The firm is pleased to announce that Karine Akopchikyan, Heather Antoine, John De La Merced, Neil Elan, and Celina Kirchner have been named to Thomson Reuters’ prestigious list of 2021 Southern California “Super Lawyers” Rising Stars. Additionally, Heather received enough votes to place her on the “Up-and-Coming 100: 2021 Southern California Rising Stars” and “Up-and-Coming 50: 2021 Women Southern California Rising Stars” lists.
Every year, “Super Lawyers” profiles attorneys in more than 70 different practice areas who have attained a high degree of peer recognition and personal achievements. The list selects the top lawyers in Southern California based on peer nomination, independent research, and peer evaluation. After the "Super Lawyers" research team has completed the screening process, only 2.5 percent of lawyers under the age of 40 years old are granted the title of Rising Stars.
View the Up-and-Coming 100: 2021 Southern California Rising Stars here.
View the Up-and-Coming 50: 2021 Women Southern California Rising Stars here.
A new landmark Supreme Court decision involving Facebook’s practice of sending unsolicited text message security notifications to cell phone numbers affiliated with potentially compromised accounts provides much-needed clarity on whether the act of sending unwanted telemarketing calls and text messages violates federal anti-robocall law under the Telephone Consumer Protection Act of 1991 (“TCPA”)
The last decade has experienced a surge in lawsuits under the Telephone Consumer Protection Act of 1991, (“TCPA”), which is codified in 47 U.S.C. § 227. The TCPA is a federal law that restricts the business practice of making and sending unsolicited telemarketing calls and marketing text messages. The TCPA prohibits the use of an “automatic telephone dialing system” (“ATDS”) to make or send telemarketing/advertising calls or text messages, without a consumer’s prior, express written consent. As defined in the TCPA, an ATDS is any equipment that has the capacity (1) “to store or produce telephone numbers to be called, using a random or sequential number generator” and (2) “to dial such numbers.” A random or sequential number generator has been generally thought to be something that chooses numbers randomly, and then dials the numbers sequentially at random without any human intervention. Stated alternatively, equipment does not constitute an ATDS if it is not capable of originating a call or sending a text without a person actively and affirmatively manually dialing each call or text. As discussed below, there has been uncertainty even over the definition of an ATDS. According to some courts, an ATDS must have the present capacity to autodial and must store or dial numbers using a random or sequential number generator; while other courts broadly interpret the meaning of an ATDS to include equipment that has the future capacity to dial numbers based on a random or sequential number generator.
Despite the foregoing definition, the determination of what is an ATDS has caused much more ambiguity than clarity, resulting in a barrage of inconsistent and irreconcilable federal court decisions throughout the country. For example, as a common fact pattern alleged in TCPA lawsuits occurs where a consumer visits a website, adds a product to the “online shopping cart”, and provides a cell phone number (among other contact information) to complete the purchase transaction online, without having actually “opted-in” or otherwise expressly agreeing to receive further text marketing messages. As part of a marketing campaign, the business then later sends promotional or marketing text messages to the consumer and other numerous similarly situated consumers based upon the information supplied by the consumer (e.g., geographical region, preferences, etc.). The outcome of such cases most commonly hinge on whether (1) the consumer provided prior, express written consent to receive the text messages, and (2) whether an ATDS was used to send the text message (e.g., whether the equipment stored or produced numbers through the use of a random or sequential number generator). Any text message that was sent using an ATDS without the consumer’s prior, express written consent constitutes a violation of the TCPA, and would subject the defendant to statutory damages of at least $500 per each unauthorized text message (as well as the potential for treble damages for willful violations).
Within the context of this general fact pattern, TCPA liability would ultimately depend on whether the federal court adopts a broad or narrow interpretation of what is an ATDS. Under a narrow interpretation, adopted by the Third, Seventh, and Eleventh Circuits, no liability would attach because the equipment would not qualify as an ATDS since the text messages were not stored or produced using a random or sequential number generator; rather, the text messages were sent to a list of targeted, individualized numbers. In contrast, under a broad interpretation, adopted by the Second, Sixth, and Ninth Circuits — even though the equipment in question did not utilize a random or sequential number generator to store or produce the text messages — the equipment used to send the text messages would qualify as an ATDS because it has the future capacity to store or produce random or sequentially-generated numbers (even if the capacity was contingent upon the installation of hardware or software in the future) and because it can dial a stored number automatically.
Fortunately, the Supreme Court brought clarity to this issue in its April 1, 2021 decision in the case of Facebook Inc. v. Duguid et al., No. 19-511 (U.S. April 1, 2021). There, Noah Duguid (“Duguid”) received a series of text messages from Facebook that alerted him of an attempt by someone to login to what Facebook believed was his Facebook account from an unknown device/browser, notwithstanding that Duguid neither had a Facebook account nor provided Facebook with his telephone number. Facebook’s notification system did not store or produce numbers using a random or sequential number generator. Rather, Facebook sent the targeted, individualized text messages to Duguid because his number was linked to a potentially compromised account. Nonetheless, Duguid advanced a broad definition of what an ATDS is and contended that Facebook’s notification system constituted an ATDS because it had the future, abstract capacity to generate random or sequential phone numbers (even though his telephone number was not stored or produced by way of a random or sequential number generator). In a well-reasoned opinion that focused on the TCPA’s plain language and legislative intent, the Supreme Court ruled in favor of Facebook. As the Supreme Court held, making calls, or sending text messages to telephone numbers without the use of a random or sequential number generator does not trigger liability under the TCPA. Rather, to qualify as an ATDS, the call or text message at issue must have been sent using a random or sequential number generator.
The impact of this decision cannot be overstated. It will, for example, (1) likely result in the dismissal of many pending TCPA lawsuits, (2) limit the opportunity for plaintiffs to forum-shop by filing a TCPA lawsuit in jurisdictions with a broad interpretation of the TCPA, and (3) provide businesses with clarity to ensure compliance with the TCPA and allow them to better determine whether they are in fact utilizing an ATDS in violation of the TCPA.
While the decision is a victory for Facebook, it will also favor consumers — on the heels of the decision, businesses will be able to alert users/consumers/customers of potentially unauthorized or fraudulent account activity, without fear of TCPA liability. Businesses should also be relieved to know that they can send advertising text messages and make advertising calls, as long as the telephone numbers are not stored or produced through the use of a random or sequential number generator. However, even after this ruling, there is still some uncertainty regarding what it means to be an ATDS — for example, as raised in a footnote in the decision , “an autodialer might use a random number generator to determine the order in which to pick phone numbers from a preproduced list. It would then store those numbers to be dialed at a later time.” What happens in that situation? Perhaps that will be the subject of a future Supreme Court decision. Until then, it is reassuring that we are at least one step closer to clarity of what it means to be an ATDS.
About Jeffrey Gersh
Jeffrey Gersh is a Partner of the Firm in the Business Litigation Practice. Before joining Stubbs Alderton & Markiles, LLP, Jeffrey was Managing Partner of The Gersh Law Firm for over 10 years and a partner for 25 years with a prominent litigation law firm. Jeffrey has been named a Thomson Reuters “Super Lawyer” for more than 9 years by his peers; an honor only achieved by less than 2.5% of attorneys in California.
Jeffrey successfully litigates, arbitrates, or mediates for both plaintiffs and defendants complex business and commercial matters, whether for individuals, public or private corporations, partnerships, limited liability companies and/or its members, shareholders and partners. Jeffrey Gersh successfully handles disputes regarding contract matters, trade secrets, intellectual property (trademarks, copyrights and trade dress) negligence and fraud, employment, real estate, license agreements, the apparel and garment industry, and general business matters.
About Neil Elan
Neil Elan is an Associate in the Business Litigation Practice group. Neil Elan’s civil litigation practice focuses on all areas of business and commercial litigation, with a particular emphasis on business dissolution, buy-sell agreements, prosecution and defense of breach of contract and promissory note actions, business torts, unfair business practices, fraud, and Anti-SLAPP. In his civil litigation practice, Neil represents real estate developers, limited liability companies, closely-held corporations, financial institutions, entertainment producers, commercial landlords and business owners.
For more information about our Business Litigation Practice contact Jeffrey Gersh at
The halcyon days of start-up companies and the venture community attraction to them hit a hard stop as the COVID-19 lock down spread across the U.S. earlier this year. As the first half of 2020 nears an end – and in the wake of COVID-19 restrictions and the civil unrest our country has recently faced – many companies and their board members are faced with difficult strategic decisions and are confronting the potential for unprecedented corporate action. The financial distress that has now been wrought upon the start-up community has led many businesses to operate well below pre-pandemic budgets and forecasts, and in many instances in or near (sometimes referred to as reaching the “zone of”) insolvency. Many directors are facing pressure to take extraordinary steps to enable their company to access capital or pursue business strategies that were unthinkable just a few months ago, in some instances simply to keep the lights on and try to “live to see another day.”
Individuals join boards of directors of start-ups for a number of reasons, often as founders or operators, as a VC fund or private equity fund representative designated as a result of an earlier funding round, and/or due to industry-specific background relevant to the start-up. Creditors of all stripes have the ability to negotiate payment terms binding the organization, and covenants (including implied covenants of good faith) are indisputably owed to creditors.
While the allure of frothy valuations may have motivated directors and officers to join a start-up, in the wake of COVID-19, many of these individuals now find themselves unexpectedly preparing for an entirely different reality and asking the question: When might a director of a struggling business become personally liable for the debts of the business? Under both California and Delaware law, insolvency is the starting point of the analysis as it respects creditors.
Directors Owe a Duty of Care and Loyalty to the Corporation and its Shareholders
As a general proposition, both directors/officers, as well as member/managers (in the LLC context) (collectively referred to as “directors” for purposes of this article) of Delaware and California corporations, owe two basic fiduciary duties to the entity and its owners (shareholders, members, partners – these terms used here interchangeably)—the duty of care and the duty of loyalty. Directors are subject to these duties regardless of solvency. The duty of loyalty requires that directors act in the best interests of the corporation and its shareholders. Directors cannot use their position of trust and confidence to further their individual interests (or the interests of other constituencies), at the expense of the corporation’s best interests. The duty of care requires that directors consider all material information reasonably available in making business decisions and use the level of care that an ordinarily careful and prudent director would use in similar circumstances.
During these unprecedented times, the duties of directors may well be extraordinarily strenuous and prompt directors to consider whether they should resign. While directors are generally free to resign as they wish, under certain circumstances, resignation does not come with impunity. Directors can face personal liability to the corporation and its shareholders if their resignation amounts to a breach of their fiduciary duties. In one case, for example, directors were tangled in litigation because they resigned from the company’s board after learning that one of the directors stole assets “from under them”. The directors’ resignation left the company in the control of the principal suspected wrongdoer. The court found that such resignation was not free from impunity (at least at the outset of the litigation).1
The violation of either of those duties of care or loyalty may result in shareholders bringing either direct claims, or derivative claims on behalf of the entity against the directors for redress. By asserting direct claims, shareholders assert that the stewards of the business harmed the owners directly; whereas, by asserting derivative claims, shareholders assert that the directors’ breaches harmed the corporation, essentially all owners in the same fashion. Directors most commonly defend against such claims by asserting the business judgment rule, which creates a presumption that directors’ decisions are based on sound business judgment. The business judgment rule, though, is not fail-safe.
Director Liability to Creditors when the Company Is Insolvent
In attempting to weather the economic storm, directors should not forget about another key constituency: Creditors. When a Delaware or California corporation becomes insolvent, in certain limited instances, creditors may have grounds to sue directors, personally – that is, when directors violate their duty of loyalty and/or care.2
To maintain a lawsuit against directors, creditors must establish that the corporation was insolvent at the time of the directors’ alleged wrongful conduct, as opposed to the business being in the “zone” of insolvency (i.e., a concept that had at one point been in judicial favor, in Delaware, however, has been expressly repudiated as a dividing line). Many startups and venture-capital-backed businesses often operate in their early growth stage with tight cash flow, little revenue, and fluctuating valuations; however, these factors which may lead the business to a “zone” of insolvency are insufficient to trigger director liability. This winds up being a “double-edged sword” as circumstances often do not clearly spell out in a binary fashion, solvent/insolvent – with the vagueness resulting in the potential for a delay in the recognition that insolvency has in fact occurred.
Creditors most commonly establish that the corporation is insolvent by demonstrating that, at the time of the challenged conduct (1) the corporation’s liabilities exceed its assets or (2) the corporation is unable to pay its debts as they come due. As any finance major will tell you, either of these standards is elastic; e.g., are “stretching” payables to trade creditors not “paying debts as they come due,” or what about that great IP that has not yet fully commercialized and been shown on the company balance sheet at its “market value” though in an instance where a lot of debt was piled on to create that same IP?
When a corporation becomes insolvent under Delaware law, creditors (whether secured or unsecured creditors, bondholders, or any other lienholder) have standing to assert breach of fiduciary duty claims against the directors on behalf of the corporation, the reasoning being that interests of stockholders become subordinate to creditors. Plainly stated, and bankruptcy issues to the side, once the corporation becomes insolvent, creditors may file a derivative lawsuit on behalf of the corporation for breach of fiduciary duties against directors, personally.
It is important to note that, while creditors of Delaware corporations can bring derivative actions against directors, creditors of Delaware limited liability companies or limited partnerships cannot bring any such derivative action.3
By comparison to Delaware law, when a corporation or LLC becomes insolvent under California law, creditors cannot assert derivative breach of fiduciary duty claims on behalf of the corporation (or LLC) against directors (or members of the LLC).4
As a practical matter, however, this distinction between California law and Delaware law is largely meaningless. To explain, while creditors of an insolvent California corporation cannot file breach of fiduciary duty claims against the directors, California recognizes the “trust fund doctrine” (which may result in the imposition of a constructive trust of the insolvent corporation’s assets for the benefit of creditors).5 In asserting the trust fund doctrine, creditors may sue directors if the facts establish that the directors diverted, dissipated, or unduly risked the insolvent corporation’s assets, and the duties created require directors to take creditor interests into account, in decision-making. Thus, while California’s “trust fund doctrine” is technically not a breach of fiduciary duty claim, it is effectively ‘a rose by another name’ – i.e., another theory under which creditors can assert to hold directors personally liable for mismanaging assets of insolvent corporations.
Especially in these perilous times, directors/managers of California and Delaware business entities should take care to consider the implications of their actions on the entity’s creditors, and should be sensitized to creditors’ availability of claims against them — even if the directors/managers did not have any direct dealings with the creditors.
For example, one group of creditors may include the employees of a business who have claims against the business for unpaid wages and salary. More specifically, California employees — without claiming any breach of a fiduciary duty or showing of the company’s insolvency — may assert direct claims of wage and hour violations against those directors who “caused” such violations. In such a situation, the directors could be personally liable for the unpaid wages and salary, in addition to civil penalties. Whether the director “caused” the wage and hour violations depends on the unique circumstances of the director’s involvement (e.g., whether the director acted with awareness of a decision to not pay wages and to instead prefer a different creditor).
Similarly, directors can be liable for unpaid employment taxes if the director is “responsible”, i.e., the director “had a duty to account for, collect, and pay” the taxes (including a person such as a director, with the authority to exercise significant control over a company’s financial affairs) and “willfully” failed to do so.6 Again, the particulars of the director’s involvement and responsibilities will determine whether the director was “responsible” for the company’s payment of the employment tax and “willfully” failed to pay it.
In further analyzing their potential liability to creditors, directors should give thought to additional considerations that may impact the analysis, including the governing law (e.g., while directors may be operating the business in California, the corporate bylaws may require the application of Delaware law). To minimize exposure to personal liability, directors should be aware of the substance of the corporate governance documents, regularly assess the corporation’s financial position, and seek guidance from other directors and professionals, as appropriate.
Best Practices to Guard against Director Exposure
While a director’s duties and obligations depend on the specific facts and applicable law, directors of (potentially insolvent) companies should consider the following measures to minimize exposure to equity holders and, in certain situations, creditors:
• Obtain Information about the Corporation’s Financial Performance. This would oftentimes require consultation with the CFO and outside accountants. Arguably, when in doubt about solvency/insolvency, prudence may lead to a conclusion of insolvency.
• Make Informed Decisions. Clearly this requires active engagement in the decision-making process and obtaining needed information and consultation with others, both inside the organization, and outside (accountants and legal counsel). Recognition of transactions that involve conflicts of interest of interested parties is important. Similarly, the use of a special committee of the Board may be appropriate in focusing on solvency issues.
• Document the Board’s Decision-Making Process. The board should obtain all relevant information in writing, and questions, objections, inquiries, board meetings and other communications should be recorded.
• Consider Obtaining D&O Insurance and Director Indemnification
Agreements. While expensive, directors may mitigate potential liability by purchasing D&O insurance and seeking indemnity from the company, as long as the insurance and indemnity agreements are in place before the occurrence of the board decision triggering a shareholder or creditor claim. Care should be taken in the review of the insurance policy, in advance, to provide comfort that the policy provides coverage for breach of fiduciary duty claims of this nature. While having D&O insurance may be attractive to creditors looking for deep pockets (i.e., the insurance carrier’s pockets) and could also create the unintended consequence of encouraging litigation against the directors personally, the D&O policy is intended to shield the director – who is likely not judgment proof – from personal liability. The D&O insurance should be reviewed carefully because some policies include contract or insolvency exclusions that may bar coverage for claims from creditors. Directors may consider seeking express contractual indemnity from the VC-fund or private equity sponsors, as well, entities presumptively with greater creditworthiness than the subject entity.
Ultimately, director liability will depend on the unique circumstances of the case, including whether the director put his or her own interests before that of the company, and whether the company was solvent during the transaction or board decision at issue. While this analysis can be complicated and ambiguous, directors and LLC managers looking to limit their potential liability to creditors (and others) should let the following precept guide their conduct: Always act in the best interests of the business entity including all creditor constituencies, without preference to any.
This article was featured on SocalTech.com, to view the article on their site visit here.
For more information about this topic or issues relating to our Business Litigation Practice please contact, Michael Sherman at .
Authors:
1 See In re Puda Coal, Inc. S'holders Litig., C.A. No. 6476–CS 15–17, Feb. 6, 2013 (Transcript)
2 Quadrant Structured Products Company, Ltd. v. Vertin (Del. Ch. 2015) 115 A.3d 535, 546 (“After a corporation becomes insolvent, creditors gain standing to assert claims derivatively for breach of fiduciary duty.”)
3 CML V, LLC v. Bax (Del. 2011) 28 A.3d 1037, 1043, as corrected (Sept. 6, 2011) (“Only LLC members or assignees of LLC interests have derivative standing to sue on behalf of an LLC— creditors do not.”)
4 See Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1041 (“there is no
broad, paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the corporation’s creditors solely because of a state of insolvency.”)
5 Id. at 1041 (“the scope of any extra-contractual duty owed by corporate directors to the insolvent corporation's creditors is limited in California, consistently with the trust-fund doctrine, to the avoidance of actions that divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors claims.”)
6 26 U.S.C. § 6672 (“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax [. . .] shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”)
Stubbs Alderton & Markiles, LLP, one of Southern California’s leading business law firms, today announced that three attorneys of the firm have been selected to the 2020 Southern California Super Lawyers Rising Stars list. SA&M attorneys Karine Akopchikyan, John De La Merced, and Neil Elan were honored for 2020. Each year, no more than 2.5 percent of the lawyers in the state are selected by the research team at Super Lawyers to receive this honor.
About Karine Akopchikyan
Karine Akopchikyan is a Litigator in SA&M’s Business Litigation Practice group. Karine has extensive experience representing and advising plaintiffs and defendants in a wide range of business and commercial disputes in state and federal courts. She focuses her practice on resolving complex contractual disputes, intellectual property disputes (including copyright, trademark, patent, right of publicity, and trade secret claims), cyber insurance coverage disputes, and disputes involving unfair competition, fraud, and other business torts. In large part, Karine’s success lies in her integrity, diligence, and ability to bring people together.
Outside of the office, Karine is committed to improving the academic and social outcomes for students in her community. With roots as a credentialed public school teacher, Karine helped create the Pasadena Bar Association’s Mentorship Committee, which connects law students with seasoned attorneys. In addition, she regularly volunteers as an attorney proctor for the Los Angeles Superior Court’s Teen Court Program, which focuses on the rehabilitation of juvenile offenders.
Karine earned her law degree from USC Gould School of Law and presently serves as the Chair of the Los Angeles Chapter of the USC Gould Alumni Committee. While in law school, Karine was a Senior Executive Editor of USC’s Business Law Advisor, which is a student-run publication focused on advisory articles relevant to the intersection of business and law. She also served as a judicial extern to the Honorable Ronald S.W. Lew of the United States District Court.
About John De La Merced
John R. De La Merced is an attorney at Stubbs Alderton & Markiles, LLP and is a member of the firm’s Business Litigation group, representing clients in commercial, intellectual property, and real estate disputes in federal court, state court, and arbitration. His experience encompasses all aspects of the litigation process, including managing client matters, drafting operative pleadings and responses, law and motion practice, discovery, mediation, client counseling, and assisting in arbitration and trial.
Since joining the firm, John has served as co-trial counsel in various arbitration and court proceedings and has been instrumental in securing favorable results on behalf of the firm and its clients. Understanding that litigation is a team effort, John prides himself in ensuring that clients appreciate how the facts of their case intertwine with the relevant legal issues. John’s strong attention to detail and thoughtfulness in analyzing the law provide his clients with the confidence of knowing that they have an advocate in their corner who is truly looking out for their interests.
Prior to joining the firm, John was an associate at a large international law firm where he represented clients in complex trust and estate litigation and commercial litigation matters.
An active member of the community, John is the Chair of the Board and Immediate Past President of the Philippine American Bar Association, the oldest and largest local association of Filipino-American lawyers in the United States, a member of the UCLA School of Law Alumni Association Board of Directors, and the alternate regional governor for the Central California region for the National Filipino American Lawyers Association. Previously, John served as a member of the Asian Pacific American Bar Association of Los Angeles County Board of Governors in 2018 and on the St. Thomas More Society of Los Angeles Advisory Committee from 2016 to 2018. John also mentors current and future law students, as well as junior attorneys in the Southern California area.
About Neil Elan
Neil Elan is an Associate in the Business Litigation Practice group. Neil’s civil litigation practice focuses on all areas of business and commercial litigation, with a particular emphasis on business dissolution, buy-sell agreements, prosecution and defense of breach of contract and promissory note actions, business torts, unfair business practices, fraud, and Anti-SLAPP. In his civil litigation practice, Neil represents real estate developers, limited liability companies, closely held corporations, financial institutions, entertainment producers, commercial landlords and business owners.
On occasion, Neil also handles various civil and probate family-law cross-over matters, including those related to elder abuse and palimony actions.
Neil understands that each case is more than just a file–it is a story with moving parts, complicated personalities, and rapid needs. He strives to protect the fast-moving, cutting-edge business and interest needs of his clients and is committed to finding creative and effective solutions. He understands that litigation is not for the faint of heart and prides himself in ensuring that the client’s legal—and business—needs are well protected.
About Super Lawyers
Super Lawyers, a Thomson Reuters business, is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a patented multiphase process that includes a statewide survey of lawyers, an independent research evaluation of candidates and peer reviews by practice area. The result is a credible, comprehensive and diverse listing of exceptional attorneys. The Super Lawyers lists are published nationwide in Super Lawyers Magazines and in leading city and regional magazines and newspapers across the country. Super Lawyers Magazines also feature editorial profiles of attorneys who embody excellence in the practice of law. For more information about Super Lawyers, visit SuperLawyers.com
About Stubbs Alderton & Markiles, LLP
Stubbs Alderton & Markiles, LLP is a business law firm with robust corporate, public securities, mergers and acquisitions, entertainment, intellectual property, brand protection and business litigation practice groups focusing on the representation of, among others, venture backed emerging growth companies, middle market public companies, large technology companies, entertainment and digital media companies, investors, venture capital funds, investment bankers and underwriters. The firm’s clients represent the full spectrum of Southern California business with a concentration in the technology, entertainment, videogame, apparel and medical device sectors. Our mission is to provide technically excellent legal services in a consistent, highly responsive and service-oriented manner with an entrepreneurial and practical business perspective. These principles are the hallmarks of our Firm. For more information on Stubbs Alderton & Markiles, visit www.stubbsalderton.com