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Archive for February, 2017

Business Case Law Update: Set up Your business agreement with the End in Mind.

February 17, 2017 1 comment

It is a beautiful Friday afternoon in downtown Grand Rapids – which is why I took a picture of Rosa Parks Circle. You can see the zamboni is out on the rink. I can’t imagine the ice will last, since the weather is supposed to get in the upper 50s this weekend…

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I often tell my clients that lawyers see the worst case scenarios.  Yes, in business, you can usually rely on your relationships to go as they should – (you send an invoice for services and typically you will get paid).

Lawyers see the relationships that go wrong.

We often have clients come to us to protect against disasters, yes, but also to guide our clients after  a disaster has happened.

For instance – when a dispute has erupted between business partners. Someone wants out of the business.

It is much easier to protect a client on the front end. That is particularly why when setting up business partnerships – whether through an LLC, corporation, or some other joint venture, it is crucial to have “the end in mind.”

How do the partners exit their relationship?

A recent court case provides lessons to business owners exiting such relationships.

Since the most common business entity formed in my practice is a limited liability company, I am always looking to read the latest court decisions that come out on LLCs.

There are relatively few court opinions covering the Michigan Limited Liability Company Act, which is why I was excited to read the August 18, 2016 unpublished decision of Joby Clark v Butoku Karate School, LLC – and it just so happened that the facts of this case are somewhat interesting.

The facts of this case seem to be somewhat publicized – at least in Macomb County.

The relevant facts:

  1. Butoku Karate School, LLC, a limited liability company in which Clark and John Wasilina were the only members.
  2. Plaintiff and Wasilina formed the company in 2002 for the purpose of operating a karate school, and together operated the school until plaintiff left the company in January 2011
  3. Rumors that Plaintiff was involved in an inappropriate and illegal relationship with a minor surfaced,
  4. On January 5, 2011, plaintiff and Wasilina together went to the bank and withdrew $100,000 from the company’s account,
  5. Plaintiff and Wasilina each received $50,000 of the proceeds of the account.
  6. On January 12, 2011, Wasilina met with plaintiff and requested that plaintiff sign two documents. The first document was entitled “Notice of Dissolution
  7. The second document was entitled “The Consent of the Members” – which, among other things, extinguished Clark’s membership interest in the Company.
  8. Both plaintiff and Wasilina signed the documents on January 12, 2011.
  9. Thereafter, Plaintiff argued “we agreed my withdrawal was temporary.”
  10. Plaintiff sued alleging three counts arising from the dissolution of the business relationship, fraud, failure to distribute, and conversion.

LAW:

IF YOU DO NOT WANT THE DEFAULT RULES UNDER THE MICHIGAN LIMITED LIABILITY COMPANY ACT TO CONTROL YOUR RELATIONSHIP IN THE LLC THEN YOU MUST “CONTRACT OUT” OF THOSE RULES.

I’ve previously written about why an operating agreement matters. A business relationship agreement should be drafted with the end in mind: how do the parties get out of the business relationship?

It is a relatively simple concept:

If you, as an owner in an LLC, do not want to leave your relationship with the other members of the LLC completely subject to the default rules under Michigan law – get your agreement in writing.

In the Butoku Karate case, the Court of Appeals cited the Michigan Limited Liability Company Act regarding the rights of a Member to withdraw from an LLC:

“MCL 450.4509 provides: (1) A member may withdraw from a limited liability company only as provided in an operating agreement….”

MCL 450.4305 provides: Until the effective date of withdrawal, a withdrawing member shall share in any distribution made in accordance with section 304. An operating agreement may provide for an additional distribution to a withdrawing member. If a provision in an operating agreement permits withdrawal but is silent on an additional withdrawal distribution, a member withdrawing in accordance with the operating agreement is entitled to receive as a distribution, within a reasonable time after withdrawal, the fair value of the member’s interest in the limited liability company as of the date of withdrawal based upon the member’s share of distributions as determined under section 303.”

As the Court noted:

“Pursuant to MCL 450.4509, a member’s withdrawal from a limited liability company is governed by that company’s operating agreement. Only if an operating agreement is silent on the subject of additional distribution to a withdrawing member is distribution to a withdrawing member governed by §305”

In this case, the Parties Operating Agreement was clear.

Further, the Parties signed a Consent Resolution concerning the Plaintiff’s withdrawal – that agreement was also clear.

The Court found that “the clear language of the Consent of the Members states that plaintiff relinquished any potential right to additional payment that he may have had previously.”

A few take aways:

If you are going into business with a business partner there are a few things you want to remember:

  1. Execute an Operating Agreement (all parties need to sign it); and
  2. Make sure that you have thought through how a member may withdraw – in what instances and under what conditions?
  3. Any revision to that relationship must be signed in writing.
  4. A Court will uphold an agreement signed by all LLC members (absent a clear showing of fraud or other exigent circumstances)

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

 

Michigan Legislation Update: The Urban Food Initiative. Community Revitalization To Include Downtown Grocery Stores.

February 15, 2017 Leave a comment

Two Thanksgivings ago I took my family to New York City.

Even amidst the chaos of protecting my 4 young children from darting out in2015-11-26-13-04-02to oncoming traffic – we absolutely loved the City.

We loved the walk-ability of City life – that you could walk down a block to a grocery store and get all of your household needs.

I love downtown Grand Rapids.

If Grand Rapids wants to encourage urban living, it needs a downtown grocery store.

Yesterday, House Bill 4207 was introduced in the Michigan house. Known as the “Urban Food Initiative” it would provide incentives for community revitalization that would include a downtown Grocery Store.

Specifically, HB 4027 would make “Urban Food Initiatives” allowable to receive funds under the Michigan Community Revitalization Program

The Bill defines Urban Food Initiatives as:

Property that will be used primarily as a retail supermarket, grocery store, produce market or delicatessen that is located in a downtown area…that offers unprocessed USDA inspected meat and poultry products or meat products that carry the USDA organic seal, fresh fruit and vegetables, and dairy products for sale to the public.”

Clearly having available and healthy food options in a downtown are necessary to City living. Check out today’s article from Next City about the Food Revolution in Detroit.

A downtown grocery store is necessary if a City wants to attract urban living – it is also necessary to provide healthy food options for those living downtown without readily available transportation.

I think particularly of the under-employed and the homeless who receive services from organizations like Mel Trotter Ministries. Grand Rapids has a need for affordable housing for the most vulnerable in our society. It would be great to see grocery options as well.

I am looking forward to tracking the progress of this bill. I am also encouraged by the many businesses in West Michigan asking the question: “How am I building a better community?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Reminder for Michigan Limited Liability Companies on Upcoming Filing Deadline. Stay in Good Standing and Maintain your Corporate Formalities.

February 9, 2017 Leave a comment

Happy #ThrowbackThursday.

 

Some (maybe all of you) may be wondering about my choice of including this photo – 2016-09-22-07-53-56it is me, years ago, dressed as Sparty for the MSUvUofM game. I thought it pertinent, given the topic of this e-mail is maintaining your business “liability shield” and as everyone knows, Sparty is the greatest warrior/mascot of all time. (You have to admit, there’s at least a loose connection.)

Today I received an e-mail from The Michigan Department of Licensing and Regulatory Affairs (“LARA”) reminding that all annual statements and reports for LLCs and PLLCs are due February 15, 2017.

Per LARA’s announcement:

“Annual statements and annual reports can be filed online at www.michigan.gov/fileonline.

The statements and reports must be filed online by February 15, 2017, or if mailing instead, received by February 15, 2017. Late filing penalties will be assessed for 2017 annual statements and annual reports for professional limited liability companies received after February 15, 2017.”

Consequences for Failing to File:

LARA also reminds that:

“Section 909(2) of the Michigan Limited Liability Company Act, 1993 PA 23, provides that if a domestic or foreign professional limited liability company does not file the annual report by February 15, then in addition to its liability for the fee, a $50.00 penalty is added to the fee.”

Is your LLC in Good Standing?

Occasionally I will have a business client come in and I will ask – just to make sure – “is your business still in good standing?”

The common answer is “I think so.”

And of course, after I perform a quick internet check with the State of Michigan it is all too common that I discover that either the LLC is “not in good standing” or worse, the company has been dissolved automatically for failure to file annual statements.

A Word on Resident Agents:

My law firm is happy to provide our business clients with resident agent services. One of the benefits of an LLC is that it provides its owners a level of privacy protection.

Michigan law requires Limited Liability Companies to have appointed a Resident Agent.

MCL 450.4207(1)(b) requires an LLC to have a resident agent. A person, or business with a physical presence in the State of Michigan.

Michigan law does not require that an “owner” of the LLC be the resident agent.

“The resident agent appointed by a limited liability company is an agent of the company upon whom any process, notice, or demand required or permitted by law to be served upon the company may be served.” MCL 450.4207(1)(b).

Many of my real estate investment clients will utilize my law firm as resident agent when filing their articles of organization with the State of Michigan.

In Conclusion:

Business owners, if you get these annual statements from the State of Michigan, or from your attorney – do not disregard them! Maintain your Corporate Formalities.

Questions? Comments?

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka