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(Part I) Sticky Situations & Solutions: Morris the Manufacturer

breach of contract

Business deals go bad through a number of ways. Oftentimes, things can be worked out before, during or after a problem through proper communication, contract drafting or negotiation, but sometimes litigation is unavoidable. This article will explore a “hot mess” of different issues, solutions, tactics and legal implications.

Disclaimer: The following information does NOT constitute legal advice and is only for general educational purposes. Each situation is different and specific legal issues usually require additional research and investigation, so do not rely on this article to address a particular legal issue; use it as a starting point to gain a general understanding.

Dramatis Personae

Able Attorney: Morris’s New York Attorney. He is hardworking, not quite schlepy, but overworked, yet diligent and kind. Even though Morris is not loaded, Able wants to do a good job for him and get him a square settlement or resolution to Morris’s business issue with Acme LLC and Crafty Carl.

Acme LLC: A limited liability company, formed and registered in Huntington (Long Island), New York, to an address, which is nothing more than a mailbox. Carl Crafty is its sole Member and formed it to protect himself against personal liability in case something in his business dealings fail. Acme engages in whatever businesses and schemes Carl can concoct; some are successful, others … not so much. Whatever money Acme makes, Carl withdraws almost immediately, and Acme LLC only has around $287 in the bank at the time of the lawsuit.

Carl Crafty: A businessman who lives in Connecticut, and has a separate office in Connecticut at 1313 Mockingbird Lane, where he manages his varied enterprises, and virtually never visits New York. He is President of Acme LLC. Carl has no personal business in New York, but through Acme LLC, did sign The Contract (as “Carl Crafty, President of Acme LLC,”), with Morris’s company. Carl, is likable, and has big dreams but often lacks follow-through and can be a bit flakey. Nevertheless, he is very persuasive and charismatic and excellent at negotiating deals with discounts or accommodations.

Morris the Manufacturer: Morris owns a factory that has been in his family for several generations, on Long Island, New York. It is a small but versatile industrial plant, being able to re-tool quickly for different products, albeit at substantial cost, which is negotiated into the price with his customers. Although, somewhat higher priced than his rivals, Morris’s customer service and quality are unrivaled and he has created a valuable niche business. Nevertheless, despite his prices, he operates close to margin, and nonpaying customers or significant problems pose a threat to his company’s viability.

The Contract: Carl and Morris recently struck a deal. At the time of the contract signing, Morris’s factory was set-up to manufacture blank computer DVDs (remember those?) for data storage, but Carl has convinced Morris to retool and manufacture “thumb” flash drive storage devices. The contract lists the contact address of Acme LLC as c/o Craft Carl Enterprises, located at Carl’s office address in Connecticut.

As part of the contract, Morris had to spend $100,000 of his own money upfront to retool to produce the thumb drives, but also estimates that if he needs to retool back to DVDs, it will cost another $50,000. Previously, Morris made about $1 per unit (net over normal every day expenses) manufactured and sold. In the last three years, Morris sold an average of about 100,000 units, therefore, clearing about $100,000 in net revenue per year.[1]

However, now Morris expects to make $2 per unit net over normal expenses (not including the retooling cost). Also, Carl, has promised a minimum order double what Morris normally receives, meaning 200,000 units at $2 per unit, or $400,000 in revenue. So, given the $100,000 it costs to retool, for the next year, that’s $300,00 profit for lucky Morris! This is considerably more than the $100,000 profit Morris was used to making; $200,000 more, in fact.

Act 1: A Villain Uncloaked (!)

Carl and Morris ink the Contract on January 2, 2015, Happy New Year! Morris tells Carl it will take him until April 30, 2015 to retool, but this is not written into the contract. Carl tells Morris he needs it done by March 28, 2015 or he will lose his orders and the whole deal will fall through. Morris assures him through best expedited efforts he will get it done by then or nearly around then and Carl shouldn’t worry. However, none of this written down in the contract; it is only said in phone calls. The only thing written down is Carl’s promise to order 200,000 flash drives by December 31, 2015, for a cost of $2 a piece. There are no provisions for liquidated damages, and there is no personal guaranty by Carl.

Morris is making his best efforts but by March 17, 2015, it looks hopeless that he will meet his deadline. In order to get it done faster, Morris spends $150,000 ($50,000 more than the original $100,000 he intended). Morris decides he either will “eat” the loss or renegotiate with Carl at the end of the year to compensate him, but Morris is most concerned with his customer service and will worry about the money later, despite operating close to margin. After all, he has a reputation to maintain.

In the interim, Carl Crafty is getting frustrated with Morris. He is worried Morris won’t make the deadline and he will lose the deal. Also, Carl’s friend, Angie Angle says she knows a manufacturer, tooled up and ready to go, that will do it for half the price. Carl knows he has a written agreement with Morris, but Angie calls him every day saying he doesn’t owe Morris anything, that Morris is a loser and that Carl should do what’s in Carl's best interest. The twin pressure of not being sure if Morris will be able to make the deadline and the easy money of doubling his own profits is too much for Carl to resist, especially with Angie needling him constantly and dangling this juicy deal in front of him. He goes with Angie’s connection, signing an agreement with them on March 24, 2015, and paying Angie a finder’s fee, thanking and crediting Angie for persuading him to switch over.

Unbeknownst to Carl, Morris completed his retooling on March 23, 2015 and was ready to go and manufacture whatever Carl needed to make his first shipments, on time and in the quantities needed by Carl. Carl “regretfully” informs Morris he had to break the contract because Morris looked like he would not finish on time. Morris has now sunk $150,000 into making thumb drives, and cannot get any buyers for them, so he will need to switch back to DVDs at a cost of $50,000. This is $200,000 in loses for Morris and he likely only will make $50,000 selling DVDs for the remainder of 2015, so he “lost” $50,000 of his normal revenue.

Immediately, Morris hires Able Attorney and sues both Acme LLC and Crafty Carl for breach of contract, in a State Supreme Court located in Long Island. Incidentally, the top court in New York is not “Supreme” but is the “Court of Appeals”; the next lowest court is the Appellate Division Court (generally four districts) and then the “bottom” court is the “Supreme Court” although technically there are even lower courts for more minor or other matters.[2] Anyway, Able Attorney has a process server deliver the Summons and Complaint to Crafty Carl’s office in Connecticut (as specified in the “Contract”) handing it to Rita Receptionist, who is described on the “Affidavit of Service” as a 5’6” blonde, 120lbs, 30ish in age, who works there. Further this Affidavit also states the Summons and Complaint were properly mailed to Carl Crafty at his business address.

Carl Crafty, through his own defense attorney, thereafter makes a “Motion to Dismiss” (i.e. requesting a court order throwing out Morris’s lawsuit). Carl’s motion argues: (1) the service against him, personally, and also against Acme LLC, were defective because it never was handed to Carl personally; he just “happened” to find it on the front desk of his office (i.e. the implication being that Rita, whoever she is, never handed it to him … or the process server lied and left it on a desk, never handing it to anyone) and (2) New York lacks the “minimum contacts” necessary to haul him (personally) into court (3) Carl, personally, is an improper party because he was not a party to the transaction complained of, i.e. he was merely an officer of the company, Acme LLC, that is the actual party to the Contract and (4) that Morris breached the contract first by giving every indication he could not perform by March 28th to Carl’s satisfaction.

Act 2: Slippery Service

Scene 1: The Summons & Complaint

In New York State, in order to start a lawsuit, a “Summons and Complaint” must filed with the clerk of the court in the county where the action will be brought.[3] A “Summons” is the paper that tells a Defendant they are being sued and asserts the power of the court to hear and determine the case.[4] A “Complaint” is the document that sets forth Plaintiff’s (the person suing) claims against Defendant (the person being sued), i.e. how has Defendant wronged Plaintiff and what Plaintiff wants (usually monetary compensation, but sometimes “specific performance” like forcing the Defendant to do something).[5]

In addition, the lawsuit must be “served” (i.e. delivered in a manner speicified by law) to the Defendant by one of a number of ways; however, the relevant one here is by “delivering the summons within the state to a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to be served and by either mailing the summons to the person to be served at his or her last known residence or by mailing the summons by first class mail to the person to be served at his or her actual place of business in an envelope bearing the legend ‘personal and confidential’ ” (note: and without any indication of being sent by a lawyer).[6] In plain English, a disintereted party, like a hired "process server" needs to deliver the legal papers to the person being sued, at that person's home or office address, and follow-up with a mailing.

Ok, here, we have the classic “I say, you say”: the processer server swore in their Affidavit of Service that he handed the legal papers to an employee (presumably of the Defendant(s)). However, Defendant Crafty says that he found the papers on a desk in his office, but never was handed the papers personally. So, what’s the problem? The Defendant got the papers, right? Not so fast. In New York, it’s not necessarily enough that the person received the service; if the service was performed poorly the court might nullify it - for example, if the process server handed the legal papers to the wrong person, but the Defendant just happened to receive it anyway.[7] The reason for this seemingly bizarre position is to discourage sloppy or careless service[8] (of which any litigating attorney can tell you plenty of stories).

Scene 2: The Traverse Hearing

Typically, in such a situation, Defendant will ask that the court dismiss the service (and therefore the lawsuit) entirely, or at the very least order a "Traverse Hearing" (a court hearing to determine who is telling the truth and/or if service was proper).[9] However, the problem for the Defendant is that as long as the process server swears, in an Affidavit of Service, that the papers were served properly, the court will assume it’s true.[10] The only way to counter this is for the Defendant to submit a sworn denial.[11] At that point, Plaintiff (the party suing) has the burden of proving, by a fair preponderance of evidence, that service was proper.[12]

So, the process server swears he delivered it properly, Carl swears he never properly received it (remember Carl “found” it on his receptionist’s desk but he says it wasn’t handed to him), and so now a judge at a Traverse Hearing has to decide who is telling the truth, right? Not necessarily. Sure, Defendant Crafty’s motion argues that the Affidavit of Service is rebutted and the Plaintiff must "establish jurisdiction of the court to hear the case" (i.e. prove Defendant was served properly with the Summons and Complaint) by a preponderance of the evidence at a Traverse Hearing.[13] However, Able Attorney, being as able as he is, will write in his Opposition papers, that the mere sworn denial of receipt of the copy of the Summons and Complaint, without further probative facts, is insufficient to overcome the presumption of delivery which attaches to otherwise proper service.[14] Again, in plain English, the Defendant has to raise serious questions of fact, not just say they didn't receive it.

So for instance, in one case, a Traverse Hearing was denied to a doctor who was served a Summons and Complaint through a proper authorized person, but at the wrong department of the same hospital, given that the doctor later actually received the papers from that authorized person; his sworn denial of service raised no probative facts of whether he was served properly.[15] If the judge agrees with Able Attorney, no Traverse Hearing will be necessary, and the judge will deny Defendant Crafty’s motion and the case will proceed.

And, here, Carl Crafty made a tactical error by not calling into question “probative facts” of the server’s delivery: for instance, whether Rita really actually worked for Carl or … say … maybe she really worked for the company down the hall and, as a courtesy, she just happened to leave it on Carl's receptionist’s desk (although whatever Carl argues must be true; if Rita truly works for him, Carl better not lie or he will have real issues). However, here, all Carl did was say he didn’t receive it, which often is not enough.

So, let’s say the judge rules for poor ole’ Morris. Well, a judge had to decide the issue anyway, so what was the big deal about avoiding the dreaded Traverse Hearing, anyway? Well, here the issue was decided as a “matter of law” (i.e. dueling by attorney - which some people consider the least humane form of warfare). If the issue went to a Traverse Hearing the process server would be called to the court to testify (at additional expense to Plaintiff, by the way) and the situation would be decided on a “matter of fact” (i.e. was the process server telling the truth? is he credible? is he honest, but maybe just made a mistake?). Even if Plaintiff loses the attorney duel, Plaintiff still could get another bite at the apple, through that Traverse Hearing. Then again, the judge outright just could rule for the Defendant as a matter of law, dismissing the service (and the case), either temporarily or permanently, depending on the judge’s interpretation of the situation.

Scene 3: The Person vs. the President

And, what about Acme, LLC? Remember it? In theory, it has a separate identity from Carl, even though Carl is the only shareholder and is the President. How does it get served? Well, there are a number of ways to do that, but because Carl Crafty is President of Acme, he most likely is authorized to receive service on behalf of it.[16] So, if the service to Carl is good, it is good in two ways: (1) against Carl personally and (2) and against him as President of Acme, LLC and therefore it is good against Acme.

But wait a minute? Wasn’t Rita Receptionist served, not Carl directly? Yah, but in one case, service to a Vice President’s secretary was upheld as service to the V.P., i.e. the Veep isn’t expected to come forth from his hall of power to receive the service, as long as his assistant reasonably could be expected to give it to him.[17] If Rita really works for Carl and Rita really was served, and Carl is the President of Acme, well, sorry Acme, “you’ve been served!”

Scene 4: Conclusion

So, who will win for the issue of service? No guarantees. The sad truth is you as a client or attorney virtually have no control over process servers and their companies. The only good news is that often you can re-serve the person properly (i.e. the faulty service will be dismissed but not “with prejudice” meaning that in the future Plaintiff can re-serve Defendant). A dismissed service usually becomes a problem only when a Plaintiff and/or their attorney waited too long and served the Defendant right before the Statute of Limitations took effect (most lawsuits have a time limit to begin them, known as the Statute of Limitations: for instance, in New York, the SOL for a breach of contract is typically six years).[18] So, whether you are the client or the client’s attorney, please do both of yourselves a favor, and don’t wait until the last minute to file and serve the lawsuit. Leave yourself proper time to deal with it. Most folks don’t like dealing with unpleasant matters, but they create more issues for themselves by putting it off. Take care of the issue early.

For Act 3 and other other scintillating issues related to this case, tune in to a future episode of Sticky Situations…


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[1] I have not yet researched how much DVD manufacturers make per DVD, but for simplicity, let’s assume it’s $1.

[6] NY CPLR, §308; see also §§302 and 313 which apply §308 to out of state process.

[7] McDonald v. Ames Supply Co., 22 N.Y.2d 111, 114-115 (1968) (Numerous authorities hold that personal delivery of a summons to the wrong person does not constitute valid personal service even though the summons shortly comes into the possession of the party to be served).

[11] Frankel v. Schilling, 149 AD2d 657 (2nd Dept. 1989) (“It is well settled, however, that where there is a sworn denial of service by the defendant, the affidavit of service is rebutted and the plaintiff must establish jurisdiction by a preponderance of the evidence at a hearing.”).

[13] Anton v. Amato, 101 AD2d 819; DeZego v. Bruhn, 99 AD2d 823 (N.Y. App. Div. (1984)), aff'd 67 NY2d 875 (1986) (Defendant claimed that they found service on desk and disputed properly receiving it, and court agreed).

[16] Port Chester Elec. Co. v. Ronbed Corp., 28 AD2d 1008 (1967) (service of a single summons on an officer of a corporation, who is also an individual defendant, constitutes proper service on both the corporation and the individual defendant).


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