Emergency Business Litigation : Chicago Business Crisis Lawyer & Attorney : Tom Patterson Law Firm : IL Emergency Business Litigation, Temporary Restraining Orders

The Supreme Court’s begins hearing January arguments today. Of interest to shareholders, however, is not a case argued today but rather a case heard in November 2009. Before the end of the current term, the Court will issue an opinion in Merck v. Richard Reynolds. Merck focuses on whether the statute of limitations on a federal securities fraud action begins to run when an investor obtains evidence of scienter of fraud or when any evidence of fraud is uncovered.

The distinction is real and would impact many securities fraud cases. Federal law requires securities fraud cases to be brought within the earlier of two years of knowledge or five years of the violation. Generally speaking, the two year period relating to knowledge does not run until all elements of a violation are discovered. The issue is important in security fraud cases because there is often evidence of fraud before there is evidence of the requisite intent. The evidence of fraud, however, is only recognizable in hindsight based on newer evidence demonstrating the intent to defraud. For example, in Merck, an internal study reached a suspicious but supportable conclusion. It was not until an independent study was published two years later that Merck’s original position demonstrated its intent to defraud.

If the statute of limitations is applied to the first instance of possible fraud, shareholders are put in a position whereby they need to take aggressive action to protect their rights. Such action is expensive, such as instituting preliminary injunction and temporary restraining order actions to preserve possible evidence of intent, and may not uncover any fraud on the part of the corporation. Corporations would also incur an added expense as they are forced to defend preliminary litigation. Waiting until all of the evidence necessary to bring a case is available will not harm corporations that are engaged in ethical practices. 

Merck will be an important case to watch not only for its impact on the discovery rule in securities fraud cases. As the Wall Street Journal Law Blog points out today, it may also demonstrate whether the Obama Administration can affect a change in the Court’s pro-business stance under President Bush.

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Illinois is supposed to be more shareholder friendly than Delaware. Its Business Corporation Act provides minority shareholders protections if the majority shareholders are

1. committing waste;
2. practicing fraud;
3. acting illegally; or
4. oppressing minority shareholders. 

There was an article in Business Law Today a while ago that contended that minority shares of stock are worthless apart from whatever rights were provided in a shareholders’ agreement, but I disagree: minority shareholders in Illinois--without any shareholders’ agreement-- have the rights given them by the Illinois Business Corporation Act (and this Act influenced the drafting of the Model Business Corporation Act). If they sue to vindicate these rights, the majority shareholders can elect to buy them out, and their buy out price is the fair value (not the fair market value) of their shares. 

Listing the rights given by statute begins to answer the question posed. If you are a minority shareholder, you need a preliminary injunction if the majority shareholders are doing one or more of the above acts and you or the corporation is going to be immediately irreparably harmed as a result. Waste of corporate assets might not be recoverable absent immediate action; an illegal act may cause the corporation to be sanctioned by law enforcement officials. Oppression is an elastic concept, but the standard is the reasonable expectation of the shareholders.   Most of these defalcations will diminish the goodwill of the corporation, a harm that is difficult to quantify, justifying a preliminary injunction.

In the midst of the ill-will that accompanies actions that necessitate shareholder actions, actual or threatened improper withdrawals from the corporation may require a preliminary injunction or temporary restraining order. Minority shareholders need to be vigilant in guarding the corporate purse. A preliminary injunction can be justified on a constructive trust theory (corporate money is a res that is the subject of dispute over whether the payment is proper). The Illinois Business Corporation Act codifies the court’s power to issue injunctions as well. And the Act provides panoply of remedies available to the court: appointment of a receiver or director, for example, and, more broadly, any order necessary.

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While I make my living suing people, I think all clients should be advised of the top ten reasons not to file a lawsuit. I offer this list:

1. You owe your opponent more money than he or she owes you.
2. You don’t want to turn over relevant documents to your opponent’s lawyer or they are already shredded.
3. You fired all of your employees who are knowledgeable about the dispute.
4. You lack the time to educate your lawyer about the dispute, retrieve relevant documents, or give a deposition.
5. You think that all witnesses tell the truth.
6. You regard yourself as superior to jurors or the Judge.
7. You believe that just by filing the lawsuit, you will get a settlement.
8. Your opponent has no money to pay a judgment.
9. Your company or key witnesses must continue to do business with your opponent or his or her allies. 
10. The cost of the lawsuit is more than you would benefit with total victory.

If none of your clients are now contemplating a lawsuit, print and save.

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It was with some excitement that Volterra Semiconductor Corporation announced that U.S. District Court Judge Joseph Spero granted its motion for a preliminary injunction against Infineon Technologies AG, Infineon Technologies North America Corporation and Primarion Inc. (Infineon/Primarion) in its patent infringement lawsuit. (Case No. 08-cv-05129-JCS (N.D. Cal.).

Commentators note that this is a rare decision because, since the Supreme Court’s ruling in eBay, Inc. v. Mercexchange, L.L.C., which eliminated the presumption of irreparable harm in the context of permanent relief, it has been difficult to win injunctions in patent infringement cases. 

Thus, Volterra was obviously pleased and stated that “"[w]e believe this ruling signals the likelihood of success on the merits of our case against Infineon/Primarion, and validates the strength of our intellectual property position."

While the Judge orally ruled on the issue of granting the preliminary injunction, a formal order has not yet been issued. Instead, the court directed the parties to both file briefs on the amount of the bond and submit proposed orders. Not surprisingly, the parties’ proposed orders are vastly different. The language of an injunction order is important because it defines who is to be restrained, what acts are to be restrained, and essentially protects a judge from an embarrassing appeal. Fed. R. Civ. P. 65 (d) dictates what each order must contain:

1. The reasons the court issued the injunction: Volterra’s proposed order states that a preliminary injunction is appropriate because the Company proved all the necessary elements, including that “Volterra is likely succeed on the merits of its patent infringement claims.” Conversely, Infineon’s proposed order simply notes that the preliminary injunction is “warranted.” While I understand why Infineon would probably not want to elaborate on the reasons why the Court granted the injunction, unfortunately, the language in its proposed order does not adhere to the mandate of Rule 65.
2. The persons or entities to be restrained: Volterra and Infineon’s orders are fairly similar in that they restrain the defendants and the defendants’ affiliates. However, Infineon’s order would exempt third parties, who have either purchased or have already contracted to purchase enjoined products.
3. The acts to be restrained: Volterra’s order would halt all sales, manufacturing or marketing of any product that contained its patents. Conversely, Infineon’s order is much more liberal and would not enjoin the defendants from:
   
   
   1. shipping enjoined products that have already been sold to customers or have already been promised to customers
   2. providing support for enjoined products that have already been sold or otherwise provided
   3. selling enjoined products that have been manufactured, but not yet sold.

Infineon’s order also cautions that any relief not granted in the order is denied.

4. Bond: Volterra’s order does not speak to bond. Infineon’s order, on the other hand, would have Volterra post a $20 Million Bond.
5. The date and hour of issuance: Infineon’s order states that the order shall not take place until the Plaintiff has posted bond. Infineon’s order also states that the order shall not take effect until 60 days until after the entry of the Order, so as to give the defendants time to review the Court’s Order and to explore a potential design-around.
6. The order’s expiration date: Infineon’s order states that the injunction shall run until trial, unless there is an earlier order modifying, terminating, or vacating the order. Volterra’s order simply contains standard language stating that the order shall remain effect until further order of the Court.

The parties are currently briefing the issue of the proper bond amount. (As is the case in patent litigation, most portions of the briefs are redacted, and the exhibits are sealed). Judge Spero is expected to issue a formal order soon, and I will let you know when he does, as it will be interesting to see which order was more persuasive.

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My prior two posts noted that in Hart Intercivic, Inc. vs. Diebold, Inc., the District Court for the District of Delaware denied a request for a TRO but ordered discovery and scheduled a hearing for a preliminary injunction in a case in which one voting machine company challenged a merger between its dominant competitor and another failing company. 

The court’s opinion noted that the plaintiff requested the mandatory relief of undoing a merger. And the plaintiff did request in part an order of divestiture and the appointment of a trustee or receiver. 

But the plaintiff also requested a hold order by which the assets, personnel, accounts, customers, technology and intellectual property of the acquired company would be kept separate from the acquired company while the litigation pended. Based on Federal Trade Comm’n v. Weyerhaeuser Co., 665 F.2d 1072, 1075 n. 7 (D.C. Cir. 1981), a hold order keeps the acquired unit as a separate entity during the litigation to keep the assets “unscrambled” while the litigation pends, making divestiture easier if the plaintiff is successful after the final trial. Perhaps the court will consider this in more depth at the preliminary injunction hearing.

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My prior post noted that in Hart Intercivic, Inc. vs. Diebold, Inc., the District Court for the District of Delaware denied a request for a TRO but ordered discovery and scheduled a hearing for a preliminary injunction in a case in which one voting machine company challenged a merger between its dominant competitor and another failing company that would result in the merged company controlling 68% of the market for voting machines.

The defendant effectively argued the plaintiff’s delay, stating the following:

1. ”On September 11, 2009, eight days after the public announcement of the Transaction, [Plaintiff] filed its initial complaint. That complaint never was served upon [Defendant]. Three days later, on September 14, 2009, [plaintiff] filed an amended complaint. Again, [Plaintiff] chose not to serve the pleading.”
2. ”On September 23, 209, some twenty (20) days after the Transaction was publicly announced, Plaintiff suddenly was struck with a sense of urgency and filed its Motion for TRO. The following day, [Defendant] received by Federal Express a copy of the Amended Complaint, a request to waive service, the Motion for TRO and supporting papers. Two days later, without contacting Defendants’ counsel, [Plaintiff’s] counsel apparently contacted the Court and arranged for a hearing to be held on Tuesday, September 29, 2009.”

The title for this section was “Plaintiff’s Schizophrenic Litigation Approach.”

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Continuing our discussion of the Illinois Appellate Court case Santella v. Kolton, in the second part of the opinion, the court determined that it lacked jurisdiction to hear the appeal of a trial court order requiring the return of bonus money paid to the individual defendants who were officers of a close corporation.

The order requiring the return of bonus money was found to be an injunction but the appellate court declined to assert jurisdiction on this aspect of the order as well. Rule 307(a)(1) only grants jurisdiction for appeals of injunctions “that merely preserve the status quo pending a decision on the merits, conclude no rights, and are limited in duration, in no case extending beyond the conclusion of the action.” As the mandated return of money altered the status quo and did not provide for the return of the money to the defendants, it was a permanent injunction and jurisdiction was not available under Rule 307(a)(1). The court refused jurisdiction under Rule 304, which provides for appeal of final judgments that do not dispose of an entire proceeding, because the trial court did not provide the requisite finding that no just reason exists to delay enforcement or appeal of the order.

Parties seeking to appeal injunction orders now need to be especially vigilant to ensure that the order has the necessary language that it is temporary, that is, that it lasts only until a further order or to the end of the case. The court’s decision that Rule 307 does not permit the appeal of mandatory injunctions will cause problems. Parties will argue over whether the injunction was mandatory or prohibitory. What should be a fast vehicle to review the propriety of a preliminary injunction will morph into arguments over the meaning of the rule. If this cannot be changed by another appellate opinion, the rule itself should be amended.

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In Santella v Kolton, a derivative and individual action alleging corporate waste and mismanagement of a close corporation, the plaintiff filed an emergency motion to enjoin the defendants from dissipating assets of the company and remove the m as officers pursuant to Illinois Business Corporation Act § 12.56. After an evidentiary hearing, the trial court ordered the defendant officers replaced and three years of their bonuses returned to the company. The defendants then appealed the trial court’s order under the Illinois rule permitting an interlocutory appeal from orders “granting, modifying, refusing, dissolving, or refusing to dissolve or modify an injunction.”

The appellate court never reached the merits. It held that under Rule 307(a)(1), the order removing the officers was not appealable for these reasons:

• Removing the individual defendants as officers and directors did not operate in personam as they were not required to do or refrain from doing a particular thing.
• Their removal was a statutory remedy that changed their legal status within the corporation.
• Requiring the return of bonus money lacked a temporal scope and thus was permanent and not temporary.

Preliminary injunction orders that lack a temporal scope are often deemed overbroad; they should be written to end upon the conclusion of the trial on the merits or some other event. In support of its determination that there was no injunctive action in removing the officers and directors, the court cites a treatise and the CJS for the proposition that the removal of officers or directors cannot be done through an injunction. 

While removal of the officers is a statutory remedy, the statute also provides that injunctions can be entered to enforce its provisions. This may be the first case that decided that the Act provided a remedy easier to obtain than an injunction and impossible to appeal as an injunction. The statements about the lack of in personam jurisdiction ignored that they were removed from their positions and restrained from exercising their rights as officers. 

The other half of the opinion will be commented upon tomorrow.

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A few days after the Court granted the Bank of America’s motion for an ex parte TRO, the Federal Deposit Insurance Corporation (“FDIC”), in its capacity as receiver for Colonial Bank, was substituted as the real party in the case, and moved the court to dissolve the TRO. The FDIC argued that, pursuant to 12 U.S.C. § 1821 (j), the Court lacked subject matter jurisdiction to restrain the FDIC in exercising its powers and functions as a receiver. Because the Court determined that the sale proceeds and loan agreements, which the Bank seeks the return of, are outside the receivership estate, it denied the FDIC’s jurisdiction argument.

Of interest to me today, however, is the fact that the FDIC admitted, in its motion to dissolve the TRO, that the Court properly issued the injunction. While declining to torture the FDIC with this admission, the Court noted that there may have been “public interest considerations contemplated by the injunctive-relief analysis,” in light of Colonial Bank’s collapse and subsequent involvement of the FDIC, but the FDIC’s failed to raise the issue. The FDIC could have strengthen its motion if it demonstrated how the four factor test weighed against the issuance of an injunction, emphasizing the public interest in supporting the FDIC in its role as receiver.

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Bank of America, N.A. v. Federal Deposit Insurance Corp. (Receiver for Colonial Bank), Case No. 09-22384-CIV-JORDON, currently before U.S. District Court Judge Adalberto Jordan of the Southern District of Florida, has garnered some media attention in the Atlanta Business Chronicle and The New Times, but is of interest to us in today’s post because the court granted an emergency motion for an ex parte TRO in a billion dollar case.

Facts

Bank of America (“the Bank”) filed a lawsuit on August 12, 2009 against Colonial Bank (Colonial) to obtain the return of loan agreements, mortgages and sale proceeds valued in excess of a billion dollars. The Bank had sent Colonial a demand for all sale proceeds and loan agreements held by Colonial Bank. Colonial refused to return the loans, and the Bank filed suit for breach of trust and other agreements.

Motion for an Emergency ex parte TRO

Along with the complaint, Colonial filed a motion for an emergency temporary restraining order (TRO), which sought to enjoin Colonial from liquidating, transferring or otherwise encumbering the assets. The motion recited the familiar four-factor test, but is of interest to me today for these three reasons:

1. The Bank didn’t rest solely on its motion; as new developments occurred, it filed supplemental papers. This is important because TROs are decided on the papers alone, so if new information develops after you have filed your motion, be sure to update the court with new information. Used appropriately, it builds momentum: “yesterday these terrible events took place; today it got worse; Judge please stop them!”
2. The Bank used newspaper stories effectively. Under Fed. R. Evid. 902(6), newspaper stories are admissible. The Bank intelligently used this Rule.
3. The Bank used supplemental sources of law. Rather than relying solely on its agreements (which should have and probably would have been sufficient), the Bank also asserted Fla. Stat. § 812.035(6), which relaxes the traditional “irreparable harm” requirement in cases involving civil theft, and instead only requires the movant to make “a showing of immediate danger of significant loss[.]” It is a good practice to always search for supplemental sources of law that may assist you in stating a claim.

Our next post will discuss a few other interesting aspects of this case.

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At a presentation last week to the DuPage County Bar Association, I mentioned that the federal courts required the movant to present a draft order along with the motion for a temporary restraining order or preliminary injunction. Illinois and many other states lack this requirement, but following a suggestion made by Maxwell II and Jacobs, I said it was useful to focus your attention on the exact relief you needed: who you are going to enjoin and what you are going to prohibit or require, because“[t]he first thing the court wants to know is precisely what action it is being asked to take.”  Edward B. Maxwell II & Jack B. Jacobs, How to Win an Injunction, 10 Litig. 20, 21 (1983). 

Afterward, Dupage County Circuit Court Judge Kenneth L.Popejoy agreed that it was useful for a Judge to see exactly what the movant was proposing, but mentioned a more important point: Judges are required to make specific findings of fact and conclusions of law. A draft order helps them focus on what facts have been shown and what conclusions the movant thinks are required by the facts. As a practitioner, I instantly agreed. 

One of the functions of an injunction requestor is to protect the court from being reversed on appeal or having to reconsider an order. To some extent this is true in every case, but injunctions happen quickly and interlocutory appeals are permitted, so an early mistake might not be as recoverable in injunction actions as it would be in ordinary litigation. Why embarrass a Judge by persuading him or her to enter an order that on its face is erroneous?

In a recent case, for example, my opponent got an ex parte TRO and tendered a draft order without mentioning a bond. In federal court, a bond is required, although the court has discretion to set the amount. Failure to discuss the bond required is a reason to vacate the TRO. In our motion opposing the extension of the TRO, we pointed out how the movant (not the Judge) had erred in failing to post a bond, and the Judge ruefully noted that perhaps he should have required one, and thereafter brokered a reasonable agreed order. I liked being able to challenge the credibility of an opponent on a clear requirement in my first appearance in the case.  

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