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Business Law Update: A Booming Downtown Real Estate Market Means Businesses Should Pay Careful attention to Contracts.

June 5, 2018 1 comment

Happy Tuesday, all.

I took this photo yesterday from the skywalk between the Amway Grand Plaza and the DeVos Place Convention Center. I like walking downtown and watching the development unfold.

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It is an exciting time to be working or living in downtown Grand Rapids. Everywhere you look, real estate development is transforming the town.

Check out Experience Grand Rapids for a detailed list of all the current downtown development.

Not to rain on anyone’s parade (but that is kind of a lawyer’s job)…

With increased commercial activity comes increased opportunity to fall into legal pitfalls.

 

 

As I tell my clients – if you are in business for any amount of time, it is just a matter of time, you will probably get into a business dispute.

Real estate development is no exception. The more transactions, the more opportunity for hiccups along the way.  A Court opinion I read last week brought this reality to  my mind.

 

Case Study

Last week an unpublished Michigan court of appeals case was released that highlights some contract drafting pitfalls. You can check out the May 31st unpublished decision of Greater Faith Transitions, Inc. v Ypsilanti Community Schools here

 

The case was about a commercial lease in which Landlord also granted Tenant an option to purchase the Building.

These “lease with options to purchase” can pose interesting questions – as the facts of this case illustrate.

Summary of the Facts

  • On August 13, 2013, plaintiff and defendant entered into a lease with option to purchase a property in Ypsilanti owned by defendant.
  • The parties intended the lease to be effective until August 31, 2018.
  • Under the lease terms, plaintiff was required to make monthly rent payments and to pay for all utility bills, including water bills.
  • According to plaintiff, it had attempted to enforce its option to purchase the property in a text to defendant on February 2, 2017, that stated:
    I tried to call you to make you aware of the fact that we’re buying the church this year.
  • On February 13, 2017, defendant sent to plaintiff a letter from its attorney and a Notice to Quit Termination of Tenancy, claiming that plaintiff was in default of the lease for repeated failure to pay water bills.

Plaintiff, tenant, sued its landlord, among other things, for interfering with its right to exercise its option to Purchase.  The trial court ended up dismissing Tenant’s lawsuit.

The tenant appealed.

The opinion of the Court of Appeals was interesting, essentially holding that the tenant’s claim for breach of contract was not ripe – since a contract was not yet breached. The tenant was not yet evicted.

(See opinion, page 2 – “Plaintiff claims that “Defendant’s improper use of summary proceedings to evict Plaintiff from the leased premises will breach the parties’ Lease
with Option to Purchase because Plaintiff will be deprived of its right to cure any defaults during the term of the Lease (i.e., through August 31, 2018) so that Plaintiff can exercise its option to purchase thereunder.”)

 

The ultimate ruling aside, the case, to me, provides a good opportunity to highlight a few drafting issues that can come up in commercial leases.

First, a general point I want to bring to the business owner’s attention:

Why Careful attention to Business Contracts is important – Freedom of Contract 

First and foremost, when entering a business contract each party should understand – they will be bound to the contracts they sign.

In a commercial lease context the courts’ mantra is “Freedom of Contract“.

The Court will look at the contract that the parties’ agreed to, and, absent extraordinary circumstances, enforce it by its term. (therefore in  a commercial lease you might see language such as the following “rent is due with no right of offset, setoff, counterclaim…”) In such instance, the landlord is telling the tenant that tenant has no right to withhold rent just because landlord may have breached a duty under the lease.

The Courts have recognized that commercial landlords and tenants are “free to contract”:

 

Drafting Issues.

Going back to the court opinion, it doesn’t appear to me from reviewing the opinion that the parties disputed that the tenant defaulted in failing to pay utility bills.

Question:

Did the lease have a provision that said that the “Option to Purchase” terminated if:

  • the tenant had been in default at any time?
  • or, only in Default at the time the Option was being exercised?
  • Or, did it say nothing on the subject of Default?

Another question:

was there a lease provision that strictly provided where “notices” must be sent?

e.g. – was it left up to the parties to interpretation whether or not notice delivered “via text message” was an appropriate method?

 

If these issues are plainly addressed in business contracts, then possibly, the parties avoid a lawsuit.

 

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauk

 

 

 

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Business Law Update: Michigan Bill Would Prohibit Non-Disparagement Clauses with Consumers.

I’m not going to sugar coat it – it is a gray day in downtown Grand Rapids.

I had lunch with a friend today, who told me – he can’t stand it when in response to the question “how are you doing” someone gives a pat answer – “good”.

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I agree.

I appreciate authenticity.

And today, is gray, and somewhat depressing and I am a little down.

Yesterday, I attended the funeral of a friend and fellow attorney who died suddenly. I am grieving and in prayer for Adam’s family, including his wife, two small children and his brother and parents.

 

 

 

Ok, enough authenticity, and on to the subject matter of this post…

 

I previously wrote about an interesting article published by the ABAJournal.

The article presents interesting questions that come up in business transactions:

when faced with entering a business relationship should you enter into a non-disclosure agreement? (NDA)

What about if the NDA contains a Non-Disparagement Clause?

What is Disparagement?

Michigan courts have held that “disparagement” is plain in its meaning. It is not ambiguous. Therefore, when signing a non-disparagement clause you can have some reasonable certainty in your conduct.

Disparage – as you will see below – has a fairly common meaning

.

‘Disparagement’ is ‘a false and injurious statement that discredits or detracts from the reputation of another’s property, product, or business.’ Black’s Law Dictionary (7th ed. 1999).

stated another way:

(1) To speak of in a slighting or disrespectful way; belittle.

(2) To reduce esteem or rank.’ . . . American Heritage Dictionary (4th Ed. 2000)

 

Non-Disparagement Clauses in Contracts with Consumers

 

Recently the Federal government passed a law holding that such non-disparagement provisions in contracts are unenforceable under Federal law

California has had such a law in place since 2016.

 

It is one thing if two sophisticated business parties are negotiating a business relationship, but should consumers have specific protections concerning Non-Disparagement Clauses?

 

At least one Michigan lawmaker thinks so.

Michigan House Bill 5193

On October 31, 2017, HB 5193 was introduced to amend the Michigan Consumer Protection Act (“MCPA”).

“The MCPA provides protection to Michigan’s consumers by prohibiting various methods, acts, and practices in trade or commerce.” Slobin v. Henry Ford Health Care, 469 Mich. 211, 215; 666 NW2d 632 (2003).

The Amendment would prohibit anyone engaged in Trade or Commerce from including in a contract with a consumer for the sale of lease or sale of consumer goods:

“A PROVISION THAT WAIVES THE CONSUMER’S RIGHT TO MAKE A STATEMENT CONCERNING ANY OF THE
FOLLOWING:
(i) THE SELLER OR LESSOR.
(ii) EMPLOYEES OR AGENTS OF THE SELLER OR LESSOR.
(iii) THE CONSUMER GOODS OR SERVICES.

(B) THREATEN OR SEEK ENFORCEMENT OF A CONTRACT PROVISION PROHIBITED UNDER SUBDIVISION (A).

(C) PENALIZE A CONSUMER FOR MAKING ANY STATEMENT PROTECTED UNDER SUBDIVISION (A).

 

Of note, under this Bill businesses would still be permitted to include provisions that protect its proprietary information.

 

I understand the intent of this provision. However, it hasn’t made any progress in committee. I will keep you posted on any development.

 

 

Questions?  Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Update: Michigan LLCs Filing with LARA: Pardon the Delays and Thank you for your Patience.

February 22, 2018 1 comment

Happy Thursday, all! I took this photo earlier today – the sun is out in downtown Grand Rapids, Michigan and people are enjoying  the ice rink at Rosa Parks Circle.

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Last week I posted about an update I received from the Michigan Department of Licensing and Regulatory Affairs (“LARA”) extending the deadline to file annual statements and reports for LLCs and PLLCs to March 1, 2018.

Annual Statements are Due on February 15th each year, “however, due to increased demand for pre-assigned Customer ID Number (CID) and PIN information, an automatic 14-day extension will be granted.

 

In my post I also mentioned that I wasn’t surprised at the filing extension, given the fact that my experience with LARA lately has been frustrating to say the least. My clients have been experiencing serious delays in returned filings from LARA.

 

Today, I received an update from LARA’s Director Julia Dale, thanking me, and other system users for our patience in the delays that we have been experiencing.

In part, Director Dale acknowledged that:

“The Corporations Division serves more than 800,000 customers doing business in Michigan and reviews more than 240,000 documents and 640,000 annual reports each year…For the last two years…LARA worked diligently to bring the agency’s aging Corporations database into the modem era by completely replacing the outdated server-based technology with a new web-based system… The database was unstable, utilized unsupported technology and the fax-based filing system had become a burden for customers and staff.”

 

I am glad that my reasonable frustrations are being acknowledged by LARA. Thank you, Director Dale.

 

Many of my clients, (real estate investors, small business owners, entrepreneurs, etc..) rely on quick turn around for corporate filings. The fact that LARA’s e-filing system has not been reliable has been troubling for my clients – and therefore troubling to me.

 

I forewarn all clients who are looking for new entity filings that they should expect to experience delays.

If the particular filing is time sensitive, you have a deal closing soon and need an entity prepared ASAP, then you may want to consider paying extra to the State for expedited processing.

 

Questions? Comments?

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Michigan Limited Liability Companies: LARA extends 2018 Annual Statement Filing Deadline to March 1. Stay in Good Standing and Maintain your Corporate Formalities.

February 15, 2018 1 comment

It is the middle of the dreary season – February 15th. Not too long and I, like many folks in West Michigan with school-aged kids will be heading to Florida for Spring Break.

2017-04-09 21.33.41

This is a photo I took last year – sunnier days ahead.

Anyway, on to the point of this post:

 

Today I received an e-mail from The Michigan Department of Licensing and Regulatory Affairs(“LARA”) reminding that all annual statements and reports for LLCs and PLLCs are due March 1, 2018.

 

 

 

 

Annual Statements are Due on February 15th each year, “however, due to increased demand for pre-assigned Customer ID Number (CID) and PIN information, an automatic 14-day extension will be granted.

 

As a practical note, if you are experiencing delay in receiving filings from LARA – just know that LARA has recently transition to an electronic filing system – and disposing of the fax filing.

All things considered, I am not surprised at the extension, and it is good news.

 

Per LARA’s announcement:

“Annual statements and reports can be submitted online at www.michigan.gov/corpfileonline. The first step to submit annual statements and reports online is to login to the system with the entity’s CID and PIN. If you have forgotten the CID or PIN, please contact the Corporations Division at LARA-CSCL-CorpPIN@michigan.gov or call (517) 241-6470 to obtain that information. Please do not send multiple email requests for CID/PIN numbers, as this will slow processing time.”

For more information about LARA, please visit www.michigan.gov/lara

 

 

Consequences for Failing to File:

LARA also reminds that:

“Section 909(2) of the Michigan Limited Liability Company Act, 1993 PA 23, provides that if a domestic or foreign professional limited liability company does not file the annual report by February 15, then in addition to its liability for the fee, a $50.00 penalty is added to the fee.”

“Penalties will be assessed for 2018 annual reports received after March 1, 2018.”

Further LARA reports that, an LLC that “fails to file its annual statement/report or the filing fee is not paid for two years, the limited liability company will not be in good standing.  The status of the limited liability company will be “active, but not in good standing.”

“A limited liability company that is not in good standing is not entitled to a certificate of good standing; its company name will be available for use by another entity, and no document will be filed on behalf of the company other than a certificate of restoration.”

 

Is your LLC in Good Standing?

Occasionally I will have a business client come in and I will ask – just to make sure – “is your business still in good standing?”

The common answer is “I think so.”

And of course, after I perform a quick internet check with the State of Michigan it is all too common that I discover that either the LLC is “not in good standing” or worse, the company has been dissolved automatically for failure to file annual statements.

A Word on Resident Agents:

My law firm is happy to provide our business clients with resident agent services. One of the benefits of an LLC is that it provides its owners a level of privacy protection.

 

You can check out a recent ABAJournal Article on how a Court is making Jared Kushner’s real estate partners disclose their identity.

 

Michigan law requires Limited Liability Companies to have appointed a Resident Agent.

MCL 450.4207(1)(b) requires an LLC to have a resident agent. A person, or business with a physical presence in the State of Michigan.

Michigan law does not require that an “owner” of the LLC be the resident agent.

“The resident agent appointed by a limited liability company is an agent of the company upon whom any process, notice, or demand required or permitted by law to be served upon the company may be served.” MCL 450.4207(1)(b).

Many of my real estate investment clients will utilize my law firm as resident agent when filing their articles of organization with the State of Michigan.

In Conclusion:

Business owners, if you get these annual statements from the State of Michigan, or from your attorney – do not disregard them! Maintain your Corporate Formalities.

Questions? Comments?

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Basics: A 5 Million Dollar Comma

February 13, 2018 Leave a comment

Today in downtown Grand Rapids is the “World of Winter Festival” where Downtown Grand Rapids, Inc.  provides a “Snow Globe” experience. Very colorful.  A lot of fun downtown.

 

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Rosa Parks Circle, Grand Rapids, Michigan

 

Today I read an article posted by the ABAJournal that illustrates the profound impact on word and grammar usage in contracts and legislation.

As the ABAJournal reported:

“A dairy company in Maine has agreed to pay $5 million to its drivers after a federal appeals court last year found ambiguity in a state overtime law because it lacked an Oxford comma.”

The ABA Journal reported in its story last year Oxford comma issue benefits drivers in overtime case:

“FOR WANT OF A COMMA”

Ambiguity caused by lack of a comma in a law on overtime pay has benefited Maine dairy delivery drivers.”

“The Boston-based 1st U.S. Circuit Court of Appeals pointed out the issue in the first sentence of its March 13 decision(PDF). ‘For want of a comma, we have this case,” the court said in an opinion by Judge David Barron.

Because the statute was ambiguous, it should be interpreted in favor of the dairy workers who distribute milk but do not pack it, the appeals court found.

 

As a result – a 5 Million Dollar  Comma.

 

A SINGLE WORD CAN BE LEGALLY SIGNIFICANT TO SHIFT RISK

A few years back I wrote about how the words used in a contract dispute significantly impacted the rights and obligations in a business dispute, based upon the Michigan Supreme Court’s interpretation.

The Michigan Supreme Court made a distinction between the inclusion of the word “in” in a Title Company’s Closing Protection Letter in a prior case, and the “exclusion” of the word “in” in that instant case. In the Court’s determination:

“Although the distinction is slight—the only difference is the word “in”—the distinction is legally significant.”

Words Matter.

E-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

www.dwlawpc.com

Business Law Update: Recent Court Case On Sour Business Relationships and Arbitration Clauses

February 12, 2018 Leave a comment

Good afternoon, all! The sun was beautiful this morning rising over downtown Grand Rapids.

 

IMG_2144Today I read a recent unpublished Court of Appeals decision that originated out of Kalamazoo County, Michigan –

The case: Elluru v Great Lakes Plastic, Reconstructive, and Hand Surgery PC

 

A summary of the Facts:

  • Plaintiff Elluru and defendant Holley practiced medicine together in  the Company.
  • Holley served as president and Elluru as secretary.
  • They entered into employment agreements with the Company.
  • The agreements provided for termination by the Company for cause upon written notice or without cause upon 90 days’ written notice.
  • They also executed a Stock Redemption Agreement that provided that a shareholder must sell his shares to the Company if he voluntarily terminated his employment  or if the Company discharged his employment with or without cause.  See Elluru , page 1.

Then the business relationship took a turn for the worse…

  • In 2015, Elluru began to express his desire to dissolve the Company.
  • Elluru called for special meetings of the shareholders to discuss his proposals for dissolution.
  • Holley disagreed with the plan to dissolve the corporation.
  • Instead, on December 7, 2015, Holley sent a letter to Elluru that he had terminated Elluru’s employment with the Company.
  • Elluru also was notified that, pursuant to the Stock Redemption Agreement, his shares were being acquired by the Company.
  • Elluru was further notified that, because he was no longer employed by the Company, he was also terminated as an officer and director of the Company.
  • The letter also reminded Elluru that he was subject to a non-compete agreement. Id, Page 1-2.

Not completely unexpected, Elluru sued Holley and Company and asked the Court to:  A. Dissolve the Corporation and B. Set Aside his Termination.

Holley and the Company filed a motion to compel Elluru to Arbitration pursuant to an arbitration clause in the parties’ employment contract. Id. Page 2.

Holley argued that “the employment agreement required that the claims be submitted to arbitration. Holley argued that “arbitration was required because all of the claims arose out of the employment agreement.” Id.

The Circuit Court denied Holley’s motion. Holley appealed.

The Court of Appeals was presented with this issue:

“whether the issue of arbitrability should have been decided by the trial court or by the arbitrator.” Id.

 

About Arbitration Clauses…

 

Michigan law favors upholding arbitration clauses in contracts.

Under Michigan law, arbitration clauses are to be liberally construed with any doubts to be resolved in favor of arbitration. Amtower v William C. Roney & Co., 232 Mich App 226,233 (1998).

 

 

In this case, the Court noted that:

The Uniform Arbitration Act, MCL 691.1681 et seq…provides that, where there is an agreement to arbitrate, a trial court must order the parties to arbitrate unless the court determines that there is no enforceable arbitration agreement. The Act further provides that it is for the court in the first instance to determine arbitrability…” Id. (my emphasis).

There is an exception to the rule that the Court determines arbitrability… 

The parties contractually agreed to delegate to the arbitrator the question of arbitrability. Id. Citing Rent-A-Center, West, Inc v Jackson, 561 US 63, 69 n 1; 130 S Ct 2772; 177 L Ed 2d 403 (2010).

In the instant case – the Court looked at the Employment Agreement:

“In paragraph 10 of the employment agreement, the parties agreed that ‘[a]ny controversy or claim arising out of or related to . . . this Employment Agreement . . . shall
be settled by arbitration . . . in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association . . . .’ Those rules provide that the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.'” Id. Page 3.

 

The Court of Appeals agreed with Holley:  “that this matter should have been submitted to arbitration and that the trial court should have held the claims in abeyance pending the outcome of arbitration.” Id. page 2.

 

 

Lessons and General Arbitration Considerations:

1. Arbitration Clauses are favored. A Court generally decides whether the clause is enforceable, and whether or not the matters are arbitrable.” However, the parties’ can contract to allow the issue of arbitrability to be decided by the arbitrator.

2. This brings up a general point – the parties could have negotiated differently in their employment and shareholder agreements before signing. “Freedom of Contract.

3. Arbitration clauses have the benefit that they are usually most cost-effective, quick, and they are private (as opposed to court cases which are public filings).

4. Where is the Other Party located? For a client who engages in business over state lines, an arbitration clause might not be effective if you are trying to quickly collect a debt owed.  Instead, you  might want a “Jurisdiction and Venue Selection Clause

This clause would include language indicating that no matter where the dispute occurred, the contract will be interpreted under Michigan law, and the parties agree that any dispute shall only be resolved in _______ County (Typically,  Kent County, Michigan, for my clients.) Therefore, if your contract contains a jurisdiction and forum selection clause, and you are owed money by a company in Florida, you would not need to retain a Florida attorney to try and collect.

5. Arbitration may be a gamble.

Businesses should realize that if you elect to arbitrate a matter and you do not like what the arbitrator finds – your rights to appeal may be severely limited.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

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