Month: March 2020

No Fiduciary Duty Owed to Students of Shuttering College

The  United States Court of Appeals for the First Circuit’s  recent decision in Tristan Squeri et al. v. Mount Ida College et al.  upholds the dismissal of  claims brought by former students of Mount Ida College against both the College and certain officers and directors of the College.   The students instituted the action as a result of the sudden closure of the institution in the Spring of 2018.   The students sought relief on the following claims:

      • violation of privacy
      • fraud
      • negligent misrepresentation
      • fraud in the inducement
      • breach of fiduciary duty
      • breach of contract
      • unfair and deceptive practices

The First Circuit held that none of the claims could withstand the defendants’ motion to dismiss and affirmed the lower court decision from May 2019.

The primary argument on appeal concerned the fiduciary duty claim.   Specifically, the students argued that the individual defendants (as well as Mount Ida itself)  owed the institution’s students a fiduciary duty.   The  First Circuit was not persuaded:    “Massachusetts law firmly establishes that there is no such fiduciary duty between Mount Ida’s officers or trustees and Mount Ida students on the claims here.”  Rather, the Court held that the fiduciary duty imposed on the individual defendants by Massachusetts law (Mass. Gen. Laws ch. 180, § 6C)  was owed to the College directly and not to the students and  that imposition of the duties sought by the students would create conflicts with existing duties.   Further, the Court declined the students’ invitation to “expand the law” and impose a fiduciary duty directly on the College to its students.

Because the First Circuit was able to affirm on the grounds discussed, it noted that it need not take up various defenses raised by the defendants including the argument that the Volunteer Protection Act, 42 U.S.C. § 14503(a) provides immunity from suit (and not merely immunity from liability) as held recently by the Massachusetts Supreme Judicial Court in  Lynch v.  Crawford, 135 N.E.3d 1037, 1041 (Mass. 2019).   Lynch was discussed in a recent blog post here.

As the litigation in Mount Ida and Lynch demonstrates,it is not unusual for officers and directors of a financially troubled entity to be the subject of various claims.  Any individual contemplating service as a director or officer of any entity (for profit or not for profit) should ensure  a suitable directors and officers liability insurance policy is in place.  For a brief discussion of some of the considerations  for such policies, see my article “Five Things to Know About D & O” published by the American Bar Association Business Law Section (copy available here).

Thinking Strategically About Business Outcomes

In  The New Boardroom Imperative: From Agility To Resilience Julian Birkinshaw, (Professor of Strategy and Entrepreneurship, London Business School) discusses the critical issue of strategic resilience –  the ability  “to make smart choices about the scope of business activities in the face of uncertainty.”

Recent posts here have outlined key strategies for tackling business challenges and provided a sampling of resources helpful in developing an effective plan.   See Five Keys to Dealing Effectively with Disruption and Resiliency Resources.

This post “zooms” out (the word choice clearly reflecting too many videoconferences) to focus on three business outcomes in a time of disruption. What are those three outcomes?  Fundamentally:  reorganization, sale or liquidation.   There are many paths to reach any of these outcomes – including in-court and out of court avenues.   Each outcome, of course, has significant consequences.

Although some businesses strategically implement a sale or a liquidation on their own terms, many find themselves dealing with those outcomes only because the opportunity to achieve a reorganization has evaporated.  Indeed, the inability to reorganize can lead to a sale or liquidation – voluntarily or involuntarily.  Resilient business leaders work to avoid such results by strategically assessing higher value reorganization options and then working to implement successfully.

What options exist in aid of reorganization?  In the United States, the federal law governing business reorganizations is Chapter 11 of the United States Bankruptcy Code.  Unfortunately, over the years, Chapter 11 has proven to be an imperfect mechanism for allowing small or medium sized businesses to reorganize.   Last summer, Congress attempted to address that situation by passing the Small Business Reorganization Act of 2019 (SBRA), which became effective in February 2020.

The SBRA adds a new subchapter V to Chapter 11 with the goal of making business reorganization more affordable and more achievable for the nation’s small businesses.  Specifics about subchapter V are detailed here.  The Coronavirus Aid, Relief and Economic Security Act (CARES Act) passed yesterday expands the availability of  subchapter V by making its provisions applicable to a broader range of businesses.  Specifically, as amended, for the next year the debt limit for a small business eligible for relief has increased from $2,725,625 to $7,500,000.  Of course, businesses with debt above that limit can still seek relief under the non-small business provisions of Chapter 11.

Federal bankruptcy relief is just one tool in the toolbox for seeking to implement a business restructuring — and not a perfect  tool.  Other options also exist both in and out of court.  For example, out of court negotiations or mediation with key constituents towards new agreements can be remarkably effective as described here.  Be sure to think critically before selecting any particular tool as each has advantages and disadvantages.   As the saying goes — once the hammer is in hand, every problem begins to look like a nail.  Be sure to act proactively to take advantage of the utility of the most value-preserving and value-enhancing tools while time exists to do so.  And be on guard against the possibility that a key business partner may start wielding a tool that could have significant implications for your own business.

Understanding the options for implementing a successful business reorganization should help in thinking critically about your own business – and (just as importantly) the businesses of your key partners.  Ultimately, part of the ability to make smart choices about current and future business activities in the face of today’s uncertainty relies on such an informed understanding.

Resiliency Resources

Many people were looking forward this March to NCAA basketball tournaments – not a march into an economic and human calamity.

Yet, with the pandemic upon us, the need to navigate serious challenges is at hand.  Last week, I posted Five Keys to Dealing Effectively with Disruption noting the importance to businesses of:

          • Avoiding Denial
          • Attacking the Problem not the People
          • Assistance – Obtaining it
          • Accelerating Communication
          • Appreciating Cash Position

A flood of information has poured forth this week  with advice on various aspects of the current situation.  Assistance is critical in developing an effective plan – and that assistance must come from credible, reputable sources.   Here are some helpful resources  from such sources that will be useful in implementing the Five Keys:

Team working remotely?  Do it safely and securely.

The National Cyber Security Alliance launched the COVID-19 Security Resource Library – a free resource on current scams, cyber threats, remote working issues, disaster relief, and more.    Do not let your focus on attacking the current problem blind you or your team to the additional threats posed by malicious actors with intent to disrupt your operations.

Stay safe and spread the message (not the virus)

The Global Resilience Institute at Northeastern University established COVID-19: How to be Safe & Resilient with the goal of providing critical tools and skills needed for people to stay safe and to help others to stay safe.   Share through your network to ensure others are informed and to promote social connectedness.  As a member of Infragard, I have attended programs at the Institute and admire their commitment to forward-thinking in managing disruption.

Business resources from corporate turnaround professionals

The Turnaround Management Association (TMA) has compiled a COVID-19 Business Resource Site to collect resiliency resources for businesses.   Contributions come from the group’s large, professionally diverse organization (almost 10,000 members in 53 chapters worldwide). Note:   as a past president of the Northeast Chapter  and as a current member of the global board, I am pleased to  co-chair the next global TMA Annual Meeting  (Boston on September 30 – October 2).

Boston business resources

The Greater Boston Chamber of Commerce has established a COVID-19 Resource Page to help businesses navigate developments, which includes periodic updates and resources from the government,  public policy analysis, and industry-specific insights into actions of employers in responding to the situation.

Other resources

Other noteworthy sites include:

Finally,  MWI (where I trained as a mediator) announced two programs:

        • Online Mediation:  the ability to mediate commercial (and other) matters using video conferencing including virtual breakout rooms .  Note:  non-profits and charities are able take advantage of this service for no charge (for one session) through the end of June 2020.
        • Online Trainings:    online training on negotiation skills and other  programs geared towards sales teams, procurement, and business leaders. Note: companies in Massachusetts can apply to be reimbursed for 50% to 75% of the costs through a partnership with the Workforce Training Fund

All of the above resources can be used to implement the Five Keys of avoiding denial, attacking the problem (not the people), obtaining assistance, communicating well and appreciating the critical importance of cash in business resiliency.

The availability of resources does not make the process of dealing with disruption simple but awareness of resources is critical in charting a path forward.

Five Keys to Dealing Effectively with Disruption

On March 10, 2020 the MIT Sloan Management Review published “How Leaders Delude Themselves About Disruption” as part of a series on Disruption 2020 published in memory of Clayton Christensen.

The article, authored by Scott D. Anthony and Michael Putz, is focused on the challenges faced by companies experiencing the effects of disruptive innovation.  As articulated by Christensen (and others) in a 2015 Harvard Business Review piece, “disruption”  in this sense describes the situation “whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.”  More specifically:

[A]s incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success.

The MIT SMR article notes that disruptive innovation has up-ended many businesses such as Eastman Kodak, Blockbuster, and Toys R Us.   In the authors’ view, leaders should take affirmative steps both individually and organizationally to “confront powerful self-deceptions” that have impeded action to avoid disruption.

For example, the authors note various delusions that afflict incumbent business leaders including:

        • The “we’re safe” delusion:  to demonstrate this point, the authors point to the April 1, 2008 interview of BlackBerry’s co-CEO dismissing the introduction of the iPhone.  BlackBerry’s revenues have fallen considerably since that time of course.
        • The “it’s too risky” delusion:   in support of this point, the authors describe the significant and underappreciated risk of not investing boldly in innovation compared to the limited risk of investing and being wrong — summing up by noting that “companies increase risk by not taking risk.”

The article concludes by imploring leaders to “focus more on mindsets, awareness, and inner capacities to combat basic biases” in navigating the challenges posed by disruptive innovation.   In short – mindfulness for both leaders and their organizations.

Just one day after the article’s release, the World Health Organization declared COVID-19 a pandemic.  The public health disaster at the heart of that announcement has caused and will cause disruption for many industries and companies – not disruption caused by innovation of new entrants – but disruption nonetheless.   And the need to deal effectively with that disruption is imperative.     Here are five keys to dealing effectively with disruption in the current distressed circumstances:

        • Avoid Denial

A common expression in the restructuring world (and other places) is that “denial is not just a river in Egypt.”   Another is that “hope is not a strategy.”   When dealing with disruption, do not underestimate the scope, potential magnitude or possible implications of the situation presented.   Rather, facts must be grasped, scenarios mapped out, options identified, and alternatives understood.    Because time is at a premium, it is critical for leaders to focus on the task at hand and not debate the “fairness” of the situation, how things “should be” different or “could be” different if some uncontrollable factors emerged.   Denial is pure delusion akin to the “we’re safe” falsehood described above that can put an incumbent at risk through disruptive innovation.  Get the facts, absorb them and begin to map out a strategic response.

        • Attack the Problem not the People

A company experiencing disruption can be tempted to focus on the people involved in the situation as opposed to the problem at hand.  Unfortunately, that focus can quickly turn negative as the company conflates the problem with the people and ends up attacking both – thus compounding the problem and the chances for creating an acceptable path forward.   Your enemy is the problem.   And that problem should be viewed as the common enemy of both you and the other party.   Navigating disruption means knowing how to work effectively with others (even others who may be disagreeable) to achieve what you desire  cost-effectively in a way that is acceptable to the other side.  More discussion of this topic is set forth in this article published in CFO Magazine prepared last year.

        • Assistance – Obtain it

The best time to obtain assistance in any situation is when time remains for those rendering aid to have an impact.   Wait too long in any number of situations and would-be helpers are rendered useless.  Of course, it can be challenging to seek assistance and daunting as well to know where to turn.  But often an essential component of “avoiding denial” and “attacking the problem not the people” is lining up experienced advisors who can help navigate the path.   Unfortunately, not all would-be helpers provide much help at all.  Some will simply exacerbate a situation – causing unnecessary delay, adding burdensome cost and failing to move a situation forward.   That is not assistance – and should be avoided at all costs.   Using a trusted network, determine reputable people that might be able to help, vet carefully, listen to the perspectives offered and ensure you fully understand all options and alternatives for moving forward.

        • Accelerate Communication

Communication is fundamental in navigating disruption.   That means communication with all key constituents including employees, vendors, suppliers, board members, investors, lenders, landlords, partners and anybody else with a relationship with the company.   Communication should be concise, honest and regular.  The purpose of communication is not just to convey information but also to convey credibility.   When a company fails to communicate to key constituencies, relationships suffer not only from a lack of information but also from a lack of attention.   Relationships are critical and deserve your investment of time and energy.  If not quite sure what to say, seek assistance from informed sources.   Do not deny the need to communicate or think that since certain parties have not reached out they must have all the information they need.  Own the responsibility to communicate.

        • ·Appreciate Cash Position

Nothing spells disruption more than dwindling cash.   Of course, cash is essential to keeping the gears of any business moving and its absence can and will bring operations to an immediate halt.   Some companies dealing with disruption will not understand their cash position or will deny the reality of threats to cash.  Avoid that scenario.  If necessary, seek assistance in developing accurate and credible cash projections.  Take steps necessary to ensure the company’s runway is well supported by available cash.   If issues exist around availability, then this reality must not be denied but rather factored into a critical problem to be solved promptly with the help of informed assistance through effective communication with key stakeholders.  Cash is truly king and shows no sign of renouncing that royal title.

The consequences of failing to deal effectively with disruption are severe.   Whether disruption is caused by innovators entering into the market or a pandemic of significant scale, leaders must avoid delusions about the potential impact of disruption.   The five keys identified above should help in building resiliency and dealing effectively with the disruptive effect of today’s economic reality.

SJC Examines Nonprofit Director Immunity from Wage Act Claims

The Massachusetts Supreme Judicial Court recently issued an important decision (Lynch v. Crawford) involving a  volunteer board member’s invocation of immunity from  liability for claims made under the Massachusetts Wage Act.

The basic facts of the case are not complex. In 2013 a nonprofit health center encountered distress and closed without paying wages immediately.  Employees brought a class action lawsuit against the volunteer board chair (who was also serving as acting CEO). The board chair sought to have the suit dismissed.  He pointed to both state law (MGL c. 231, sec 85W) and federal law (42 USC sec 14503) – both of which generally seek to protect volunteers in connection with their service to nonprofits.  Although the employees were eventually paid from the entity, they nevertheless continued their Wage Act complaint (seeking treble damages and attorneys’ fees).

The trial judge denied the director’s motion to dismiss.  The  Massachusetts Appeals Court also refused to dismiss.   Neither court was convinced the above statutes necessarily provided the volunteer director absolute immunity from a Wage Act claim.    The issue  before the SJC was twofold:  (i) procedurally – was the volunteer director entitled to bring an appeal of the denial of the motion to dismiss immediately or did he need to await a final judgement; and (ii) under what circumstances (if at all) does an unpaid volunteer board member have immunity from a Wage Act suit.

In its decision, the SJC considered the intersection of the Mass Wage Act and the various immunity statues for service to a nonprofit and held that the volunteer board member was entitled to bring an immediate appeal of the lower court’s denial of his motion for summary judgement.   That holding, of course, is welcome news to any volunteer board member as the SJC recognized the importance of allowing immediate review to a board member seeking  immunity from liability by statute.

The SJC did not stop its analysis there however.   Rather, it further held that on the particular facts of the case presented, genuine issues of material fact existed that justified the denial of the director’s summary judgement motion.    Specifically, the SJC pointed to language in the state immunity law excepting “any acts or omissions intentionally  designed to harm.”   When viewing the record in the light most favorable to the nonmoving party (the Wage Act plaintiffs), the SJC determined that a genuine issue of of fact existed on that issue making denial of summary judgement appropriate.

As a result of this decision, nonprofit board members should be especially mindful of engaging in managerial acts that could be construed later as intentionally inflicting harm.  In the Crawford opinion, the SJC pointed specifically to facts indicating that the board member directed certain vendor claims to be paid before employee claims.   Although the volunteer will have the opportunity to dispute this factual issue at trial, the mere existence of such a factual issue proved sufficient to put his entitlement to immunity in jeopardy.