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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

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

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

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

Landlords/Investors/Property Managers: Single Member LLCs Could Evict Tenants without Legal Representation under House Bill

April 27, 2017 Leave a comment

 

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.

 

Proposed House Bill Would Allow LLCs to Evict without Legal Representation.

 

House Bill 4463 was introduced last month ago 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.

The Bill would also allow a Property Manager or other Agent to represent the LLC.

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).

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

 

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: Unfair Competition may not be Preempted by Michigan’s Uniform Trade Secrets Act

April 21, 2017 Leave a comment

Greetings on this cloudy Friday in downtown Grand Rapids, Michigan.

 Business owner: I’m going to give you a scenario.

Let’s say your business wants to engage the services of another business to sell its products.

Q: When a business wants to engage the services of another business that will necessarily involve the business divulging confidential infoIMG_1513rmation what do you do?

A: Enter into a Non-Disclosure/Confidentiality Agreement.

Another question:

Q: What happens when the business that received the confidential information goes on to develop a product eerily similar to your product after learning about your confidential information?

A: Potentially, a lawsuit.

Yesterday I read a new published decision from the Michigan Court of Appeals,

Planet Bingo LLC v VKGS, LLC

In the words of the Court of Appeals:

the relevant procedural history is complex“.

Therefore, I won’t delve into the history. Suffice it to say, the parties filed lawsuits based upon the same claims in several different courts across the country.

“This case arises out of Video King’s use of a software program (“EPIC”) that was developed by Planet Bingo’s subsidiary Melange, Video King’s subsequent development of a competing software program (“OMNI”), and plaintiffs’ allegation that Video King wrongfully developed OMNI using confidential information gleaned from EPIC.” Id. pg 1.

The parties entered into a confidentiality agreement.

According to the court –  the parties entered into a contract in 2005 that “had a substantial confidentiality clause:”

Such agreements are necessary to protect in a broad manner all confidential information disclosed to another party in a business agreement.

In a nutshell, Planet Bingo claimed Video King had access to Planet Bingo’s confidential information for its software program EPIC. Thereafter, Video King allegedly used that confidential information to create its own competing software program.

Planet Bingo sued VKGS (Video King) for –

breach of contract (confidentiality agreement),

unfair competition, and

unjust enrichment.

What is unfair competition?

“unfair competition” may encompass any conduct that is fraudulent or deceptive and tends to mislead the public.  See Atco Indus. v Sentek Corp., Lexis 1670, page 7 (July 10, 2003).

This court went back and forth among several courts/jurisdictions and eventually, the Trial Court in Ingham County dismissed plaintiffs’ claims. Among other things, the Court said that the Michigan Uniform Trade Secrets Act (MUTSA)  MCL 445.1901 et seq, preempted – or replaced the common law claim of unfair competition.

The Court of Appeals reversed.

According to the Court:

MUTSA generally “displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret,” Id. pg 6.

“It has been recognized from common law, on the other hand, that unfair competition encompasses more than just misappropriation. See In re MCI Telecom Corp Complaint, 240 Mich App 292, 312; 612 NW2d 826 (2000) (“[T]he common-law doctrine of unfair competition was ordinarily limited to acts of fraud, bad-faith misrepresentation, misappropriation, or product confusion.”) (Emphasis added). Id. pg 7.

“Thus, MUTSA does not preempt all common-law unfair competition claims, only those that are based on misappropriation of “trade secrets” as defined by MUTSA.” Id.

“The pertinent question, then, is whether plaintiffs’ unfair competition claim was based on misappropriation alone or also on fraud, bad-faith misrepresentation, or product confusion.” Id.

Conclusion:

We can glean from the Planet Bingo Case that a claim of unfair competition can be brought when based on:

  • Fraud
  • Bad-faith misrepresentation; or
  • product confusion.

If a claim for unfair competition is brought solely related to misappropriation of Trade Secrets, then the MUTSA is the controlling statute.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

twitter: @JeshuaTLauka