Love LetterOn Valentine’s Day, Zack takes Kelly, his high school sweetheart who goes to a different college, to the Max for a romantic dinner.  At the end of the meal Zack says, “Kelly, I want us to promise each other that after college we’ll both move back to Bayside and get married.  Will you marry me?”  Kelly responds, “Oh Zack, that’s wonderful!  I love you so much and I promise.”  Delighted, Zack puts the engagement ring on Kelly’s finger and says, “That’s great Kelly!  Now there’s one more thing – I spent every dime I made working last summer on this ring.  Will you promise me that if we don’t get married after college you’ll return this ring?”  Kelly writes on her napkin “I promise to return my engagement ring if we don’t get married after college,” signs her name and gives it to Zack.


Two years later, Kelly decides to take make a surprise visit to Zack’s school one weekend.  When she arrives she finds Zack at a party kissing another woman.  “You two-timing slime ball!  We’re through and never getting married,” Kelly tells him.  Zack asks for the ring back and Kelly refuses.  Three months later Zack sues Kelly for the ring.  He still has Kelly’s napkin from Valentine’s Day.  Does he have a good case even though he’s a pig? 

Written Promises Around Engagements Are Enforceable

We covered this topic many years ago under a different fact scenario and the law has not changed since then.  Zack is entitled to the ring. Kelly promised in writing to return the ring if they did not get married after college.  Importantly, Kelly’s written promise was not conditioned on who broke off the engagement or why it was broken off.  Thus, Zack gets the ring although his actions caused Kelly to call off the engagement.

What if Kelly Didn’t Give Zack the Napkin?

Kelly probably gets to keep the ring because it was Zack’s fault that the engagement ended, even though Kelly called it off.  In the absence of an enforceable written agreement, Texas follows the conditional gift rule, which requires Kelly (the donee) to return the ring to Zack (the donor) if Kelly is at fault in terminating the engagement.  But, Texas courts allow the donee to keep the ring if the donee can prove that there was a justified reason for calling off the engagement.  Zack’s cheating should be enough, absent other facts.

Tilting the Scales in Your Favor

While some people might find the conditional gift rule offensive, other people may see it as a reasonable approach.  Regardless, it’s important to remember that if you have significant assets you are bringing into a new marriage, you may want to consult with an attorney about whether you should have a prenuptial agreement in place in case the marriage does not work out.

Riding her beloved Packers late-game win against the Dallas Cowboys, Allfer Funn, owner of Con Genial, is polishing her cheese head hat and dusting off her Super Bowl Squares Pool from last year in anticipation of the Big Game in a couple of weeks. Electing not to “Reinvigorate [Her] Super Bowl Office Betting Pool” as some have suggested, she does, however, decide to up the ante from $10 a square on her 10 x 10 grid to $20 a square. Just good clean office fun to build morale, right? It’s not illegal… or is it?

The Legal Reality?

Yes, it’s illegal in any number of ways. It’s illegal gambling in Texas. And, for Allfer, organizing the Pool is likely “bookmaking” – receiving more than 5 bets in a 24 hour period. Under the gaming laws of all 50 states, it’s a bet with a prize that is won or lost solely by chance. Because squares pools involve randomly assigned numbers, the contest is entirely based on chance and thus illegal unless (in a state other than Texas) it falls within a state-specific “recreational gaming exception.”

And there’s more.

Beyond Texas, the federal Professional and Amateur Sports Protection Act of 1992 also prohibits gambling, specifically on professional and amateur games. Should Allfer Funn or her employees elect to bet online there’s always the federal Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) which Tilting commented upon in 2011 that prohibits nearly all types of online gambling.

Notably, the UIGEA exempts most fantasy sports competitions, classifying them as games of skill rather than games of chance – except for the Super Bowl. A fantasy football competition is based upon a single game with a limited number of outcomes as well as a limited number of players/teams from which participants can choose, whereas the Super Bowl is viewed as a game of chance rather than a game of skill.

The Practical Reality?

As reported in a Houston KTRH NewsRadio 740 interview last year by Tilting’s own Cleve Clinton, “It’s illegal. Now, realistically and practically, is anybody going to do anything about it? No.”

In the same interview, Clinton told KTRH that Texas law has such a broad definition of gambling, that technically any betting pool violates state law.  Whether or not the state chooses to enforce that depends on a few factors.

“The first thing you really want to look at is how big of a pool are we talking about, the second thing is who’s running it, and the third, will someone (the organizer) profit by it,” says Clinton.

Allfer may want to reconsider and not increase the pool size from a total of $1,000 to $2,000.

Good Clean Fun?

Notwithstanding that gambling on the Super Bowl is illegal, Allfer Funn should be wary of potential retaliation and hostile work environment claims from employees either excluded from or uncomfortable with office gambling.  What happens if an employee snitches? The Texas Penal Code seems to offer “testimonial immunity.”

Tilting the Scales in Your Favor

While Texas does have strong laws against gambling, most low-stakes office pools should be all right, as long as they are run by an individual and not the company, and nobody takes a profit or fee off the top for organizing or running the pool.  “It risks becoming a problem when you get out of bounds on size or (scope),” says Clinton. It is best for Allfer Funn that she not manage the Super Bowl pool. And, she should check Con Genial’s employee manual to make sure that she is not stepping out of bounds of her own company policy. Finally, Allfer should be cognizant of the objection of any employee and respond accordingly. Go Packers!

Read more: Houston KTRH NewsRadio 740 Super Bowl Betting Pools May Be Illegal

Tilting the Scales articles: Internet Gambling in the U.S.March Madness Basketball GamblingWanna Bet? Betting About Baseball Returns to the News

Dr. Nole Specs created a website for his successful optometry practice.  Over the holidays, Dr. Specs received a threatening letter from Mo Dougherty, a plaintiff’s lawyer.  Dougherty’s letter claims Specs’ website is not ADA compliant, and demands that Specs fix the problem immediately and pay Dougherty $2,500 or Dougherty will sue.  While Specs knows the ADA applies to the brick and mortar aspect of his business, he’s never heard of it applying to websites and thinks it’s a scam. Should Specs just ignore Dougherty’s letter?

The Federal Government Believes Websites are Governed by the ADA

Title III of the Americans with Disabilities Act (ADA) prohibits discrimination on the basis of a disability in places of public accommodation, such as a restaurant, movie theater, school, doctor’s office, or other business.  Recently, 60 Minutes ran a story on “Drive-By Lawsuits,” where plaintiffs’ lawyers or people hired by them will drive around looking for businesses that are not ADA compliant.  Typically, the public considers this prohibition applying to wheelchair access.  But in 2010, the Department of Justice (DOJ), which enforces the ADA, issued a notice stating it would amend the language of the ADA to ensure accessibility to websites for individuals with disabilities.  As a result of this notice there has been a proliferation of demand letters from plaintiffs’ lawyers threatening to sue businesses for having non compliant websites, and offering to settle if the business will bring the website into compliance and pay the lawyer a few thousand dollars to go away.

How do you ensure ADA Compliance?

First, it’s important to know that the DOJ has not issued binding rules on regulations on ADA compliance for websites.  The DOJ is not expected to issue binding rules until sometime in 2018, unless the new administration changes course on this issue.  However, the DOJ and plaintiffs’ lawyers consistently suggest that websites will be considered ADA compliant if they follow the Web Content Accessibility Guidelines (WCAG-2.0) Level AA.  For example, if the website includes live audio content, Level AA guidelines call for the website to also provide captioning.

Tilting the Scales in Your Favor

Although the DOJ has not issued binding rules and regulations, you should take steps to bring your website within the WCAG-2.0 Level AA guidelines now.  Some plaintiffs have filed lawsuits against plaintiffs even without the binding rules in place and successfully argued that the website was a place of public accommodation that was not accessible to disabled individuals.  This is especially important for businesses that sell goods online, because courts have routinely considered those businesses’ websites to be places of public accommodation.

Apple iPhone 6s plus with Airbnb application on the screen.Following his transfer to Houston, Ruel Benda decided to keep his posh gated neighborhood Rodeo Drive house and started advertising it on AirBNB. His profits were so good that he began renting for 7 days or less. Insisting that Benda’s home use was commercial and not residential, a violation of his property owners association’s (POA) recorded  Covenants, Conditions and Restrictions, the POA fined him. Benda sued. Did he win? Can Benda continue to rent his house?

It depends. No, if Ruel Benda lived in San Antonio. Under these facts a San Antonio appellate court concluded that the POA deed restrictions prevented such rentals and granted the POA’s injunction denying further rentals.

Yes, if Benda lived in Austin where, under very similar facts, the Austin Court of Appeals found no violation of a restrictive covenant under similar circumstances, determining  that the covenant restricting homes to be used “for single family residential purposes” was ambiguous. The Austin court “resolve[d] the ambiguity against the Association and in favor of the [homeowner’s] free and unrestricted use of their property.” The San Antonio Court respectfully disagreed with the Austin Court of Appeals and did not find its reasoning persuasive.

Like Uber, the AirBNB kerfluffle has landed in the news in Chicago, Spokane, (requires a license) and even Arlington County near Washington, D.C. – just in time for Inauguration Day.  Even San Antonio is considering municipal regulations that would affect properties not otherwise subject to a property owner’s association.

Tilting the Scales in Your Favor. Avoid being surprised. If you are in a property owner’s association, read your documents. While many POAs have more detailed restrictions against short term rentals (STR) of POA homes, some enforce their rules and others don’t. Likewise, while smaller counties and cities are not actively enforcing requirements to report and pay hotel occupancy taxes upon home rentals, many cities like Austin, San Antonio and Houston are.                                                                                 

Under Texas law, an STR is rental of a property for less than 30 days and the guest is charged $15 or more per day. Texas hotel occupancy tax due to the Texas Comptroller is six percent of the room cost. Counties are authorized to impose a hotel occupancy tax also.

And, by the way, your income from the STR may well be taxable. As my colleague Drew York wrote a couple of months ago, whether the income is taxable depends upon a “Master Exception” to the Internal Revenue Code. Check out our September article Do I Owe Income Taxes When I Rent Out My Home?

This is the last installment of a series discussing potential pitfalls relating to selling your business.  Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; Successfully Selling Your Business: 4 Tips – No Matter the BuyerSelling Your Business: Why Accurate Financials are Important; and Selling Your Business: 5 Critical Deal Points. Today we’re going to discuss why it’s important to have a business plan.   

It’s the end of the year and you have made that decision: you want to sell your business next year and retire.  Congratulations!  Previous installments in this series discussed the importance of deal points, accurate financials and having any legal issues resolved to avoid any pitfalls when you sell your business.  But to get to the point of making a deal with a buyer, you first have to have a marketable business.  A business plan is the essential tool you need to help market your company.

Business Plans are Road Maps for Buyers

The question on every prospective buyer’s mind is “What makes your business so special that it’s worth $_____________?”  A business plan helps buyers understand your assets and why someone would want to buy your business.  For example, a business plan can summarize historical and projected financial data, market share, marketing strategies and analyze your competition.  Your business plan should also summarize what key intellectual property your business owns, as well as any proprietary licensing that is in place.  This information attracts prospective buyers to dig deeper – especially if the business plan is packaged well because it conveys a sense that you run a disciplined business.

Putting it All Together to Tilt the Scales in Your Favor

We’ve talked about a lot of important issues in this series.  If you are looking to sell your business remembering these key points will help your sales process get off to a good start:

  1. Prepare or update your business plan to market your company to prospective buyers.
  2. Have your accountant audit your financials.
  3. Make sure a prospective buyer signs a confidentiality and non-competition agreement before you allow them to conduct any non-public due diligence.
  4. Qualify your buyer. Why waste time allowing a buyer who can’t meet your payment terms or get financing from a lending institution?
  5. Use a lawyer to prepare, review and advise you on all letters of intent or sales agreements.
  6. When negotiating back and forth with a prospective buyer, make sure all of the terms are documented in writing!

Hope you have enjoyed this series.  Merry Christmas and Happy New Year!  See you in 2017.

Vacant Retail Building with For Sale Real Estate SignThis is the fifth installment of a series discussing potential pitfalls affecting the intended sale by JR and Sue Ellen Pawlenty of their business Pawlenty Energy. Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; Successfully Selling Your Business: 4 Tips – No Matter the Buyer and Selling Your Business: Why Accurate Financials are Important. This month we discuss the Top 5 Critical Deal Points and Recommendations.

Get to the Offer Stage Quickly by Term Sheet or Letter of Intent.  Before signing any written understanding, JR and Sue Ellen should consult a trusted representative to assist them in preparing a well drafted non-binding Letter of Intent, which is critical to setting goals and expectations for a clearly understood, viable offer that represents a good probability of closing.

  1. Payment Terms – Price and Timing. Unless you are paid in cash in full at closing, there’s more than setting price. Expect to negotiate both time and money – deferred and/or contingent payments such as earn-outs, seller notes and stock all depend upon whether your buyer is strategic or financial. Taking a modest down-payment with a note secured only by your company assets and giving the buyer control over your company’s operations, for example, is a recipe for probable disappointment, if not certain disaster.
  2. Reps and Warranties. These are essential statements of fact made by the buyer and seller to each other about various aspects of the transaction, typically including finances, customers, taxes, contracts, ownership, legal issues, intellectual property and more. While both pledge their statements to be true, difficulty of proof and ability to collect realistically impact any agreed upon remedy. Making sure that the statements (promises) you make are clear and accurate is critical.
  3. Indemnification. If a representation or warranty of either you or the buyer is incorrect, the transaction documents address who is responsible and how damages are determined; attorney’s fees are frequently assessed against the loser. Careful attention to contract language addressing both the promises made and the scope of liability imposed for misstatements is crucial.
  4. Transition. Expect the buyer to require your continuing participation to transition the sale. Delaying negotiation of your role and compensation risks an undesirable commitment of time at an almost certainly reduced compensation.
  5. Employees. What assurances does the buyer require about key employees? What is the buyer’s plan for both key and support employees post-closing? Will the buyer retain them with the same compensation and benefits? Be careful when you tell your team. Wait for a solid plan and a solid buyer so you can answer– what does this mean to them?

Tilting the Scales in Your Favor

Beyond the deal points there are some lessons learned that are worth knowing, particularly if this is your first “rodeo”:

  1. Your first “buyer” likely won’t.
  2. Run your business as if you were going to own it forever – it improves your negotiation position.
  3. Due diligence is a two-way street. Check out your buyer’s ability to perform.
  4. Run a litigation check on your prospective buyer.

Unless you’ve been living under a rock for the past three weeks, you know Donald Trump was elected the next President of the United States.  You also probably know that some of Mr. Trump’s companies are defendants in various lawsuits.  Individuals have also threatened to file individual lawsuits against Mr. Trump.  Can Mr. Trump be forced to sit for a deposition while he’s in office?  Can plaintiffs take his cases to trial during his presidency?  Or does Mr. Trump enjoy a “Presidential Privilege” during his term that bars litigation against him that is unrelated to his office?

Presidents Are Not Immune From Lawsuits for Acts Outside of Office

Generally, Mr. Trump is not immune from lawsuits that do not relate to his activities in office.  The United States Supreme Court ruled in Clinton v. Jones that a sitting president is not immune from litigation for acts that occurred before he became president.  This means presidents may be forced to go to trial and engage in discovery, such as a deposition, during the presidency.  However, the Supreme Court noted that in “cases of extraordinary public moment,” such as times of war, a plaintiff may be required to delay prosecuting his or her case against the president to allow the president to perform his duties to promote “public welfare or convenience.”  So, for example, a plaintiff may be required to delay trial while the president deals with a natural disaster or a terrorist attack.

Will Presidents Always Be Required to Appear for a Deposition?

It’s important to remember that Mr. Clinton was being sued by a woman who claimed he sexually harassed her.  Mr. Trump faces similar allegations.  But some of his companies also face claims (Mr. Trump settled the Trump University lawsuits shortly after his election).  So can Trump be forced to sit for a deposition relating to the claims against those companies while he’s in office?  In addition to the Supreme Court’s concerns about the burdens on the office of the presidency, Mr. Trump might not have to appear for a deposition unless his personal involvement is significant to the case. Some courts have adopted an “apex deposition” doctrine that protects high level corporate executives from deposition where the executives do not have personal knowledge of facts or issues that are relevant to the lawsuit.  Thus, Mr. Trump may not be subject to deposition if he lacks that knowledge.

Tilting the Scales in Your Favor

Just because the president does not enjoy immunity probably does not mean there will be a rush of lawsuits against him.  As the Supreme Court notes in Clinton v. Jones, frivolous and vexatious lawsuits are usually terminated at the pleading stage and require little personal involvement from the president.  There have also been a small number of lawsuits filed against sitting presidents for acts that occurred before they took office.  It’s thus unlikely that the American public will be subjected to a “trial of the century” involving a sitting president.

HiResGunner Gunter employs dealership manager Sayles and computer technician H. Packard (“Pack”) at Falconaire’s Fine Ford and pays these “white collar” employees $40,000 per year. In busy sales months, each averages 50-60 hours a week without paid overtime. Do the new FLSA regulations affect Gunner?

Yes. Effective December 1st, Sayles and Pack must either be paid for their overtime hours or to avoid this mandate, their minimum annual salary must be $47,892 (up from the current $23,600 minimum per year) assuming they are Fair Labor Standards Act “white collar” employees (i.e., executive, administrative or professional) under the exemption, and not otherwise entitled to overtime pay.

The Labor Department estimates the new rules affect some 5 million exempt workers, predominantly in Texas, California, Florida, Illinois, New York and Pennsylvania, which have the largest number of newly eligible workers – 200,000 or more in each state. Of those numbers, hardest hit are lower-wage businesses and service industries like hospitality and retail, which identify the new rules as “Career Killers.” Rather than increasing salaries, many business may elect to reclassify professionals as hourly workers and reduce hours, adjust or remove existing benefits and flexibility (including loss of their more prestigious titles) or cut base salaries. “Comp time” (working overtime for future days off) is not an option for these newly eligible overtime workers. Even with labor reductions, the projected additional administrative costs to businesses to track hours of more employees and updating payroll systems are estimated to cost $745 million.

Employers who fail to comply after December 1st risk Department of Labor (DOL) investigation. More daunting, perhaps, is the threat of private litigation, including class action litigation – a risk with substantial downside potential.

Tilting the Scales in your Favor

Evaluate your current employees and salary levels to assess your company’s possible DOL exposure. If you elect to reclassify employees from “overtime exempt” to “overtime eligible”, develop comprehensive plans to (1) determine new hourly rates for impacted employees; (2) revise or update current timekeeping programs and policies to reflect the changes; and (3) implement training for both managers and employees addressing the changes. Congress may attempt to redirect these changes with legislation, but it’s more likely that the results of the November election  will dictate whether that momentum is sustained. Consider using a Checklist.

For more insight on cutting edge employment issues, including federal changes to overtime exemptions, visit the Texas Employer Handbook blog, written by Gray Reed employment partner Michael Kelsheimer.

This is the fourth installment of a series discussing potential pitfalls that JR and Sue Ellen Pawlenty, who own Pawlenty Energy, should be wary of when they are trying to sell their business. Recently, Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; and Successfully Selling Your Business: 4 Tips – No Matter the Buyer. Today, we’re going to discuss why it’s important for your business’s financial records to be in order.   

Avoid Losing the Sale

Many business sales begin with a letter of intent that gives the buyer a due diligence period to investigate and evaluate the business.  Inaccurate financial statements will send up a red flag for potential buyers and probably cause them to walk away from the sale.

Potentially Avoiding Litigation

When there’s a falling out between the buyer and seller after the sale, particularly where the business isn’t doing as well as it was before the sale, the buyer usually complains that the seller’s financials were inaccurate. Although you can’t control whether the buyer sues you, you can create a paper trail during the course of the sale that will make it easy to present your defense.  One way to do that is to pay your accountant to perform an audit of your financial statements before you put the business up for sale.

Boosting Your Business’s Market Value

Inaccurate financial statements might also lead to a below-value sale. For example, if your financial statements inadvertently omit the extra $100,000 in revenue you made last month, the business doesn’t look as valuable to a prospective buyer, meaning you will probably sell the business for less than it is actually worth.  You should also consider having the business appraised.

Other Important Records

If your business is regulated by the local, state or federal governments you want to make sure all of your required licenses are in good standing.  Potential buyers who discover that a business’s licensing is not in compliance will question whether the business’s financial records are also sloppy.

If you incorporated your business, you need to make sure that you have filed all necessary documents with the secretary of state.

You may also want to consider obtaining an environmental audit of the property where your business operates if you handle hazardous chemicals.

Tilting the Scales in Your Favor

Although getting your financial and other documents in order may take some time and cost some money, doing so before you put your business up for sale will save you from surprises later on. If a buyer finds flaws, it will delay the sale, may cost you the sale and may have cost you other potential buyers while you were trying to fix these problems.

 

Home for RentOver the summer, Brad Bevos’ company relocated him from Austin to Springfield, Illinois. A University of Texas alum and huge Longhorn football fan, the move bummed Brad because he won’t be able to attend home games this season.  Because hotels are scarce during home game weekends, and other special events at UT, Brad decides to list his downtown Austin apartment for rent on VRBO instead of selling it.  Brad manages to rent the apartment for 12 nights during the season for $2,400.   Brad doesn’t include this income on his tax return, and when he gets audited the IRS finds out about his side business.  Is Brad in trouble?

Issues to Look Out for When Renting Your Home

Many people now rent out their homes on VRBO or Airbnb websites to make extra income. Before entering the rental industry it’s best to understand how renting will affect your:

  1. income taxes;
  2. local taxes (do you owe hotel occupancy taxes?);
  3. property taxes (do I keep my homestead exemption?);
  4. homeowner’s insurance (does my policy cover me for tenants?); and
  5. whether you are complying with your HOA’s rules.

Do you owe the IRS?

It depends on how often you rent out your home during the year. The IRS has an exception – dubbed by some as the Master Exception for homeowners who rented out their Augusta homes during the Masters golf tournament – that permits you not to report rental income if:

  1. you rented the home for 14 days or less during the year; and
  2. you used the property yourself for 14 days or more during the year, or for more than 10% of the total days it is rented.You may be able to deduct some of your expenses to offset your rental income, so discuss with your tax advisor.

Does Brad owe the IRS?

No, because Brad rented out the house for less than 14 days, and he had lived there for more than 14 days before he was relocated. But, Brad will likely owe income taxes in future years if he rents for more than 14 days, or didn’t visit Austin for at least 14 days.

Tilting the Scales in Your Favor

Before getting into the rental business make sure you have a full understanding of the financial implications. If you are renting out a second home, you should consider hiring a rental management company who can handle day-to-day issues that arise, such as maintenance.