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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

IMG_1858

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Today I read an unpublished court of appeals decision that provides another illustration on why not only having the operating agreement matters, but also the exact language in your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

 

 

 

 

 

 

Removing Employment Barriers For the Most Vulnerable. Work To Be Done.

August 11, 2017 Leave a comment

Today I read an article from the ABA JournalNY District Attorney’s efforts resulted in some $644,000 of minor offenses being dismissed. Check out the article here.

In making his argument in support of the massive dismissals, the District Attorney explained to the Judge that:

“New Yorkers with 10-year-old summons warrants face unnecessary unemployment risk, housing and immigration consequences,”

 

Such unintended consequences are not unique to New York City.

In West Michigan, our community development organizations see firsthand that outstanding warrants cause significant barriers to employment and housing. Immigration is an ever increasing topic of local and national concern.

 

Indeed, the ABA Journal had noted several years ago that Post-conviction consequences make it difficult for ex-offenders to find jobs – here

The ABAJournal noted that: “The U.S. economy loses up to $65 billion in output each year because of fewer job opportunities for convicted felons, according to a 2010 study by the Center for Economic and Policy Research.

The Small Business Association of Michigan – has previously reported that:

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.

 

Michigan’s Role..

Michigan government has taken steps to remove such employment barriers. The Work Opportunity Act was introduced in the Senate back in February to further incentive businesses in hiring former convicted felons.  You can check out my previous articles on the matter here.

More Locally…

Check out Mel Trotter Ministries and their Community Outreach Court – formerly “Street Court” initiative.

mel-trotter-ministries-1122_20111229171415_320_240

An older  press release (here) details how MTM, Degage Ministries and Heartside Ministries help the homeless with criminal backgrounds.

I’m thankful for the work that Mel Trotter, Degage, Heartside, and other organizations are doing to help the homeless in West Michigan clear up outstanding legal issues that are just another obstacle between them and employment..

Also Worth Praising their Efforts….

There are a number of great companies who reach out to support putting Michiganders with certain barriers to work.  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.

Some West Michigan companies who do a great job of reaching out to hire/place those with employment barriers are Cascade Engineering and its Founder Fred Keller. Others include Lacks EnterprisesKentwood Office Furniture and Express Employment Professionals of Grand Rapids lead by Janis Petrini to name a few.

These community partners deserve praise for their work putting to work the “unemployable” and the vulnerable in our local community.

To conclude:

there’s work to be done.

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

 

 

Business Law Update: When are Non-Competes Enforceable?

March 20, 2017 2 comments

Welcome to Spring! I took this photo from my office, the first day of Spring. It is fitting that the ice rink in Rosa Parks’ circle is melting.

With spring comes new opportunities – including employees leaving their jobs.

What happens if the employee signed a non-competition agreement during the course of employment? Are non-competes enforceable?IMG_1456

 – it depends.

 

A few years back I posted on an article written by Above the Law titled – Jimmy John’s Serves Up Sandwiches And Oppressive Non-Compete Agreements.

See the link from the “Above the Law Blog”

In Michigan, Non-Competes are enforceable to protect legitimate busines
s interests.

MCL 445.774a provides:

“1) An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests…”
Further the Agreement must be reasonable:
  • “as to its duration,
  • geographical area, and
  • the type of employment or line of business.”

In November I posted an article about a possible change to Michigan covenants not-to compete statute, you can see that article here – no new movement on th
at HB. It appears that it got stuck in committee and left to die…

Of note, a bill was proposed earlier this month that would require employers to offer Paid Sick Leave

At any rate, going back to the topic at hand…

The question posed by the Above the Law article is a good one – ok, Jim
my Johns, you have a non-compete agreement, that may be valid…so,

to what end?

What is the point? What type of legitimate business interest is Jimmy Johns trying to protect here?

Going back to the initial topic of this post – when can a business enforce a non-compete?

One Answer:

When a business has a legitimate interest to protect.

 

A recent Michigan Court of Appeals on the topic of Non-Competition Agreements provides some illustration on this point.

BHB Investment Holdings v Ogg

I won’t delve into the details, but the first paragraph of the Opinion is telling:

“Steven Ogg took a job with Aqua Tots Canton after being terminated by its competitor, Goldfish Swim School of Farmington Hills. Ogg’s actions breached a noncompetition agreement he signed with the Goldfish franchisee, BHB Investment Holdings. BHB sought to preliminarily enjoin Ogg from working with Aqua Tots, but presented no evidence of irreparable harm. BHB later failed to establish that the agreement protected a legitimate business interest to support the issuance of a permanent injuncti
on. Nor did BHB substantiate that it suffered any damages as a result of the breach.”

 

Is restricting a former employee from swim instruction a legitimate business interest?

The Court on page 3 recognized a number of factors in the analysis in denying enforcing the non-compete, including:

  1. the position was a low-level position;
  2. employee had no access to confidential information;
  3. employee didn’t take any information;
  4. employee didn’t solicit customers;
  5. interestingly, the employer didn’t previously enforce the non-compete when other employees left.

One other interesting piece of information – the Court rejected the employer’s allegation that its swimming lessons were proprietary information. The Court’s rationale?

the employer “placed its methods in the public domain because this was a public building and the students parents, as well as any member of the public, could watch the lessons and glean the methods.” pg 8.

Having no proprietary information, the employer “could not establish a legitimate business interest it needed to protect.” Id.

 

Lessons:

  1. Non-competes will not be enforced unless they protect a legitimate business interest.
  2. Non-competes are less likely to be enforceable against low-level positions with no access to proprietary information.
  3. If you are going to seek an injunction in court, it helps to have some evidence that your former employee is unfairly competing.

 

questions? comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Basics: “For Want of a Comma” The Words You Use Can be Costly.

March 16, 2017 Leave a comment

Disclaimer: The photo below has nothing to do with this post. It is simply my way of recognizing that I am sick of winter and looking forward to the 15 hour drive to Florida in a few weeks…

 

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

Oxford comma issue benefits drivers in overtime case  

2016-01-09 12.56.14

Photo I took of Clearwater Beach, FL

“FOR WANT OF A COMMA”

As the ABA Journal reports:

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.

 

A SINGLE WORD CAN BE LEGALLY SIGNIFICANT TO SHIFT RISK

Last year 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 Case Law Update: Set up Your business agreement with the End in Mind.

February 17, 2017 1 comment

It is a beautiful Friday afternoon in downtown Grand Rapids – which is why I took a picture of Rosa Parks Circle. You can see the zamboni is out on the rink. I can’t imagine the ice will last, since the weather is supposed to get in the upper 50s this weekend…

img_1417

 

I often tell my clients that lawyers see the worst case scenarios.  Yes, in business, you can usually rely on your relationships to go as they should – (you send an invoice for services and typically you will get paid).

Lawyers see the relationships that go wrong.

We often have clients come to us to protect against disasters, yes, but also to guide our clients after  a disaster has happened.

For instance – when a dispute has erupted between business partners. Someone wants out of the business.

It is much easier to protect a client on the front end. That is particularly why when setting up business partnerships – whether through an LLC, corporation, or some other joint venture, it is crucial to have “the end in mind.”

How do the partners exit their relationship?

A recent court case provides lessons to business owners exiting such relationships.

Since the most common business entity formed in my practice is a limited liability company, I am always looking to read the latest court decisions that come out on LLCs.

There are relatively few court opinions covering the Michigan Limited Liability Company Act, which is why I was excited to read the August 18, 2016 unpublished decision of Joby Clark v Butoku Karate School, LLC – and it just so happened that the facts of this case are somewhat interesting.

The facts of this case seem to be somewhat publicized – at least in Macomb County.

The relevant facts:

  1. Butoku Karate School, LLC, a limited liability company in which Clark and John Wasilina were the only members.
  2. Plaintiff and Wasilina formed the company in 2002 for the purpose of operating a karate school, and together operated the school until plaintiff left the company in January 2011
  3. Rumors that Plaintiff was involved in an inappropriate and illegal relationship with a minor surfaced,
  4. On January 5, 2011, plaintiff and Wasilina together went to the bank and withdrew $100,000 from the company’s account,
  5. Plaintiff and Wasilina each received $50,000 of the proceeds of the account.
  6. On January 12, 2011, Wasilina met with plaintiff and requested that plaintiff sign two documents. The first document was entitled “Notice of Dissolution
  7. The second document was entitled “The Consent of the Members” – which, among other things, extinguished Clark’s membership interest in the Company.
  8. Both plaintiff and Wasilina signed the documents on January 12, 2011.
  9. Thereafter, Plaintiff argued “we agreed my withdrawal was temporary.”
  10. Plaintiff sued alleging three counts arising from the dissolution of the business relationship, fraud, failure to distribute, and conversion.

LAW:

IF YOU DO NOT WANT THE DEFAULT RULES UNDER THE MICHIGAN LIMITED LIABILITY COMPANY ACT TO CONTROL YOUR RELATIONSHIP IN THE LLC THEN YOU MUST “CONTRACT OUT” OF THOSE RULES.

I’ve previously written about why an operating agreement matters. A business relationship agreement should be drafted with the end in mind: how do the parties get out of the business relationship?

It is a relatively simple concept:

If you, as an owner in an LLC, do not want to leave your relationship with the other members of the LLC completely subject to the default rules under Michigan law – get your agreement in writing.

In the Butoku Karate case, the Court of Appeals cited the Michigan Limited Liability Company Act regarding the rights of a Member to withdraw from an LLC:

“MCL 450.4509 provides: (1) A member may withdraw from a limited liability company only as provided in an operating agreement….”

MCL 450.4305 provides: Until the effective date of withdrawal, a withdrawing member shall share in any distribution made in accordance with section 304. An operating agreement may provide for an additional distribution to a withdrawing member. If a provision in an operating agreement permits withdrawal but is silent on an additional withdrawal distribution, a member withdrawing in accordance with the operating agreement is entitled to receive as a distribution, within a reasonable time after withdrawal, the fair value of the member’s interest in the limited liability company as of the date of withdrawal based upon the member’s share of distributions as determined under section 303.”

As the Court noted:

“Pursuant to MCL 450.4509, a member’s withdrawal from a limited liability company is governed by that company’s operating agreement. Only if an operating agreement is silent on the subject of additional distribution to a withdrawing member is distribution to a withdrawing member governed by §305”

In this case, the Parties Operating Agreement was clear.

Further, the Parties signed a Consent Resolution concerning the Plaintiff’s withdrawal – that agreement was also clear.

The Court found that “the clear language of the Consent of the Members states that plaintiff relinquished any potential right to additional payment that he may have had previously.”

A few take aways:

If you are going into business with a business partner there are a few things you want to remember:

  1. Execute an Operating Agreement (all parties need to sign it); and
  2. Make sure that you have thought through how a member may withdraw – in what instances and under what conditions?
  3. Any revision to that relationship must be signed in writing.
  4. A Court will uphold an agreement signed by all LLC members (absent a clear showing of fraud or other exigent circumstances)

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka