The Nuts and Bolts of Crafting a Derivative Case

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by Tara J. Myslinski and Stephanie R. Parker

The Profession

Filing a new complaint?  If your client is part of a for-profit corporate entity and the dispute concerns that entity, there is a good chance that you are wondering whether some or all of your client’s potential claims are derivative or direct claims.  There are plenty of ways to get tripped up in this context; it is wise to think early about all of the possible pitfalls in such a case and understand the road ahead.

In this article we discuss the steps an attorney facing this issue must take, including understanding the nature of your client’s entity at the outset of a case, determining whether your client has direct or derivative claims, and following the unique procedural and substantive rules applicable to derivative claims.

Understand the Nature of Your Client’s Entity and its Place of Formation.

The law of the state of the entity’s incorporation or registration will dictate substantive issues of law for claims concerning that entity.  Procedural rules for the forum will govern procedural issues.

Issues of substantive law include whether claims are derivative or direct and whether a plaintiff has standing to pursue derivative claims against the entity.  See Cannonball Fund, Ltd. v. Dutchess Capital Mgmt., LLC, 84 Mass. App. Ct. 75, 93 (2013) (quoting Harrison v. NetCentric Corp., 433 Mass. 465, 471 (2001)).  The differences among the states on derivative suits can be substantial; for example, whereas under Massachusetts law a shareholder is required to make demand on directors in every case alleging derivative claims on behalf of a corporation, see G.L. c. 156D, § 7.42, a suit on behalf of a Delaware corporation may still allege futility of such demand.  See Johnston v. Box, 453 Mass. 569, 578 & n. 15 (2009); Del. Ct. Ch. R. 23.1; see also 6 Del. C. §§ 18-1001 & 18-1002 (allowing any LLC member to bring derivative action).

In addition to ascertaining the state of your entity’s formation, study the entity’s governing documents for specific provisions that may apply to derivative suits.  See, e.g., G.L. c. 156C, § 56.

Determine Whether Your Client has Direct or Derivative Claims, or Both.

In your complaint, you must specify whether each claim is brought directly by your client as an individual or derivatively by your client on behalf of the entity.  This distinction is important because, as discussed below, you must comply with special procedural requirements for any derivative claims you assert.

In general, a derivative claim asserts a wrong done to the corporation, as opposed to any particular shareholder.  As such, a derivative claim belongs to the corporation and any damages recovered on a derivative claim will go to the corporation.  Examples of derivative claims include:

Wasting, mismanaging or misappropriating corporate assets, resulting in a general diminution of the value of corporate stock, assets, or cash on hand; see, e.g., Rubin v. Murray, 79 Mass. App. Ct. 64, 80 (2011);

A direct claim, in contrast, alleges breach of a duty owed to the plaintiff as a shareholder, investor, or creditor of a corporation and seeks to remedy some harm that is distinct from that suffered by shareholders generally.   IBEW, 476 Mass. at 558.  As such, damages recovered on a direct claim will go directly to the plaintiff.  Examples of direct claims include:

In certain contexts, particularly cases involving a close corporation, the line separating direct and derivative claims can be blurred.  In those contexts, good pleading practice may require alleging certain claims both individually and derivatively.

Follow the Procedural Prerequisites and Substantive Rules that Apply Uniquely to Derivative Suits.

1. As a Threshold Matter, Ensure Your Plaintiff has Standing.

Massachusetts law on a plaintiff’s standing to bring a derivative claim varies somewhat depending on the type of entity at issue.  See G.L c. 156C, §§ 56-57 (LLCs); G.L c. 156D, §§ 7.40-7.47 (corporations); G.L. c. 109, §§ 56-59 (limited partnerships).

With respect to any entity in Massachusetts, however, to have standing to bring a derivative claim, a plaintiff must have been a shareholder (or member or partner) at the time of the alleged misconduct and must continue to be a shareholder throughout the entirety of the derivative litigation.  G.L. c. 156D, § 7.41; see Billings v. GTFM, LLC, 449 Mass. 281, 289-96 (2007) (involuntary loss of ownership interest during pendency of litigation deprived plaintiff of standing to press derivative claims); see also Kolancian v. Snowden, 532 F. Supp. 2d 260, 262-263 (D. Mass. 2008) (“a narrow exception to this rule arises where the [event causing the loss of the plaintiff’s ownership interest] itself is the subject of a claim of fraud. . . [t]o establish that a merger was fraudulent, a plaintiff must plead with particularity that it was undertaken ‘merely to eliminate derivative claims’”) (quotation omitted).  If your client is concerned that, during the pendency of the case, the defendant may eliminate your client’s interest, preliminary injunctive relief to halt that transaction may be necessary.  See IBEW, 476 Mass. at 564 n.15.

If your client controls the entity by owning a majority of its shares or serving as its manager or president, your client may be able to bring a direct suit against a wrongdoer.  But if the company is owned 50/50 and your client is one of the 50% owners seeking to sue the other 50% owner in the company’s name, the analysis is different.  Although Massachusetts has yet to issue a clear decision on this issue, other jurisdictions uniformly hold that a 50% owner may not bring suit against another 50% owner in the company’s name without following derivative procedures.  See, e.g., Swart v. Pawar, No. 1:14-cv-10, ECF #162 (N.D.W.Va. Nov. 19, 2015); Barry v. Curtin, 993 F. Supp. 2d 347, 352-53 (E.D.N.Y. 2014); Crouse v. Mineo, 189 N.C. App. 232, 238-39 (2008).

If the entity is a limited liability company, G.L. c. 156C, § 56 imposes additional constraints on a plaintiff’s standing.  It requires that a plaintiff alleging a derivative claim be either: (1) a member authorized to sue by the vote of members owning more than 50% of the unreturned contributions to the LLC; or (2) a manager of the LLC authorized to sue by a vote of a majority of the managers.  In either case, the vote of any member or manager who has an interest in the outcome of the suit that is adverse to the LLC’s interest must be excluded.  Given this statutory rigor, unless the LLC’s operating documents state otherwise, a minority member, or single manager in a multi-manager LLC, would have to secure a favorable vote to obtain a non-interested majority in order to have standing to sue on behalf of the LLC.  Compare G.L. c. 156D, § 7.41 (any shareholder holding stock at the time of wrongdoing may commence a derivative proceeding so long as they “fairly and adequately” represent the interests of the corporation).

2. Comply with Procedural Rules for Derivative Claims in Massachusetts State or Federal Court.

State and federal rules of civil procedure impose special pleading requirements on derivative claims.  Specifically, in addition to any substantive law governed by the entity’s state of formation, Massachusetts Rule of Civil Procedure 23.1 requires that the derivative complaint:

  • Be verified;
  • Allege that the plaintiff was a shareholder or member at the time of the transaction at issue, or that the plaintiff’s share or membership thereafter devolved on him by operation of law from someone who was a shareholder or member at the time; and
  • Allege with particularity the efforts made by the plaintiff to obtain the action he or she desires from the directors or comparable authority and the reasons for his failure to obtain the action.

The requirements of Federal Rule of Civil Procedure 23.1 are similar, but add that the plaintiff must plead that “the action is not a collusive one to confer jurisdiction that the court would otherwise lack.”  The requirements of the Massachusetts Rule can be waived if a defendant proceeds to trial without addressing these issues, see Diamond v. Pappathanasi, 78 Mass. App. Ct. 77, 89 (2010) (involving a general partnership), but there is no analogous case law concerning the Federal Rule.

You also must name the company as a nominal defendant in any derivative action when filing suit in Massachusetts state or federal court, regardless of the state of formation of the entity.  See Fusco v. Rocky Mountain I Investments Ltd. P’ship, 42 Mass. App. Ct. 441, 447 (1997); Gabriel v. Preble, 396 F.3d 10, 14-15 (1st Cir. 2005).

3. Properly Apply Substantive Law on Demand Requirements Prior to Filing a Derivative Suit.

The most frequently litigated issue of substantive law in derivative cases is demand/demand futility.  Massachusetts substantive law imposes hurdles additional to the procedural requirement of Mass. R. Civ. P. 23.1.

Corporations

A plaintiff intending to bring a derivative claim on behalf of a Massachusetts corporation must first demand that the corporation pursue the claim.  G.L. c. 156D, § 7.42.  “The rationale behind the demand requirement is that, as a basic principle of corporate governance, the board of directors or majority of shareholders should set the corporation’s business policy, including the decision whether to pursue a lawsuit.”  Harhen v. Brown, 431 Mass. 838, 844 (2010).  The procedure for making demand is detailed and is set forth in G.L. c. 156D, §§ 7.40, et seq.  Massachusetts is a universal demand state, which means that demand must be made even if the plaintiff believes it would be futile due to a board’s interest or lack of independence.  See Johnston, 453 Mass. at 578 n.15.

A plaintiff may only initiate a derivative action once the corporation has either (i) refused a demand to bring suit; or (ii) ignored the demand for at least 90 days (or 120 days if the decision regarding whether to pursue the claims is submitted to the shareholders for a vote).  A derivative plaintiff may file suit before expiration of the waiting period if the plaintiff can show that irreparable injury would result by waiting for the period to expire.  G.L. c. 156D, § 7.42.

If your client’s demand is refused and she disagrees with the corporation’s decision, you should carefully study G.L. c. 156D, § 7.44 and be prepared to challenge the refusal in your complaint and in your opposition to the inevitable motion to dismiss.  In this context, the “business judgment rule” precludes the suit if the corporation can show that it determined in good faith and after reasonable inquiry that the suit would not be in the best interests of the corporation.  G.L. c. 156D, § 7.44(a).  Although challenging a director vote to refuse a demand is difficult because of the protections of the business judgment rule, Judge Kaplan of the Superior Court’s Business Litigation Session recently denied a motion to dismiss derivative claims in just that context.  See Brining v. Donovan, No. 1684-CV-3422-BLS1 (Mass. Super. Ct. Sept. 14, 2017).  The court questioned the directors’ independence given their close ties with the alleged wrongdoer and also found reasonable doubt as to whether the board conducted its investigation in good faith because its conclusion in the face of glaring financial improprieties was “so different from what an independent Board would be expected to do.”  Id.

Limited Liability Companies

In contrast to corporation derivative suits, the futility exception is still alive in the context of LLC derivative suits, but must be well-pleaded to satisfy Mass. R. Civ. P. 23.1.  See Billings, 449 Mass. at 289-90 n.19; see also Harhen, 431 Mass. at 844 (futility exception is pled by alleging that “a majority of [members] are alleged to have participated in wrongdoing, or are otherwise interested” and adopting definition of “interested” director as stated in ALI’s Principles of Corporate Governance, §§ 1.15 & 1.23); Diamond, 78 Mass. App. Ct. at 89 (“to satisfy rule 23.1, a complaint in a derivative action must plead with particularity either the presuit demand the plaintiff has made or the reasons why making such demand would have been futile”).

Partnership

Limited partners alleging damage to the partnership must make demand upon the general partner or allege the reasons that doing so would be futile.  G.L. c. 109, § 58.

4. Follow Procedural and Substantive Rules at the Conclusion of a Derivative Case.

A derivative proceeding filed in Massachusetts may not be discontinued or settled without court approval.  Mass. R. Civ. P. 23.1; G.L. c. 156D, § 7.45.

As discussed above, damages recovered on a derivative claim will go to the entity.  The Massachusetts Appeals Court recently noted that there may be some irony, particularly in the context of a close corporation, if this rule results in the wrongdoer benefiting from a share in the recovery.  See Beninati v. Borghi, 90 Mass. App. Ct. 566, 567, n.11 (2016).  This irony can be mitigated by the trial judge, who is “free to take the equities into account in fashioning any remedy under c. 93A.”  Id.  In an effort to remedy that type of unfair result, on remand to the Business Litigation Session in Beninati, Judge Sanders recently reduced a G.L. c. 93A damages award by a wrongdoer’s percentage of ownership interest in the company and directed that the company “shall not permit” any distribution of the damages to the wrongdoer.  Beninati v. Borghi, Nos. 1284-cv-1985-BLS2, 1384-cv-1772-BLS2 (Mass. Super. Ct. June 30, 2017).  An appeal of that decision is currently pending.

Massachusetts law authorizes the court to award attorneys’ fees and costs to the plaintiff upon conclusion of a case if the court finds that the proceeding has resulted in a “substantial benefit to the corporation.”  G.L. c. 156D, § 7.46; see also Beninati , 90 Mass. App. Ct. at 568 (affirming denial of fee application in part because time records failed to make that distinction).  The court may award the defendant its fees and costs if the court finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose.  G.L. c. 156C, § 57 contains parallel fee-shifting provisions for derivative claims in the Massachusetts LLC context.  Because Massachusetts law is not clear on the issue of whether an award of attorneys’ fees in derivative litigation is procedural or substantive, be sure to also understand the law of the entity’s formation state on this issue at the outset of your case.

Tara J. Myslinski is a partner in the business litigation boutique O’Connor Carnathan & Mack LLC based in Burlington. She focuses her practice in complex commercial and corporate litigation, frequently involving small-business shareholder disputes, complex contractual disputes, trade secret and non-compete litigation, and internal pre-litigation investigations. 

Stephanie R. Parker is an associate in the business litigation boutique O’Connor, Carnathan & Mack LLC, based in Burlington, MA. Ms. Parker graduated from Northeastern University School of Law in May 2013. Prior to joining OCM, Ms. Parker worked as a judicial intern for The Honorable Patti B. Saris at the U.S. District Court for the District of Massachusetts. 

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A Signed Text Message Can Result in a Binding Real Estate Contract

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by Peter F. Carr, II

Practice Tips

The commonplace reliance upon and acceptance of text messaging in commercial dealings has forced courts to examine the legal implications of texting within the seminal rule that a contract concerning real estate shall not be enforced “[u]nless the promise, contract or agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or by some person thereunto by him lawfully authorized.” G.L. c. 259, § 1, Fourth. At the trial court level, courts have embraced the concept of “contract by text message” for real estate so long as additional key elements are established. One, the text message must either contain or incorporate by express reference all material terms of an agreement concerning land. Two, the text message must conclude with the signature of the “party to be charged” or its authorized agent. A formal signature or even a complete first and last name is not required. However, the sequencing is critical. The cases to date largely have turned on whether the name of the sender appears at the end of the text message to signify the authentication of its preceding substance. The text message is sufficiently signed and binding provided that it concludes with a “mark” to indicate that the sender adopts the message.

Recent cases from the Land Court bear out these core concepts. In a commercial real estate dispute that hinged on text message exchanges between the parties’ brokers, a judge denied a special motion to dismiss a lis pendens that was issued in favor of the plaintiff buyer seeking to enforce a sales contract. St. John’s Holdings LLC v. Two Electronics, LLC, 24 LCR 190, 16 MISC 000090 (RBF), 2016 WL 1460477 (Mass. Land Ct. April 14, 2016), aff’d, 92 Mass. App. Ct. 1114 (2017). Although the defendant seller ultimately prevailed at trial, the Court steadfastly held that the text message of the seller’s broker satisfied the signed writing requirement of the Statute of Frauds. The text message incorporated by reference the final letter of intent for the purchase and sale of the property following ongoing negotiations between the parties. The contract was deemed signed and accepted by the seller when the seller’s broker concluded the text message with the inclusion of his first name. The Court held, “In the context of these exchanges between the parties, the court infers that the text message sent by [Tim, the seller’s broker] was intended to be authenticated by his deliberate choice to type his name at the conclusion of his text message.”  In another case, the Court similarly found compliance with the Statute of Frauds because, “[t] he broker’s writing her first name ‘Laurie’ at the end of the text message constitutes a signature for the purpose of the Statute of Frauds.” However, the Court ruled that the text message did not contain or incorporate sufficient material terms to form a contract. Fiore v. Lindsey, No. 17 MISC 000533 (RBF), 2017 WL 5969332 (Mass. Land Ct. Nov. 29, 2017). In contrast and underscoring the critical nature of the sequencing, text exchanges between brokers did not satisfy the Statute of Frauds where none of the operative texts concluded with the names of the brokers, even though those names appeared in the bodies of the messages. Donius v. Milligan, 24 LCR 440, 443, No. 16 MISC 00277 (HPS), 2016 WL 3926577 (Mass. Land Court July 25, 2016). The Court denied relief because the “text messages here are not signed by either the proposed buyer or seller, nor are they signed by the agents.” In addition, the Court ruled that the substance of the text messages evidenced mere negotiations.

Although no appellate court has yet addressed squarely text messages in the context of the Statute of Frauds, the prior appellate decisions affirming the binding nature of informal email exchanges coupled with the expanding usage of electronic communications arguably signal that reviewing courts are likely to embrace the theories established at the trial court level. Accordingly, to avoid being bound to an agreement involving land that may never have been intended, parties should insist upon more formal means of communicating with clear documentation, at least as negotiations proceed. A party involved in a transaction may be wise to limit or eliminate all text messaging with a counterparty during the course of negotiations, or to include written disclaimers to memorialize that text messages will not be accepted as part of a deal. At a minimum, parties must avoid a course of conduct which creates the presumption that a text message is sufficient to express offer and acceptance. Otherwise, as the judge observed in St. John’s Holdings, “a text message, all too familiar to most teenagers and their parents, can constitute a writing sufficient under the Statute of Frauds to create an enforceable contract for the sale of land.”

Peter F. Carr, II is a member of the litigation department of Eckert Seamans Cherin & Mellott, LLC, a regional law firm, practicing out of the Boston Office since joining the firm in 1995 after completing a clerkship with the Massachusetts Appeals Court assigned to former Chief Justice Joseph Warner. Peter’s daily practice covers a wide variety of business counselling and commercial litigation matters to include substantial trial experience. Peter served as trial and appellate counsel in the Land Court case of St. John’s Holdings referenced above.


Just the Right Size: Benefits (and Potential Pitfalls) of Limited Assistance Representation

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by Christopher T. Saccardi

Practice Tips

Every day in Massachusetts state courts, people take on the burden of representing themselves in civil cases. While there are a number of reasons for this, the principal factor is obvious: lawyers are expensive, and many individuals simply can’t afford them.

There are no easy solutions to this problem, but Limited Assistance Representation (LAR), which was introduced in Massachusetts in 2009 and has been expanding through the trial courts, can help. It allows litigants to retain counsel for an essential phase of litigation, or for a crucial hearing, at a cost that is much less than what an attorney might charge to represent the client for a full case. LAR also allows an attorney to offer pro bono services for a particular litigation event without having to commit to taking on an entire case.

While this article draws primarily on procedures and experience with LAR in Housing Court to introduce practitioners to LAR, highlight its benefits, and identify key issues and potential pitfalls, the rules are very similar in the other courts in which LAR is now available to civil litigants—the District Court, the Boston Municipal Court, Probate and Family Court, and the Superior Court.

Under LAR, attorneys are permitted to represent clients on a limited basis after registering with the appropriate court and watching a short video or attending a training on the mechanics of LAR. The duration of the representation can vary by agreement reached between counsel and client. Representations can be as short as a single hearing or discrete task, or they can cover a longer period of time, such as assisting through the completion of discovery or even preparing for and conducting a trial.

For example, common parts of a Housing Court case that are particularly conducive to LAR are: answering or drafting discovery requests; drafting and filing motions; appearing to argue a motion, such as a motion to vacate a default judgment or to issue an execution; conducting a mediation with a Housing Specialist; or trying a summary process (eviction) case.

The mechanics of appearing and withdrawing under LAR vary slightly from court to court, but generally follow the same basic parameters throughout the Commonwealth: attorney and client must sign an agreement that details the specific nature of the representation and the tasks and period of time to be included. The attorney will then complete a set of LAR appearance and withdrawal forms that can be obtained from the appropriate court (or online) and which must be signed by both the client and the attorney. The withdrawal is filed as soon as the representation ends; in the case of LAR for a discrete hearing, it is not unusual to file the limited appearance form at the beginning of the hearing and to file the withdrawal in open court immediately following the conclusion of the hearing.

While LAR can be a convenient tool for both attorney and client, it does present some unique challenges that are important for practitioners to keep in mind. Litigants can risk disjointed or incomplete counsel from an LAR attorney who focuses narrowly on the specific task at hand without considering the overall litigation strategy. Or, a client who engages an attorney only to draft a motion could be ill-served, even if the motion is excellent, if the LAR agreement does not provide for properly preparing the client to argue that motion. It is therefore important for both attorney and client to carefully consider the appropriate duration of the representation and the way in which the included tasks will be defined. A failure to do this can lead to awkward situations, as a judge will occasionally not allow the LAR withdrawal if he or she feels that an additional task should be completed by the attorney. For example, a judge will sometimes ask the LAR attorney to postpone the withdrawal after a hearing in order to receive a copy of the decision and explain it to the client.

Another challenge can result if it is unclear to opposing counsel when exactly an LAR attorney has entered and, more importantly, has exited the case. Not knowing whether the adverse party is represented or is pro se can hamper the ability of opposing counsel to negotiate a resolution or simply to communicate about procedural issues. Timely providing copies of the limited appearance and withdrawal to opposing counsel is therefore critically important.

Housing Court Standing Order 1-10, which governs LAR in the Housing Court, contains several requirements counsel must follow to help avoid those potential pitfalls. For example, the signature block of any document filed by an LAR attorney must indicate that it is filed under a LAR representation; a failure to do this could convert the engagement from limited to full representation. The Standing Order also requires opposing counsel to serve documents related to matters within the scope of the limited representation on both the LAR counsel and the party. Similar rules apply in other courts. See, e.g., BMC Standing Order 1-10, District Court Standing Order 1-11, Superior Court Standing Order 2-17, and a memo and FAQ regarding LAR in Probate and Family Court. The LAR page on the Massachusetts state website provides a good summary of the various LAR rules, along with links to FAQs, standing orders, and court forms.

In sum, LAR can be a valuable tool, especially in courts that serve a large population of unrepresented parties. It can be used on a pro bono basis or for paying clients, and can be a helpful way to provide assistance to a party with a critical piece of litigation at considerably lower cost than full representation. Judges are generally appreciative of LAR attorneys because they understand that often the alternative is no representation at all. So long as counsel give careful consideration to how they delineate the duration of the representation and are familiar with the applicable rules, LAR can be a useful part of any practice.

Chris Saccardi, formerly a litigation associate at Edwards Angell Palmer and Dodge, LLP, opened his own practice in 2010 in which he focuses exclusively on landlord-tenant law. He was named to the BBA’s Public Interest Leadership program in 2012-2013 and has served as Co-Chair of the BBA’s Solo and Small Firm Section.


How to Get an LLC into Federal Court: Tips for Pleading Diversity Jurisdiction Over Unincorporated Entities

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by Thomas Sutcliffe

Practice Tips

For federal diversity jurisdiction under 28 U.S.C. § 1332, a plaintiff, or removing defendant, must establish diversity of citizenship between the parties.  Typically, that means that all of the plaintiffs must be citizens of a different state than all of the defendants.  And a party wishing to get into federal court is required to plead diversity at the outset of litigation.

Pleading diversity, however, can be a challenge when the other party is an unincorporated entity.  A corporation’s citizenship is straightforward; it is considered to be a citizen of both the state of incorporation and the state in which its principal place of business is located.  The citizenship of other entities, such as LLCs and partnerships, is based upon the citizenship of each of its individual members or partners.  See generally Americold Realty Tr. v. Conagra Foods, Inc., 136 S. Ct. 1012 (2016).  A complaint or notice of removal, therefore, must say something about the citizenship of an unincorporated entity’s members.  Failure to do so can result, at the very least, in a show cause order, especially within the First Circuit, where judges have not hesitated to raise the issue sua sponte.  See e.g., N. Beacon 155 Assocs. LLC v. Mesirow Fin. Interim Mgmt. LLC, No. CV 15-11750-LTS, 2015 WL 13427609, at *1 (D. Mass. June 29, 2015) (finding that allegation in notice of removal that only pleaded state of organization and principal place of business of LLC parties insufficient); Fratus v. Vivint Solar Developer LLC, 1:16-CV-10517 (D. Mass June 8, 2016) (issuing show cause order sua sponte based on similar problem in plaintiff’s complaint); see also D.B. Zwirn Special Opportunities Fund, L.P. v. Mehrotra, 661 F.3d 124, 125 (1st Cir. 2011) (determining, sua sponte, that notice of removal failed to allege jurisdiction over LLC plaintiff).

Requiring a party to plead the citizenship of another party’s members results in something of a Catch-22.  The membership of an LLC or partnership is often not publically available information, meaning a party trying to access federal court may not be able to determine the citizenship of its adversary until discovery.  But parties typically cannot conduct discovery unless they can plead some basis for subject matter jurisdiction, leaving plaintiffs and removing defendants in a quandary.

The Pragmatic Approach Taken by Some Circuits

Some courts, outside the First Circuit, have started to address this dilemma by adopting a more pragmatic approach to pleading citizenship.  For example, in Carolina Cas. Ins. Co. v. Team Equip., Inc., 741 F.3d 1082 (9th Cir. 2014), the Ninth Circuit embraced the “sensible principle that, at [the pleading stage], a party should not be required to plead jurisdiction [against an LLC] affirmatively based on actual knowledge.”  Id. at 1087.  Instead, the court held, it is enough for a plaintiff “to allege simply that the defendants were diverse to it,” and it is permitted “to plead its allegations on the basis of information and belief.”  Id.  Meanwhile, if the unincorporated entity – which presumably knows the citizenship of its own members – has information to the contrary, it is free to provide it and the court can “reevaluate its jurisdiction if contrary information emerged later.”  Id.  Until then, the court reasoned, the unincorporated entity is not in a position to complain.

The Third Circuit reached a similar conclusion in Lincoln Ben. Life Co. v. AEI Life, LLC, 800 F.3d 99 (3d Cir. 2015).  In Lincoln, the court reasoned that “[d]epriving a party of a federal forum simply because it cannot identify all of the members of an unincorporated association is not a rational screening mechanism,” particularly given that “[t]he membership of an LLC is often not a matter of public record.”  Id. at 108.  As a result, the court forged a compromise aimed at “strik[ing] the appropriate balance between facilitating access to the courts and managing the burdens of discovery.”  Id.  Specifically, it held that it was enough for a plaintiff to “alleg[e] that none of the defendant association’s members are citizens of” the same state as the plaintiff.  Id. at 107.  Furthermore, plaintiffs were permitted to make that allegation on information and belief provided they “conduct[ed] a reasonable inquiry into the facts alleged,” such as by consulting publically available sources.  Id. at 108.  “If, after this inquiry,” the court held, “the plaintiff has no reason to believe that any of the association’s members share its state of citizenship, it may allege complete diversity in good faith.” Id.

The court in Lincoln went on to examine the plaintiff’s complaint and found that – when combined with the plaintiff’s opposition to the defendants’ motion to dismiss – its allegations were sufficient to plead diversity of citizenship.  Specifically, the court noted that the plaintiff had alleged that:

  1. The LLC defendants had some connection to states where the plaintiff was not a citizen;
  2. Plaintiff’s counsel had “conducted a reasonable inquiry to determine the membership of the LLC defendants but found nothing of value;” and
  3. Plaintiff’s counsel “found no connection between the LLC defendants” and plaintiff’s home state.

Id. at 110.

Based on these allegations, the court concluded that the plaintiff had “alleged complete diversity in good faith.” Id. at 111.

Applying Carolina and Lincoln in the First Circuit

Can the approach of Carolina and Lincoln be applied in the First Circuit?  Not exactly.  In D.B. Zwirn Special Opportunities Fund, L.P. v. Mehrotra, 661 F.3d 124 (1st Cir. 2011), the First Circuit held, in a decision that predates Lincoln, that citizenship cannot be pleaded in the negative; that is, it is not enough to allege that the plaintiff and defendants are not parties of the same state, as the parties in that case had done.  The problem, the court explained, was that even if a party was not a citizen of the same state as its adversary, that did not rule out the possibility that one of the parties was a stateless entity (such as a foreign corporation) in which case diversity jurisdiction would again be lacking.  Id. at 126-27.  As a result, the court required affirmative information regarding the citizenship of the plaintiff-LLC’s members.

But the Carolina/Lincoln approach still offers some guidance, and Massachusetts courts might be warming to it.  In BRT Mgmt. LLC v. Malden Storage, LLC, No. CV 17-10005-FDS, 2017 WL 2726689 (D. Mass. June 23, 2017), for example, the court issued a show cause order, and the plaintiff, citing Lincoln, argued that it had searched publically available records but had been unable to determine the citizenship of the LLC defendant.  Judge Saylor observed that the approach articulated in Lincoln conflicted somewhat with D.B. Zwirn, but he nonetheless concluded that Lincoln’s “basic reasoning is sound.”  Id. at *1.  He further held that, because BRT – like the plaintiff in Lincoln – had “consulted all available public information and alleged, in good faith, that there is complete diversity of citizenship,” it was entitled to take jurisdictional discovery.  Id.

BRT suggests then that providing some indication of good faith research might go a long way towards overcoming the seemingly high burden set by D.B. Zwirn. The decision in D.B. Zwirn itself signaled that the court may be open to this kind of a pragmatic approach. Indeed, it is noteworthy that, in D.B. Zwirn, the court ordered the plaintiff-LLC to provide information regarding its citizenship, not the defendant who had removed the case to federal court (and who bore the burden of establishing jurisdiction). That suggests that the First Circuit may, in the future, be open to permitting jurisdictional discovery, at least in those instances where the party seeking federal jurisdiction makes an adequate threshold showing.

Lessons to Be Learned

So what are the lessons that can be gleaned from the case law?  A few guidelines seem to emerge:

  1. First, a party seeking federal diversity jurisdiction involving an unincorporated entity should research publically available information to the fullest practical extent and describe those efforts in the complaint or notice of removal. Even if that research is inconclusive, it is helpful to establish good faith.
  2. Second, if the research reveals no contacts between the unincorporated party and the state of which the party seeking federal jurisdiction is a citizen, the complaint should say so. If there are some contacts, the complaint should explain (if possible) why those contacts are insufficient and/or explain why the unincorporated party’s connections to another state are more extensive. The party should also allege, if appropriate, on information and belief, that the parties are not citizens of the same state.
  3. Third, the party should try to allege the unincorporated party’s state of citizenship, even if it is only an educated guess. That will help avoid the kind of “negative” pleading the First Circuit rejected in D. B. Zwirn.  Failing that, the complaint should at least try to allege facts ruling out the possibility that the unincorporated party is a “stateless” actor, such as, for example, establishing that the entity is based in the United States (and therefore presumably a citizen of some state).

The rules for establishing diversity jurisdiction over unincorporated parties are at times byzantine and arguably “def[y] logic.”  Lincoln, 800 F.3d at 111 (all judges concurring).  But neither the Supreme Court nor Congress has shown any sign of changing those rules, and courts are quick to enforce them.  By putting a bit of extra time into alleging diversity jurisdiction over these entities, parties can save themselves considerable trouble in the future and ensure that they remain in the forum of their choosing.

Thomas Sutcliffe is an attorney at Prince Lobel Tye LLP. His practice focuses on complex commercial litigation.


The United States Court of International Trade

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by Hon. Gary S. Katzmann

Voice of the Judiciary

From October 27, 2004 until September 15, 2016, it was my great privilege to serve as an Associate Justice of the Massachusetts Appeals Court.  On September 16, 2016, after evaluation by the American Bar Association, nomination by President Obama, a hearing before the Senate Judiciary Committee, and confirmation by the United States Senate, I began service as a Judge on the United States Court of International Trade (CIT).  In the federal constellation, in contrast to other specialized courts, the CIT is an Article III court, with lifetime judicial appointment, equivalent to a United States District Court, and with full powers in law and equity.  The CIT judges can also sit by designation, upon assignment by the Chief Justice of the United States, on other Article IIII courts, that is, the District Courts and Courts of Appeals throughout the nation.

With the intense focus in recent years on the global marketplace, it is perhaps not surprising that there has been heightened interest in the work of the CIT — in particular, adjudication under domestic trade laws involving protection of U.S. businesses from unfair competition arising from unfair pricing by foreign companies and unfair subsidies to foreign companies by their governments.  Yet, it should be noted that from the founding of this nation, international trade has presented matters for adjudication in our federal courts.    The first case tried in the first court organized under the Constitution of the United States involved an importation dispute.  Eventually, such disputes were heard by the U.S. Customs Court.  The Customs Court Act of 1980 replaced that court with the CIT.  That Act broadened the power of the court, creating a comprehensive system for judicial review of civil actions arising out of import transactions and federal transactions affecting international trade.   This system is rooted in the mandate of Article I, Sec. 8 of the Constitution that “all Duties, Imposes and Excises shall be uniform throughout the United States.”  The geographic jurisdiction of the CIT, the only national Article III trial court, encompasses all of the United States.  The CIT has nine sitting judges, including the chief judge, who is a statutory member of the Judicial Conference of the United States, as well as senior judges. The CIT sits in the James L. Watson Courthouse in New York City,  although it is authorized to sit elsewhere, including in foreign nations.  While the Second Circuit sits across the street in Foley Square, the appeals from the final decisions of CIT go not to that court but to the Federal Circuit in Washington, D.C., and ultimately can reach the Supreme Court.

Since the geographical jurisdiction of the court extends throughout the United States, the judges of the court are assigned, as needed, to preside at trials at any place in the United States in the appropriate United States Courthouse.  When a judge of the court conducts a trial outside New York City, the clerk of the district court in that judicial district may act as clerk of the CIT for that case, including selecting and summoning the jury.

The CIT possesses limited subject matter jurisdiction.   It may hear only cases involving particular international trade and customs law questions.  For example, the CIT hears disputes involving determinations made by the U. S. International Trade Commission and the Department of Commerce’s International Trade Administration regarding anti-dumping and countervailing duties (imposed when a foreign producer sells a product in the United States at a price that is below that producer’s sales price in its home market),  protests filed with U.S. Customs and Border Protection regarding classification of goods and imposition of duties, decisions regarding Trade Adjustment Assistance by the U. S. Department of Labor or U.S. Department of Agriculture for workers and sectors injured by increased imports, and customs broker licensing.  An exception to the CIT’s jurisdiction arises under the 1994 North American Free Trade Agreement, whereby in cases involving antidumping and countervailing duties imposed on Canadian or Mexican merchandise, an interested party can request that the case be heard before a special ad hoc binational panel.

In addition to specified types of international trade cases, the CIT has residual, exclusive authority to decide any civil action against the United States and its agencies or officers that arises from any law pertaining to international trade.  Because the CIT possesses all powers in law and equity of, or as conferred by statutes on, a U.S. District Court, the CIT may grant any relief appropriate to the particular case before it, including, but not limited to, declaratory and monetary judgments, writes of mandamus, and preliminary or permanent injunctions.  The CIT also has exclusive subject matter jurisdiction of certain civil actions brought by the U.S. Government under the laws governing import transactions, as well as counterclaims, cross-claims and third party actions relating to cases pending in the Court.

A few examples:

Is a Dixon Ticonderoga pencil manufactured by an American company – such that Dixon Ticonderoga can challenge a Chinese manufacturer on the basis that it is dumping pencils on the American market – that is, at less than fair value to the detriment of American business?   The Chinese company said “no,” alleging that Dixon Ticonderoga is a Chinese manufacturer with no standing to sue under American laws.  See https://www.cit.uscourts.gov//SlipOpinions/Slip_op17/17-11.pdf

A surety company that issued bonds to multiple importers to duties imposed under the United States’ custom laws, on entries of the importers’ goods into the national commerce, challenges the U.S. Customs agency’s demands for payments on the bonds.  The surety alleges that defects in the bond forms void the bonds.  The U.S. Government, on behalf of Customs, opposes these contentions, and argues that the bonds are valid, and that sovereign immunity bars the surety’s defensive theory that its obligations are discharged because its surety rights have been impaired.  See https://www.cit.uscourts.gov//SlipOpinions/Slip_op17/17-103.pdf

Does the automatic stay in bankruptcy under the bankruptcy code stay a civil penalty action brought by the United States against the bankrupt party for alleged fraudulent representations made in the course of importing goods into the commerce of the country?

See https://www.cit.uscourts.gov//SlipOpinions/Slip_op17/17-104.pdf

How should food casings composed of both textile and plastic be classified under the Harmonized Tariff Schedule of the United States for determining what tariff rate should apply to their importation?  Millions of dollars hang in the balance.

See https://www.cit.uscourts.gov//SlipOpinions/Slip_op17/17-149.pdf

These are all questions that have come before more me during this past, inaugural year on the court.  We see the full panoply of complex matters – including administrative agency action, statutory interpretation, standing issues, contracts, insurance, sufficiency of evidence, and the intricacies of foreign institutions and practices.   The menu of the issues, although more specialized than the diverse range presented by the general jurisdiction of the Massachusetts Appeals Court, are nearly always challenging.  The quality of the lawyering is generally excellent, with appearances by many of the large firms and boutique firms specializing in international trade; the U.S.  Department of Justice appears in every case on behalf of the Department of Commerce.  There is a civility among the bar that is impressive.

Although our cases can include jury trials (such as a battle of experts in a customs classification case where the essence of a good is in controversy), the great bulk of our work is judicial review of administrative action – that is, appeals from agency decisions.  In this respect, the work is the work of an appellate judge, and not really different from adjudication on the Appeals Court.  Of course, one important distinction is that while an Appeals Court judge must persuade two other panelists comprising the three judge panel, on the CIT, with the exception of cases raising constitutional or vital public policy issues, we each sit alone.  On the Appeals Court, there is a great volume of cases, and typically, for those cases that are argued, not more than thirty minutes is allotted to a case.  On the CIT, while the volume is less, the records in each case are huge and the multiple issues raised by each case are complex.   In this respect, the cases are akin in size to antitrust or multidistrict litigation.   I have adopted the practice of some of my colleagues of sending counsel, at least two weeks in advance of argument, the many questions I will ask at oral argument.  It is not uncommon for the arguments in a case to last two or three hours, but because the parties have the benefit of the questions and the ensuing discussion is truly a search to address challenging legal questions or to elucidate the record, the time flies.  I have found that sending the questions in advance removes the “gotcha” quality of argument and truly advances the dialogue between the court and counsel.  In retrospect, I have thought of some cases during my tenure on the Appeals Court when such a practice would have been beneficial to the process of decision.

As on the Appeals Court, on the CIT, the ultimate judicial product in a case is the opinion.  On the Appeals Court, my view was that the decision should be understandable not only to the experienced litigator but to those unschooled in the law.  So too on the CIT, my goal is to produce opinions which strip away the legal jargon and demystify the complex international trade cases that affect in a very real way the every day quality of life in this country.

Reminiscing about his service on the First Circuit, at my investiture Justice Breyer noted the longstanding connection to the First Circuit established by the CIT judges who sat by designation.   Other judges and practitioners have remembered the CIT judges who have sat in the District Court in Boston over the years.   Beyond that, the CIT, as constituted by a single judge, has sat in Boston in the adjudication of cases under the court’s jurisdiction.  The relationship between the court and the Massachusetts legal community has been historic.  May it continue to thrive.

Judge Katzmann is a Judge on the United States Court of International Trade.  He previously served as an Associate Justice of the Massachusetts Appeals Court.   He is a former member of the BBJ Board of Editors.


Massachusetts Appeals Court Permits Claim for Breach of Fiduciary Duties Against Company Counsel by Minority LLC Members

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by Michael Cohen and William Cushing

Case Focus

In Baker v. Wilmer Cutler Pickering Hale and Dorr LLP, 91 Mass. App. Ct. 835 (2017), decided this past July, the Massachusetts Appeals Court allowed the minority members of a Massachusetts limited liability company to sue the LLC’s outside counsel for breach of fiduciary duty relating to counsel’s involvement in an alleged “freeze-out” scheme that benefited the majority members. Although the Supreme Judicial Court had previously held that counsel to closely-held corporations may owe fiduciary duties to individual stockholders, Baker is the first case in which a Massachusetts appellate court has permitted a claim for breach of fiduciary duty to proceed against outside company counsel by minority owners. Corporate lawyers should be acutely aware of the Baker decision and its implications.

BACKGROUND

The factual allegations relating to the underlying dispute that are set out below come from the plaintiffs’ complaint, as related by the Appeals Court’s opinion.

Elof Eriksson and W. Robert Allison formed Applied Tissue Technologies LLC (“ATT”) as a Massachusetts LLC in early 2000, at which time they were issued seventy-five and twenty-five percent membership interests in the company, respectively. (Both Eriksson and Allison later assigned portions of their interests to family trusts, and a former key employee was granted a small interest in ATT.)

In 2003, ATT adopted an amended operating agreement which provided, among other things, that (a) the members have exclusive management control over ATT, which they exercise by votes in proportion to their percentage interest in the company, (b) the agreement cannot be amended unless both Eriksson and Allison agree in writing, (c) the proportion of net profits to which each member is entitled cannot be reduced or diluted without that member’s consent, (d) if any member chooses to provide additional funds to the company, those advances are treated as loans for which ATT will pay interest at the prime rate, and (e) all members owe each other a duty of utmost loyalty and good faith in the conduct of ATT’s affairs.

By early 2012, ATT was facing financial difficulties, and Eriksson and Allison could not agree on how to address ATT’s challenges. Eriksson was willing to contribute capital in exchange for additional equity in the company, while Allison wanted outside investment and a new management team.

Around this time, company management urged Eriksson to gain “control” of the company. Eriksson reached out to his daughter, an associate at a Boston law firm, who in turn connected her father with a partner at the firm who had experience working with emerging companies. In February 2012, ATT’s chief executive officer signed an agreement to engage the law firm as company counsel. The agreement expressly provided that the law firm would represent ATT, and would not represent any individual members of ATT. Shortly thereafter, the law partner relocated his practice to another law firm, which provided ATT with a substantially similar engagement letter to represent only the company.

At the request of Eriksson and management, ATT’s outside lawyers initially drafted a plan to buy out Allison’s minority membership interests, along with an email that Eriksson would send making the buyout offer to Allison. Allison rejected the offer and responded that he wished to work to maximize ATT’s value for a more favorable exit down the road. He also reminded Eriksson of the minority protections in the ATT operating agreement and suggested that all members meet to address the issues facing the company. Soon after receiving Allison’s response, Eriksson and ATT’s outside lawyers prepared an alternative plan to forcibly remove the minority member protections by using General Laws chapter 156C, section 60, which authorizes a Massachusetts LLC to merge with another business entity (in this case, a Delaware LLC specifically created to facilitate the “freeze-out”) upon the vote of a simple majority of the members unless the company’s operating agreement provides otherwise. Because ATT’s operating agreement was silent about a member’s rights in connection with a merger, ATT could be merged into the new entity by a simple majority vote, thereby depriving the minority members of the protections for which they had previously bargained. ATT’s lawyers advised management that the merger would eliminate Allison’s “ability to interfere with company operations” and that, over time, the company could reduce Allison’s interest to “a smaller and smaller ownership position.”

Having accomplished everything necessary to effectuate the plan, Eriksson and company management met with Allison and informed him of the merger. They advised Allison to contact the company’s lawyers if he wanted copies of the new operating agreement and other company documents for the surviving entity. Over the ensuing months, the new Delaware LLC issued additional preferred interests to Eriksson and management, substantially reducing the interests of Allison and the other minority members in the surviving company.

In May 2015, Allison and the company’s other minority members sued, among others, the law firms that had acted as outside counsel to the company, along with the individual attorneys who had advised Eriksson and company management, alleging, among other claims, breach of fiduciary duty. The Superior Court dismissed the fiduciary duty claim and Allison and other minority members appealed.

ANALYSIS

Massachusetts law has long provided enhanced protections to minority shareholders in closely held corporations. In Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 593 (1975), the SJC held that shareholders in a closely held company owe each other a fiduciary duty of utmost good faith and loyalty, akin to the duties owed among partners in a partnership. And, in Schaeffer v. Cohen, Rosenthal, Price, Mirkin, Jennings & Berg, P.C., 405 Mass. 506, 513 (1989), the SJC observed that “there is logic in the proposition that, even though counsel for a closely held corporation does not by virtue of that relationship alone have an attorney-client relationship with the individual shareholders, counsel nevertheless owes each shareholder a fiduciary duty,” though the SJC’s decision in Schaeffer did not require it to determine that issue.

In Baker, the Appeals Court invoked a decision of the Michigan Court of Appeals holding that the lack of an attorney-client relationship between a fifty percent shareholder in a closely held professional corporation and counsel for the corporation did not necessarily preclude a fiduciary relationship between the shareholder and corporate counsel. Baker, 91 Mass. App. Ct. at 843-44 (citing Fassihi v. Sommers, Schwartz, Silver, Schwartz & Tyler, P.C., 107 Mich. App. 509, 309 N.W.2d 645 (1981)). Rather, a fiduciary relationship may arise when “one reposes faith, confidence, and trust in another’s judgment and advice,” and the existence of that relationship is largely a question of fact. Id. (quoting Fassihi, 107 Mich. App. at 514-15).

The Appeals Court observed that the defendants in Baker undertook their representation of ATT “with full knowledge” of the protections that the operating agreement afforded the minority members, that they “knew, or should have reasonably foreseen” that company counsel was “constrained by the operating agreement, and the consensual decision-making it imposed on important matters,” and that counsel could not act “in concert with the majority members, for the very purpose of eliminating those protections.” The court also noted counsel’s “purposeful steps” to conceal their activities from the minority members, even though the minority members “should have been able to repose trust and confidence that any counsel hired by the company would have communicated and consulted with them prior to undoing [the minority] protections.” Noting that the existence of a fiduciary relationship “is largely a question of fact,” the Appeals Court could not conclude that the defendant attorneys owed no fiduciary duty to the minority LLC members in this case based on the facts alleged in the complaint. Accordingly, the court reversed the dismissal of the complaint and remanded the case to the Superior Court so that the lawsuit could proceed. The defendants did not file a petition for further appellate review in the SJC.

TAKEAWAYS

The Baker decision yields at least two crucial practice points for attorneys working with LLCs and other closely held companies:

  1. Respect the Role of Company Counsel, and Remain Faithful to Your Client

An attorney retained by a corporation represents the corporate entity, not its shareholders, members, officers, employees, directors, or other constituents. Cf. Mass. R. Prof. Conduct 1.13(a) (attorney represents the organization), 1.13(f) (attorney shall explain identity of client to organization’s constituent with whom he is dealing if organization’s interests are adverse to that person). The corporate attorney may also represent a corporate constituent, but counsel must address potential conflicts of interest in accordance with the dual-representation rules. Mass. R. Prof. Conduct 1.13(g) (referring to Mass. R. Prof. Conduct 1.7). Attorneys engaged as company counsel owe allegiance to the entity, and they should be mindful of potential conflicts of interest involving those persons giving instructions and of the ways in which the interests of the entity and (all of) its owners may differ from the interests of those directing company counsel. The defendant lawyers in Baker would have been wise to suggest that Erikkson and management retain separate counsel to address personal interests.

  1. Respect Negotiated Contractual Rights

The members of ATT had agreed upon a set of rights intended to ensure that all members moved together, and they provided in the operating agreement that these rights could be varied only by express agreement of the members. The Appeals Court took a dim view of the use of a merger transaction, orchestrated by company counsel, to involuntarily deprive the minority LLC members of those rights, notwithstanding that the operating agreement did not expressly prohibit a merger or impose enhanced approval requirements in connection with a merger. Company counsel should ensure that advantageous contractual rights are changed only through a process that respects the “faith, confidence and trust” that members of an LLC may repose in company counsel.

Michael J. Cohen is a Partner in Brown Rudnick LLP’s U.S. Corporate and Capital Markets practice group, and is based in the firm’s Boston office. Michael represents early stage and mid-market companies in connection with mergers and acquisitions, joint ventures and strategic alliances, financing transactions and general corporate and commercial matters at all stages of the corporate life cycle. Michael also advises venture capital and private equity funds and would-be portfolio companies in connection with deal terms and transaction structuring.

 William T. Cushing is an Associate in Brown Rudnick LLP’s U.S. Corporate and Capital Markets practice group, and is based in the firm’s Boston office. While at Boston University School of Law, Will was an Executive Editor for the Review of Banking & Financial Law. In 2014, Will worked as a legal Intern at the Massachusetts Attorney General’s Office in the Gaming Division.


Legal Aid Funding Is Not “Wasted Money”

starkeyby Carol A. Starkey

President’s Page

“No more wasted money,” is how President Trump has characterized his proposal to cut $54 billion from the federal budget. To get there, the administration has placed the Legal Service Corporation (LSC) and its approximate $366 million in federal appropriations on the chopping block. The President’s budget – released in March – eliminates this program entirely, a proposal that attempts to carve out the backbone of civil legal aid to the poor in this country.  The consequences of such a proposal would, at best, render those most vulnerable amongst us unable to properly access our courts for daily needs such as housing, health care or safety, and at worst, keep them from exercising their basic rights to survive in this country.

Last month, I once again had the privilege as your Bar Leader to travel to Washington, DC to meet with members of the Massachusetts delegation and advocate for the reinstatement of funds as part of a larger lobbying effort with the American Bar Association. Shortly after those visits, a deal was struck in Congress to fund LSC through October 1st. This is good news in the short term, but when it comes to access to justice, short term solutions are not nearly enough.

Quite simply, LSC provides necessary legal aid to low income individuals and families in Massachusetts and throughout this country at large.  The LSC is an independent nonprofit established by Congress in 1974 to provide financial support for civil legal aid to low-income Americans. LSC is a grant-making organization, distributing more than 93% of its federal appropriation to eligible nonprofits delivering civil legal aid. It is the largest single funder of civil legal aid in the country, including $5 million annually to Massachusetts-based legal services organizations.

The need for this essential service is undeniable. In the United States, 80 percent of qualified applicants – those who meet the income eligibility requirements and face serious legal problems – are turned away simply because there isn’t adequate funding to take them on as clients. This figure is unacceptably high. These are people, amongst others, who are our neighbors being wrongfully evicted from homes, women and children in our communities already made vulnerable by poverty trying to safely escape abusive partners, parents trying to advocate for a beloved child with special needs, and veterans, many of whom come home struggling with serious mental and physical health issues, trying to secure the benefits that are rightfully theirs, so as not to end up homeless.

This urgent need alone is enough to justify keeping this line item, which represents about one hundredth of one percent of the entire federal budget.  But what if Congress and the President also knew that preserving LSC would actually save taxpayer money and support the economy? That’s just what three independent economists conducting separate evaluations have found.

In 2014, the Boston Bar Association (BBA) released Investing in Justice, a report which showed that taking a preventive approach to legal issues would help families, save government funds and ensure fairness in our justice system. Simply put, investing in civil legal aid programs pays dividends by avoiding back-end costs.

The BBA report – representing the work and opinions of legislators, judges, business leaders, academics, and legal services representatives – is the result of 18 months of intensive research into the problems and unseen costs that arise when people do not have access to adequate legal assistance.

For example, in Massachusetts, when studying the impact on state expenditures of representation by a civil legal aid attorney in eviction and foreclosure cases, economists at The Analysis Group concluded that for every dollar spent on civil legal aid in eviction and foreclosure cases, the state stands to save $2.69 on the costs of other state services, such as emergency shelter, health care, foster care, and law enforcement.

In addition, the firm Alvarez & Marsal analyzed the costs of domestic violence and what savings could occur if additional civil legal aid representation was available in such cases.  They determined that every $1 spent on legal aid yields $2 in medical and mental health care savings, including $1 to the state and $1 to the federal government.

The Boston Bar Association has long argued that legal assistance is an essential service for those who are struggling to deal with the issues that go to the heart of their families and livelihoods, like housing and personal safety. But we can also make the case that it is the fiscally prudent thing to do.

Others can, too. We need our leaders – both in Washington and here at home – to understand that advocating for every American to have access to justice is not only a just cause, but a sound investment that is worth our resources.

As lawyers, you have a valuable perspective to bring to this issue, one that lawmakers will find substantive and relevant.  To that end, I’m pleased to share the Boston Bar Association’s podcast: How to Talk to Your Legislators About Civil Legal Aid, featuring an interview with Equal Justice Coalition Chair Louis Tompros of WilmerHale.

I hope you enjoy it, and then reach out to both your state representative and your senator in support of increased funding for legal aid.  Your voice is needed to tell legislators and others how much we care about legal aid funding, backed up by our findings that investing in civil legal aid actually saves money while improving people’s lives.

Carol A. Starkey is the president of the Boston Bar Association. She is a partner at Conn, Kavanaugh, Rosenthal, Peisch & Ford.