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Business Owners: News Headline Illustrates the Potential Legal Consequences of Business Break-Ups

August 25, 2014 Leave a comment

The American Bar Association Journal reported a bit of legal news today-  a Defunct Law Firm was Ordered to Pay Subleases for a Manhattan Office Building, see the article here

 

Business owners – you know why you create a business entity – a corporation, or a limited liability company – to limit your personal liability from the reach of creditors of the business.

 

However, this headline illustrates another issue that business owners should be mindful of when thinking about limiting liability: what happens when you break up a business partnership, or decide to dissolve and then create a new business?

 

 

I. When breaking up a business relationship:

 

What happens when you have a dispute with your business partner and you decide to go your separate ways?

 

Facts of the article above are helpful.  It involves a business with four shareholders.  Two of the shareholders decided to leave the business (the “Leaving Partners”) and the other two shareholders dissolved the business, stayed together as a partnership (the “Remaining Partners”) and resided in the former business office space.

The Remaining Partners, through their new business incurred lease expenses for the building.

Upon exit, the Leaving Partners received releases of liability from the Business.

 

Business Owners and Fiduciary Duties.

 

As a business owner, you have a fiduciary duty, to act in the best interest, of the company and the other shareholders.

When exiting a business relationship, naturally, removing yourself from this duty is important. In this case, the Leaving Partners were allowed to go their separate ways and they no longer had any responsibilities to the business for any future debts. They were not responsible for liabilities incurred by the remaining partners after their exit.  Their share of their former business’s  assets could not be used to pay their former business’s rent.

 

Points To Consider when exiting a business relationship.

 

When leaving a business relationships make sure to look at the partnership agreement, bylaws or operating agreement, that you entered into with the business partners.

That document will answer some of these questions:

  • do you have a right to leave voluntarily?
  • If so, how do you value your shares? Is there a different way to measure your shares depending on how you exit the company (good cause, voluntarily, disability, etc..)
  • Are you bound by a non-compete or non-solicit of company clients? If so, for how long?

 

The good news of ending a business relationship, as they two Leaving Partners found out in the article, is that you  no longer have any responsibilities to the departed business (assuming you didn’t personally guarantee any obligations of the business)

 

 

II. When Dissolving a Company and Creating a New One.

 

First, a good question to ask is, why do this?

 

When breaking up a business partnership that went bad, it could be simply to get a “fresh start”.  It could also be that you are getting into a completely different business, different market, different product line, different geography, etc…

 

The wrong reason would be that your prior business held a lot of debt and you want to distance yourself from that debt. That brings us to the topic of:

Successor Liability.

 

The 1999 Michigan Supreme Court case of Foster v Cone-Blanchard Mach Co, 460 Mich 696, 702; 597 NW2d 506, 509-10 (1999), gives a good definition of “Successor Liability”.

 

“The traditional rule of successor liability examines the nature of the transaction between predecessor and successor corporations.
If the acquisition is accomplished by merger, with shares of stock serving as consideration (e.g. “stock Purchase“), the successor generally assumes all its predecessor’s liabilities.
However, where the purchase is accomplished by an exchange of cash for assets (i.e. “Asset Purchase“), the successor is not liable for its predecessor’s liabilities unless one of five narrow exceptions applies. The most often invoked exception:
(5) where the transferee corporation was a mere continuation or reincarnation of the old corporation.”
Point to consider when dissolving a business to start-up a new venture: is this new venture merely a continuation of your old company?  If so, you won’t be able to avoid any outstanding debts from your old company.
Questions? Comments?
Email: Jeshua@dwlawpc.com

 

 

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Lessons for Business Owners from Recent DOJ Suit: Grand Rapids Landlords to Pay $550,000 and Terminate Manager’s Responsibilities

August 20, 2014 Leave a comment

The U.S. Department of Justice issued a press release yesterday afternoon regarding a Settlement reached with a Grand Rapids Real Estate Owner concerning actions of its Property Manager.  You can see the Press release here

 

According to the press release, “the owners of the Alger Meadows Apartments in Grand Rapids, Michigan, have agreed to pay $550,000 in damages and civil penalties and to terminate property manager Dale VanderVennen’s role in managing the complex to settle a lawsuit alleging that VanderVennen sexually harassed female tenants in violation of the Fair Housing Act (FHA).”

 

You can read the press release, and the complaint as well, since it is public record, about the details of the allegations against Mr. VanderVennen concerning the allegations of inappropriate actions against female tenants in the buildings that he managed.

 

There are a lot of lessons to be learned from this whole mess – I will highlight 3.

 

1. Hard to Come by Good Property Managers

I have noticed this problem that applies to clients of mine who own investment real estate – it can be a challenge to find good, honest property managers!

This press release highlights, among other things, the fact that there is a need for good, honest property managers in West Michigan. If you are a property manager, or looking to get into that role, you can set yourself apart by ethical and competent behavior.

 

2. Business Owners – take care in who you employ – it is a reflection on you.

 

Certainly there is no allegation that I can see in the complaint that any of the direct owners played a role in the actual misconduct against tenants, however, legally that is not an excuse.  Business owners would do well to insulate themselves from liability by surrounding themselves with good people.  I see this problem most often arise with construction clients of mine, hiring unethical subs (because its hard to find good people)

 

3. Business Owners – Take Value in Protecting your Privacy through your LLC.

 

Many of clients form LLCs to hold their real estate, or other business ventures. There is an added benefit to holding property as such – it provides a level of anonymity to the members/owners. The State of Michigan Limited Liability Act requires a resident agent be named, but it doesn’t require that it be an owner. To add a level of privacy, (business owners can value privacy for numerous reasons, case in point) add an agent not connected with the business. I often times serve as agent for business clients of mine.

 

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

 

 

 

 

 

 

 

 

 

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Categories: business, Real Estate

Don’t file a Lien Against a Judge Part II: “Paper Terrorists”

August 19, 2014 Leave a comment

As a follow up to my last blog post about the sovereign citizens, who believe the laws don’t apply to them, I found this interesting article through the ABAJournal, see it here

One of the stories cited by the article is re: Victor Cheng:

 

“The Atta family locked up their Temecula, Calif., home and went on vacation in 2012. While they were gone, Victor Cheng moved in.

Cheng had owned the home before the Attas, but he lost it in foreclosure. Nonetheless, he filed a fraudulent deed with the county recorder’s office, transferred the utilities into his name and even tried to evict the Attas after their return.

During his prosecution for burglary, trespassing and filing a false document, he insisted that he was not the person being prosecuted because the indictment spelled his name in all capital letter.

 

The article notes that the FBI has identified these people as “Paper Terrorists

 

You can read the full article to get some more personal stories about how these “sovereigns” have wrecked havoc on peoples lives.

 

I had a client go through a similar situation – his spouse was a self-proclaimed “sovereign” and, unfortunately, she was in charge of all the family finances. She kept her activities secret from her husband for years and was filing maritime liens against every creditor they had. My client discovered, only through my due diligence, that his family home had already been foreclosed on and he was literally weeks away from being evicted (despite the fact that his spouse had filed a billion dollar “maritime lien” against the lender on their Home. Why a register of deeds would allow spouse to record such a silly thing is beyond me.)

 

The point of my post is simply an observation: it’s hard to defend against actions like Mr. Cheng’s when they don’t play by the rules.

 

Comments? Questions?

jeshua@dwlawpc.com

http://www.dwlawpc.com

 

 

Lesson: 

Categories: Real Estate

Lesson from the Department of Justice: It Doesn’t Pay to File a Lien Against a Federal Judge

August 4, 2014 Leave a comment

I love the Department of Justice Press Releases.

 

They always seem to be the best source for serious (and interesting) offenses committed against the Federal Government. If you ever want proof that it is not a good idea to mess with the Feds, just go to the DOJ’s website. Or you can take a look at their latest press release.

 

On Friday, a federal jury in Omaha, Nebraska, found Donna Marie Kozak guilty on Friday of conspiracy to file and filing false liens against two U.S. District Court judges, the U.S. Attorney for the District of Nebraska, two Assistant U.S. Attorneys and an Internal Revenue Service (IRS) special agent.

 

Ms. Kozak was apparently affiliated with the Republic for the United States of America

 

I know, do a double take. This is not the good ole’ U.S.A, but, an anti-government organization. As the Republic identifies itself:

 

the Republic for the United States is operating as a parallel government peacefully co-existing with the corporate UNITED STATES and has, in effect, already “broken away” from the current U.S. corporation. Lawfully, the Republic should be able to exercise oversight of the corporation.

 

– I wonder how many countries are recognizing the Republic’s sovereign status?

 

 

 

According to the DOJ, some of the illegal activity Ms. Kozak engaged in included:

  • placing her property in sham trusts,
  • establishing a sham charitable foundation,
  • sending harassing correspondence to IRS employees
  • filing bogus tax returns, trust returns, private-foundation returns and other false documents with the IRS.
  • In 2008, she filed a tax return based on fictitious income and tax withholdings on Form 1099-OID statements that claimed a refund of $660,000.

 

“Kozak was remanded into custody pending sentencing.  The maximum prison term for each false lien charge is 10 years.”

 

I only highlight this story partly because it is interesting (and just silly to file a lien against a judge), but also partly to highlight that defrauding the government is a big deal.

 

 

 

 

 

 

 

 

Categories: Real Estate