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Archive for May, 2017

Michigan Entrepreneurs and Small Businesses: Crowdfunding Law Update.

Last year  Representative Tom Barrett introduced House resolution2015-11-26-13-04-02 235 (HR 235)

“to support the (SEC)’s recent adoption of rules…to facilitate small and start-up companies’ access to capital raised through crowdfunding.”

The resolution supports crowdfunding as viable tools for start-up businesses.

The resolution acknowledges:

Businesses in Michigan have greatly benefited from the opportunities created by the…Michigan Invests Locally Exemption (MILE) program. MILE has allowed everyday Michiganders, referred to as unaccredited investors, the ability to play a larger role in growing Michigan’s creative business ventures through Michigan-based crowdfunding platforms while still enjoying investor protections and security in their investments” (Emphasis added.)

 

Is Crowdfunding a Viable Option in Michigan?

Fast forward to today,  MIBiz recently reported that Michigan’s crowdfunding law hasn’t gained much traction

However, it may remain a viable tool for cash-strapped startups and the Michigan legislature has not given up on it.

 

Yesterday the Michigan House passed HB 4035 that amended the Michigan Invests Locally Exemption to Intrastate Crowdfunding.

 

According to yesterday’s announcement from the Michigan House Republican Website:

The amendments contained in HB 4035 “will expand the program so people can also invest in small businesses primarily doing business in the state and allows Michigan’s law to remain active under new Federal regulations

You can check out the House Fiscal Agency’s Analysis Here

The HB now moves to the Senate Commerce Committee for consideration.

 

Entrepreneurs and Start-ups:

 

Proponents of Crowdfunding: access to capital.

A while back Candace Klein Chief Strategy Officer at DealStruck was Interviewed by CrowdfundInsider and talked about how small business might benefit from crowdfunding. She had this to say, in part:

“Most businesses are community-based, and have an immediate impact for those in their community, whether geographic or industry-based.  Crowdfunding brings these companies together with the everyday investors in their communities.”

 

Crowdfunding for Social Enterprise?

I agree. As I’ve previously written about, crowdfunding appears to be a viable tool for community based businesses.

People are willing to invest in projects that will enhance their local community.

This is what makes local equity-based crowdfunding attractive for social entrepreneurs.

This is what makes local equity-based crowdfunding attractive for social entrepreneurs.

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

www.dwlawpc.com

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Business Law Update: Michigan Supreme Court’s May 15, 2017 Decision on Minority Oppression

 

There are relatively few court opinions covering the Michigan Limited Liability Company Act. There have been even less on the issue of minority oppression claims.

It has been almost 3 years since the Michigan Supreme Court issued its Opinion in the  Madugula v Taub  case on Michigan’s shareholder/member oppression statutes.

The Madugula clarified that a claimant is not entitled to a jury a trial undmoney-73341_640er the Act; and breach of a Shareholder/Operating Agreement can be evidence of “oppressive” conduct.

On May 15, 2017 the Michigan Supreme Court issued its Opinion in Frank, et al v. Linkner, et al.

In summary, the Supreme Court held:

  • that MCL 450.4515(1)(e) provides alternative statutes of limitations, one based on the time of discovery of the cause of action and the other based on the time of accrual of the cause of action; and
  • That a cause of action for LLC member oppression accrues at the time an LLC manager has substantially interfered with the interests of a member as a member, even if that member has not yet incurred a calculable financial injury. See Frank, id. page 1.

 

The facts of Frank are admittedly, interesting (and unfortunate if you are the Plaintiffs):

Facts:

  • Defendant ePrize was founded by defendant Joshua Linkner in 1999 as a Michigan LLC specializing in online sweepstakes and interactive promotions.
  • Plaintiffs are former employees of ePrize who acquired ownership units in ePrize.
  • Plaintiffs allege Linkner orally promised them that their interests in ePrize would never be diluted or subordinated.
  • In 2005, plaintiffs’ shares in ePrize were converted into shares in ePrize Holdings, LLC.
  • In 2007, ePrize ran into financial difficulties and required an infusion of cash.
  • To remedy this problem, ePrize obtained $28 million in loans in the form of “B Notes” from various defendantmembers of ePrize and other investors;
  • plaintiffs were not invited to participate in these investments.
  • In 2009, ePrize remained struggling to meet its loan obligations and therefore issued new “Series C Units.”
  • These units were offered to various investors, including those who had obtained B Notes.
  • In exchange for the Series C Units, investors were required, amo
    ng other things, to make capital contributions, guarantee a portion of a $14.5 million loan from Charter One Bank, and convert their B Notes into “Series B Units.”
  • On August 20, 2012, ePrize sold substantially all of its assets and, pursuant to the Operating Agreement, distributed nearly $100 million in net proceeds to the holders of Series C and Series B Units.
  • Plaintiffs received nothing for their common shares.

Procedural History

Plaintiffs sued on April 19, 2013 alleging among other claims, minority oppression under MCL 450.4515. The trial court dismissed the claims, indicating that they were “untimely” under the 3 year statute of limitation period. The Court of Appeals reversed. This matter then went to the Supreme Court.

 

 

In General – Michigan Minority Oppression Statute

Michigan law provides a cause of action against the shareholders/members who are in control of a company and oppressing minority owners:

Minority Shareholder Oppression, MCL 450.1489 (Minority Member Oppression, MCL 450.4515)

“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:
illegal;
fraudulent;
or willfully unfair and oppressive to the corporation or to the shareholder.” 
“If the shareholder establishes grounds for relief, the circuit court may make an order or grant relief as it considers appropriate, including, without limitation,
an order providing for any of the following:
(a) The dissolution and liquidation of the assets and business of the corporation.
(b) The cancellation or alteration of a provision contained in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.
(c) The cancellation, alteration, or injunction against a resolution or other act of the corporation…
Therefore, if a court finds that those in control of the business committed misconduct against a minority owner amounting to “oppression”, the Court has broad discretion to create the type of relief it deems is best.
Back to the Supreme Court’s Decision in Frank…
a. Statute of Limitations
The Supreme Court agreed with the Court of Appeals that:
“MCL 450.4515(1)(e) contains two alternative statutes of limitations:”
1. (2 years) predicated upon discovery of the cause of action and
2. the other (3 years) predicated upon accrual of the cause of action. Id. at pg 6.
The Supreme Court clarified that under the statute “A plaintiff has two years from the time he or she ‘discovers or reasonably should have discovered the cause of action” to bring a claim [under the minority oppression statute]”. Id pg 13. “…a plaintiff cannot bring a claim three years after accrual of the cause of action, even if he or she did not discover and reasonably would not have discovered the cause of action during that period.”
b. when does an oppression claim accrue?
The Plaintiffs/minority members argued that their claims “did not accrue until they first incurred a calculable financial injury after ePrize sold substantially all of its assets in 2012.” Id. pg 16. They reasoned that no monetary damages occurred until the company was liquidated. Id.
The Supreme Court, however reasoned that the “plaintiffs’ argument conflates monetary damages with ‘harm'”.  The Court held that:
the actionable harm for a member-oppression claim under MCL 450.1515 consists of actions taken by the managers that “substantially interfere with the interests of the member as a member,” and monetary damages constitute just one of many potential remedies for the harm.
Therefore, the Court held that :the Court of Appeals erred by focusing on the availability of monetary damages, rather than on when plaintiffs incurred ‘harm’.” The Court reversed the Court of Appeals on this issue. Id. 17.
“Once a plaintiff proves that a manager engaged in an action or series of actions that substantially interfered with his or her interest as a member, the “harm” has been incurred, and therefore the claim has accrued.” Id.
Application 
In application, the Supreme Court therefore found that the alleged harm occurred when the minority members’ interest were subordinated (in 2009) by amendment of the operating agreement and not when the sale occurred (in 2012). Id. at 20.
So, unless plaintiffs can show fraudulent concealment, Plaintiffs’ claims for monetary damages are barred.

 

Take away for Business owners/Investors/Entrepreneurs:

 

1. Get an attorney involved before the business relationship begins and clearly document the business relationship, especially your shareholder/operating agreement. That will contain the exit strategy and relevant buy-out language. Further, any conduct the parties agree to in their shareholder/operating agreement will not be deemed “oppressive”. However, a breach of the agreement, may deemed interference with your rights sufficient to constitute “oppression” however, this is based on a highly fact-intensive analysis.

2. If you believe you are being frozen out of control/profits in a business – do not wait. The Michigan Supreme Court has held that your claim accrues when the harm occurs. Learn from the Frank Decision.  Michigan law gives you broad remedies, including the minority shareholder/member oppression statutes.

Questions?

Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

News for Residential Real Estate Investors: DOJ receives Verdict against Landlord Disability Discrimination.

img_1417Here’s a profound truth those in the real estate industry will readily acknowledge:

Owning and Managing Real Estate is uniquely challenging.

I hear it from my Property Owner/Manager clients. I experience it when I am involved in negotiating in landlord/tenant disputes.

I believe that is why, at least in West Michigan, there is an opportunity for good property management companies – and a handful of companies I work with locally do it really well.

 

Some of the pitfalls property owners/managers have to watch out for are illustrated in a recent press release announce by the Department of Justice.

Yesterday the Department of Justice announced that it obtained a verdict in a disability discrimination case against a Landlord

 

 

According to the press release,

The lawsuit, filed in U.S. District Court in Butte, alleged that Jaclyn Katz, the owner and manager of rental properties in Bozeman, discriminated against Kristen Newman, a tenant with physical and psychiatric disabilities, by charging her a $1,000 deposit as a condition for allowing her to keep her service dog, Riley.  At trial, Newman, her treating therapist and an independent expert testified that Riley assisted Newman in living with the symptoms of her disabilities, including providing emotional support, helping to predict migraines, and reducing suicidal thoughts.  Newman also testified that she repeatedly informed Katz that charging a deposit for a service animal was illegal and that Newman understood that she would have to pay for any actual damage caused by her service dog.

 

 

Not good.

A right to a Service animal is legally protected under the Americans with Disabilities Act.

Michigan Law requires a public accommodation to permit the use of a service animal by a person with a disability.

Among other things:

“A public accommodation shall not ask a person with a disability to remove a service animal from the premises due to allergies or fear of the animal. A public accommodation may only ask a person with a disability to remove his or her service animal from the premises if either of the following applies:

(a) The service animal is out of control and its handler does not take effective action to control it.

(b) The service animal is not housebroken” MCL 750.502c

 

Landlords and property owners should heed the warning of General Deputy Assistant Secretary Bryan Greene of the U.S. Department of Housing and Urban Development’s Fair Housing and Equal Opportunity.

“Many people with disabilities require the assistance of an animal to carry out major daily activities,” said  “Complaints alleging disability discrimination now account for the majority of the complaints HUD receives. HUD will continue to enforce the law and educate the public on the rights of people with disabilities in housing.”

.

I wonder, did the landlord/property owner ever consult with legal counsel on its practices?

There are some lessons to be learned for landlords, property owners, managers, and real estate investors.

 

Two takeaways from this news headline:

 

1. It is worth being proactive and engaging legal counsel. 

Issues arise. When in doubt, e-mail or call your attorney.

 

2. Residential Real Estate Investment is highly regulated.

If you are a landlord leasing out “residential” property as opposed to purely commercial property (business tenant), you are under much more stringent regulations. You must comply with Federal laws, like the Fair Housing Act and state laws, like the Michigan Truth in Renting Act. Make sure you are operating lawfully.

 

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Michigan Business Law: Update on Work Opportunity Act – Removing Barriers to Employment for Ex-Felons.

May 17, 2017 1 comment

Falling From Grace.

Yesterday, I was at a CBMC Grand Rapids Luncheon and listed to Craig DeRoche tell his remarkable story of his rise to becoming the youngest House Speaker in Michigan history and abrupt fall to incarceration due to his hidden drug and alcohol addiction.

Craig now uses his skills and unique life experiences serving as VP of Policy at Prison Fellowship, an organization actively engaged in restoring those affected by crime and incarcerated.

But for God’s Grace – there go I.

Craig’s story and my own life experiences gave me pause to consider:

How many of us are a few life choices/circumstances away from being homeless? In prison? Addicted?

Serving the Vulnerable – Ex-Felons.

Yesterday I read a rather timely article posted by the Small Business Association of Michigan – the following statistic stood out to me:

Convicts leaving incarceration often have a difficult time re-entering the working world because, according to one survey, 65 percent of employers would never consider hiring someone with a felony record.

When people think about the marginalized in our society – those with a felony record should be at the top of the list.

Michigan Work Opportunity Act

Senate Bill 14 was passed by the Senate and it appears set to be passed by the House as well. Check out the Legislative Analysis by the House Fiscal Agency, here

The Bill would create the “Work Opportunity Act” which would require the Department of Talent and Economic Development (TED) to provide grants for employers’ hiring of qualified individuals on probation or parole.

The House Fiscal Agency’s Analysis recognizes the “apparent problem”

“In seeking re-entry into the workforce, an ex-felon is confronted with myriad challenges, including appealing to employers who are not eager to accept the risk of hiring an ex-felon. This program would seek to mitigate that risk, by offering grants of a portion of the exfelon’s salary to employers who hire qualified ex-felons.”

The Bill has received formal support from the following organizations:

Kelly Services (2-8-17)

Goodwill Industries of Greater Detroit (2-8-17)

Michigan Catholic Conference (2-8-17)

Michigan Sheriff’s Association (3-1-17)

Grand Rapids Chamber (3-1-17)

The office of the Attorney General (3-1-17)

Being Part of the Solution.

I am encouraged by the many groups committed to being part of the solution to removing barriers to work for the formerly incarcerated.  Goodwill Industries of Greater Grand Rapids lead by CEO Kathy Crosby does a fantastic job of equipping this demographic and putting them into long term employment. Mel Trotter Ministries has placed 135 individuals in their shelter into full time employment in 2016.

Some West Michigan companies who do a great job of reaching out to hire/place those with employment barriers include Cascade Engineering, the work started by its Founding CEO Fred KellerLacks EnterprisesKentwood Office Furniture and Express Employment Professionals of Grand Rapids lead by Janis Petrini  to name a few.

These organizations should give us pause to reflect on how we can do our part.

But for God’s Grace, there go I.

Questions? comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Real Estate Law Update: Investors Purchasing at Foreclosure – Take Care in Handling Personal Property Left at the Property.

May 11, 2017 2 comments

Today I am posting about a Court of Appeals case decided on April 25, 2017  – Suzor v Kamlay 2016-07-22 13.10.20

Foreclosed Property = high risk/high reward.

Real estate investors are always wary of the many pitfalls when purchasing property at foreclosure.

I’ve previously posted on problems when someone is still occupying the Property after foreclosure.

The latest case talks about what happens if the holdover is no longer in the property – but has left personal belongings.

Should you take matters into your own hands and remove the stuff?

What liability does a purchaser have after foreclosure and the expiration of redemption if they remove any personal belongings?

FACTS:

  • Plaintiffs’ home was foreclosed on.
  • The property was sold at a sheriff’s sale.
  • Plaintiffs did not redeem the property.
  • Purchaser sued  and was given a judgment of possession and an order of eviction.
  • Purchaser hired defendant to secure and clean the property and remove any remaining personal property—a process commonly referred to as a “trash out.
  • Plaintiffs brought a claim for conversion, arguing that their attempts to get defendant to return the items of personal property he removed from the foreclosed property were to no avail
  • Defendant argued – I have immunity under the Anti-Lockout Statute, since I was operating pursuant to a Court Order.
  • Trial Court agreed.

 

Anti-Lockout Statute – MCL 600.2918 

Any landlord who has gone through the process of evicting a tenant knows that, in the residential leasing context, there are heightened duties of landlords, and heightened rights of tenants.  Tenants have the right not to have their possessory interest in the property interfered with, without the proper court procedure being complied with (Summary Proceeding Action in District Court).

 

Here, Defendant claimed he was shielded from liability under MCl 600.2918(3)(a) which provides

that “[a]n owner’s actions do not unlawfully interfere with a possessory interest if . . . [t]he owner acts pursuant to court order.” Id. page 2.

The Court of Appeals held though that such immunity only shields from liability if the parties have a landlord-tenant relationship.

“However, the parties to this case did not have a landlord-tenant relationship.”

Also, The Court noted that

“While an owner has the right to lawfully enter the premises and remove belongings left therein pursuant to court order, the owner does not have title over the property removed.” Id. page 4.

 

The Court of Appeals would have presumably reversed on this point, but held that the trial court essentially “got it right, but for the wrong reasons.”   The Plaintiffs failed to provide any evidence to prove their case – that the defendant when he removed the personal property converted them by failing to allow the Plaintiffs to recover the property, or otherwise “that a bailment existed”. Id.  page 4.

 

Conclusion:

A purchaser at foreclosure should be careful in handling the personal property leftover.

 

As the Court of Appeals noted – the purchaser is not shielded from liability under the Anti-Lockout Statute, since there is no landlord-tenant relationship.

Also, the owner may have purchased title to the real estate, but not to the personal property.

 

To avoid any unfounded claims by holdovers, it always makes sense after purchasing property at foreclosure, when there are any occupants present, to go through the lawful channels for a court proceeding to extinguish any possessory rights and to make sure any personal belongings are handled appropriately.

You don’t want to expose yourself to undue liability.

 

Questions? Comments?

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka