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Real Estate Investors: Update on Bill Allowing Single Member LLCs To Evict Tenants without Legal Representation

 

A common scenario in my legal practice:2015-11-26-13-04-02

Investor purchases property in an LLC. Investor locates a tenant. Tenant falls behind in rent. Investor hires attorney to evict Tenant.

Why hold real estate in an LLC?

Most of my investor clients own investment real estate in a Limited Liability Company.

This is for liability protection.

 

Once a limited liability company comes into existence, limited liability applies, and a member or manager is not liable for the acts, debts, or obligations of the company. “Duray Dev., LLC v. Perrin, 288 Mich. App. 143, 151 (2010).

 

Why not hold real estate in an LLC?

Some investment property owners decide not to do so. The primary driving reason from my experience is cost.

Cost associated with setting up the LLC; and

Cost associated with hiring an attorney and evicting non-paying tenants.

Some landlords don’t want to hire an attorney to evict a tenant.

Under current Michigan law, since an LLC is a separate legal person independent of the actual owners of the LLC, unless such owner is a licensed attorney, an owner of an LLC cannot file a lawsuit on behalf of the LLC.

To do so would be the unauthorized practice of law.

You can practice law on your own behalf – just not on behalf of someone else.

Although, the saying goes – he who is his own lawyer has a fool for a client.

 

UPDATE ON PROPOSED House Bill 4463 – Would Allow LLCs to Evict without Legal Representation.

 

House Bill 4463 was introduced in March and referred to the  committee on law and justice.

 

 

The Bill would allow owners of a single-member LLC (or a married couple under certain conditions) to file their own eviction actions on behalf of the LLC without the need for legal representation.

If the Landlord is seeking money damages, the amount, not including taxable costs, must be under the small claims Court maximum.

I commented that I would be surprised if this bill passes, although other states have similar laws.

 

Call me surprised.

The Bill recently came out of the committee on law and justice and a substitute bill was referred for a second reading.
The Major Difference in the Substitute Bill

 

The major revision that came out of the committee affects property managers.

The Bill as introduced would have allowed property managers or agents to represent the LLC under certain circumstances – e.g. – having personal knowledge of the relevant facts related to the Property and tenancy.

That language was removed from the first version of the bill.

Under the substitute bill, Property Managers or other Agents would not be allowed to represent the LLC.

Further, this is a “burden shifting” mechanism in the substitute bill – the law would place the burden on the LLC owner to prove he or she is in compliance with the statute. That makes sense – since the legislature would be creating an exception to the rule – only lawyers practice law.

 

To Hire an Attorney or Not?

As I stated in my last post, this makes sense for Landlords who want quick and cost-effective resolutions. I understand that an Investor who is not making money on a tenant also doesn’t want to expend additional legal fees to evict a Tenant. This is particularly true since the most attorney fees that a Landlord can recover against a residential tenant is limited to the statutory amount (currently $75).

All business owners make this same business decision –

at what point can I handle a legal matter myself and at what point do I pick up the phone and call my lawyer?

 

However, I will refer readers back to the lawyer who has a fool for a client…

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Update: Business Owners: Bill Would Restrict Non-Competition Agreements with Employees.

2017-05-09 08.08.30On June 14, 2017, House Bill 4755 was introduced in the Michigan House of Representatives.

If passed it would limit the enforceability of a non-competition agreement signed between an employer and an employee.

In my opinion – in some pretty significant ways.

I have spent several articles discussing the legal consequences/enforceability issues of non-competes.

It appears the Legislature is wrestling with the question posed by Nick Manes of MIBiz in an article a few years back: “Are noncompetes a barrier to growth?

You can check out the text of the bill here

The Bill was referred to the committee on commerce and trade.

The Bill has a few key components to it:

1. Require Employers to follow a Specific Procedure prior to enforcing a non-compete.

The Bill would only permit Employers to enforce a non-competition agreement if the Employer followed a procedure intended to notify the Employee of the requirement of signing a non-compete as a condition of employment.

(A) INFORMED THE PROSPECTIVE EMPLOYEE IN WRITING OF THE REQUIREMENT AT OR BEFORE THE TIME OF THE INITIAL OFFER OF EMPLOYMENT.

(B) Disclose the Terms of the Non-Compete in writing; and

(C) Post the Text of the Law at the Worksite in a CONSPICUOUS LOCATION

2. Non-Compete unenforceable if the Employee is a “low wage” worker.

Defined generally as $15.00/hr or $31,000 annually.

 

3. Voids Certain Provisions in a Non-Compete – shifts the burden to Employer.

The Bill also has some teeth in it for Employees, including:

  1. Prohibits an Employer from including a clause that states a different state’s laws control the Agreement – this would be an obvious attempt to circumvent the prohibition of non-compete against “low wage” workers;
  2. Gives the Attorney General power to prosecute a violation of the Act;
  3. Automatically places the Burden on the Employer to prove that the Non-Compete was reasonable, as to “scope, duration, time limit.”
    1. Moreover, if a Court limits the non-compete in any respect, the employee is entitled to recover attorney fees.

 

Wow. This bill has a lot of bite to it. My first thoughts – if this Bill does come out of the Trade and Commerce Committee, I can’t imagine it will look the same as its current version.

I understand the legislature’s interest in protecting “low wage workers” from unreasonable restrictions. Check out my prior post on the subject of Jimmy John’s non-competes.

However, in my opinion the restrictions as written places an enormous burden on the employer to narrowly tailor the non-compete, to a judge’s definition of “reasonableness”.

 

 

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

http://www.dwlawpc.com

Warning for Real Estate Investors: Three Northern California Real Estate Investors Convicted of Rigging Bids at Public Foreclosure Auctions

 

There are many pitfalls for real estate investors who purchase dIMG_1513istressed property.

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

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

Today, the Department of Justice announced that a federal jury convicted three real estate investors for their 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.

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 convictions 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, including bid rigging, do you believe is going on in your state? What are you seeing foreclosure sales?

In Michigan the record numbers of foreclosed properties since 2008 has provided a market (albeit one that is slowing down) for flipping and rehabbing residential real estate.

This has also created opportunities for abuse and fraud.  The real estate legal landscape is complex enough, do yourselves a favor – follow the rules.

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

 

Questions? Comments?

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

 

More Updates on Michigan’s Affordable Housing Crisis

Today is a beautiful day in downtown Grand Rapids. The photo below actually from yesterday. There is something about the sun that just puts me in a good mood.

A few days ago I did not have a sunny disposition. I was in court during a landlord/tenant docket. I’ll be honest – it was a depressing scene.  Many of the people in the courtroom were in a sad condition – one lady was visibly intoxicated.IMG_1570

Grand Rapids’ Housing Crisis

This morning I read an article on how the Rental Housing Market Leads to Homelessness in Grand Rapids

Clearly, Grand Rapids, and other parts of the State and Nation have an affordable housing crisis. I have previously offered my own perspective, both as a lawyer representing real estate developers/investors, and as Board Chairman at Mel Trotter Ministries.

A Community Problem – requires Community Collaboration

Recently Mel Trotter Ministries announced that it was partnering with 3:11 Youth Housing and the NAACP to provide housing for homeless males ages 18-24.

This effort could not have happened without collaboration between community stakeholders. It also couldn’t have happened without real estate owners willing to put “purpose above profit”.

There are other examples of social enterprises taking action to address affordable housing. One community partner is Pastor Jim Davis and his company “Purpose Properties

“The mission of Purpose Properties is to “raise enough money from local foundations and philanthropists to buy market-rate and affordable rental properties in the city.”

It will take all community stakeholders to do their part – businesses, churches, government, and non-profits.

The question we should all ask ourselves: Am I working to build a better community?
Legal Updates – Bills and Lawsuits.

 

A few months back I wrote about a Michigan House Bill introduced that would repeal Michigan’s prohibition on rent control. This Bill seemed to be a “gut response” to the affordable housing crisis that we are facing in Michigan and all across the United States.

Other local governments across the U.S. are exploring legislative avenues to address the housing crisis.

A few days ago, Representative Stephanie Chang introduced a few other Bills on Affordable Housing.

On May 31, 2017 House Bill 4686 was introduced that would allow local government  to “adopt an ordinance to limit the rent paid by senior citizens and individuals with a disability to 50% of their household incomes.”

Tie-barred to that Bill was House Bill 4687  which would prohibit local government from enacting, maintaining, or enforcing “an ordinance or resolution that would have the effect of  controlling the amount of rent charged for leasing private resident.”

Representative Chang also spoke on the issue of Affordable Housing at a Detroit Housing Summit a few days ago at the University of Detroit Mercy School of Law.

 

DOJ sues City of Jacksonville for refusing to allow development of permanent supportive housing for individuals with disabilities.

You can check out the press release from yesterday – Where Cities Can Get in Trouble with Fair Housing Laws

Yesterday, the Department of Justice issued a Press Release concerning an agreement it reached with the City of Jacksonville, Florida. Apparently, the DOJ sued the City concerning “allegations that the city violated the Fair Housing Act and the Americans with Disabilities Act when it refused to all ow the development of permanent supportive housing for individuals with disabilities in its Springfield neighborhood.”

As part of the settlement, the City has agreed to “establish a $1.5 million grant to develop permanent supportive housing in the city for people with disabilities.”

 

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

 

 

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

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