divoce.jpgAnita Deal and Ivana Bie formed their commercial real estate  business Dirt Cheap, LLC several years ago. Through 2007 it was wildly successful. Then the bottom fell out. Their friendship, tenacity and cash reserves are waning. Ivana believes that the market has turned and that now is the greatest real estate buying opportunity of all time. Anita isn’t so sure. Worse yet, their bank requires them both to sign new guaranties and to put up more collateral. Anita wants out. What should they do?

Anita and Ivana should first review the Dirt Cheap, LLC formation documents. Ideally, the parties signed a buy-sell, dissolution or comparable organizational agreement pursuant to which they agreed to an orderly procedure for one to buy out the other in the event of a death, disability, marital divorce or business divorce of the partners. Ideally, their agreement addresses how business debts and liabilities are assumed and how the assets are divided or otherwise accounted for. Properly drafted, their agreement should be tailored to fit their company’s business model, their personal relationship and needs, and the nature of the entity (corporation, partnership, limited liability company, joint venture, etc). The concept of an orderly agreement for transition from both Anita and Ivana to only one of them requires thoughtful pre-planning.

Tilting the Scales in Your Favor.

If you find yourself needing to get a “business divorce,” you will want to do so in such a way as to maximize value, to reduce time and expense, to accomplish an amicable separation, and to preserve current and future business relationships. If so:

  • Review the Organizational Documents. Determine if there is already an agreed process for an orderly and amicable business “divorce.” If you do not already have a business dissolution agreement, consider getting one. Very much like dying without a will, not having a written plan for your business will throw you at the mercy of Texas statutory and case law and the vagaries of the Texas judicial system. Much like a court appointed administrator to preside over your post-death estate, a court appointed receiver oversees the dissolution and distribution of a business to “wind down” the affairs of the company.
  • Review Your Financials. Starting with the same current financial information, Anita and Ivana should evaluate the company’s assets and the liabilities and the best way to maximize value to both. Don’t forget that the company’s creditors, particularly those who hold personal guaranties of the owners will have certain contractual rights in the dissolution process.
  • Commit Your Separation to Writing. Memories can be short. Any agreed separation and dissolution will have continuing obligations of the past and future owners. Committing that understanding to writing before splitting the sheets better enables all concerned to remember what they agreed to do and by when. Consider formally dissolving your business with the Texas Secretary of State. Each business entity has its own particulars, for example the dissolution of a Texas Limited Liability Company.
  • Consider Mediation. If you can’t agree, before things get out of hand you might want to consider getting an unbiased third party who can keep the communication lines open, ask good questions and encourage unemotional dialogue.
  • Don’t Wait Until It’s Too Late. If you don’t tend to your business you run the risk of bad credit, bad health, lost relationships and customers, potential lawsuits with former partners, lenders, vendors and customers. The long term risk and cost could easily exceed any perceived short term savings.

present-16ufgnb.jpgDana Plato is a 6th grade student at a public school in south Texas.  Plato’s favorite teacher is Mr. Socrates, who teaches world geography.  Unfortunately, world geography is Plato’s worst subject.  In fact, Plato is dangerously close to failing the course.  Whether or not she passes is dependent upon how she scores on the final exam, which is scheduled the week before Winter Break.  The day of the final exam arrives and as Plato turns in her test, she hands Mr. Socrates a Christmas present — a $100 gift card to his favorite restaurant, The Republic.  Can Mr. Socrates keep Plato’s generous present?

Mr. Socrates may accept a gift from Plato so long as the gift is not in exchange for preferential treatment or giving a passing grade.  However, the amount of the gift may not exceed $50 and cannot be cash or another negotiable instrument.  Thus, even if Mr. Socrates was able to convince himself that the gift came with no strings attached, the amount of the gift is too high for a public school teacher (a public servant) to accept.

Tilting the Scales In Your Favor

If your company conducts business with governmental agencies or officials, keep in mind that section 36.10 of the Texas Penal Code prohibits gifts in excess of $50 to all public servants, which includes public school teachers.  While gift cards are not considered negotiable instruments, they often can be converted into cash and might, when given to a public servant, have the appearance of being improper.  Regardless of the value of the gift, it is a crime (bribery) for a public servant to accept a benefit as consideration for a decision, vote or exercise of discretion.

bankruptcy.jpgMuch of the corn that Ethan Awl raises is sold to Beau Plymouth for Beau’s company Plymouth’s Pride to feed its turkeys. Ethan’s payment terms are net 30 days. As the economy worsened and alternative fuels gobbled up corn supplies dramatically increasing feed costs, Plymouth’s formerly prompt payments from Beau are well beyond 30 days and are nearing 60 days before payment is received. Before Ethan Awl cries foul, Plymouth advises that he filed for bankruptcy protection. What should Ethan do?

First, stop all contact with Plymouth’s business immediately. Once a person or business files for bankruptcy any collection activity, from demand letters to litigation, must stop; otherwise, Awl risks sanctions from the bankruptcy court. Next determine whether the business bankruptcy filed by Plymouth’s Pride contemplates liquidation (Chapter 7) or a reorganization (Chapter 11) that might allow Plymouth to continue in business. In either case Awl can expect Plymouth to file schedules of its assets and liabilities and give certain notices to its creditors.  Reviewing Plymouth’s bankruptcy schedules and attending the mandatory “341” Creditors Meeting can provide Ethan valuable information to assess whether it is even worth his time to attempt to collect the receivable or simply to take the loss. In any event, check the bankruptcy notice for the deadline to file a claim with the bankruptcy court. Failing to file a “proof of claim” will almost certainly eliminate any chance of payment from Plymouth.

Bankruptcy issues for businesses are not yet behind us. Even though business bankruptcies seem to have peaked in 2009 with 60,837 filings, non-business filings in calendar year 2010 were up 9 percent to 1,536,799.

Tilting the Scales in Your Favor. If you want to maximize collection of your receivables in an uncertain economy, at a minimum consider –

  • Get Paid Early to Avoid Danger. At least get paid on time. Payments regularly made by Plymouth within 30 days that were later extended to 45 days and beyond are more than a cause for casual concern. Plymouth payments received by Ethan in the 90 days before Plymouth filed for bankruptcy may be “preferential payments.” The bankruptcy court trustee may demand that such payments be repaid to the court for the benefit of all creditors creating a lawsuit requiring you to participate just to keep the money you were paid.
  • Credit Check. Perform a credit check on your customer. Background checks and credit checks should be a routine step in opening an account with a new customer. If payments become later or other behavioral changes are noted, a follow up credit and background check may be in order.
  • Protect Your Business Upfront. Depending upon the nature of your business (construction and manufacturing, for example), you may be able to negotiate or file a security agreement in the goods that you are delivering or the services you provide. Also consider getting a deposit, collateral or, preferably, a personal guarantee – certainly for a new business.

smiley-not-face.jpgXavier Breath goes to his local barbershop, the Best Little Hairhouse in Texas, looking for a cut and a new hairstyle to replace his tired comb over.  His young stylist recommends a “Justin Bieber” cut, which she says is very popular.  Xavier does not know who Justin Bieber is, but agrees to try it out.  After an hour in the chair, Xavier looks in the mirror and is very, very unhappy with his $45 haircut.  He complains to the owner and demands a refund, but the owner tells Xavier that her stylist did the best she could with the little hair that she had to work with.  Xavier leaves the salon in a rage and immediately gets on Zelp.com (an online website where users can leave reviews of various local businesses) and posts a scathing and exaggerated review of the Best Little Hairhouse in Texas.  The owner sees the nasty post and brings suit against Xavier for defamation claiming that the untruthful review was hurting business.  Will the owner prevail?

Maybe.  As the popularity of websites such as Yelp, Angie’s List and Facebook continue to soar, so too have lawsuits brought by companies against those who leave critical comments online.  First Amendment activists argue that these lawsuits, often referred to as SLAPP lawsuits (Strategic Lawsuits Against Public Participation), can have a chilling effect on free speech.  Nearly 30 states, including Texas, have passed anti-SLAPP laws which work to support Xavier’s defense of freedom of speech.  Whether Xavier will be liable will depend largely upon whether his critical review of the Best Little Hairhouse in Texas was truthful.

Tilting the Scales in Your Favor:

For businesses, lawsuits are certainly one avenue to deal with false postings.  Sometimes, however, this can lead to further bad publicity.  Some businesses manage their online reputation by quickly responding to negative posts.  Groups such as Medical Justice seek to protect physicians from internet defamation by having patients sign agreements that give physicians increased control over what patients post online while at the same time fostering a more useful and honest rating system. There are also companies (Looper Reed being one of them) that offer consulting and/or services on how bury the negative review with positive reviews and information.  This is particularly effective with Google rankings. For more information on this service, check out http://www.emedialaw.com.

For those leaving an online review, tell the truth.  Angry reviewers are prone to seeking revenge by exaggerating the facts and their false statements will serve as a basis for defamation or business disparagement claims.

haunted_house.jpgIt’s Halloween. Linda Blair, Rosemary, Buffy and fellow high school senior girlfriends are looking for something to do.  Trick-or-treating is boring. The thought of staying home with parents is unbearable.  With no particular plan in mind, the eighteen year olds, like all bored teenagers, head to the mall.  As the girls leave Abercrombie and Fitch after a couple of hours and head to Cinnabon in the food court, the girls notice a haunted house (quaintly named “Lucifer’s Haunt of Scream’s and Dismemberment”). It’s in the space that Big Box, the anchor tenant vacated.  Intrigued, each of the girls shells out $20, signs a one page form with small writing that they don’t pay much attention to and enter Lucifer’s. They are immediately accosted by all manner of ghouls.  One particularly convincing, Texas chainsaw-wielding ghoul chases the girls through the darkness scaring the Lucifer out of them.   Emerging from Lucifer’s crying and screaming, the girls notice that Buffy has a bloody nose from running into a wall.  A week later, several of the girls still suffer from nightmares. They wonder if they can bring a lawsuit for extreme fear, mental anguish and emotional distress. Lucifer’s was simply too scary.

The owners of Lucifer’s Haunt of Screams would not find the threatened lawsuit very scary.  The consent “form” signed by Blair and friends undoubtedly stated that they assumed the risks associated with entering the haunted house and released Lucifer.  Even without such a release, the girls’ claims would have little bite.  Although many jurisdictions, including Texas, abandoned assumption of the risk as a defense to negligence (unless there is an express or written consent), it would still affect the decision of who bore the most responsibility for the “injuries,”  the girls or Lucifer’s. Simply put, if you enter a haunted house, you should not be too surprised if you become scared or frightened.  An appeals court in an eerily similar case ruled:

The very nature of a Halloween haunted house is to frighten its patrons.  In order to get the proper effect, haunted houses are dark and contain scary and/or shocking exhibits.  Patrons in a Halloween haunted house are expected to be surprised, startled and scared by the exhibits but the operator does not have a duty to guard against patrons reacting in bizarre, frightened and unpredictable ways.  Operators are duty bound to protect patrons only from unreasonably dangerous conditions, not from every conceivable danger. 

The number  of these cases that haunt our court system is shocking.  Consider Cleanthi Peters who visited Universal Studios’ Halloween Horror night and sued for $15,000 alleging extreme fear, mental anguish and emotional distress claiming that the their haunted house was just too scary.  Or the case of Jessica Launderville who sued the operator of the Realm of Terror after she tripped on a floor mat while being chased by a ghoulish fiend wielding a chainsaw.

But What About that Agreement They Signed: The Devils in the Details

If Linda, Rosemary, Buffy and gang can find someone to take their case, what about that one page form with the small writing that none of them paid much attention to? Does it affect their claims?

Like many Americans every day, when you purchase a computer, lease a car or even dare to enter Lucifer’s Haunt of Scream, you often sign a “form.” Often buried in all that fine print is what is referred to as an arbitration clause. That clause governs any disputes – from not liking the ghouls to claims the ghouls hurt you – which might arise under the “form.” In short, you have to go to arbitration if there is a dispute.

Arbitration – Is that the same thing as Mediation? No. There is a big difference. An arbitration clause commits both parties to binding arbitration if there is a dispute. Mediation, which will be addressed in a later blog article, is purely voluntary, is not conducted at the courthouse, and is not at all binding.  Typically the arbitration clause is located near the end of the agreement, often above the signature line. It should contain what rules you must arbitrate under, where the arbitration is to be conducted, who the arbitration service provider is, how the arbitrator’s fees will be set and how you may contact them for more information or to file a dispute.

Arbitration – it’s not Litigation. Although it is binding, an arbitration clause does not permit you to go to court. It’s more informal. There are no specific rules of evidence like at the courthouse. The arbitrator can permit all sorts and forms of evidence, weighing it as she sees fit. An arbitrator can even curb irrelevant and repetitious testimony. The parties can, but do not have to be represented by an attorney. They can handle their own testimony, witnesses, evidence, experts and closing statements, including questioning and rebutting the other party’s testimony, their witnesses and evidence.

Arbitrators are not judges, and are not necessarily attorneys. Unlike courts where a judge is assigned to a case, arbitrators are selected by the parties for the specific cases, often because of their knowledge of the subject matter.

Arbitration – Confidential, Faster, Final and Binding. Unlike the courthouse, arbitration proceedings are not public record and may even be kept confidential. Arbitration is much faster than a lawsuit which can often take years to get to trial. Also, unlike a lawsuit that can be appealed, the decision of the arbitrator is final and unappealable. Often, because the conclusion is faster and unappealable, arbitration is generally less than the cost of formal courts.

Tilting the Scales in Your Favor. If you do have an agreement that calls for arbitration, read and carefully follow the procedures referenced in the agreement. Notify the business in writing that you have a dispute and that you wish to resolve it through arbitration, or contact the arbitration service provider referenced in the agreement.  You might also consider calling your favorite lawyer.

Tilting the Scales to Manage Your Legal Risk. Unlike Linda, Rosemary, Buffy and gang if you have a chance to negotiate your agreement, there are several things to consider. First, do you even want an arbitration clause? What are the pro’s and con’s? Properly drafted, they do make sense for many businesses. They are not for everybody. It does make sense, however, to craft dispute management language in any significant contract. Some, like those businesses regulated by securities laws, require arbitration through a particular arbitration entity like FINRA – Financial Industry Regulatory Authority. The most common service providers in Texas are JAMS – Judicial Arbitration and Mediation Services, Inc., the American Arbitration Association and the Better Business Bureau.

Gunter Ongway lives in a suburb of Dallas and does not have a car.  In preparation for his fantasy football draft (which is to take place at a local restaurant), Gunter uses Google Maps to find walking directions to the restaurant.  Directions in hand, Gunter sets out on his journey across town following Google’s directions carefully.  However those directions lead Gunter to walk along a narrow six lane highway (without sidewalks) where he is struck by the side mirror of a passing vehicle.  Gunter is injured badly and sues Google alleging that his injuries were caused by Google negligently providing him with unsafe directions.  Does Gunter have a case?

Probably not.  To prove a case for negligence in Texas, Gunter must first show that Google owed him a legal duty.  In determining whether a duty exists, courts will look at many factors including the legal relationship between the parties, the foreseeability of injury, the likelihood of injury and other public policy concerns.  In all likelihood, a court would find that no special relationship existed between Gunter and Google so as to impose a legal duty.  As Google provides directions to Gunter as well as countless other users, the relationship between Google and Gunter is too attenuated to impose any duty on Google.  Furthermore, even if Gunter was able to clear the duty “hurdle,” it is quite possible that a jury would find that his recovery was barred by his own negligence.  In Texas, Gunter would be barred from a negligence-based recovery, if a jury found that his negligence (and failure to use common sense by avoiding a six lane highway without sidewalks) contributed to more than 50% of the accident.

A lawsuit similar to the fact pattern above was filed last year in a Utah district court by Lauren Rosenberg against Google and Patrick Howard, the driver who hit her.  A copy of the complaint can be found at justia.com.

icecream.jpgTim and Harry were friends. They both love ice cream and inventing their own flavors. The latest, “Cold Sweat” made of an ice cream base with hot sauces, picayune, habanero and Thai chili peppers was so successful they decided to partner in a new company – 50/50… and on a “handshake.” Later, Harry bought a pepper company that sells to their partnership. Is this a good idea?

50/50 Partnerships. Maybe, but problems are on the horizon. Forming a new startup with a friend who shares the same vision would seem only fair to split 50/50. However, keeping good friends requires that good planning and that “bet the company” issues are in writing – sell, buy, borrow, and merge, among others. But what about suing and defending lawsuits? Without a partnership agreement creating authority of officers or an agreed process to resolve deadlocks on these issues, the partners risk their friendship, the value of their company, their investment and perhaps more. And, if Harry’s company doesn’t pay its bills, what is the likelihood that he will permit his pepper company to be sued?

Tilting the Scales in Your Favor. If you want to partner up with a friend who shares your vision, at a minimum consider –

  • Define Business Roles. Describe each of your responsibilities even going so far as to specify the responsibilities and authority of the president or manager, member or treasurer, for example
  • 50/50. A limited liability company allows different percentages of ownership, profit distribution and decision making, if appropriate. Or, at the least, have a “tie-breaker” solution that does not require a lawsuit for a solution.
  • Communicate. Plan to meet regularly to share new ideas, concerns and solutions.
  • Partnership Agreement. It may sound obvious and simple, but many partners don’t take the time to agree on the “what if” problems which can often be fair and simple if agreed from the beginning.
  • Related Entities. If you must do business with another entity owned in whole or in part by your partner, agree on a person or plan to resolve complaints. It’s called a conflict of interest for a good reason.

Yes. Forming a new company with your partner is a good idea, but that alone is not enough for you to manage your legal risk. A written organizational or partnership agreement is a must.

Can Oil & Gas Companies Place a Pump Jack in Your Front YardSeldon Wright, an accountant, searched for years to find the perfect piece of property to open his tax preparation business, Many Happy Returns.  At long last, Wright finally located and purchased an ideal parcel from Molly Kuehl, a physicist at the local university.  Several months after Wright finished construction of his office and opened for business, Kuehl stopped by and informed Wright that natural gas had been found in the area and, as she still owned the mineral rights, that she intended to enter into a lease to allow drilling on the property.  Wright tells Kuehl that her right to the natural gas was terminated when she sold the property and that any exploration or drilling would be a trespass.  Is Wright right?

Probably not.  In Texas, land is divided into a “surface estate” and a “mineral estate.”  A seller can sell the entire estate (both the surface and mineral) or just the surface or mineral estate.  When Wright purchased the land, his concern was for the surface estate where he intended to build his office.  Wright didn’t care (or even realize) that Kuehl had retained the mineral estate because natural gas and/or oil had never been drilled in the area.  This is all very bad news for Wright.  In Texas, where oil and gas have been so critically instrumental to the state’s economy, case law has developed greatly favoring the estate of the mineral owner.  When the estate has been severed (as in this case), the mineral estate always dominates so that the minerals (e.g. oil and gas) may be produced.  Despite Wright’s protests, if Kuehl enters into a mineral lease with a natural gas company, the company may use as much of the surface as is reasonably necessary for its operations.  Kuehl’s ability to drill is subject, however, to municipal ordinances and the prior use doctrine, which protects land owners from damage or disruption to their business. 

Tilting the Scales in Your Favor – When purchasing or selling property pay close attention to whether the surface and mineral estate will remain united or are being severed.  Looper Reed has seen a resurgence in certain oil and gas legal work as a result of new drilling technologies.  These recent advances have permitted oil and gas companies in North Texas to drill in areas where once there was no drilling (including residential neighborhoods), but have also moved drilling operations closer to residential neighborhoods.  What drilling activities may take place and where they may take place is ultimately governed by the municipality in which the land is situated. 

What is Qui TamTatt L. Tale was beside himself.  His company FreshLike Grocers was the largest supplier of food sold and shipped to U.S. troops in the Middle East during the Iraq war.  One day, Tatt caught his boss Kot “Red” Handid changing the “use-by” labels on the food it was supplying.  Freshlike Grocers did nothing to stop Red from continuing to falsify the food labeling and in fact seemed to be encouraging it.  Finding no other way to stop this grievous practice, Tatt blew the whistle to the U.S. government.  Following a lengthy trial, the U.S. Department of Justice announced that FreshLike Grocers, Inc. agreed to pay $13.2 million to settle Tatt’s “whistleblower” lawsuit.  Tatt’s take?  Between $1.9 to $4 million.

Qui Tam or “Whistleblower” Lawsuits.  During the Civil War, President Lincoln signed the “Informer’s Act” to incentivize private individuals to help curb a rash of fraud against the United States Army. Sometime referred to as “Lincoln’s Law”, the original False Claims Act focused on fraud committed by government contractors.  Violators then and today were subject to civil and criminal penalties for damages, today tripled plus civil penalties from $5,000 to $10,000 per false claim. 

A private person with information that the defendant knowingly submitted or caused the submission of false claims can “bring a case on behalf of our lord the King, as well as for himself” – a “qui tam” action. If the “whistleblower” (known as a “relator” in the lawsuit) complies with very strict statutory requirements, they can receive between 15% to 30% of the total recovery.  Not a bad tip for Tatt!

Since 1863, Lincoln’s Law has been significantly expanded.  Today, anyone who receives government funds can be subject to the False Claims Act. More recent “whistleblower” lawsuits allege false claims were filed by culpable third parties against the government: for mortgage fraud, for insurance fraud for pressuring engineers to blame hurricane storm damage on flood water instead of wind, for failure to comply with federal student financial aid requirements, for programs run through the Federal Government, for Medicaid and Medicare fraud by nursing home operators,  for illegal inducements to hospitals by a rural ambulance provider, for federally reinsured crop insurance payments, and for waste disposal environmental violations, among others.

Tilting the Scales in Your Favor. If you or your company receive payments under a government contract or statute, make sure that the statutory or contractual requirements are being satisfied. If you are employed by a company that receives government funding and refuses to comply with its obligations, possibly creating criminal liability for you, you may want to consult us or someone else who has handled these types of cases.

Lou Pole was indicted on charges of first degree murder and pled not guilty to the killing of his three-year-old son. The prosecution sought the death penalty in a six week trial that received intensive national media attention and was a popular topic on television talk shows. Pole did not testify at his trial. To the surprise of many, the jury found Pole not guilty of murder and he was released a free man. Haunted by the notoriety of the trial, Pole had difficulty finding a job. After several months without any income, Pole accepts a substantial advance from a publisher to write a “tell all” book about his ordeal. With much public anticipation, Pole’s book is published and it is immediately apparent that the jury was unaware of many factors that would clearly establish Pole’s guilt, including, Pole’s brazen statement that he got away with murder. Can Pole be charged again based upon the newly discovered evidence?

Not likely. Double jeopardy is a procedural defense that forbids Pole from being tried again in a criminal court on the same or similar charges. The concept of double jeopardy is found in the Fifth Amendment to the U.S. Constitution which maintains that no person shall be “subject for the same offense to be twice put in jeopardy of life or limb.” Accordingly, despite Pole’s confession, he would be immune from further criminal prosecution. However, if evidence were to come to light that Pole committed another crime in connection with the event, e.g. conspired with another person to kill his son, this would be considered a different crime, with distinct facts, which would allow for new charges and a new trial. Moreover, while a “tell all” book might be tempting, it could be very costly. Pole’s admission could and would be used in a civil lawsuit brought against him by his son’s estate.

The recent mistrial that was granted in the Roger Clemens perjury trial raises interesting legal questions as to when jeopardy attaches. In the Clemens case, the judge declared a mistrial almost as soon as the trial began based upon the prosecution’s failure to abide by a pretrial order. The question then becomes, how far must a trial proceed before the prosecution has had their one opportunity to obtain a conviction? While most experts agree that jeopardy attaches when a panel of jurors have been sworn in, whether or not the court will require Clemens to stand for a second trial could ultimately hinge on whether the judge considers the prosecution’s miscue to have been accidental or intentional.