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Business Law Update for LLCs: The Words You Use In Your Operating Agreement Matter.

October 18, 2017 Leave a comment

Good morning, all! Yesterday was a beautiful day, see the photo I took overlooking downtown Grand Rapids. The leaves are already changing color.

Today I read a Court of Appeals Case that came out yesterday that provides a good example for business owners.

Background – Today LLCs are generally the entity of choice.

Most businesses that were formed in Michigan last year were Lim

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ited Liability Companies. This is for several reasons:

Limited liability (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))

Flexibility (centralized management – generally no distinction between owners/managers) 

No double taxation (like in traditional C-Corporations).

 

Your Operating Agreement is an Important Document

However, just forming the LLC by filing the articles of organization with the State of Michigan is not enough to fully protect your business.

One fundamental document is your operating agreement.  It is that document that spells out how the business affairs of the company are conducted.

It also spells out the “exit” – in what event and on what terms can a member leave the company?

I have often written about why your operating agreement matters.

Today I read an unpublished court of appeals decision that provides another illustration on why not only having the operating agreement matters, but also the exact language in your operating agreement matters.

 

Healthwise Medical Clinic, PLLC, and NP DREAMS,LLC

 

Facts:

The parties:

Plaintiff Rhonda Keller, LNP and Defendant Kasandra Lechel, licensed nurse practitioners.

They were the sole members of two LLCs – HealthWise was the “operating company” and NP Dreams owned the real estate used by HealthWise.

Keller and Lechel had entered into operating agreements governing
HealthWise and NP Dreams.

The HealthWise Agreement had a “personal and professional standard of conduct” section that required a member to withdraw from the company if they violated the provision.

Keller found out that Defendant Lechel had taken actions that she deemed should require Lechel to resign. Lechel did not resign and therefore Keller sued to compel withdrawal from the company.

There were other claims and counter-claims made between the parties; however, the issue relevant for purposes of my article is regarding the buy-out provision in the Operating Agreement.

The Operating Agreement required the Company to buy out a withdrawing member under certain terms.

Plaintiff sued to expel Lechel, claiming she committed bad acts that required her removal. As such, Plaintiff should not be required to compensate her buy out.

 

Trial Court’s Decision

The Trial Court agreed.

With regard to the HealthWise and NP Dreams Agreements and compensation due to Lechel, the trial court held that “neither the buyout nor the liquidation option provides a logical and just resolution.” The court pointed to uncontroverted proofs that the corporate debts exceeded assets. Further, the trial court explained, because Lechel had breached the contract first, she was not entitled to recover on it. The trial court issued an order stating that Lechel “is not entitled to any compensation for her interests in the two Limited Liability companies.” Id. Page 4.

 

 

The Court of Appeal’s Decision

Court of Appeals reversed on this issue.

Law: Your Operating Agreement is a Contract. Courts will interpret a Contract in accordance with its plain meaning.

The Court of Appeals analyzed this issue as follows:

“Our primary goal in interpreting a contract is to honor the intent of the parties by enforcing the plain and unambiguous language of the agreement. See Klapp v United Ins Group Agency, Inc, 468 Mich 459, 473; 663 NW2d 447 (2003); Defrain, 491 Mich at 367. Clear and unambiguous language will be enforced as written. Farmers Ins Exch v Kurzmann, 257 Mich App 412, 418; 668 NW2d 199 (2003).

 

The Court reviewed the Operating Agreement and held that the language was clear and unambiguous:

“[i]f such Member shall fail to voluntarily withdraw, the Company shall take such
action as may be required to compel resignation under the same terms.” Section 5.2 lists the terms for voluntary withdrawal, including 2 options for compensating the withdrawing member: either (1) payment of 80% of the member’s share of the agreed-upon value of the company, which amounts to $40,000 to defendant.” Id. at Page 7.

 

The Court’s language in its opinion is very telling. It was not going to apply “equity” since the parties were free to contract how they saw fit.

Despite testimony that HealthWise’s liabilities exceeded its assets, we see no reason to apply an equitable remedy when a contractual remedy is available. See Tkachik v Mandeville, 487 Mich 38, 45; 790 NW2d 260 (2010).

The parties were free to bargain for protection in the event of a court-ordered withdrawal, and they did so.

 

 

Lesson:

Take care in drafting your operating agreement. If you desire a penalty in the event of termination of a membership interest – then make sure that language is included in your operating agreement. The courts will enforce clear language in an operating agreement.

 

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

 

 

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Real Estate Law Update: Bill Moves Forward Allowing Single Member LLCs To Evict Tenants without Legal Representation

September 28, 2017 Leave a comment

 

UPDATE ON PROPOSED House Bill 4463 – Would Allow LLCs to Evict wi

thout 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 witho

2017-09-14 15.04.09

ut 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.

Back in May, the Bill came out of the committee on law and justice and

 

a substitute bill was referred for a second reading.

Just 8 days ago the substitute was adopted. Yesterday the Bill was

referred to the Judiciary Committee.
The Major Difference in the Substitute Bill as Adopted.

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.

 

A Divisive Issue: To be, or not to be your own lawyer?

I commented that I would be surprised if this bill passes, although other states have similar laws.  The reason I was surprised is demonstrated a legislative analysis that came out just a few days ago.

 

A recent Legislative Analysis highlights the extreme opposite view points – those expressed by Real Estate Investors and Real Property Owner Associations, and those of Attorneys and Judges.

 

 

To Hire an Attorney or Not?

As I stated in my last post, the Bill 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: Another Call to Clear Contract Drafting.

September 26, 2017 Leave a comment

It is Artprize again in downtown Grand Rapids! See one of the exhibits on Monroe Avenue in front of the Venue.

2017-09-14 13.08.48

 

Question:

Did you know: “Shall” has a different meaning then “May”?

One is mandatory.

The other is permissive.

In business, it pays to be clear in the contract language you use.

 

Check out this recent Michigan Court of Appeals decision on why you need to take care in drafting contracts.

 

 

This case was a dispute over a commercial lease contained in a “letter agreement” – and the legal concept of contra proferentem that ambiguities in contracts should be construed against the drafter.

 

 

According to the Court of Appeals: “the primary question presented in this case is
whether the following paragraph of the letter agreement precluded plaintiffs from filing this lawsuit:
“10. The failure of either party to perform the preliminary duties outlined in
this agreement will permit the obligee of the duty to declare a default and
terminate this preliminary agreement to lease or other remedy that may be agreed
to by the parties.”

The trial court found that this language precluded the tenant from suing.

The court of appeals disagreed.

The Court of Appeals evidently found this language to be ambiguous.

“It is an elementary rule of construction of contracts that in case of doubt, a contract is to be strictly construed against the party by whose agent it was drafted.” Shay v Aldrich, 487 Mich 648, 673; 790 NW2d 629 (2010).

This rule of construction is known as “contra proferentem”.

The contra proferentem rule is applicable only as a last resort, when other techniques of interpretation and construction have not resolved the question of which of two or more possible reasonable meanings the court should choose. It is a tie breaker when there is no other sound basis for choosing one contract interpretation over another.”
Klapp v. United Ins. Group Agency, Inc., 468 Mich. 459, 460, 663 N.W.2d 447, 449, 2003 Mich. LEXIS 1224, *1 (Mich. 2003).

However, in this case, the Court seemed to make much of the fact that the drafter, who was a party to the contract, was an attorney.

The Court of Appeals reversed the trial court decision and found that the language did not preclude the tenant from filing suit and the case needed to proceed to trial.

 

Conclusion:

Small business owners often times are wearing many “hats”. They are working with limited cash flow and are forced to make many choices. Many of these choices are in areas outside of their expertise.

Oftentimes startups and small business owners will “cut corners” to be more efficient and cost-effective.

When it comes to signing a legally binding contract – it is simply not worth cutting corners on.

The cost of what you do not know can be significant.

Question? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

 

 

 

 

 

 

Real Estate Investors and Property Managers Should Keep Track of this Bill to Make Veterans a Protected Class in Housing Discrimination.

August 31, 2017 Leave a comment

On August 16, 2017 HB 4872 was introduced into the Michigan House of Representatives.

The Bill amend the “Elliott-Larsen civil rights act,” and would provide that veterans are included in the list of those protected by Michigan law against housing discrimination.

The Bill would define Military Service as:

IMG_1768“STATUS OF BEING AN ACTIVE DUTY MEMBER OF THE ARMED FORCES OF THE UNITED STATES OR A VETERAN WHO RECEIVED AN HONORABLE OR GENERAL
ADMINISTRATIVE DISCHARGE FROM ACTIVE DUTY WITH THE ARMED FORCES OF THE UNITED STATES.”

 

The Bill brings two thoughts to mind:

  1. Our Veterans and those who served our country deserve to be treated fairly in housing and all other areas of life.
  2. This Bill brings up a fundamental question: are Veterans being discriminated against in housing? Does it happen?

 

 

According to statistics recently published in the Bridge with insight from Dennis Van Kampen of Mel Trotter Ministries, there are fewer homeless veterans than ever in Michigan today, but more homeless youth.

The Bill was sent to the committee on Military and Veteran Affairs. I will be tracking this bill.

 

I look forward to hear comments from the public on this issue: are we in Michigan protecting our Veterans access to fair housing?

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

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

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

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