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Archive for July, 2017

Cautionary Tale for Real Estate Investors: Yesterday California Investor Sentenced to Prison for Bid Rigging at Foreclosure Sales.

There are many pitfalls for real estate investors who purchase distressed property.

In today’s market, good deals for real estate investors are getting harder to come by. With distressed property becoming a scarce resource and competition ever increasing, some real estate investors have resorted to less than legal  acts to boost their profit.

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Rosa Parks Circle in Downtown Grand Rapids

Investors should know that the Department of Justice as well as State Agencies are cracking down on unfair real estate practices.

 

As a follow up to a story that I have been keeping tabs on, just yesterday, the Department of Justice announced that a judge sentenced a real estate investor for his roles in a conspiracy to rig bids at public real estate foreclosure auctions held in Northern California.

This after a 3-week trial.

 

 

You can see the press release here

 

According to the press release: Alvin Florida Jr. was “sentenced to serve 21 months in prison and to serve three years of supervised release. In addition to his term of imprisonment, Florida was ordered to pay a criminal fine of $325,803.

Based upon the DOJ’s investigation – this was a large conspiracy “to rig bids to obtain hundreds of properties sold at foreclosure auctions. The conspirators designated the winning bidders to obtain selected properties at the public auctions, and negotiated payoffs among themselves in return for not competing. They then held second, private auctions at or near the courthouse steps where the public auctions were held, awarding the properties to conspirators who submitted the highest bids.”

 

What is particularly striking to me is that including today’s sentencing the DOJ report that:

68 individuals have pleaded guilty or been convicted after trial as a result of the department’s ongoing antitrust investigations into bid rigging at public foreclosure auctions in Northern California.

 

Question for Real Estate Investors:

What type of unfair practices do you believe is going on in your state? What are you seeing take place at foreclosure sales?

In Michigan the record numbers of foreclosed properties since 2008 has provided a market (albeit one that is slowing down) for flipping residential real estate. With this opportunity to profit has also created an opportunity for abuse and fraud.  The real estate legal landscape is complex enough, do yourselves a favor – follow the rules.

 

Questions? Comments?

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

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Business Law Update: Court Lessons on Personal Guarantees.

Rosa Parks Circle in Downtown Grand Rapids

In the world of lending if a business wants to secure financing, you will be hard-pressed to find a bank that is not going to require some collateral, including a personal guarantee of the debt by the principal owner(s) of the business.

businesses don’t want to sign personal guarantees; it’s why businesses take on the corporate formalities of a limited liability company, or a corporation – to limit their personal liability. Therefore, it is understandable in a lawsuit over a promissory note that an individual would argue against the enforceability of a personal guarantee.
This is a reason why lenders, private investors, should make sure their legal documents are precise – so that in the event a lawsuit needs to be filed the document is not drafted so as to create an ambiguity.
Two cases come to mind that illustrate problems in enforcing personal guarantees – one recent and one a few years back.
June 29, 2017 Real Estate Development case
For an interesting case that went up and down the appellate courts, just look no further than a June 29, 2017 decision of WNC Housing LP v Shelborne Development Company
In that case a mortgage loan for a particular real-estate development project, the “Shelborne Park project,” was in default, and to avoid foreclosure, plaintiffs purchased the debt at a negotiated price.” Id.
The trial court found the general partner in a limited partnership of the development, Makino, to be a guarantor.
Makino appealed the trial court’s determination that she was personally liable, attacking the language of the general partnership agreement. The Court of Appeals affirmed the trial court’s decision that Makino was liable, but the Michigan Supreme Court, vacated that portion and essentially told the Court of Appeals to reconsider it.  The Court of Appeals reconsidered, reviewing the text of Makino’s partnership agreement and found, once again, Makino was liable under the language of the agreement (The pertinent language stated that Makino as general partner “hereby guarantees lien free Completion of Construction of the Apartment Housing on or before May 1, 2003”) . Id. at page 3.
October 9 , 2012 Case of the Ambiguously Signed Promissory Note.
Another example is illustrated in the 2012 unpublished Michigan Court of Appeals case of Marcuz v. Steven Premiere Properties & Dev., L.L.C., 305733, 2012 WL 4801060 (Mich. Ct. App. Oct. 9, 2012)
The promissory note was signed by Branoff twice: once as a “member” of Premiere Properties, and once “individually.” The note was also signed by defendants Mario and Antonio Giannandrea “individually.”
Premiere Properties defaulted on the promissory note so Marcuz sued the company and individuals on September 3, 2009.
In court, Branoff admitted that he signed the promissory note twice, but he claimed his second signature was not intended as a personal guarantee.  But his signature and the two other individuals were simply “because “we were showing…who were going to be the finalized members of the company.

Thus, an ambiguity exists.
Regardless, the trial court and the Court of Appeals disagreed with Branoff.
The Court held that “[w]hen Branoff signed the promissory note first as a “member” of Premiere and second “individually,” he manifested his intent to personally guarantee the note. Simply put, it would have been redundant for Branoff to sign the promissory note a second time if he did not intend that his second signature have some legal effect different from his first signature.”
LESSON from these two cases:Don’t Draft Legal Documents In a Manner That Creates Ambiguities.
Although the Lender in both instances did in fact win the day, the problem remained – they won after litigating a case that went to appeal, (and in Makino’s case, up to the Supreme court and back down to the Court of Appeals) which undoubtedly cost significant legal fees. The  drafter of the promissory note and the partnership agreement – much of the trouble could have likely been avoided if the partnership agreement and promissory note were more clearly drafted.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

OCC’s Remarks on Fintech Charter and a “Conversation about Financial Innovation and Fintech”

Today, Keith A. Noreika, Acting Comptroller of the Currency gave remarks encompassing the topic of Responsible Financial Innovation and Fintech Companies.

2015-11-14 13.57.51You can read Mr. Noreika’s remarks here.

All the excitement surrounding fintech companies reminds me of something that gets me excited – college football, particularly Michigan State Spartan Football (thus, a photo from one of my past experiences at Spartan Stadium)

 

Back to Fintech, by way of recap…

The prior OCC, Thomas Curry announced earlier this year that OCC would move forward with considering applications from financial technology (fintech) companies to become special purpose national banks.

 

Mr. Curry had this to say, in the past:

“Over the past year, no topic in banking and finance has drawn more interest than innovative financial technology, and for good reason. The number of fintech companies in the United States and United Kingdom has ballooned to more than 4,000, and in just five years investment in this sector has grown from $1.8 billion to $24 billion worldwide.

 

“The OCC published a paper discussing the issues and conditions that
the agency will consider in granting special purpose national bank charters.” You can check that paper out here

 

Fintech Charter: Praise, Debate, and a Lawsuit.

The propriety of a Fintech charter has been supported by the Fintech community in general.

 

As reported by Crowdfund InsiderBrian Peters, Executive Director of Financial Innovation Now  “a public policy coalition comprised of Amazon, Apple, Google, Intuit and PayPal” stated;

“FIN believes that payments and lending regulation needs streamlining for the modern era. We commend the

OCC’s leadership and vision in driving this regulatory discussion. The OCC has rightly concluded that its approach must evolve to ensure that all American consumers and small businesses are empowered with better access to the benefits of financial technology.”

According to Crowdfund Insider  “Fintech Charter could benefit innovative financial firms that can provide superior services at a lower cost for both consumers and businesses.”

 

 

That being said, the propriety of such action by the OCC has been questioned by others, and officially sued by the Conference of State Bank Supervisors as an “unprecedented, unlawful expansion of the chartering authority”- check out the Press Release from the CSBS back in April.

 

 

The OCC’s present Stance on a Fintech Charter

It appears no action will be taken until at least the lawsuit is resolved.

Mr. Noreika stated today that “at this point, the OCC has not determined whether it will actually accept or act upon applications from nondepository fintech companies for special purpose national bank charters that rely on this regulation. And, to be clear, we have not received, nor are we evaluating, any such applications from nondepository fintech companies.

Still, Mr. Noreika expressed his thoughts on the need for a fintech charter:

“I also believe that if you provide banking products and services, acting like a bank, you ought to be regulated and supervised like a bank. It is only fair, but today, that is not happening. Hundreds of fintechs presently compete against banks without the rigorous oversight and requirements facing national banks and federal savings associations.”

 

Why Fintech Intrigues me – Purpose Driven.

I’ve previously talked about why fintech is so intriguing.

a. taking a risk doing something different;

b. disrupting business as usual;

c. for the good of others.

That’s social entrepreneurship at its finest.

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Fintech Company “Lemonade” Following Through on Its Purpose Driven Mission.

In the past I have posted on Fintech Companies – and highlighted a few – namely Lemonade.  Below is an update on some exciting things Lemonade is doing.

2015-11-26-13-04-02

 

But as a threshold matter:

What is Fintech?

 

According to FinTech Weekly:

Financial technology, also known as FinTech, is a line of business based on using software to provide financial services. Financial technology companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.

 

The idea of a business’ purpose of “disrupting incumbent”…anything is intriguing to me.

Some systems need to be disrupted. I have previously posted my own thoughts on being a disruptive force for good.

To that point, Lemonade seemingly fits the bill. Look no further than it’s mission statement on its homepage: “Instant everything. Killer prices. Big heart.

About Lemonade:

According to its website, Lemonade is the “World’s First P2P Insurance Company” (Peer-to-Peer).

Lemonade provides Renters and Homeowners Insurance to New

Yorkers.

According to a CrowdFundInsider article: “Lemonade has positioned its platform in a David vs. Goliath battle to challenge antediluvian insurance incumbents by providing a far better service at a superior price.”

Who doesn’t root for the underdog?

Technology Driven.

Shai Wininger, co-founder and President of Lemonade, explained to CrowdfundInsider that technology drives everything at Lemonade.

“From signing up to submitting a claim, the entire experience is mobile, sim

ple and remarkably fast. What used to take weeks or months now happens in minutes or seconds. It’s what you get when you replace brokers and paperwork with bots and machine learning.”

Disruptive Force for Good.

Daniel Schreiber, co-founder and CEO of Lemonade. told CrowdfundInsider “the opportunity is unusual. Disrupting an industry that has not changed for a hundred years ”

According to an article posted by Venture Beat:

Lemonade is also setting out to combat existing models through an annual “giveback,” where it donates unclaimed money to good causes.”

Talk is cheap.  Has Lemonade followed through on its actions?

Apparently so – in a very impressive way.

 

Lemonade’s 2017 GiveBack

Lemonade posted today that its Giveback for 2017 was $53,174:

this amounts to 10.2% of its 2017 revenue.

 

The article highlighted one such GiveBack recipient: New Story

“New Story builds safe homes for the homeless, and aims to transform slums into thriving communities in the developing world.”

 

“Through the Giveback to New Story, the Lemonade community built a new home for the Quitéño family, from start to finish. Now, the Quitéño family will have a safe home to return to every day, giving them a stable foundation to improve their health, education, and income.”

 

Conclusion.

Lemonade is doing some innovative work for the social good.

I love the concept of this startup –

a. taking a risk doing something different;

b. disrupting business as usual;

c. for the good of others.

That’s social entrepreneurship at its finest.

If you are a homeowner or tenant residing in New York, this company is worth checking out.

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Update: Lessons From Court on Deadlock Between Business Owners.

July 12, 2017 2 comments

This morning was rainy and gray in Grand Rapids.

It is one of those days that prompted me to write on a topic that can be downright depressing – when relationships between shareholders go bad.

I had a client come in recently and ask me to set up an LLC for him.

rainy dayClient planned on owning the LLC 50/50 with a business partner. Someone he trusts (right, because no one goes into business thinking it will end in a lawsuit.) Regardless of the best intentions between these business partners, The 50/50 ownership can be problematic.

For an example, look no further than the May 11, 2017 Court of Appeals Decision in Shamee Catwilmat, LLC v Shamee Development Company, LLC et al.

The Shamee case originated out of Kent County’s Business Court Docket. (A little pride here, for our esteemed business court).

 

Shamee was a convoluted case regarding default on a Note, Mortgage and collateralized business assets – and ended in a mess for both sides. In essence, the Bank erroneously  foreclosed on only a portion of the Property that was otherwise secured by the mortgage.

However, of particular note for the purpose of this post is how the LLC was owned and the resulting problems:

50/50 ownership between members – Shah and Mead.

According to the Court:

“At some point, Shah and Mead began to disagree about the management of Shamee Development. Unable to reconcile their conflicting viewpoints, they reached a “membership deadlock” that prevented Shamee Development from continuing to service its debt to the Bank and from taking the necessary steps to refinance or renegotiate such debt. After Shamee Development failed to make payments as agreed, the Bank accelerated the debt, including the mortgages, and instituted this action against
defendants.”

 

Thus, one equal member had the power to halt business operations, fail to service its debt, and the result was this lawsuit foreclosing on real estate and an appeal.

There are several ways the members could have avoided this scenario, here are just a few:

  1. Create an Operating Agreement that contained a deadlock provision.  This provision could call for mediation/arbitration, or even a buy-out in the event that equal owners halt the business from making key business decisions.  Going back to my client mentioned above, that was my solution for him. Creating a deadlock provision in his Operating Agreement.
  2. Negotiate different ownership prior to forming your business: someone  has majority control, someone has minority.
  3. Set up the LLC as a manager-managed LLC – give certain powers to a single manager to take care of the daily business affairs of the Company – and retain some of the “major” decisions, such as amendment of operating agreement, admission of new members, dissolution, etc… to the members.

 

Lesson:

When setting up a business, you should always have the end in mind. How does a business owner get out of the business?  You should also make sure that one member does not have the power to halt business operations, like in the Shamee case.

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

 

 

Real Estate Law Update – a Court Case Discussing Laches.

From a lawyer’s perspective, real estate disputes are often messy.

The parties are often driven by emotion. The facts are often complex.

Simply put – it is usually a mess.

2017-04-09 21.33.41

Often the doctrine of laches gets raised in such a lawsuit.

A few years back I wrote a post about the legal (technically, “equitable”) doctr ine of Laches and how laches is an often raised defense in real estate disputes.  

The argument usually goes something like this:

“Hey, Plaintiff! You should have brought your claim sooner! Because you were so late in suing me, there are specific related reasons that make it unjust for the court to hold me responsible!”

A June 2017 Michigan Court of Appeals decision came out, where laches was raised as a defense.

You can check out the case here:   DeGhetto v Beaumont’s, et al. (unpublished) No. 330972 (June 22, 2017).

In this case – the court opined that the facts were “muddled”.  (my interpretation – “a mess”)

But first, as a recap…

 

The Equitable Doctrine of Laches:

 

“Laches is an equitable tool used to remedy the inconvenience resulting from the plaintiff’s delay in asserting a legal right that was practicable to assert.” Public Health Dept v. Rivergate Manor, 452 Mich. 495, 507; 550 NW2d 515 (1996).

As such, “when considering whether a plaintiff is chargeable with laches, [a court] must afford attention to prejudice occasioned by the delay.” Lothian, 414 Mich. at 168. It is the prejudice occasioned by the delay that justifies the application of laches.Dunn v. Minnema, 323 Mich. 687, 696; 36 NW2d 182 (1949) .

 

Stated another way,

“the equitable doctrine of laches bars a claim “when the passage of time combined with a change in condition would make it inequitable to enforce the claim ag

 

ainst the defendant.” Township of Yankee Springs v Fox, 264 Mich App 604, 612; 692 NW2d 728 (2004) (Emphasis added.)

Therefore in deciding on the issue of Laches, a Court will ask two questions:

1. was there a delay in bringing the claim and, if so,

2. did it prejudice the Defendant?

Question: Why is laches relevant to real estate disputes?

Answer: Because many real estate claims are based in “equity” as opposed to “law”-  e.g. –an injunction, specific performance, action for quiet title…

 

The Case of DeGhetto v Beaumonts, et al.

The case involved homeowners and an Association.

The dispute was about the “ongoing viability of restrictive covenants o

 

n plaintiffs’ lots” and the ability of an Association to assess Association dues against Association members.

The Association believed it could enforce deed restrictions – the homeowners disagreed.

Certain disagreements arose, including l.iens recorded on some properties,

and thereafter the Homeowners sued the Association.

The Homeowners asked the Court to declare the deed restrictions were unenforceable, and that the Association had no rights to assess dues.

The Court admitted that the facts are a bit “muddled” – as is often the case in real estate disputes.

One of the Association’s defense was that laches should bar the homeowners’ lawsuit.

“Defendant argues that the doctrine of laches should apply to bar plaintiff’s suit
because there was a change in conditions that made granting relief to plaintiffs inequitable—plaintiffs’ sudden refusal to pay dues, which prejudiced defendant because it had relied on their payments for years.” DeGhetto. Pg 8

 

 

The Court of Appeals disagreed with the Association, holding that:

“Plaintiffs did not delay in filing suit. There was debate over whether the
dues were enforceable and two attorneys rendered different opinions on the matter. Plaintiffs asserted their right by filing suit after defendant indicated that the dues were mandatory as opposed to voluntary. Furthermore, defendant cannot show prejudice.” Id.

 
The Court held that Defendants did not satisfy the requirements to establish Laches.

As the Court held in Charter Township of Lyons v James E. Petty, et al. (unpublished) No. 327686 (Oct. 13, 2016):

“Prejudice is a mandatory element.” and

“The prejudice necessary to establish a laches or estoppel defense cannot be a de minimis harm…” Id. pg 5.

 

Lesson:

Laches is an often raised and valid defense, applicable in many real esta

te disputes. When raising a defense of laches in real estate disputes, Defendant must show Plaintiff delayed in bringing forth the claim.

Showing merely the passage of time is not sufficient.

Further, showing the presence of de minimis harm due to the passage of time is not sufficient.

Significant harm must be shown along with delay.

 

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka