Fired employees are often a source of problems for a business, especially when those ex-employees choose to bad-mouth their former employer. While some employers may simply ignore allegations that terminations were based on racism, sexism or ageism, other employers choose to take legal action.

One such employer is Overhill Farms, Inc., which chose to terminate employees who failed to provide correct social security numbers. The employer gave the employees an opportunity to provide the social security numbers after the IRS had notified the employer of the erroneous numbers.  The fired employees claimed that this was merely a pretext for their dismissal. 

The ex-employees publicly charged the employer with racism, sexism and ageism in written materials and in demonstrations.  The employer sued the ex-employees for defamation. 

In response, the ex-employees filed an Anti-SLAPP special motion to strike, alleging that the employer’s lawsuit was designed to squelch their First Amendment free speech, petition and assembly rights. 

The trial court denied the ex-employees’ motion, thereby allowing the employer’s lawsuit to continue. 

The ex-employees appealed, but the decision of the trial court was affirmed by the California Fourth District Court of Appeal, Division Three in a 2 – 1 decision.  The court held that the plaintiff-employer should be given the opportunity at trial to show that the ex-employees’ allegations are demonstrably false assertions of fact masquerading as opinion. This case demonstrates that employers should have less fear that an Anti-SLAPP motion will be granted when unfounded charges are made that may be disproven at trial. (Overhill Farms, Inc. v. Lopez, G042984, Dec. 14, 2010 (DOC/PDF).) 

Might current and former employees who trash employers online (e.g., My Space, Facebook, etc.) face a similar fate?  Perhaps.  While most employers won’t waste their time and money, some might decide that a lawsuit is necessary to protect their reputations if the criticism is false and sufficiently damaging.  Many employers know that certain kinds of allegations are a tool to force businesses to cave in to certain demands.  Now employers know that litigation may be an viable tool, even when (ex) employees cry “First Amendment!”

James J. Manning, Jr. (“Jim”)  is a Senior Partner at the Riverside (CA) based law firm of Reid & Hellyer.  His media law practice includes defending newspapers, large and small, throughout Southern California.

Photo Source: Photobucket.

California law provides broad immunity from civil liability for a social host who “furnishes alcoholic beverages to any person,” as many Californians do at their house parties. (Civil Code § 1714 (c).) However, a social host loses that immunity if he or she “sells, or causes to be sold, any alcoholic beverage, to any obviously intoxicated minor.” (Business and Professions Code § 25602.1.)

This is exactly what happened at a recent house party where alcohol was available and the host charged a $3 to $5 admission fee.  Tragically, one of the underage attendees left the party intoxicated, driving his car into and killing another partygoer. A lawsuit was filed attempting to hold the social host liable under Business and Professions Code section 25602.1. The social host filed a motion for summary judgment that was granted by the trial court which found that the host was not civilly liable for damages for admitting to the party an obviously intoxicated minor, nor is such a host “required to be licensed” within the meaning of Business and Professions Code section 25602.1. The trial court’s ruling was affirmed by the California Court of Appeal, Second District in December 2010. (Ennabe v. Manosa, Dec. 1, 2010, Case No. B222784 (DOC) (PDF).)

This opinion seems to shed light on the deference of courts to the immunity from liability for social hosts, which this Court reiterated provides “sweeping civil immunity.” When the party is over, social hosts should sleep soundly without the nagging worries of irresponsible actions by their partygoers.

To the surprise of one California employer, a class action labor and employment attorney demanded one million dollars upon alleging that their pay stubs failed to include the required information- calculated at $4,000 for all 250 employees. While the facts in that case made the alleged violation debatable and worth far less than the plaintiffs’ lawyer requested, the potential for serious liability in other situations is very real.

California employers need to be aware that they are required to provide itemized statements every time an employee is paid, whether by check, in cash, or otherwise. Under Labor Code Section 226(a), every time employees are paid, the employer must provide a detachable part of the check or a separate writing showing required information.

The following information is required to be on the itemized statement:

• Gross wages earned.
• Total hours worked.
• The number of piece-rate units earned and any applicable piece rate if the employee is paid on a piece-rate basis.
• All deductions.
• Net wages earned.
• The inclusive dates of the period for which the employee is paid.
• The name of the employee and the last four digits of his or her social security number or an employee identification other than a social security number.
• The name and address of the employer.
• All applicable hourly rates in effect during the pay period, and the corresponding number of hours worked at each hourly rate by the employee.

Source: California Department of Labor (DOL).

The penalty for failure to provide the appropriate information on a pay stub can be fairly expensive for employers with a significant number of employees. An employer’s failure to comply with Labor Code Section 226 may be subject to a penalty equal to $50.00 for the first violation and $100.00 for each subsequent violation–up to $4,000.00 per employee. Therefore, all employers should review their current pay stubs to insure that all required information is provided.

A few months back, one of my newspaper clients reported about a doctor’s disciplinary matter pending before the California State Medical Board. The article reported what was in the official public records and published the doctor’s denial of the charges therein.

Nevertheless, the doctor took umbrage, arguing that no report should have been published, as no decision had been made yet – i.e., he had not been found “guilty” of the charges. So, he sued the newspaper, even though the article made it clear that the charges were still pending and no decision had been made by the board.

We tried to get the doctor to dismiss his suit, citing cases that immunize the media from accurate and true reports of what’s in official records, including charges of wrongdoing. As in criminal cases, one may report about the accusations as being just that – accusations. The media does not need to wait until a decision is made – otherwise, there could be no reports until all appeals were exhausted.

Somehow, neither the doctor nor his lawyers could draw the analogy, so the court did it for them, granting our Anti-SLAPP motion under California Code of Civil Procedure section 425.16 (a special motion to strike a Strategic Lawsuit Against Public Participation (SLAPP)).

That statute has a mandatory attorney’s fee provision in favor of successful defendants, such as our newspaper client. So, the doctor (or his lawyers) wrote a check to the newspaper for the privilege of having filed an unmeritorious suit against it. If justice were served, the doctor’s lawyers should have been the ones who actually footed the bill, as they should have known better than to file the suit or they should have dismissed it once we gave them the authorities upon which the trial court relied later in granting the Anti-SLAPP motion.

So, don’t rush to sue a newspaper or other media outlet. Losing’s bad enough, but paying the newspaper’s lawyer rubs salt in the self-inflicted wound.

James J. Manning, Jr. (“Jim”)  is a Senior Partner at the Riverside (CA) based law firm of Reid & Hellyer.  His media law practice includes defending newspapers, large and small, throughout Southern California.

While many victims of the so-called “Nigerian e-mail scam” would be too embarrassed to trumpet that fact, others end up infamous for their victimhood like the appellant in a published opinion of the California Court of Appeal in Riverside. Also known as an advance-fee fraud, the Nigerian scam baits the victim with an advance sum of money now in the hopes of realizing an even larger payment later.

In March 2009, Brian Peters received an email from someone purporting to be a citizen of Malaysia. The e-mail informed Peters that certain third parties in the United States and Canada owed the purported Malaysian money, but that “they can not transfer the funds to any bank account outside America continent due to their new company policy [sic].” He asked Peters to “assist me in receiving the funds and forward to me.” He offered to pay Peters 12 percent of the money. Peters agreed after apparently negotiating an increase of his fee to 15 percent.

Peters deposited the $808,988.90 in checks received from the purported Malaysian at Chino Commercial Bank. After the bank notified Peters that the checks had cleared, Peters wire transferred $468,000 to Hong Kong. Shortly thereafter, the checks were dishonored after the bank detected that they had been altered. Since Peters was personally liable for any overdrafts on the account, which had only a few thousand dollars, the bank sought to attach property owned by Peters to collect on the overdraft. The trial court granted the bank’s motion to attach against Peters in the amount of $458,782.60.

Peters appealed and lost again, this time in Riverside’s District Court of Appeal. (Chino Commercial Bank v. Peters (Dec. 13, 2010, Case No. E049170).) The court held that the bank had demonstrated the probable validity of its claim, citing California Uniform Commercial Code sections 4201, subd. (a), and 4214, subd. (a)- the bank’s notification that the checks had cleared gave only provisional credit until that collection was final.

Despite the obvious life lessons, the legal one is this – don’t transfer funds received unless and until you know that collection of the original deposit is final. This is particularly true for lawyers and others who receive funds in trust.

David G. Moore is a Senior Attorney at Reid & Hellyer law firm in Riverside, CA, where he began his legal career after completing law school in 1964. Reid & Hellyer practices business, real estate, litigation and bankruptcy. He may be reached at dmoore@rhlaw.com or via phone at (951) 682-1771.

Update from Reid & Hellyer (12/20/2010): This blog post made the front page of Slashdot.org on Dec. 19, 2010 and was mentioned in The Press-Enterprise on Dec. 20, 2010.

Update from Reid & Hellyer (1/3/2011): This blog post was mentioned in inland Southern California’s Business Press.

Beginning January 1, 2011, the California Evidence Code, as applied in civil cases, will no longer govern California State Bar attorney disciplinary hearings. The new Rules of Procedure, Rule 7.12, provide that the hearing need not be conducted according to technical rules of evidence.

The new evidentiary standard is that “any relevant evidence must be admitted if it is the sort of evidence on which responsible persons are accustomed to rely in the conduct of serious affairs,” including inadmissible hearsay. (Rules of Procedure of the State Bar of California, Rule 7.12(C) (effective Jan. 1, 2011).)  This change means that the attorney disciplinary evidentiary pendulum has completely swung to the opposite end of the spectrum since the 1970′s when I was a prosecutor for the State Bar. In those days, the hearing referees bent over backwards to ensure that errant attorneys received an abundance of due process considerations.

However, in recent years, public criticism over light attorney discipline has heightened. As a result, the State Bar has reacted to this concern. Attorneys faced with disciplinary charges are best advised to hire an attorney that is familiar with the unique rules of this system.

Businesses in the Inland Empire already have a hard enough time making ends meet. The responsibilities of meeting payroll, coming within budget and maintaining a positive cash flow are harder to meet than they were just a few years ago.

An added pressure to businesses can be the cost of responding to a subpoena requiring the production of documents. While many assume that only parties can be subpoenaed, a third party, also known as a non-party, can be subject to this power as well.

Being unwittingly included in litigation via subpoena can be a hassle, but current laws ensure fair compensation for the time and resources you expend on meeting its requirements.

In California, businesses are able to charge the party issuing the subpoena for all reasonable costs associated with producing records in a civil case,[1] including postage, clerical charges and reproduction of documents.[2]  Payment for these costs can be received when you deliver the subpoenaed records, and you have no obligation to deliver the records until the party in the litigation case makes the payment.[3]

However, you must produce an itemized statement in order to be compensated.[4]  Moreover, if a party to the litigation merely inspects or makes copies of documents at your place of business, recoverable fees cannot exceed $15.[5]

Subpoenas requiring the production of records from non-parties aren’t just limited to litigation in California state court. Attorneys can also issue such subpoenas to non-parties in a case filed in federal court.

Federal rules require that such subpoenas not be unreasonable or oppressive,[6] and if they are, the issuing party can be mandated to produce reasonable payment beforehand.[7] In fact, federal rules instruct courts to protect non-parties from significant expense.[8]

Thus, if a business is facing significant expense to produce documents, it is within their legal right to seek reimbursement.

The Riverside attorneys at Reid & Hellyer often represent Inland Empire businesses in business litigation, and regularly counsel clients who receive a subpoena as a third party to the litigation. Often times, the attorneys are able to work with the subpoenaing party to reduce the burden on your business. Serving your customers and clients should be your utmost priority, and as one of the largest firms in Riverside and San Bernardino counties, Reid & Hellyer exists to ensure that the burden of our legal system does not impair your business activity without due compensation under law.

[1] Cal. Evid. Code § 1563(b).

[2] Cal. Evid. Code § 1563(b)(1).

[3] Cal. Evid. Code § 1563(b)(2).

[4] Cal. Evid. Code § 1563(b)(3).

[5] Cal. Evid. Code § 1563(b)(6).

[6] Federal Rules of Civil Procedure, Rule 45.

[7] Shepherd v. Castle, 20 F.R.D. 184 (D.C. Mo. 1957).

[8] Fed. R. Civ. P. 45(c)(2)(B) Advisory Committee’s Note (“a non-party required to produce documents or materials is protected against significant expense resulting from involuntary assistance to the court.”).

**This client advisory is intended to provide the reader with general information regarding current legal issues. It is not to be construed as specific legal advice nor as a substitute for the need to seek advice from an attorney on specific legal matters.**

Comply with Corporate Formalities to Ensure Limited Liability

By Michael G. Kerbs – The Business Press Guest Columnist

As published in Riverside, San Bernardino and the Inland Empire by The Business Press on November 24, 2010.

Corporate shareholders and board members often make the mistake of thinking they can’t be held personally liable for their corporation’s debt. One local construction company realized this the hard way by failing to follow its corporate formalities.

Upon forming the corporation, the individual overseeing its management did all the necessary steps to file the Articles of Incorporation and adopt bylaws. However, this individual never actually signed the stock certificates, never held any shareholder or director meetings and never kept separate financial records for the corporation.

More importantly, the corporation never set up its own bank account, and the individual paid his individual expenses and the business’ expenses out of the same account. Because the individual failed to recognize that the corporation was a separate entity and commingled his affairs with those of the corporation, he was found to be liable for all the corporation’s debts. Ultimately, he had no choice but to file for bankruptcy.

From time to time, we will hear similar stories about corporate owners who lose their homes, their cars and most of their personal assets because they are misled to believe that by simply forming a corporation they are granted limited liability. But in order to be protected by limited liability, a corporation must act like an independent legal entity and follow through with its corporate formalities of properly addressing corporate records, regular meetings and financial statements.

Corporate records, meetings

When a corporation is formed, it enacts bylaws which are the rules that the corporation operates by. In most bylaws, it is specified that the corporation is to conduct regular meetings for the individuals managing the corporation, its board of directors, as well as annual meetings for its shareholders. Minutes of those meetings should be prepared and maintained to show that the corporation held its required meetings and to establish that the corporation properly authorized activities relating to its business.

Another important corporate record is its Articles of Incorporation, which must be filed by the corporation when it is formed. The Articles of Incorporation are filed with the Secretary of State and are proof of the corporation’s existence. The Articles of Incorporation describe the purpose of the corporation and authorizes it to issue its stock. Once the Articles of Incorporation are filed, the Secretary of State issues a Certificate of Incorporation which declares the corporation to be a legal entity. All of these documents should be maintained in a corporate binder with the minutes from all meetings.

One common occurrence for individuals forming a corporation is that they often neglect to issue the actual shares of stock for the corporation. Ownership interests in a corporation are evidenced by certificates of stock. Copies of the issued stock certificates should be kept and documented in a stock ledger. The ledger should provide information regarding the shareholder’s name and address, the date of the issuance and number of shares and documents the shareholder’s signature acknowledging receipt of the certificates.

Financial statements

Corporations must document all of their financial activities and maintain a current balance sheet that is separate from the owner’s personal finances. Failure to maintain separate finances is the number one reason for imposing personal liability on the owner of a corporation.

The corporation must also keep detailed records of all financial transactions, and to the greatest extent possible, make its regular payroll and dividend payments consistent. If possible, both monthly and annual financial statements should be prepared, which will be helpful in preparing the corporation’s tax returns.

Ongoing compliance to all corporate formalities, including holding shareholder and director meetings and maintaining detailed financial records, is key to protecting one’s personal assets. Corporate owners that don’t follow through with these actions will to be liable for all the corporation’s incurred debt.

Michael G. Kerbs is President of Reid & Hellyer, a law firm based in Riverside that practices primarily in litigation, real estate, business, bankruptcy and mediation. He can be reached via 951-682-1771 or mkerbs@rhlaw.com.

Construction lenders beware of California Civil Code section 3137(c), which provides that a mechanic’s lien for “site improvements” has priority over a trust deed recorded before commencement of the site improvement work in certain circumstances.

That provision has several subparts, but one trap for the unsuspecting lender and title insurance company is this if the loan proceeds secured by the trust deed are solely or primarily to pay for the construction of the site improvements, then a mechanic’s lien for those site improvements would have priority over the prior-recorded trust deed. Period.

When is a construction loan trust deed “primarily” for site improvements when other items are to be paid for from the loan proceeds?  What if the only items paid for, in part, are some site improvements and the balance of the loan funds are never disbursed due to a default and foreclosure?  Would a court look solely to the loan documents and budget at inception of the loan?  Or, would it look to see how the funds were actually used in the particular case?  Given California’s stated public policy favoring payment to contractors who have completed the work and have complied with the law, the latter scenario may be a real possibility, thereby exposing lenders and title insurers to unanticipated risk of loss.

The California attorneys at Reid and Hellyer are excited to announce the launch of their new blog: California Litigation Attorney Blog.