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Tilting the Scales

Business Issues with a Legal Slant

Personal Guaranties: What? Me Worry?

Posted in Property Issues

Franklin, a Senior at Fraternal State, is finally moving off campus to his own apartment with four of his buddies. Before Owen Ohner, the landlord, will approve their lease, he requires a personal guaranty from all the parents. The landlord’s rep Lyn Lackey assures Franklin’s Dad Milton Munney that the guaranty is “standard.” Could this be a problem for Milton?

Yes. The “standard” guaranty that Milton signs almost certainly guarantees his unconditional and absolute payment of the entire debt – whether Franklin’s frat friends and their parents pay or not. Worse yet, a “standard” guaranty waives all tenant defenses or rights of offset against the landlord, meaning Milton would have to pay in full and separately get reimbursement from the other parents. And, if Franklin has any claims against Ohner, they are not offset against Milton’s guaranty. Franklin must sue Ohner separately and then collect his judgment, without any right of offset landlord’s claims under the lease.

Separate Obligations

Under Texas law, the Guaranty and the Lease Agreement are separate undertakings. One who guaranties payment and waives the requirement that the holder of the note exhaust its rights against the maker, (1) becomes an absolute guarantor, (2) is primarily liable, and (3) waives all defenses and any requirement that the landlord first act against the lessees, or, in this case, any other guarantor. As a general rule, an absolute guaranty imposes liability on the guarantor even if the underlying obligation cannot be enforced against the principal.

Because Milton waived all affirmative defenses, he is liable on the guaranty even if the lease is unenforceable against his buddies because of some alleged breach.

Tilting the Scales in Your Favor

A personal guaranty is not likely to be avoided. Milton is better off co-signing the lease as a tenant than as a guarantor. A second option would be to modify the guaranty so that Milton is responsible only for Franklin’s twenty percent share of the lease – which is not likely. If all else fails, at least plan to meet with the parents of Franklin’s friends and talk about their views of the lease and the relative responsibilities of each. Good luck.

So You Might Sell Your Business Someday. Do You Need a Broker?

Posted in Company Management, Money, Property Issues

Business For SaleThis is the second installment of a series discussing potential pitfalls of which closely held business owners should be wary when they are trying to sell their business. Here’s a link to our first installment.

After a lifetime of pouring time and energy into growing and expanding, Pawlenty Energy, JR and Sue Ellen Pawlenty are ready to sell their business and retire. Having never sold anything of this magnitude, JR and Sue Ellen have no idea where to start to try to sell their company.  Even more challenging is that, until the money exchanges, they must continue to run their business. Marketing to sell their company will be a hassle that could negatively affect their operations, their personnel and their reputation both with their customers and with their vendors.  Their friend Nancy Noitall recommended that they hire a business broker to assist them in handling the sale.  Is this a good idea?

Benefits of a Business Broker

Business brokers can provide a valuable resource to sellers. For example, a business broker can mass market a company when the seller does not already have a prospective buyer lined up.  The broker also serves as the seller’s spokesperson, allowing the seller to concentrate on running the business instead of dealing with the daily distractions that arise from trying to get a deal done.  This includes screening prospective buyers to ensure they can afford the sales price.  A broker can also come up with a market value for the business based on the sales prices of similar businesses.

Risks of Using a Broker

Sellers face some risks using business brokers. Because a business broker is the seller’s spokesperson, the seller would likely be liable if the broker misrepresented the business to a buyer.  Business brokers also typically use form agreements for each transaction.  If there are unique aspects of the transaction, or the business, that are a material part of the sale, form agreements may not address those issues and create the potential for litigation between the buyer and seller down the road.

Should I Involve Other Professionals?

Yes. If you have an accountant, he or she can help you get your financial statements in order before you advertise your business for sale.  If your accountant did not previously do so, he or she may be able to audit your financial statements, which will improve your business’s value.  If you hire a broker, your broker can deal directly with your accountant on any questions from potential buyers about the company’s financials.

You should also involve an attorney who can review and advise you about the broker agreement. Your attorney can also review and revise the broker’s form sales contracts to try to protect you from certain risks if the sale fails.

What Should I Look For in a Broker?

If you want to hire a broker, you should look for someone who has a proven track record selling similar businesses, or who has experience in your industry. The broker should be willing to work with your financial and legal advisers.  Most importantly, you want a broker who puts your interests ahead of his or her fee.

Tilting the Scales in Your Favor

Whether you use a broker to help you sell your business depends on your personal circumstances. If you choose to use a broker, conduct a thorough background check, including references, of all potential candidates before hiring one.  You also need to make sure you have a clear understanding of how the broker is compensated under the broker agreement – which you should have an attorney review with you.

Employee Embezzlement: 4 Tell-Tale Signs

Posted in Employment & Labor

Having started as a bookkeeper and worked his way (fifteen years later) to become controller of the Bunz in the Oven family owned business, Swendoll Hugh felt underpaid andbusinessman hiding envelope with money in pocket at jacket under-appreciated by Bertha Bunz and her highly successful business. When Swendoll’s grandmother passed away, he “borrowed” funds from Bunz in the Oven to cover funeral expenses. Easily repaying the money without detection, Swendoll “borrowed” again and again, and eventually quit repaying the “loans” amounting to hundreds of thousands of dollars. What’s the crime? How could that have happened? What might Bertha and Bunz in the Oven have done to discover Swendoll Hugh’s embezzlement earlier?

It’s a crime to steal all or part of the money or property entrusted to you for management or monitoring. Beyond merely stealing, embezzlement is also a violation of a special position of trust. For embezzlement of money or property valued over $200,000, Texas penalties include a fine of up to $10,000, at least five (and up to 99) years in prison, or both.

Be Vigilant.

Embezzlement often occurs when there is a lack of accounting controls. For smaller companies with minimum gross revenues, missing money is more obvious and the cost to implement necessary controls may be cost prohibitive. Yet, as the company and its gross revenues grow, so must accounting controls.

Embezzlement can be as simple as issuing and then voiding a check to a customary vendor at a time when the expense is expected, and then issuing a check for an identical amount to cover personal expenses. According to news accounts, that’s exactly what the controller of Collin Street Bakery did on his way to stealing nearly $17 million from the landmark Corsicana business.

Look for These 4 Warning Signs.

Beyond making prudent accounting changes to match your business success—and avoiding placing trusted employees into a predicament tempting their violation of company trust—these warning signs should alert you to be more vigilant:

  1. Significant Lifestyle Changes. Just like the Collin Street Bakery controller who spent millions on watches, cars and vacation homes, that were noticed and ignored for years, unexplained upgrades in automobiles, exotic vacations and expensive apparel merit close attention and perhaps investigation.
  2. Financial Difficulties. Employees with constant financial troubles have a greater incentive to steal and can generally rationalize almost any behavior when faced with enough pressure from friends, family and creditors. Often not intending to commit fraud, many act out of desperation.
  3. Never Wants to Take a Vacation. Certain types of fraud have to be monitored to maintain and remain undetected. The perpetrator will be unwilling to take a vacation and risk detection.
  4. Constantly Works Overtime and Wants to Take Work Home. Embezzlers often avoid the watchful eyes of co-workers. They need privacy and might work late or take work home to eliminate unannounced visits from fellow employees when dealing with incriminating evidence.

Tilting the Scales in Your Favor.

Trust but verify. Be vigilant. And, be careful. Your self-indulging employee may have won the lottery or inherited from a rich uncle. It might be prudent to offer aid to an employee with a sudden death in the family. Cross-train employees so that trusted, dedicated employees can confidently go on vacation knowing that a competent co-worker is filling in. Consider re-arranging the workloads of those constantly working overtime to improve their work-life balance.  Explore the value of both a periodic financial audit by your outside accounting company and their examination of your appropriate financial safeguards.

Successfully Selling Your Business: Top 6 Potential Pitfalls

Posted in Company Management

ABusiness for salemong the growing number of business owners looking to sell their business, JR and Sue Ellen Pawlenty are in the market to sell their darling Pawlenty Energy. This month, Tilting the Scales highlights a variety of issues is its first installment of a series discussing the potential pitfalls that closely-held business owners should be wary of when selling their business.

Top 6 Potential Pitfalls

  1. Personal Issues & Exit Plan – Exit plan, succession and transition, will you get enough? What is your answer to the question, “Why are you selling your business?”
  2. Business Plan – Do you have one? What makes your business special and worth the premium? Why would someone buy your business?
  3. Accurate Financials and Legal/Regulatory Affairs Current – What do your financials disclose about the quality and sustainability of your earnings?
  4. Value & Timing – What’s your business really worth? When is the right time to sell? What can you realistically expect to be offered?
  5. Deal Points – What are your options? What terms are realistic? What terms are critical? Why should you care about reps and warranties? Should you draft your own documents?
  6. Business Brokers & Other Critical Advisers – What should you be looking for? Can the broker help you avoid selling to the wrong buyer? Your accountant? Your attorney?

Be on the lookout for us to cover these issues in depth with the Pawlenty family over the next several months.

Concealed Carry Permits & Regulatory Reporting Requirements: Who Decides?

Posted in Legal Risk Management

Concealed Handgun Permit ApplicationHow do subjective decisions of government officials, when it comes to issuing any kind of permit, affect private citizens?

What are the risks of making any sort of “ownership database” publicly accessible?

Setting aside the emotional pros and cons of gun control, consider how the issuing of a concealed carry permit affects private citizens, or the potential risks involved in a publicly accessible gun ownership database.

California: No permit. No gun.

Carrying a loaded firearm in California public areas of incorporated and certain unincorporated areas without a concealed carry permit is illegal.

A concealed weapon permit applicant must:

  • Live in the city or county
  • Be of “good moral character”
  • Have “good cause” for the license

Five San Diego residents sued the county sheriff after their applications were rejected due to lack of a “good cause” for a concealed carry permit. A three-judge panel found the permitting process unconstitutional, but the process was ultimately upheld as constitutional when reheard by the full 9th Circuit panel.

Complaining of a near-total refusal of some counties to issue carry permits due to lack of “good cause,” the plaintiffs noted that permits are only granted for very rare and specific circumstances. For example, only 138 women within San Diego County’s 3.1 million population have a Concealed Carry Weapon.

This brings to question, what is “good cause?” Who decides? What is the objective criteria? Is there an appeal? Can the result of a subjective process effectively create a ban?

Hawaii: Gun owners, who has access to your data?

Owners of Hawaii firearms required to register with their county police departments will now be enrolled in the FBI “Rap Back” system, a criminal record monitoring service. New legislation allows county police departments in Hawaii to evaluate whether or not the firearm owner may continue to legally possess and own firearms after notification of the owner’s arrest for a criminal offense anywhere in the country. The law also authorizes the Hawaii Criminal Justice Data Center to access firearm registration data.

What should be the objective criteria for maintaining any database containing a list of private citizens? What are the practical implications of making such a list available to the public?

Tilting the Scales in Your Favor.

The regulatory legislation placed on gun owners is interesting to consider, when applied to less emotionally charged topics:

Would there be push back if American Airlines was required to report to law enforcement those who flew to Las Vegas more than every 30 days?

What about having to permit your cell phone with GPS service that could not be disabled?

If there is any conduct requiring a permit or license—health, barber, medical, law, pilot or otherwise—what is the risk to private citizens if the permitting authority has the subjective authority to assess “good cause” or “good moral character”? Are there other permits or regulatory authorizations that can be denied for failure of the applicant to satisfy a governmental official that there is “good cause” for the permit?

How to Avoid Getting Popped: Top 10 Texas Firework Laws

Posted in Around the Holidays

Sure, fireworks are fun, but it’s important to be cautious and careful. We covered firework laws in the 2008 and 2014, but a few things have changed. Below are Texas’ top 10 firework laws you need to be aware of before lighting the fuse. Remember though, laws may vary county to county.

Top 10 Texas Firework Laws

  1. New for 2016: The periods for selling fireworks were expanded by the Texas Legislature.  Fireworks can now be sold from June 24th through July 4th and December 20th through January 1st.  Each county commissioner’s court can also permit firework sales for Texas Independence Day (February 25th-March 2nd), San Jacinto Day (April 16th-21st) and Memorial Day (the Wednesday before Memorial Day through Memorial Day).  If the retail fireworks store is located within 100 miles of the Texas-Mexico border, the store can also sell from May 1-5 for Cinco de May—as long as the county commissioner’s court approved the sale.
  2. texas firework lawsIt’s illegal to sell or shoot fireworks within 100 feet of a place where flammable liquids, flammable compressed gasses or fireworks are sold or stored. …seems reasonable!
  3. Despite what you may have seen in the movies, it’s illegal to shoot fireworks from or towards a motor vehicle, including boats.
  4. It’s illegal to shoot fireworks from a public roadway, public property, park, lake or U.S. Corps of Engineer Property. …would hate to set a lake on fire…
  5. The minimum age to buy or sell fireworks is generally 16 years old. Though, it should probably be closer to 26 years old.
  6. It’s illegal to shoot fireworks within 600 feet of a church, hospital, day-care center or school. Personally, I wouldn’t feel great about going into surgery with a constant barrage of fireworks outside the building.
  7. It’s illegal to shoot fireworks within city limits and, in many cities, it’s also illegal to possess them. Selling, igniting or possessing fireworks within city limits can carry hefty fines approaching $2,000. Yet, country clubs keep getting away with it.
  8. In unincorporated areas where fireworks are legal, you may only shoot off fireworks if you own property there, or if you receive written permission from a property owner. A county “burn ban” outside incorporated areas often means a prohibition against shooting fireworks. So, no blowing up the neighbor’s mailbox…without their permission!
  9. If you start a fire by shooting fireworks and it’s found to be started intentionally, you may be charged for arson. If the fire is found to be accidental, you may be subject to a fine. In either case, you could be held civilly liable for damages.
  10. Beginning January 2, 2008, bottle rockets (a.k.a. pop rockets) were banned. You know you’re addicted to fireworks if you built up a reserve supply of bottle rockets prior to the ban.

Here’s a list of fireworks shows in DFW this holiday weekend. Have a great (and safe) Independence Day!

Trial & Heirs: 5 Estate Planning Stumbling Blocks

Posted in Family Issues

Last Will and Testament with Fountain PenLast month, Prince died at the ripe young age of 57. He had no will, as reported by his only full sibling (a sister). She filed for probate of his estate in Minnesota, where he owned a home in Paisley Park. Under Minnesota law, a probate court there will determine who gets what.

Typically, an intestate estate (one without a will) in Minnesota would first go to his children, then to his parents, and then to any siblings. As Prince was twice divorced with no children, and his parents are deceased, his sister and five surviving half brothers and sisters are banking on splitting the estate. Various pundits estimate Prince’s net worth between $150 and $300 million. While some suggest he was very attentive to his business matters, other say he didn’t trust anyone and his financial affairs are in disarray. If this is the case, who will control and manage Prince’s brand, his record label and the thousands of unreleased songs?

Assuming no will exists, Prince’s sister asked the Minnesota probate judge to appoint her as a special administrator. In the probate court, all financial details and business relationships will become public record and all asset decisions and distributions require court approval and will be shared with the public.

Probate Issues and Concerns

The Heirs: There will almost certainly be a fight, even if it’s just among his siblings. Given the amount of money involved, it would not be a surprise if one or more individuals came forward claiming to be Prince’s child. If a claim turned out to be true, they would eliminate everyone else as a potential heir.

Asset Management: The expanse of his assets–a humongous song catalogue (both released and unreleased) and vast real estate and business holdings–would be daunting to manage, even without the worries of taxes and heirship challenges.

Privacy: Unlike the privacy granted in estate planning, every asset must be filed and every minor decision about management and distribution of the assets and payment of liabilities will likely to require approval by the probate court. It’s a lengthy process, and will likely take years.

Taxes

True to Ben Franklin’s adage, death and taxes are certain. Having not availed himself of the benefit of estate tax planning and legal counsel, the bite could be painful. If we assume an unplanned $350 million estate, it’s conceivable that estate taxes could be over $138 million. Even if the estate was a paltry $150 million, estate taxes could be roughly $58 million.

But wait! Who has that kind of cash lying around? For a farmer or rancher, the dilemma is called “land rich and cash poor.” To get the money to pay the estate taxes, something will need to be sold. If the assets are not readily marketable at full value, it’s possible that some will need to be sold at a fire sale discount to secure the necessary funds. Land sales are especially subject to this risk.

Tilting the Scales in Your Favor

Avoid these 5 Frequent Estate Planning Stumbling Blocks

  1. No will. Over 50% of Americans like Prince do not have a will and do not expect to die anytime soon. Whether you have a lot or a little, start with a will, particularly if you have kids or are divorced. If you don’t have a will, the laws of your state will determine who receives your assets after you die, how they are divvied up and by whom.
  2. Failure to set up a trust.  Do you want everyone to know how much money you had and who got it? Planning in advance avoids the public airing of your laundry. Consider a living trust. A living trust details who is entitled to your assets and how they’ll receive it, but it’s not part of the probate court inventory that is generally filed, and it can offer some tax benefits.
  3. Failure to Implement the Estate Plan. As a trial lawyer, I cannot count the number of times that a well-intended couple completes their estate planning process and pays the lawyer, but doesn’t supply the funding of the related trusts and business entities or change the beneficiaries on the insurance policies and retirement plans, saving it all for “later”. Only, “later” doesn’t come before death. Good plan. Good idea. But, it’s as if it never happened, because it didn’t.
  4. Neglecting to update estate plans. Life changes. Children are born and pass into majority. Divorces affect estate plans as do new spouses. The needs of older children change. Grandchildren are born. Businesses are bought and sold. All of these are reasons to update your estate planning documents.
  5. Forgetting to plan for disability. Physical and mental needs change as we get older. Power-of-attorney documents can protect you if you become incapacitated, or be subject to challenge if you wait too long to sign them. Properly drafted living wills and advance directives can give loved ones the authority to make medical and financial decisions when you can’t. Without them, your family and spouse may not have the legal right to speak or act on your behalf when you aren’t capable.

Estate Planning Expertise

Gray Reed experienced probate and estate lawyers Norm Lofgren, Greg Sampson and their protégé Jennifer Gurevitz are the experts here. I work with them to pick up the pieces when one or more of these estate planning stumbling blocks erupts into a full-fledged fight between heirs over an estate.

Related Articles

Last-Minute Wills….What Counts?

Where There’s a Will, Is There Always a Way?

Did My Employee Just Say That?!? Manage Risk with a Company Crisis Plan

Posted in Company Management

TV interviewJohnny Hotshot, the 11 year-old shortstop on the Dallas Rangers Little League team, suffered a horrific brain injury after a pitching machine at the Hitz-R-Us batting cage malfunctioned. Melanie Scoop, a reporter from one of the local news stations, showed up a couple of days later to cover Johnny’s injury. Melanie spoke to Scotty Van Winkle, the Hitz employee on duty when the accident happened. To Melanie’s surprise, Scotty told her that the pitching machines at Hitz have had similar malfunctions in the past. Should Hitz be concerned about its liability?

Employee’s Statements Can be Used Against You

An employee’s statements about events that occurred in the scope of the employee’s duties are admissible against the employer. That’s not a good thing for employers because employees tend to divulge too much information. For example, a father recently had to hold onto his son after the seatbelt on the roller coaster malfunctioned. After the father reported the issue to the ride operator, the ride operator allegedly told the father he knew the seat belt malfunctioned.

Have a Crisis Plan

Given the risk that an employee could make a “foot in mouth” statement after an accident, companies should develop a crisis communications plan and regularly train their employees on that plan. A crisis communications plan requires more than just “no comment” because, as we discussed in a post several years ago, that response fails to give your customers and employees confidence in your operations. Good crisis communications plans have designated spokespersons, prepared “holding statements” for when a crisis erupts, and notification and monitoring systems for internal and external communications.

Tilting the Scales in Your Favor

Reputation is everything. When a crisis happens it’s imperative that companies do all they can to maintain control over their reputation. Companies that plan ahead place themselves in the best position to do so when accidents happen.

Related Articles

The Benefit of Crisis Communication Plans

Crisis Response and Communications to the Press

The Top 3 Things Tom Brady Can Learn From Blue Bell Creameries: “Nothing is More Important To Us Than Maintaining Your Trust”

“Best Interests” of Investors and Employees

Posted in Fiduciary Duty

Close-up Of Person Hand Inserting Coin In Pink Piggybank On TableIma Knowitall, owner of All My Business Ideas (AMBI), just read the Wall Street Journal article on new Department of Labor (DOL) regulations and called her financial advisor, Phillip Coffers. Mindful of last fall’s Tilting the Scales post that suggested she might owe her employees a fiduciary duty as the trustee of AMBI’s 401(k), Ima asked Coffers if the new DOL ruling affected either Ima as an investor with Coffers in her own retirement savings or as the owner and administrator of the AMBI 401(k) plan.

Does the ruling affect Ima as an investor? Yes. Because Coffers renders investment advice for a fee or other compensation, he is a fiduciary investment adviser and is subject to the new fiduciary standards of care under ERISA. Coffers will risk becoming personally liable for Ima’s losses resulting from recommendations given by the Coffers team—specifically, the investment losses plus related court costs and attorneys’ fees. Originally passed to require disclosure of hidden fees and allegedly under-performing investments promoted by financial advisers who persuaded customers to “rollover” their 401(k)’s into IRA’s, the new regulation moves the investment adviser’s standard of care from a “suitability” standard to a “best interests of the customer” or fiduciary duty standard.

What about Ima as administrator of the AMBI 401(k) plan? Yes, Ima continues to have at least the fiduciary responsibility to diligently monitor the company 401(k) expenses. Although not originally intended as such, it remains to be seen whether the new regulations might impose increased responsibilities on Ima similar to those of Coffers.

Tilting the Scales in Your Favor.

Whether it’s your broker acting in your best interests for your retirement investments or you as the company administrator acting in the best interest of your employees, both retirement investments represent, for most people, the second largest asset they own—their home being the largest. Every retirement account owner can expect to get new documents from their investment adviser asking them to sign agreements outlining your financial adviser’s disclosures to satisfy the new “Best Interest Contract Exemption” and the “Principled Transactions Exemptions.”

If you would like to learn more about the new DOL regulations, Jason Luter, a Gray Reed attorney and an ERISA adjunct professor at SMU teaching on qualified and non-qualified plans, and I are giving presentations on the new DOL regulations focused on this new directive to act in the “best interests of the clients”—a statutorily imposed fiduciary duty standard.

“What is, and What is Not, a Fiduciary Duty,” focuses on the DOL’s changes subjecting certified financial planners, financial advisers and brokers to an ERISA fiduciary duty standard. We discuss the differences between the DOL regulations, the self-imposed CFP “fiduciary duty” standard and “old-fashioned” common law fiduciary duty that will, almost certainly, impact many clients and client’s families of the financial advisers, including very dire penalties risked by unwitting directors / owners of closely held businesses, their trustees, executors and guardians. While all three may be called “fiduciary duty,” they are very different from each other. Confounded yet? Not surprising.

When the Company’s Joke Backfires

Posted in Company Management

april-fools-at-workHarvey Slapstick, CEO of Jokes-R-Us, decided an April Fool’s prank on his employees was just what the company needed to boost morale. So he hired two former soldiers to conduct a fake hostage situation at the company’s office. In an effort to ensure things wouldn’t get out of hand, Slapstick advised the police and 911 emergency system. When the hostage situation went down, Jimmy Wannabe, a weekend warrior, decided to play hero. Wannabe shot the “hostage takers”, but also injured Elizabeth Little, a Jokes-R-Us employee. When Little heard that Slapstick orchestrated the prank, she sued him and the company.

Liability for Office Pranks.

Previously, we’ve written about when a prank among friends goes too far. Many companies have gotten into the act in recent years and pulled their own April Fool’s prank on customers or employees. Some pranks go well, but some pranks come off poorly. If Slapstick knew, or had reason to know, that Wannabe might take the law into his own hands, Slapstick and Jokes-R-Us are likely liable. For example, if Slapstick knew that Wannabe carried a gun with him at the office, Slapstick and Jokes-R-Us are liable for creating a dangerous situation.

Tilting the Scales in Your Favor.

April Fool’s pranks can be lots of fun, but you have to think ahead. Is there any chance that people who aren’t in on the joke could be injured, or could injure someone else? If so, the prank’s probably not one you should move forward with. You should also run your proposed prank past some friends to see if they think it’s a good idea. Slapstick clearly didn’t think things through or seek advice.  In the end, the company will pay for the prank going wrong.