC and does not have authority to bind the LLC, except to the extent provided by the articles of organization. Instead, each manager is an agent of the company and has authority to bind the LLC, subject to the following exceptions:

1. The manager does not have actual authority and the person with whom the manager is dealing knows that the manager does not have actual authority.
2. The act is not apparently for the purpose of carrying on the LLC’s business and affairs in the usual manner, unless the manager has been granted actual authority by the operating agreement or by unanimous consent of the members..
3. For LLCs formed after June 30, 1999, the articles of organization provide that the manager does not have the authority to bind the company.

Although Sections 3-1 and 3-1.1 of the Indiana Business Flexibility Act speak only of authority and agency, not of apparent authority and apparent agency, it seems clear that those sections deal with apparent authority and that actual authority of managers and members is addressed elsewhere, in Section 23-18-4-1. Indeed, the only Indiana decision to address Section 3-1.1, Cain Family Farm, L.P. vs. Schrader Real Estate & Auction Company, describes that section as a source of apparent authority and not actual authority.

Comparison of Common Law and Statutory Bases for Apparent Authority

The following table summarizes the main differences between the common law basis of apparent authority and the statutory basis.

When we’re dealing with managers of an LLC or with members in a member-managed LLC, the statute confers authority more broadly than the common law because no other conduct on the part of the LLC is necessary. However, the statutory exceptions are also broader because the common law contains no exception for acts outside the usual way the LLC does business. In addition, the statute denies authority to members of a manager-managed LLC (except to the extent the articles of organization confer authority) but the common law analysis treats the members of a manager-managed LLC no differently than any other agent. In other words, it is possible for a manager or member to have apparent authority under the statute but not under the common law, and vice versa. What happens then?

One possibility is that the statute is now the exclusive source of apparent authority for members and managers of LLCs. That would not appear to cause any problems when the statute confers apparent authority more broadly than the common law standard, but what about situations that fall into one of the broader statutory exceptions, for example when the member of a manager-managed LLC takes an action that a third party would reasonably believe, based on the conduct of the LLC, the member was authorized to take? Does the statute abrogate the common law in that situation?

It appears that it does not. In the Cain Family Farms decision mentioned above, the Court of Appeals considered the apparent authority of a member to bind a member-managed LLC. In doing so, the Court of Appeals analyzed the member’s authority under both the common law and the Indiana Business Flexibility Act. Perhaps because the Court found that apparent authority existed under both analyses, it did not expressly decide which one would control in the event of a conflict. Nonetheless, the implication seems to be that both sources of apparent authority remain viable and that the LLC will be bound by the actions of a member or manager if either the common law or the Indiana Business Flexibilty Act impute that authority to the member or manager.

[For more discussion of this topic, see LLCs and Apparent Authority II.)

The business law office of Smith Rayl works extensively with limited liability companies. To read about that practice area, click here.

The post LLCs and Apparent Authority appeared first on Indiana Business Law Blog.

The case began with a purchase agreement for a condo between Gayle Fisher, the seller, and Michael and Noel Heyman, the buyers. The purchase agreement permitted the buyers to have the condo inspected and to terminate the agreement if the inspection revealed major defects. The inspection report showed that some electical outlets and lights did not work. The Heymans informed Fisher that they would terminate the contract unless Fisher corrected the problem by a specified date. Fisher did not meet the deadline, and the Heymans refused to go through with the purchase. However, shortly after the deadline passed, Fisher had an electrician repair the problems, for which the electrician charged her $117. By then, however, the Heymans had found another property and refused to purchase Fisher’s condo. Fisher put the condo back on the market, but the best offer she received was $75,000 less than the price that the Heymans had agreed to pay. In the meantime, she incurred additional expenses that raised her damages to over $90,000.

The buyers argued that they believed the electrical problem was a major defect that allowed them to back out of the deal. However, the trial court and the Court of Appeals disagreed with the buyers, holding that the demand for repairs was an anticipatory breach, a concept we discussed in our previous blog post. The Supreme Court decision changes nothing about that aspect of the Court of Appeals decision. Both the Court of Appeals and the Supreme Court held that trial court did not err by finding that the electrical problems were not a “major defect” and that the buyers breached the purchase agreement by making a demand that they were not entitled to make. The difference between the two opinions is how to analyze the seller’s duty to mitigate damages.

When one party breaches a contract, the other party is entitled to damages sufficient to put the non-breaching party in the same position it would have occupied had the contract been performed. However, the non-breaching party must use reasonable efforts to mitigate the damages. This case illustrates the concept nicely. The original purchase price was $315,000. Sometime later, Fisher received, but rejected, an offer of $240,000. Ultimately, she sold the condo for $180,000. The trial court found (and the Supreme Court affirmed) that Fisher acted unreasonably when she rejected the offer of $240,000. Accordingly, the most she could recover was the difference between $315,000 and $240,000, not the difference between $315,000 and $180,000. The question, however, is whether the doctrine of mitigation of damages required Fisher to comply with the Heymans’ demand to have the electrical problem fixed. If so, she would be able to recover only $117, the amount it cost her to fix the electrical problems. Last year, the Court of Appeals said yes.

Today, the Supreme Court said no, agreeing with Judge Cale Bradford of the Court of Appeals. In his dissenting opinion, Judge Bradford reasoned that the doctrine of mitigation of damages does not require the non-breaching party to accede to a demand that creates a breach. The Supreme Court agreed with that reasoning and elaborated that, just as a non-breaching party may not put itself in a better position than it would have been had the contract been performed as agreed, neither can the breaching party. Here, the buyers agreed to pay $315,000 for a condo that had minor electrical problems (if tripped ground fault interrupters and burnt out light bulbs can be considered “problems”), and the seller was not obligated to sell them a condo with no electrical problems for the same price. Result: The Heymans owed Fisher not $117, but more than $90,000.

Setting aside the legal arguments, the Supreme Court decision avoids some very practical, real-world issues that would have been posed by the Court of Appeals decision. Had that decision stood, the law in Indiana would have allowed a party to a contract to continue to make additional demands on the other side, confident that the worst thing that could happen is that it would be required to pay the incremental cost of the demand. Conversely, the party on the receiving end of those demands would be forced to choose between acceding to them or being satisfied with the incremental cost of the demand, regardless of the magnitude of its actual damages.

A simple example: Imagine a musician who agrees to perform at a concert for $20,000. The organizer of the concert has already incurred another $30,000 in expenses and sold $100,000 worth of tickets. At the last minute, the musician refuses to go on stage unless he is paid an additional $10,000. The organizer would be forced to choose between paying the additional $10,000 or suffering a loss of $80,000, while being able to recover no more than $10,000. Surely that is not how mitigation of damages is supposed to work.

[Note: In discussing the example of the last paragraph, this post originally mentioned a loss of $130,000 rather than $80,000, but that’s not the way damages are calculated. The organizer’s damages would be the cost of refunding the price of the tickets ($100,000) less the $20,000 that the organizer originally promised the musician. The $30,000 in expenses would have been incurred even if the concert proceeded, giving the organizer a profit of $50,000. If the musician breached, the organizer would have to refund the price of the tickets, leaving the organizer with a $30,000 loss. To put the organizer in the same position it would have occupied had the contract not been breached — i.e., with a $50,000 profit — the musician would owe the organizer $80,000.]

If you need to have a contract written, or if you are party to a contract that has been broken, please feel free to contact our firm.

The post Anticipatory Breach and Mitigation of Damages revisited: The Indiana Supreme Court Clears the Minefield appeared first on Indiana Business Law Blog.

In 2001, a married couple, Dan and Lori, purchased a fitness and health franchise known as Curves for Women that they intended to operate in Angola, Indiana. The franchise agreement, which Dan and Lori both signed, contained the following affirmation:

We the undersigned principals of the corporate or partnership franchisee, do as individuals jointly and severally, with the corporation or partnership and amongst ourselves, accept and agree to all of the provisions, covenants and conditions of this agreement[.]

At no time did Dan and Lori form a corporation or limited liability company to own the franchise – not before signing the franchise agreement and not after.

At about the same time, Dan and Lori leased space in which to operate the business, known as Curves for Women of Angola. The landlord was Flying Cat, LLC. Both Dan and Lori signed the lease, each in the capacity of “Owner.” The lease was for a term of three years, with options to renew for additional three-year terms.

After the lease was signed, the business began operation. Lori managed the day-to-day operations, and Dan handled the responsibilities for accounting and equipment maintenance. The profits from the business were treated as joint marital property, available to both Dan and Lori.

In 2004, Dan and Lori exercised the option to renew the lease. As with the original lease, they both signed the renewal agreement.

In 2005, Dan and Lori separated. Over the next two years, they made several attempts to reconcile, but in 2007 Lori filed for divorce.

After she filed for divorce, Lori signed a second lease extension with Flying Cat, LLC. Dan did not sign the renewal agreement. At the time the second lease extension was signed, the business was already behind in its rent, and over the next two to three years, it fell even further behind. In 2010, Flying Cat, LLC sued Curves for Women of Angola, Lori, and Dan, claiming that, as partners, Lori and Dan were both personally liable for the back rent owed by the partnership.

First, the Court of Appeals held that a partnership existed between Dan and Lori. In doing so, the court cited Ind. Code § 23 4 1 7, which provides that, with certain inapplicable exceptions, the receipt by a person of a share of the profits of a business is evidence that a partnership exists. Once a partnership exists, each partner is personally liable for all the obligations and debts of the partnership. In addition, it requires the signature of only one partner to form a contract that binds the partnership and, by extension, binds all the partners.

However, Dan argued that he was not bound by the second lease extension that Lori signed after she filed for divorce, pointing to the fact that her petition clearly indicated her intent to terminate the business relationship with Dan. The Court of Appeals agreed with Dan that the partnership was dissolved when Lori filed her petition, but nonetheless held that Dan was liable for the second lease extension.

The basis for the holding lies in Ind. Code § 23 4 1 35(1)(b), which provides that a partner can bind the partnership after dissolution if the other party to the transaction knew that the partnership existed prior to dissolution and had no knowledge or notice that the partnership had been dissolved. Notice can be provided by publishing a notice of the dissolution in a newspaper of general circulation in the place where the partnership regularly conducted business. The Court of Appeals noted that the landlord knew of the partnership prior to dissolution, that the landlord had no knowledge or notice of the dissolution, and that no notice had been published in the local newspaper. Accordingly, Lori’s signature on the second lease extension bound the partnership and, by extension, Dan, even though the partnership was already dissolved.

Because each partner to a general partnership is liable for all the obligations and debts of the business, including obligations and debts incurred by one partner even without the knowledge of the others, it is hard for us to imagine a situation in which we would advise a client to organize a business as a general partnership. Even so, general partnerships exist, and, as this case illustrates, a partner leaving the partnership must take appropriate measures – including publication of a notice of dissolution – to protect himself or herself from incurring further liability.

The post Partnership Dissolved, but Partner Still Liable appeared first on Indiana Business Law Blog.