NJ Business Law Blog

New Jersey Appellate Division Confirms That the Consumer Fraud Act Does Not Apply to the Sale of Business

Consumer Protection Law: The New Jersey Appellate Division recently evaluated a claim arising from allegations of fraud in connection with the sale of business and associated real estate. In 539 Absecon Boulevard, LLC. v. Shan Enterprises, et. al., 2009 WL 774474, the defendants had sold the plaintiff a motel business; the real estate upon which the motel resided; and adjacent property. The plaintiff, the purchaser in the transaction, claimed that the seller had falsified its income figures and therefore, defrauded the purchaser in the sale transaction. Among its other claims, the plaintiff-purchaser sued the seller for fraud and a violation of the New Jersey Consumer Fraud Act (“CFA”).

 

The CFA is a broad, remedial statute aimed at protecting New Jersey consumers from a seller’s wrongdoing in connection with the sale of merchandise and other services. However, while the CFA specifically applies to sales of real estate, it has previously been construed not to apply to sales of businesses. Nevertheless, the lower Court made the determination that the CFA applied to this sale transaction. Its analysis was based upon its conclusion that “a distinction could be made when, as here, the transaction involved both the sale of a business and the sale of real estate.” The Court viewed the transaction as primarily being real estate driven with the business operating thereon to simply be an “improvement” attached to the property. The Court awarded treble damages and attorney’s fees to the plaintiff accordingly.

 

However, the Appellate Division reversed the decision, specifically finding that the CFA was not aimed at transactions involving the sale of a business. The Appellate Division specifically noted that the New Jersey legislature determined that it wanted to extend the CFA’s reach to real estate, but had specifically not addressed the sale of business. The Appellate Division concluded that had the legislature wanted such a transaction addressed, they would have included it within the statutory language.

 

Moreover, the Appellate Division noted that the real estate was not the main draw of the transaction but instead was “incidental to the motel business” that had been sold. Accordingly, it dismissed the lower Court’s rationale for applying the CFA. The Appellate Division specifically noted that the CFA is aimed at sellers of merchandise that are offered to the public as a whole, and that a one-time business sale transaction was of a nature not covered by the Act. Accordingly, the Appellate Division specifically concluded that the CFA does not apply to the sale of a business, even if that sale includes a sale of real estate. The New Jersey Supreme Court denied certification in June, so the ruling stands.

 

Comments/Questions: ljm@gdnlaw.com

© 2009 Nissenbaum Law Group, LLC

 

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State Trademarks Are Insufficient for Federal Protection

Intellectual Property: Trademark Rights: We have previously discussed the fact that the mere registration of a business with the State, or the registration of the business name with the State is insufficient to insulate business owners from individual liability. However, the other common misconception about these filings is that they protect the business name that is registered. It is critical that business owners understand the limitations of the protection that is offered by State registrations.

In New Jersey, registration of a corporate entity will protect that entity’s precise name from being registered by another company in New Jersey. There are a few important things to note here. First, it does not prevent another company from registering that name in another state. Second, it does not prevent another company from making minor changes to the name (i.e., the spelling) in order to register their entity in the State. And finally, the registration of a business entity does not necessarily prevent another party from using that name; all that would be prevented is the third party’s registration of the name. The rights at issue are really trademark rights, which are addressed by the law separately from corporate formation rights.

Some businesses prepare state trademark filings. However, it is important to note that this too has limitations. First and foremost the filing only applies to New Jersey, and only protects against infringement in New Jersey. Next, the state registrations generally operate as individual databases, so there is nothing stopping someone from registering the same or similar trademark, or using i, in a neighboring state.

The best way to protect a business name is to use it in interstate commerce (i.e., across state lines) and to obtain a Federal trademark registration through the United States Patent and Trademark Office. The Federal filing will provide additional remedies to a trademark owner in the event that the mark is used in a way that is likely to confuse consumers anywhere in the United States (and perhaps even beyond with some of the International Treaties that are in place). This is particularly important in the Internet age, where businesses generally have at least a regional or national presence and are not so localized. For example, if a business owner has a New Jersey-registered trademark, and they learn that a competitor is using the mark in Pennsylvania in an infringing manner, the State registration will not help the enforcement efforts. The mark owner would be limited to pursuing its claim under common law theories and would be unable to avail itself of the benefits and protections of a federally registered trademark.

Comments/Questions: ljm@gdnlaw.com

© 2009 Nissenbaum Law Group, LLC

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com

The Importance of Attending to Corporate Formalities

Business Law: Corporate Formations: On this blog, we have previously discussed the fact that registering a business name with the State may be insufficient to adequately protect the corporate owners from individual liability. (Please see Simply Registering a Company Name is Insufficient to Avail Business Owners of the Protections of the Corporate Shield). The logical next step for a business owner would be to move beyond the sole proprietorship model and register the business with the State.

However, it is important to keep in mind that this too may not be sufficient. Establishing a corporate presence, whether in the form of a limited liability company, limited partnership or a corporation, is important in order to create a liability shield that will help insulate the business owners’ individual assets. There are various ways of piercing this veil and creditors may nevertheless be able to try to access those individual assets.

One way of doing this is for a creditor to argue that the corporation is really a sham, and not operating as a true organization. Rather, the argument would be that the individual owner of the company is really acting in his individual capacity, rather than through a separate legal entity. One of the ways in which this attack is made would be by showing that the requisite corporate formalities were not attended to.

In this regard, simply forming the company with the state and obtaining a tax identification number may be insufficient. Instead, a business owner should do everything possible to bolster the corporate shield and to prove that the corporation has an operation and existence that is separate and apart from the individual owner(s). This is particularly important for small businesses and entrepreneurs.

The best way to start this is to have all of the appropriate corporate documents put in place. If the company is a limited liability company, it should have, at a minimum, a signed operating agreement, meeting minutes, organizational resolutions and a ledger of its members. Similarly, a corporation should have, at a minimum, bylaws, a shareholder’s agreement, meeting minutes, organizational resolutions, issued stock certificates and maintain a ledger of those distributions. All of these documents need to be signed and issued, and not just exist in blank form.

In addition, both types of organizations should have annual and special meetings and should have those meetings memorialized in the corporate form. This may sound silly if the business is owned by just one person, but that is precisely the situation in which it is even more important to attend to these formalities. This is because where there is just one or two owners, the argument can be more easily made that they are really acting in their individual capacities. Thus, even a sole-owner should ensure that he is, from a legal perspective, operating the business in accordance with corporate formalities to help enhance the valuable corporate shield.

Comments/Questions: ljm@gdnlaw.com

© 2009 Nissenbaum Law Group, LLC

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com