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Lesson Regarding Business Disputes: Be Pro-active. Avoiding The Problem Doesn’t Make It Go Away.

September 27, 2013 1 comment

I met with a client today. My client is looking to sell his shares in his Company to the other owners.  His company is a closely held business with a few shareholders who make all the business decisions.

 

My client knew that he should have begun this process a long time ago.  He could see the warning signs, but the Company was doing so well that he tried to avoid the conflicts between the other shareholders (family members – which adds another relational layer to the business relationship).

 

It wasn’t until the business relationship had absolutely deteriorated and he was desperate to get out that he sought legal counsel.

 

Strategically speaking, this is probably one of the worst times to get out, yet it is most common.

It is one of the worst times to get out for several reasons:

  • The value of the business could have been hurt by the poor business relationship of owners (which in turn diminishes the value of his Company stock);
  • disgruntled owners are more prone to making mistakes/poor decisions that may violate their fiduciary duties that they owe to other shareholders and to the Company (when they are upset, they aren’t necessarily thinking about the best interest of those they angry with);
  • At this point in the business relationship, business disputes take on a personal nature (especially when family is involved) where emotions may run high and cloud each shareholder’s otherwise sound ability to make an amicable buy out – or at least to make a sound business decision. This point is particularly dangerous because a failure to reach a reasonable buy out  could result in litigation which is costly for all parties. For more on this point See: https://jeshualaukalegalnews.wordpress.com/2013/08/27/business-disputes-in-closely-held-companies-a-warning-why-business-partners-should-not-be-quick-to-file-lawsuits/

 

My point in all of this is simple:

 

Avoiding problems in close business relationships does not make the problem go away – it makes it worse!  

This isn’t rocket science, but it is a fact that often times  people wait to properly address important finance and business decisions when it is too late. It is why  many people don’t have estate plans (even lawyers!) However, that is another topic altogether.

 

I end with two simple takeaways for business owners in closely held companies:

 

1.  Be proactive to address shareholder disputes before they spiral out of control. 

Consult with an attorney about your rights/duties.

2. Be Sure that in your Frustration you don’t violate your Fiduciary Duties.

Corporate Shareholders, Partners, and Members in Limited Liability Companies all owe statutory duties to act in the best interest of the company, and for each business partner. See M.C.L.A. 450.1541a of the                   Business Corporation Act; MCL M.C.L.A. 449.21 Uniform Partnership Act; and MCL 450.4515 of the Michigan Limited Liability Company Act.

 

 

 

Do you have an interesting issue related to business or real estate? I’d love to hear about it.   

Email or call me. Email: Jeshua@dwlawpc.com / Ph: (616) 454-3883.
You can also visit my law firm’s website at http://www.dwlawpc.com.

 

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TD Bank Assessed $37.5 M For Violations of Bank Secrecy Act

September 24, 2013 Leave a comment

Scott Rothstein is serving a 50-year prison sentence for running a $1.2 billion scheme from Fort Lauderdale-based Rothstein Rosenfeldt Adler PA.

He sold wealthy investors stakes in what he said were payouts in confidential sexual-harassment and workplace-bias cases. The cases were fabricated. Back in July his law firm his liquidation was confirmed in a Chapter 11 Bankruptcy case. See article http://www.bloomberg.com/news/2013-07-18/ponzi-schemer-rothstein-s-law-firm-liquidation-confirmed.html

 

TD Bank was the unfortunate Bank where Scott Rothstein ran the money through his operation.  Suffice it to say, TD Bank is paying for not catching its mistakes beginning in 2008.

The Bank ultimately provided more than $600 million in restitution to investors impacted by Rothstein’s Ponzi scheme.  

Yesterday, the OCC announced a hefty penalty assessed against TD Bank for its failures which constitute violations of the Bank Secrecy Act. You can check out the Consent Order entered into by TD Bank here: http://www.occ.gov/static/enforcement-actions/ea2013-142.pdf

 

According to the OCC’s website:

“The OCC found that from April 2008 to September 2009, the Bank failed to file suspicious activity reports (SARs) on activity in accounts belonging to Rothstein Rosenfeldt Adler, P.A., the Ft. Lauderdale, Florida law, firm through which Scott Rothstein ran a $1.2 billion Ponzi scheme.”

“These failures by the bank resulted in violations of the OCC’s SAR regulation (12 C.F.R. § 21.11(c) and (d)), which requires banks to file SARs in 30 to 60 days, depending on the circumstances.”

 

Further, “[t]he failures to file SARs were significant and egregious for a number of reasons, including the number of alerts generated by these accounts and the volume and velocity of funds that flowed through them.

 The $37,500,000 civil money penalty reflects a number of factors, including:

  • the scope and duration of the violations and
  • the financial harm that resulted to the Bank.

The penalty will be paid to the U.S. Treasury.

The OCC is coordinating its action with the Financial Crimes Enforcement Network (FinCEN) and the Securities and Exchange Commission (SEC). FinCEN is ordering the Bank to pay a $37,500,000 penalty. The SEC is ordering the bank to pay an additional $15,000,000 penalty and to cease and desist from violating sections 17(a)(2) and (3) of the Securities Act of 1933.

 

 

 

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OCC Assesses $60 Million Penalty Against JP Morgan Chase, Orders Bank to Reimburse Consumers for Unfair Billing Practices

September 19, 2013 Leave a comment

Tough day for JP Morgan Chase. 

The Office of Comptroller of the Currency (“OCC”) today assessed several penalties by virtue of consent order, totaling hundreds of millions of dollars in penalties.

 

One such consent order imposed a $60 million penalty against JP Morgan Chase and ordered the Bank to make restitution to millions of consumer who were unfairly billed for, and paid for, identity theft that they did not receive.

According to its website, “The OCC found that the bank’s billing practices violated Section 5 of the Federal Trade Commission (FTC) Act, 15 U.S.C. § 45(a)(1), which prohibits unfair and deceptive acts or practices.”

 

The $60 million civil money penalty reflects a number of factors, including the scope and duration of the violations and financial harm to consumers from the unfair practices. The penalty will be paid to the U.S. Treasury.

 

The restitution ordered by the OCC will benefit consumers who, between October 2005 and June 2012, enrolled in and paid for identity theft protection products but did not receive the full benefit of the products.

 

The restitution will include the full amount paid for these products, plus any associated over-limit fees, and finance charges. The OCC believes that there are approximately 2.1 million harmed consumers, and fees and charges subject to restitution total approximately $309 million.

See the Consent Order: http://www.occ.gov/static/enforcement-actions/ea2013-141.pdf

 

See another Consent Order issued today http://www.occ.gov/static/enforcement-actions/ea2013-138.pdf  that reflects findings  that JP Morgan Chase engaged in  “unsafe or unsound practices in connection with the bank’s non-home loan debt collection litigation practices and the bank’s non-home loan compliance with the Servicemembers Civil Relief Act (SCRA).”

 

Again, tough day for Chase.

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Messy Real Estate Issues: Delving Into the Mire that is “Church Property Law”

September 18, 2013 1 comment

Churches are not perfect.  Disputes happen – either within the congregation or within the denomination.  A lot of these issues boil down to church polity – the laws of the church or denomination.

There is typically no place for Courts in issues of church polity.

Sticky issues may result when a church wants to leave a denomination and either start its own church, or join a different denomination.   Real estate disputes complicates church disputes.  Simply put, when real estate is involved – the Courts can get involved.

I. General Law Regarding Church Property Disputes “Neutral Principles of Law” Approach

In 1979, the U.S. Supreme Court made clear that courts have more than one method available in resolving church property disputes. Jones v. Wolf, 443 US 595, 602206 (1979) held that a court may employ the:

neutral principles of law or different approaches.

The Neutral Principles of Law approach is the majority approach, being applied in most States.  Under the Neutral Principles test, a court determines property ownership by identifying and applying secular provisions of the church’s governing documents as well as deeds, articles of incorporation, statutes, and similar materials.

The Supreme Court in US v. Jones explained the benefit of this Neutral Principles of Law approach,

“the primary advantages of the neutral principles approach are that it is completely secular in operation and yet flexible enough to accommodate all forms of religious organizations and polity.  The method relies exclusively on objective, well-established concepts of trust and property law familiar to lawyers and judges.  It thereby promises to free civil courts completely form entanglement and questions of religious doctrine, polity, and practice.” US v. Jones 443 US at 603. 

 

Therefore, under this approach, when deciding who owns church property:

  • look to the Deed – who owns the real estate?
  • Does the deed contain  a “reverter” clause – stating the property reverts back to the denomination, if the church leaves the denomination?
  • Does the deed contain any language  that would indicate an express trust of any kind was created for the benefit of the denomination?

 II. Hierarchical Approach – Michigan’s minority approach and the case of Lamont

Although the Neutral Principles of Law approach is the majority approach, this is not the approach that Michigan courts have adopted and upheld as recent as 2009.  In Lamont Community Church v. Lamont Christian Reformed Church 285 Mich. App. 602 (2009), the Michigan Court of Appeals reaffirmed the hierarchical test as governing church property disputes.

There the Court held that the Lamont Community Church, after splitting with the Lamont Christian Reformed Church and leaving the CRC, was not entitled to the church property. It relied on the Hierarchical analysis in holding that the CRC denomination was hierarchical with respect to property, therefore under the hierarchical method for resolving church property disputes the court was required to defer to the denomination’s determination that the property belonged to the CRC.

 i.                    The Facts of Lamont

 

The facts in Lamont are as follows:

Lamont Christian Reformed Church (hereinafter “LCRC”) was originally incorporated in 1880.

LCRC is a member of the Zeeland classis and of the Christian Reformed Church (“CRC”).

In 1998, LCRC created a corporation to hold the church property, the “Lamont Christian Reformed Church Property Corporation”.

This corporation was created separately from LCRC intending that if LCRC decided to leave the CRC, it could do so and retain the church property.

After the church transferred this property into the property corporation, LCRC began to look into affiliating itself with another denomination, the United Reformed Church.

On September 15, 2004, LCRC’s consistory approved the committee report submitted for leaving the denomination.  See Lamont, 285 Mich. App. 602, 605 – 606.

Disputes between the classis and LCRC’s consistory lead to the split of this church.

A number of people within this LCRC announced they were leaving LCRC but they did not contact the classis to consult regarding disaffiliation.

On October 30, 2005, 132 signatures were obtained as signatures of commitment to an unnamed new congregation.

In late November 2005, LCC transmitted Articles of Incorporation to the State which were filed on December 2, 2005 and therefore the Lamont Community Church, a separate congregation affiliated with no particular denomination, was created.

Sometime thereafter, LCC demanded that LCRC turn over the church property.

The Lawsuit resulted.

 ii.                  The Court Applied the Hierarchical Approach

The Michigan Court of Appeals in analyzing the rights of the parties applied the Hierarchical approach, holding:

“the First Amendment…severely circumscribes the role that civil courts may play in resolving church property disputes by prohibiting civil courts from resolving church property disputes on the basis of religious doctrine and practice and requiring that courts defer to the resolution of issues of religious doctrine or polity by the highest court of a hierarchical church organization.” (Emphasis added.) Lamont, Supra at 615. 

 

To briefly summarize Michigan’s approach its inquiry is simple:

1.      Is the Church Hierarchical or Congregational?

a.      If Congregational, the Court can apply  Neutral Principles of Law in deciding the dispute;

b.      If Hierarchical, the Court must defer to the highest court of the organization.

 

An exception exists – was an express trust created that holds the property for the benefit of another? If so, the Court will uphold that express trust.

To summarize,  in Lamont, the court determined whether or not CRC is hierarchical or congregational.

The determination over whether the denomination is hierarchical is a factual question. “A denomination is organized in a hierarchical structure when it has a central governing body which has regularly acted within its power while the looser congregational structure generally has all governing power and property ownership remaining in the individual churches.”  Lamont Community Church citing Calvary Presbyterian Church v Presbytery of Lake Huron of United Presbyterian Church, 148 Mich. App. 105, 108 (1986).

The Lamont court held that the CRC is clearly hierarchical finding this based on Michigan case law.  As the Michigan Supreme Court in Borgman v. Bultema, 213 Mich 684, 690 (1921) stated:

“I do not see how anyone could read the 86 articles of the church order of the Christian Reformed Church which is a supreme law or constitution of the church without coming to the conclusion that this religious denomination is much more than a federation of churches.” 

III. Lesson: See the headline to this Post – Church Property Issues are Messy.  

This is especially true in Michigan, which applies a minority approach. A crucial inquiry is whether or not a church is “hierarchical” or “congregational.” This inquiry will bear much weight on who has ultimate ownership rights in the Property.

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Construction Liens: Part 2

September 17, 2013 Leave a comment

Last week I posted about Construction Liens and if a Court determines that a lien was filed in bad faith, or “vexatiously” the Court may award sanctions against the lien claimant.

 

I received a comment to the effect that it seemed like the legislature was making it harder and harder to recover under a construction lien.

However,  contractors should keep in mind a few concepts regarding the Michigan Construction Lien Act:

 

1. The Construction Lien Act is Remedial to benefit Lien Claimants

 

MCL 570.1302(1) states:

“This act is declared to be a remedial statute, and shall be liberally construed to secure the beneficial results, intents, and purposes of this act.”

 

2. Substantial Compliance is Generally the Standard Called For

MCL 570.1302(1) further states:

“Substantial compliance with the provisions of this act shall be sufficient for the validity of the construction liens provided for in this act, and to give jurisdiction to the court to enforce them.”

 

Therefore, substantial compliance is the general standard. This is not the case for “timing” provisions under the act.

 

 

A great example of this is the lien amount – what happens if you file a lien and indicate too much?  Is your lien void? Typically. no.

 

In order to void a construction lien that is filed in an excessive amount a showing of bad faith is required.  Tempo Inc v Rapid Elec Sales & Services, Inc, 132 Mich App 93; 347 NW2d 728 (Mich Ct App 1984).  “A lien is not lost because the amount claimed is excessive, unless the claim was made in bad faith. In such instances, the proper remedy is to reduce the amount of the lien to the correct amount.” Id

 

 

 

3. Timing of Recording  – Strict Compliance

 

The Michigan Construction Lien Act, MCL 570.1111, provides:

the right of a contractor…to a construction lien created by this act shall cease to exist unless, within 90 days after the lien claimant’s last furnishing of labor or material for the improvement, pursuant to the lien claimant’s contract, a claim of lien is recorded in the office of the register of deeds for each county where the real property to which the improvement was made is located. (Emphasis added.)

 

This 90 day filing is not governed by the “substantial compliance” standard.  This makes sense, since as the Michigan Court of Appeals noted in Stock Bldg Supply, LLC v Dept of Energy,  if there is no way to measure the last day of improvements, then lien claimants could potentially bring liens in perpetuity and cloud title to property.

The Legislature has imposed certain and definite limits on the timing and scope of the claiming of construction liens, so as to protect owners and purchasers of property, including that claims of lien be filed within a very short period of time after a contractor’s work is finished, which commences upon the last furnishing of labor or material for an improvement pursuant to a contract defining the scope of that improvement. MCL 570.1111(1).  Stock Bldg Supply, LLC v Dept of Energy, No. 295893, 2011 WL 1816510 (Mich Ct App May 12, 2011).

 

 

 

4.  Takeaway – Substantial Compliance is the general standard – Strict Compliance is applied in certain cases and means you should pay attention to “timing”

 

In general, the legislature provided that contractors should “substantially comply” with the CLA.  Strict Compliance is, however, the standard in the timing requirements of the CLA – 90 days to record a lien from the last date of improvement, 1 year statute of limitations to foreclose on the lien.

There are other prerequisites to foreclosing on liens such as providing notice of furnishings for sub contractors, and providing sworn statements, that I have not delved into. This is why it is always a good idea to consult with an attorney before filing a lawsuit, or recording a lien, in the context of construction liens.

 

 

 

 

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“If you don’t pay me, I will file a Lien!” Construction Liens: When is filing a lien “Vexatious”?

September 13, 2013 Leave a comment
I had good news today – a client of mine that I recorded a construction lien for told me that it was enough leverage to get the property owner to pay the amount owed.  Good news, and now I will discharge the lien.
Conversely,
I had a client who recently retained a renovation company to perform some work on his building. He should have gotten references, like through the local HBA http://www.mygrhome.com/, Regardless, my client hired an individual with a bad track record, unlicensed, and with a criminal record.
As you might imagine, the company performed substandard work, and when my client refused to pay – threatened to file a lien on my client’s Property.
Undoubtedly, the company likely thought this threat would provide leverage to get paid, however, the company likely didn’t realize the negative consequences if it proceeded to file a lien in bad faith, or as the Construction Lien Act calls it “Vexatiously
A Recent unpublished decision from the Michigan Court of Appeals  illustrates the possible consequences of filing a construction lien “vexatiously” :   Polaris Constr., Inc. v. Delicata, 308254, 2013 WL 3107537 (Mich. Ct. App. June 20, 2013)
I. Facts
This case arose from water damage to a commercial building in Detroit.
Defendant, Delicata, owned the building and leased a portion of it to Confidential, Inc. (Confidential), which operated a nightclub and restaurant in the leased space.

On January 19, 2009, a water pipe in the nightclub burst, causing damage to both the nightclub and restaurant as well as to a portion of the building not leased to Confidential. (*Important fact)

After the water damage was discovered, Peter Arabo, Confidential’s president, contacted Plaintiff, Polaris Construction to perform the remediation work.
Robert Kato, plaintiff’s head of operations, met with Arabo and defendant at the building. According to Kato and Arabo, defendant authorized plaintiff to proceed with the remediation work.
Pursuant to the terms of its lease agreement with defendant, Confidential maintained insurance coverage that included coverage for water damage to the leased premises.
Confidential filed a claim with its insurer, Badger Mutual Insurance Company, which paid $254,989 to plaintiff and Confidential for the remediation work.
At issue in this case is whether defendant had a contract with plaintiff to perform remediation work on the nonleased portion of the building and whether defendant owed plaintiff $120,000, which was the balance of the total contract amount of $374,989 for the entire building.
Plaintiff filed a claim of lien against the property in the amount of $120,000 and filed a complaint against defendant seeking foreclosure of the lien and alleging breach of contract, unjust enrichment, and fraud.

 
Defendant filed a motion to dismiss arguing:

  • no enforceable contract existed between he and plaintiff for the work performed.
  • Regarding plaintiff’s unjust enrichment claim, that the work that plaintiff performed did not directly benefit defendant;
  • that plaintiff’s lien foreclosure claim failed because plaintiff did not serve a notice of furnishing as required by MCL 570.1111(4), and its lien was therefore invalid, filed vexatiously, and therefore should result in sanctions to the plaintiff.

 

The trial court granted defendant’s motion and awarded defendant attorney fees and costs totaling $29,183.94.

Essentially, the trial court told the Plaintiff – you had no legitimate reason to file and foreclose on your construction lien, and therefore you should be responsible for paying the attorney fees incurred.

 

The Court of Appeals found differently, and reversed, holding that, Plaintiff had valid arguments for a unilateral contract, as well as unjust enrichment claims.

 

II. Law 

“VEXATIOUS LIEN”

 

MCL 570.1118(2) provides:

In an action to enforce a construction lien through foreclosure, the court shall examine each claim and defense that is presented and determine the amount, if any, due to each lien claimant or to any mortgagee or holder of an encumbrance and their respective priorities. The court may allow reasonable attorneys’ fees to a lien claimant who is the prevailing party. The court also may allow reasonable attorneys’ fees to a prevailing defendant if the court determines the lien claimant’s action to enforce a construction lien under this section was vexatious. [Emphasis added.]

A vexatious proceeding within the meaning of MCL 570.1118(2) is “a proceeding undertaken ‘without any reasonable basis for belief that there was a meritorious issue to be determined….’ “ ER Zeiler Excavating, 270 Mich.App at 652, quoting MCR 7.216(C)(1)(a).
The Court of Appeals held that the lien was invalid, although not for the reason the trial court found, but because Plaintiff failed to provide a sworn statement to Defendant (a prerequisite to foreclosing on a lien).
However, given the meritorious arguments that Plaintiff had regarding a breach of contract and unjust enrichment claim, the Court held that the lien was not filed vexatiously, or in bad faith, and removed the sanctions imposed by the trial court.
III. Lessons
There are several:
1. Draft your contracts carefully! This applies to any business.
2. Contractors – go to your attorney before filing a construction lien – make sure you comply with the prerequisites of the Construction Lien Act.  Yes, the CLA is a “remedial statute” however, there are sections, like timing of filing liens, and providing sworn statements, which must be strictly complied with.
3. This is a subset of number 2, Don’t file a lien simply because you think the party will pay.  They  might pay, but if the only reason you are filing it is to get them to pay you, and you do not have a valid reason for filing the lien you could be held responsible for filing a lien “vexatiously” and have to pay their attorney fees.

 

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Alert: Latest Banking Scam Reported By The OCC – Fake Checks Issued By Meridian Bank

September 4, 2013 Leave a comment

Today I received a spam email from someone from a foreign country asking me to assist in collecting a $2.5 Million Debt. These scams are unfortunately very common. Maybe more so in the legal profession than any other profession – probably these  con-artists  are playing on the  presumed “greed” of lawyers 🙂

The way that these lawyer scams typically work is as follows: “Client” – the scammer –  retains attorney with a phony check – the check appears to clear the bank, and then “Client” asks attorneys to remit a certain percentage of funds to the client. After Attorney remits funds to the client, attorney gets notice that the Client’s initial check bounced. The OCC’s website reveals the reasons for this delay:  “When you deposit a fraudulent check into your account, the law requires your bank to make the funds available within a specific period of time even if the check has not yet cleared through the banking system”  http://www.occ.gov/topics/consumer-protection/fraud-resources/types-consumer-fraud.html#cashiers

My law firm once received such a check from a potential scammer for almost $1 Million – the scammer probably was hoping we couldn’t “resist the urge” and deposit the fake check. Fortunately, I was of the opinion that if its too good to be true, it probably is. The check made a great souvenir though.

The OCC reported today of one such  scam that consumers and banks should be on the look out for: A Fake Check  supposedly issued by Meridian Bank of Phoenix, AZ sent to individuals claiming they are lottery winners. According to the OCC:

The Fictitious checks presented to date have been made payable in the amount of $2,700.90 and are being mailed to potential victims along with correspondence containing the letterhead of “Trust Financier, 400 Orange Street, Bloomingdale, NY 07211; Tel: 1-905-781-0357.”

The letter informs the recipient that he or she is the winner of a lottery drawing in the amount of $55,000. The letter states that the check is being provided to the winner to pay the taxes due of $1,750. Recipients are further instructed to keep their winning status confidential and to contact Jason Sight at 1-905-781-0357 for additional information.

See the full report by the OCC at http://www.occ.gov/news-issuances/alerts/2013/alert-2013-17.html

Banks and consumers should be wary – if there is any doubt about the validity of a check, contact the OCC.  Again, if its too good to be true, it probably is.

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