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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 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 Law Update: Key Terms to Consider in Business Contracts.

January 13, 2017 Leave a comment

If you’ve followed my posts for any amount of time, you probably aren’t surprised that I  like reading and writing about the latest Michigan court cases.

Particularly if they are relevant to business or real estate. I always find there are some lessons to be learned.

As another aside – I also like to include photos I took of downtown Grand Rapids, Michigan – overloimg_1360oking Rosa Parks Circle. This one, from today, shows the Zamboni smoothing out the ice for skaters looking to enjoy some weekend ice skating.

The latest case on my mind:

Summit Diamond Bridge Lenders, LLC v Philip R. Seaver Title Company, Inc.

This dispute really has to do with:

Forum Selection Clauses in a Contract.

Backing up a step, why do we prepare written contracts for business transactions?

Contracts are about risk allocation.

In any business transaction, business owners need to  have set in stone terms that answer one question:

who bears what risk?

A Forum Selection Clause would include language indicating that no matter where a dispute about the contract occurred, the contract will be interpreted under (in our case) Michigan law, and the parties agree that any dispute shall only be resolved in _______ County (Typically,  Kent County, Michigan, for my clients.) The parties then would agree to submit to the jurisdiction of said Courts.

Therefore, if your contract contains a forum selection clause, and, for instance, you are owed money by a company in Florida, you would not need to retain a Florida attorney for initiating a lawsuit in Florida. Just initiate the lawsuit in good ole’ Grand Rapids.

So as a general principle, if your business operates in commerce in other states or countries, it is wise to have such a clause.

 

However, the Summit Diamond Bridge Lenders case tells us that although generally such clause is enforceable, it isn’t always the case.

FACTS:

This case involved an escrow agreement with a  forum selection clause that “provides that California law governs any dispute arising from or related to the escrow agreement. The parties also designated the state of California in the agreement’s forum-selection clause.”

Plaintiff brought suit in Michigan alleging defendant, title company, breached its fiduciary duty as escrow agent of the loan funds by dispersing the funds without an approved letter of credit. Id. at page 2.

Defendant filed a motion to dismiss – arguing that Plaintiff sued in the wrong state. California was the proper forum for the dispute under the plain language of the escrow agreement.

The trial Court agreed. It dismissed the case.

The trial court held that California was the proper forum based upon the plain language of the forum selection clause.

The Court of Appeals reversed.

The Court of Appeals noted on page 3 of its decision that “In Michigan, public policy favors the enforcement of such clauses and, absent certain exceptions” citing Michigan Statute, MCL 600.745(3)(a)-(e).

Those excepts are:

(a) The court is required by statute to entertain the action.

(b) The plaintiff cannot secure effective relief in the other state for reasons other than delay in bringing the action.

(c) The other state would be a substantially less convenient place for the trial of the action than this state.

(d) The agreement as to the place of the action is obtained by misrepresentation, duress, the abuse of economic power, or other unconscionable means.

(e) It would for some other reason be unfair or unreasonable to enforce the agreement.” Id. at pg 5, citing MCL 600745(3).

The Court looked to California Law to determine whether or not the forum selection clause applied. California had a statute that ” precluded from bringing suit against a defendant who is a foreign corporation unless …(2) the agreement relates to a transaction involving at least $1,000,00.” Id. at page 4.

Because the agreement does not relate to a transaction involving at least $1,000,000, because defendant only agreed to hold in escrow $700,000 of plaintiff’s funds.

Essentially, the court of appeals held that since California would not entertain the lawsuit – because it did not meet the monetary threshold – the parties couldn’t obtain effective relief in California – satisfying the exception under subsection b.

 

Important Lesson:

1. Understand Your Contract Before Signing. 

Contracts are about risk allocation. In a business relationship you need to decide what risk you are willing to bear, and what risk you will allocate away. I am sure in this case Summit did not foresee a dispute arising, and therefore was willing to bear the risk in the event of a dispute to litigate in California in an inconvenient forum. They were fortunate that an exception applied and allowed them to maintain their suit in Michigan.

2. Understand  Your Contract After Signing.

Your business contract will dictate what your rights and duties are.  Here, Summit had the perceived contractual duty to pursue its dispute in California. However, its attempt to avoid abiding by the contract worked out – but it was costly. It was initially dismissed. It took an appeals court to find that a narrow exception applied.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Twitter: @JeshuaTLauka

 

 

 

 

Business Law Update: You have Terms and Conditions, but are they CONSPICUOUS?

December 16, 2016 Leave a comment

Business Owners – ask yourself:

When selling or buying, what are in my company’s Terms and Conditions?

You can check out some of my prior posts on Terms and Conditions. “TnCs” are important to review closely. TnCs “allocate risk” among the two parties to the contract. In some instances, even if one party never reads the TnCs.

Recent Case…

On November 29th, a Court of Appeals case was issued stemming from a product sold by a business to a customer. The case: John French Jr. v Ben’s Super Center

This case involved “the sale of a defective outdoor wood furnace”

Facts:

“On May 21, 2011, after meeting with defendant’s salesman, Todd Kaatz, and having a fairly lengthy discussion with him regarding purchasing an outdoor wood furnace for his home, plaintiff purchased an outdoor wood furnace, (“Optimizer 250″) from Ben’s Supercenter for $12,000.00.” Id. at pg 1.

Defendant delivered the Optimizer 250 to plaintiff’s property and plaintiff installed it.

Sometime around Christmas of 2011, after plaintiff had been using the furnace for about three weeks, he began to have trouble with its performance and contacted Kaatz for help.

“Kaatz…came to plaintiff’s property and inspected the furnace, but they were unable to determine why the furnace was operating inefficiently.”

After several years of attempting to work with the manufacturer and “retrofit” to make the furnace work, Plaintiff sued Defendant.

Plaintiff raised about of claims, variations of “breach warranties”.

Among other things, Plaintiff claimed that Defendant had breached an “implied warranty of merchantability.”

Essentially, it is implied in a sale of goods that what the buyer is getting, he or she will be able to use for the purpose it is generally intended to be used for.

Michigan law allows a business to exclude such warranties.

So the question is: did this business properly exclude any such warranties?

Answer: No.

Under MCL 440.2316 if a business is going to exclude such warranty, it must do so in CONSPICUOUS LANGUAGE. According to the statute, conspicuous “means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it.” Id. pg 4.

In this case, the business pointed not to any of its own terms and conditions, but to the manufacturer’s handbook, which had one line that stated: “No other warranty is expressed or implied.” Id. Pg 5.

As the Court noted – this was not conspicuous language.

The Court upheld the verdict in favor of Plaintiff.

Take Away on Terms and Conditions

  1. Read the Terms and Conditions

Enough said.

2. Implement Terms and Conditions

I recommend business clients to always include a Terms and Conditions page that is either attached to the back of their physical Purchase Orders, or is included in their Website and incorporated by reference. The Terms and Conditions will, essentially, allocate risk and liability, on such items like:

  • warranties (what is the provider guaranteeing and what isn’t it?) As emphasized by the French case – disclaimers need to be CONSPICUOUSLY IDENTIFIED.
  • payment terms (when and how is payment accepted? Late fees?)
  • remedies (what is your recourse in the event the goods aren’t what the buyer expected? Are your damages limited to a refund, or can you get related damages as well? Can attorney fees be covered?
  • Venue – (where can you bring your dispute? An arbitrator? Who pays the fees? Is the location of the arbitration specified?

3. Enforce Terms and Conditions

And of course, its important that a business enforces its terms. I have had clients who have been sued before and forgot of their advantageous language in their terms and conditions. If a business is sued and it waits too long in the litigation before raising its right to arbitration, the court very well might consider the business to have “waived its right” to arbitration. Although, “Waiver of a contractual right to arbitrate is disfavored” by the Courts. Best v Park W Galleries, Inc, No. 305317, 2013 WL 4766678 (Mich Ct App September 5, 2013), app den 495 Mich 979 (2014).

Questions?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Pitfalls for Business Owners: Recent Court Case on Piercing the Corporate Veil.

December 8, 2016 Leave a comment
img_1311

Rosa Parks Circle in Downtown Grand Rapids, getting ready for Christmas.

We are heading towards the end of the year – I love the Christmas season!

One thing that comes to mind for local business owners going into the New Year – make sure that your legal documents and procedures are in proper order.

As every business owner should know, one of the main purposes in creating a business entity is, generally, to limit an owner’s personal liability from the obligations of the company.

Unfortunately, liability is not limited in all cases.

 

Generally though, proper creation of a business entity results in the following:

 

Owners are not personally liable for the debts of the company.

 

A November 22nd  Court of Appeals decision highlights some of the pitfalls that could result in a business owner suffering from personal liability.

Check out Joelle 98 LLC v Stone Central, LLC

Law: Piercing the Corporate Veil
 In general, a corporation is treated as an entity that is completely separate from its stockholders. Foodland Distrib v. Al–Naimi, 220 Mich.App 453, 456; 559 NW2d 379 (1996).
That separation may be ignored, however, “where there is a unity of interest of the stockholders and the corporation and where the stockholders have used the corporate structure in an attempt to avoid legal obligations.” Id.
“Piercing the corporate veil requires the following elements:
(1) the corporate entity is a mere instrumentality of another individual or entity,
(2) the corporate entity was used to commit a wrong or fraud, and
(3) there was an unjust injury or loss to the plaintiff.”Lakeview Commons, 290 Mich.App at 510.
Facts: 
Joelle 98 LLC v Stone Central, LLC and its owner Najib Atisha involved a dispute over payments made under a land contract for commercial property.
Joelle 98 LLC claimed that Stone Central, and its sole member owner, Atisha, were both liable for monies owed to Joelle 98 LLC.
After trial, the Trial Court made the following ruling:
“I find that Mr. Atisha is using his corporations interchangeably and not keeping them as separate entities depending on what he’s trying to do. There really is no reasonable explanation as to why if [Atisha Land] purchased [the property] why Stone Central, LLC would have it as its only asset. Nor is there any reasonable explanation that Stone Central, LLC’s only asset [the property] why would the payments be made to [Atisha Land]. He’s obviously treating these separate entity corporations as if they were one. Moreover, there’s a problem with doing that and this case is a good example of it. Because when you do something like that, when Stone Central, LLC should have received the excess funds that were paid by [Joel Cars], the money should be there to repay Joel [Cars]. However, the money’s not there because Mr. Atisha made this decision to comingle funds among his LLC’s. Accordingly, I find from both of those reasons that the corporate veil should be pierced, that Mr. Atisha should be responsible also on the breach of contract action.” (emphasis added.) Joelle 98, LLC Id. at page 5.
The Court of Appeals affirmed the Trial Court’s decision.  It found, among other things, the defendant “had multiple corporate entities…and he used these entities as his instrumentalities…he co-mingled the assets of the entities…” Id. Pg 7. Further, the Court found that Defendant used his corporate structure simply to to commit a wrong – avoiding to refund the payments to Plaintiff. Id.
Lesson: 
Business owners need to take care in forming as well as maintaining their business in order to keep their personal liability protection.
Don’t take actions, like commingling your personal and business funds, that could jeopardize your protection.
e-mail: Jeshua@dwlawpc.com
Twitter: @JeshuaTLauka

Another Court Lesson for Business Owners: Read Your Contracts Before You Sign.

November 7, 2016 Leave a comment

I recently read yet another court decision that provides a classic example for businesses owners of the consequences for not reviewing your contracts before signing.

The case: the October 6th, 2016 Michigan Court of Appeals decision of Earl Pegues, LLC v Izis General Contractors, LLC.

The dispute concerned a construction agreement.

The property owner, Pegues LLC engaged a contractor to construct a restaurant for the price of $1,050.000 in my hometown of Saginaw.

Pegues LLC claimed the contractor overbilled by approximately $123,000.

The main problem:

Pegues had signed off on the Contractor’s Sworn Statement and therefore authorized the title company to release the funds and therefore, unwittingly, agreed to the alleged overbilling.

Thereafter, Pegues sued for breach of contract and fraud.

During the lawsuit, Pegues admitted that he simply “did not look at the figures.” That he “did not understand the sworn statement when the bank gave it to [him] to sign.

Pegues admitted – “It was my oversight.”

The trial court dismissed all claims against the Contractor – Pegues appealed, and the Court of Appeals upheld the dismissal.

Law:

It is your responsibility to know what you are agreeing to before you sign a contract.

The Court of Appeals reasoned:

“It is well-settled that a person who signs a contract cannot have the contract set aside merely because he was negligent in failing to read the terms.” Citing Shay v Aldrich, 487 Mich 648, 680-681 (2010).

Further:

“[A] person who signs and executes an instrument without inquiring as to its contents cannot have the instrument set aside on the ground of ignorance of the contents.” Christensen v Christensen, 126 Mich App 640, 645 (1983).

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

Business Law Update: Why Your Operating Agreement Matters.

October 5, 2016 1 comment

Business Owners and Entrepreneurs: Let me paint you a picture:

You decide to go into business. You’ve identified a business partner. You and your business partner decide the details of who is going to contribute what (capital, finances, “sweat equity”, etc..).

Your startup is now off and running!2015-11-26-13-04-02

Your business does not go as expected.

You have a few “hiccups” that were unanticipated.

Your business needs some emergency cash flow.

You and your business partner agree (verbally) that you will contribute some extra funds out of your savings, and your partner will do the same.

Your partner does not contribute what you verbally agreed to….

Unfortunately, these scenarios can oftentimes find themselves in Court.

The Michigan Court of appeals issued a  recent business law opinion on September 20, 2016.

The Case is Copacia v Ginzinger (on reconsideration of its prior decision.)

This case illustrates very important reasons why you want your LLC to have a fully executed Operating Agreement in place.

The Facts:

Plaintiff and Defendant formed an LLC in 1998 as equal members. 50/50.

The purpose of the LLC was to own a parcel of undeveloped land to develop site condos.

side bar- 

An initial question you may be asking yourself: Why should I form an LLC? 

The primary reason – limit your personal 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)

Ok, now going back to the facts…

As the Court tells us in its opinion,

“the development did not go as planned by the parties.” Cocacia, Id. at page 1.

The financing of the development had to be restructured – Plaintiff and at times his spouse provided additional funds. Copacia, Id at page 1.

Thereafter, Plaintiff sued his business partner for “50% of the operating expenses and costs pursuant to a purported oral agreement between the parties.” Id. pg 1-2.

Defendant counter-sued, he asked the court to declare that $135,000 held in escrow should be disbursed according to the proper adjustment of the parties’ membership in the LLC (50/50). Id.

 

Law: The Business Partners’ Operating Agreement Controlled.

An Operating Agreement is a contract between the owners of the LLC.

“The LLC operating agreement is the written agreement regulating the parties conduct in this matter. See MCL 450.4102(2)(r)(footnote omitted). An operating agreement is a contract between the members of a limited liability company and is interpreted according to principles of contract interpretation.” Copacia, Id. at pg 2.

The Court went on to hold that the parties’ operating agreement is a contract that is analyzed under ordinary contract principles, citing Holmes v Holmes, 281 Mich App 575, 594; 760 NW2d 300 (2008). “The language of a contract should be given its ordinary and plain meaning.”

As the Court noted, analyzing under the plain meaning,  the signed operating agreement indicated that no interest accrues on any capital contribution and no member shall have any right to withdraw or to be repaid any capital contributions except as provided in the operating agreement. Id. pg 3.

Plaintiff’s argument is essentially:  Ginzinger verbally agreed to compensate me for the additional funds that me and my wife contributed!

Michigan law is clear, MCL 450.4302 “a promise by a member to contribute to the [LLC] is not enforceable unless..in writing and signed by the member.” See Copacia, Id. at pg 4.

The Court found that the parties’ business relationship was governed by the Operating Agreement. Period.

If Copacia expected to be repaid the funds he contributed, a few things he could have done:

  1. loaned the funds under an executed promissory note; or
  2. have the parties’ Operating Agreement revised and signed by him and his business partner.

 

A few take aways:

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

  1. Limit your Liability – form an LLC.
  2. Execute an Operating Agreement (all parties need to sign it); and
  3. Any revision to that relationship must be signed in writing.

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka