Saturday, July 26, 2008

Losing Limited Liability with the Stroke of a Pen: Serge Doré Selections Ltd. v. Universal Wines and Spirits LLC, 23509/2007.

My Payment Systems students sometimes struggle with the notion that a check constitutes its own, separate contract and can be an independent means of liability, wholly apart from the contract pursuant to which the check was written. A recent Westchester County, New York Supreme Court case provides a good example.

The case arose from Serge Doré Selections, Ltd.’s sale of about 900 cases of wine to Universal Wine and Spirits LLC for $112,372.92. There is no dispute that Universal received the wine, has resold at least some of the wine, and never paid for the wine. The interesting portion of the case, for the purposes of this posting, concerns the personal liability of two individuals, Jesse Kessler and Carla Lewin, for Universal’s debt to Serge Doré. The court’s opinion does not indicate who Kessler and Lewin are, but a public-records search reveals that Jesse Kessler is one of two manager-members of the LLC and Carla Lewin is apparently his wife.

Universal’s contract with Serge Doré was memorialized by an invoice and a purchase order, neither of which Kessler and Lewin signed. Instead, Leah B. Dedmon, whose name does not appear in any of the public records for Universal that I found, signed on behalf of Universal.

After the wine was delivered, Universal issued a check in the amount of the invoice, then instructed Serge Doré not to deposit the check. Serge Doré complied, and then a lengthy correspondence ensued between Kessler and Mr. Doré, the President of Serge Doré Selections Ltd. In the course of this correspondence, Kessler provided – and then withdrew – a personal check drawn on his joint account with Lewin for the full price of the wine. Universal also later supplied a second corporate check, which bounced twice and was never paid, precipitating the lawsuit.

Ultimately, the court found that Kessler’s correspondence with Serge Doré, coupled with his issuance of a personal check, showed that he had undertaken personal responsibility for Universal’s debt. (The court found that Lewin, however, had no liability to Serge Doré, since she had not signed the check and apparently knew nothing of its issuance.)

Universal was organized under the laws of Florida, which, like most states, has adopted its own version of the Uniform Limited Liability Company Act. Kessler would normally have been shielded from liability for Universal’s debt pursuant to Florida’s version of Uniform Limited Liability Company Act §303 (a) (1995), which states that generally “the debts, obligations, and liabilities of a limited liability company . . . arising in contract . . . are solely the debts, obligations, and liabilities of the company, [and] [a] member or manager is not personally responsible for a debt, obligation, or liability of the company solely by reason of being . . . a member or manager.” Thus, he was not personally liable to Serge Doré under the contract. The personal check he wrote, however, constituted a separate contract under which he undertook personal responsibility as a drawer.

The court’s analysis does contain an error with regard to UCC §3-402 (b) (1), in that it tends to suggest that Kessler could have avoided personal responsibility if the check had expressly indicated (1) the identity of the principal (Universal) and (2) the fact that Kessler was signing only in a representative capacity. While this would have been true in the case of a promissory note, for example, this would not have shielded Kessler from liability in this instance, since he wrote a personal check drawn on his own account and would therefore necessarily face liability as the drawer of that check under UCC §3-414.

The lesson of this case is an important one for businesspeople as well as lawyers and law students, in that it tends to suggest that limited liability can be quite literally wiped out with the stroke of a pen, at least if that pen is used to write a personal check.

40 comments:

Anonymous said...

Just curious, what can other wineries do to receive payment from Universal Wines even if they had not received a personal check from Jesse Kessler. Is this case usable to acquire funds directly from him?

Thanks!

Internet Lawyer said...

Wow, this is good stuff, and I bet it happens to small business people all the time.

Glad to see you out on these Internet(s). We need a UCC expert!

I look forward to reading more.

Carlos Leyva

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Anonymous said...

Once, again...I this is Oblivious

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Anonymous said...

Here's a great article on Universal's accountant and Jesse's close personal friend...Joe Poole. Another example of his stand up character and smart business sense.

http://www.usdoj.gov/usao/md/Public-Affairs/press_releases/press08/BaltimoreBusinessOwnerSonandAccountantIndictedonTaxFraudCharges.html

Jack Cacciato

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Anonymous said...

http://dockets.justia.com/docket/court-utdce/case_no-2:2008cv00669/case_id-67385/

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Anonymous said...

From an outsiders opinion, it sounds like all past bloggers are familiar with each other. Perhaps you should concentrate on you own businesses and/or jobs and less time blogging. Either that or you are all a bunch of trust fund babies with no concern for others and are wreckless in your decision making process.

F.T.T.

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Anonymous said...

GRASONVILLE ACCOUNTANT CONVICTED OF PREPARATION OF FALSE TAX RETURNS

Baltimore, Maryland - After a seven-day bench trial, U.S. District Judge Richard D. Bennett convicted Joseph Poole, age 62, of Grasonville, Maryland, today of four counts of aiding in the preparation of false tax returns, in connection with a scheme to underreport the income earned and tax owed by a Baltimore City business owner, announced United States Attorney for the District of Maryland Rod J. Rosenstein.

“Willfully filing a false tax return is the same as stealing and there are serious consequences,” stated C. Andre' Martin, Internal Revenue Service-Criminal Investigation Special Agent in Charge. “Prosecuting individuals who intentionally prepare and file false tax returns is a vital element in maintaining public confidence in our tax system.”

According to trial testimony, between 1998 and 2003, Stilianos (Stan) Mavroulis, the President and 100 percent owner of Fidelity Home Mortgage Corporation (FHMC), diverted more than $1,100,000 of FHMC’s funds to pay for personal family expenses. Poole classified such personal expenses as business expenses in FHMC’s books, thereby fraudulently decreasing FHMC’s net profit figures as well as the income shown on Stan Mavroulis’ personal tax returns. The evidence also demonstrated that, between 1998 and 2003, Stan Mavroulis withdrew approximately an additional $700,000 from FHMC as shareholder draws that should have been reported as capital gains on his personal tax returns. Poole, who worked for an accounting firm headquartered in Annapolis, Maryland, prepared all of FHMC’s corporate tax returns and Stan Mavroulis’ personal tax returns for the relevant period. Judge Bennett concluded that Poole willfully prepared false personal tax returns for Stan Mavroulis for tax years 2000 through 2003, failing to report a total of more than $1,438,000 in income for Mr. Mavroulis in those years. For 2000 and 2001, Stan Mavroulis’ personal tax returns, as prepared by Poole, claimed the Earned Income Credit, despite the fact that Stan Mavroulis did not qualify for such credit. In addition, the evidence showed that Poole knew that Stan Mavroulis’ children were working at FHMC but were not on FHMC’s payroll and therefore were not reporting their income to the IRS; instead, the payments to the Mavroulis children were disguised within the approximately $700,000 in shareholder draws that were not reported on Stan Mavroulis’ tax returns.

Poole faces a maximum sentence of three years in prison on each of the four counts for aiding in the preparation of false tax returns. Judge Bennett has scheduled sentencing for October 16, 2009 at 2:00 p.m.

Stan Mavroulis, age 65, and his son, Kirk Mavroulis, age 27, both of Baltimore, previously pleaded guilty to related charges. Stan Mavroulis pleaded guilty on January 26, 2009, to filing a false individual income tax return, and is scheduled to be sentenced on September 30, 2009, at 9:00 a.m. Kirk Mavroulis, who was the head of FHMC’s accounting department, pleaded guilty on January 22, 2009, to failing to file an individual tax return that should have reported the income he received from FHMC and which was disguised as shareholder draws to Stan Mavroulis. He was sentenced to probation and a $9,000 fine on May 22, 2009.

United States Attorney Rod J. Rosenstein thanked the Internal Revenue Service - Criminal Investigation for their investigative work. Mr. Rosenstein commended Assistant United States Attorneys Stephen M. Schenning and Jonathan Biran, who are prosecuting the case.

Anonymous said...

It would seem that this Mr. Kessler is quite a busy man. In Maryland courts he has about 9 current cases where he's the defendant; case numbers 060200202052008, 302913V, 303345V, 295418V, 02C08134750, 050200273522009, 060100022202009, 060200183642006, 300077V. He has two in Palm Beach County; case 502008CC012247XXXXMB and 502008CA020629XXXXMB. He has another four in Miami Dade County; cases numbers 13-2007-CA-007265-0000-01, Case 13-2008-CA-011531-0000-01, 13-2008-CA-055622-0000-01, and 13-2008-SC-004527-0000-21. Our system here at school doesn't search much the country, who knows how many more are out there.

Steve Willard - Law Student