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.

Of Settlements and Sales: Hanson Staple Co. v. Ole Mexican Foods, Inc., A08A0658.

In one of the better-reasoned cases on this topic I have read, the Georgia Court of Appeals has explained why settlement agreements that arise from disputes regarding sales of goods should not normally be considered sales contracts, even when those settlements require one of the settling parties to purchase additional goods.

The parties’ dispute centered on Ole Mexican Foods’ decision to stop buying packaging materials from Hanson, and instead to purchase the necessary materials from one of Hanson’s former employees. In its suit for breach of contract, Hanson contended it was left holding more than $300,000 worth of packaging materials that it had customized for Ole Mexican Foods and could not resell. In its counterclaim, Ole Mexican Foods claimed it should be relieved from its contractual obligations due to the fact that Hanson had tendered defective materials. Hanson, of course, vigorously defended against this contention, claiming the goods were merchantable.

The parties negotiated a settlement whereby Ole Mexican Foods agreed (1) to purchase at least $130,000 worth of inventory from Hanson, (2) to test Hanson’s remaining inventory and, if it proved satisfactory, to purchase additional inventory, and (3) to begin to do business once again with Hanson.

Unfortunately, the settlement agreement did not end the parties’ dispute. Instead, Ole Mexican Foods refused to perform, and Hanson moved the trial court to enforce the settlement agreement. In response, Ole Mexican Foods claimed, among other things, that Hanson had violated the parties’ agreement by insisting that Ole Mexican Foods purchase inventory without regard to its merchantability. In support of its claim, Ole Mexican Foods contended that the Uniform Commercial Code’s implied warranty of merchantability found in 2-314 should apply to the settlement agreement.

The trial court accepted this argument, and Hanson appealed. In properly reversing, the Court of Appeals applied the predominant purpose test and held that the predominant purpose of the settlement agreement was to resolve the parties’ dispute regarding an earlier sales agreement, not to create an additional agreement of the kind to which implied warranties of quality would normally apply. Instead of turning on the merchantability of Hanson’s goods, Ole Mexican Foods’ duties under the settlement agreement would be governed by principles of good faith and “honest judgment.”

Although the court did not expressly say so, one reason why the court’s holding is so clearly correct is that a contrary holding would essentially eviscerate the purpose of this particular settlement: since one of the central disputes in the underlying litigation was whether Hanson’s goods were merchantable within the meaning of the Uniform Commercial Code, and since the case was settled rather than having this issue decided by the court, applying the implied warranty of merchantability to the settlement agreement would almost certainly require the parties to relitigate the question of merchantability.

Bankruptcy and Gift Cards

This AP article dated March 3, 2008, ”Bankruptcy Makes Gift Cards Worthless,” is one of several that I have seen along similar lines recently and serves as a good reminder that, notwithstanding a variety of attempts to protect consumers who use gift cards (including limits or outright bans on expiration dates, which about 70% of states now have in some form), consumers can still be vulnerable to total loss in the event of the issuer’s bankruptcy. The article also highlights some fairly ingenious efforts on the part of competitors to take advantage of the situation (and attract new customers) by honoring those otherwise worthless gift cards, at least in part.