Small Business Owners: Avoid these Pitfalls

Happy Friday, and a conclusion to “Small Business Week”.

President Barack Obama has proclaimed May 1-7, 2016 “National Small Business Week.”

I follow the Small Business & Entrepreneurship Council, if you are a small business owner you should check the organization out.

In regards to National Small Business Week, SBE Council president & CEO Karen Kerrigan was quoted this week as saying: “in order to boost opportunity and business growth Washington must focus on advancing policies that are more friendly and supportive”

I agree. I am all for policies that are friendly to small business.

But, I’m not here to talk policy. I’m here to talk about “what not to do” if you are a small business owner.

And what better way to help me illustrate this than a recent court of appeals decision from April 12th.

The case:

Herman v. Jeffrey W. Pickell & Kaleidoscope Books, 2016 Mich. App. LEXIS 700, *1-2 (Mich. Ct. App. Apr. 12, 2016)

Facts:

  • Defendant – Pickell was the sole proprietor of a business: Kaleidoscope Books and Collectibles, located in Ann Arbor, Michigan.
  • Plaintiff – Herman met defendant at some point in the late 1990’s while plaintiff’s daughter was a student at the University of Michigan.
  • Plaintiff frequented defendant’s store due to his interest in collectibles  and other products that defendant sold.
  • The parties each claimed that the other was the first to initiate the suggestion of going into business together. Id. ps 1-2. (I’m picturing this –“You wanted to go in business first, no, YOU wanted to!“)

The Business Terms:

According to the Court, “both parties seemed to agree that at some point they came to an understanding whereby plaintiff would provide defendant with $50,000 in return for a 10% interest in defendant’s business.” Id. pg 2.

Apparently, that’s about all they could agree on.

The Writing that contained the Business Terms: Two Letters:

According to the Court, “[n]o writing existed between the parties before a February 1, 1998 letter from defendant to plaintiff that stated that plaintiff was “a ten percent (10%) silent partner in the business.” Id. pg 3.

“Defendant sent a letter to plaintiff dated June 25, 1998 that stated that plaintiff would “retain 10% ownership . . . until the $50,000 loan is completely repaid.” Id.

(Question: Is Plaintiff a “silent partner”, or an investor with a “loan to be repaid?”)

Addressing these types of ambiguities are the reasons you retain a lawyer beforehand…

Long story short, 10 years went by without communicating, and Plaintiff sued Defendant for breach of a business contract.

I’m not going to tell you how the story ends, you can read that here.

But, these facts give me the opportunity to illustrate a few points for small business owners to consider:

1. Your business agreements should be in writing.

Any business transaction where money is changing hands. should be in writing. Taking on a partner?

Taking on an investor?

Taking on an investor that could convert into an equity partner?

Entering a business contract for services, supplies?

Put it in writing.

2. In writing, prepared by a lawyer, not a letter you drafted yourself.

I’ve written many times in the past on the problems that arise when people decide to be their own lawyers.

Nowhere is this more prevalent than small business. Putting together the documents you need likely is not as expensive as you think, and is worth it considering the cost of litigation.

3. Your business should be incorporated.

The defendant in this case was a “sole proprietor”. He had no liability protection.  He was completely liable for any debts or liabilities of his company. I’ve written on this topic before: Business owners  need to consider forming a limited liability company or a corporation to shield yourself from personal liability of your business debt.

e-mail: Jeshua@dwlawpc.com

twitter: @JeshuaTLauka

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“Prince Died Without a Will.” Business Owners Should Ask the Question: Who Are My Advisers?

Yesterday, the ABAJournal posted that Prince’s sister filed in court claiming Prince died without a will.

A year ago I posted about some lessons from Robin Williams’ Estate.

I wrote about Robin Williams’ Estate as “an example of the problems that can erupt after a loved one passes away – even if that loved one had a well thought out estate plan.”

In the case with Prince, it appears that he had absolutely no estate plan at all.

This is surprising given, as the ABAJournal put it Prince apparently “had a ‘revolving circle’ of lawyers and business advisers, according to the New York Times. He also handled many of his business affairs himself.”

I wonder where were the attorneys, accountants, financial advisers telling prince:put your affairs in order!

Maybe this happened. Maybe he had one or more lawyers over the years tell him, “by the way, Prince, you really need to prepare an estate plan so that your finances are in order when you die.”

Maybe estate planning was simply not important to him. According to the article Prince did not have a surviving spouse or parents… one can only speculate.

Prince is apparently survived by 5 siblings. It will be interesting to see if they can all agree on the estate administration or if there are any other apparent heirs that claim a part of the quarter of a billion dollar empire Prince left behind.

Two comments:

1. To business advisers: If we aren’t being proactive with our clients to push them to get their affairs in order, we are doing a disservice. This is especially true when we serve business owners or individuals whose finances might have a lot of moving parts.

2. To Business Owners: Who are your advisers? Maybe you are like Prince – you like to handle many of your business affairs yourself. That only works so well. You can’t be an expert in every area. Surround yourself with good counsel. You need advisers who can steer you in the right direction.

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

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Proposed Bill Affects Landlords in Recovering Property Against “Squatters”

Several years ago I wrote a post about a proposed bill affecting Landlords.

The Bill affected the time frame which a property owner could bring an action to recover property; most importantly, it affected the statute of limitations for a claim of “adverse possession” or “squatters rights” by a holdover tenant.

 

Here’s the scenario:

Investor purchases at foreclosure. Investor finds out the Property is being occupied. Redemption period expires. Investor files suit to gain possession of the Property.  “occupant” counter-sues – and claims “I own this Property by adverse possession”.

 

The prior bill provided that the statute of limitations period does not apply to a person if an adverse party is asserting a claim to the property based upon adverse possession.

That bill went nowhere.

 

House Bill 5546 was introduced a few weeks ago and referred to the judiciary committee.

The Bill would extend the period which a “squatter” or “holdover tenant” would need to prove title by adverse possession from 15 years to 30 years.

This makes sense for Landlords: what if you purchase real estate at foreclosure sale, attempt to remove a tenant and find out they have a claim to adverse possession?

The statute would make it harder for a hold-over tenant to prove they had a lawful right to the Property.

 

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e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

A Lawyer’s Perspective: the Tension Between Encouraging Real Estate Entrepreneurship and Keeping Families in Affordable Housing.

2017-09-14 15.04.09If you are reading this, you may know that I am a lawyer.  I love working with entrepreneurs – a large number of my clients invest in/manage real estate.

As the current Chairman of the Board of Mel Trotter Ministries, I also care very deeply about the homeless, hurting, and hungry.

 

I was in court recently on behalf of an investor client. The client purchased real estate at foreclosure sale, redemption period had come and expired months ago, and I was filing suit to terminate any “possessory rights” of anyone occupying the Property.

In this specific case someone was residing at the Property, without any lawful claim, not paying any money to stay there, for months/years. My client needed immediate possession of the Property to begin work to bring the Property in good condition, to ultimately rent to a willing tenant.

I read this article from the ABAJournal:

Couple must sue to evict stranger who moved into their vacant home

It sounds kind of strange, right? Why would someone need to sue to evict someone who has no business being there in the first place?

This question illuminates  the “flip side” of the housing crisis (not enough affordable housing is causing families to be homeless.)

The flip side:

There are entrepreneurs who revitalize blighted real estate. These entrepreneurs pay money to own property, invest real money into purchasing, renovating, and leasing the property to individuals/families who can afford to pay rent. (Depending on the level of development of the property, some might call this “gentrification”)  There are people living in these homes they cannot afford. So they live there, rent free, until a court orders them to leave. At that point – they are rendered homeless, or struggling to find housing they can afford.

After obtaining a possession judgment for my client – my job ends.   But my “Mel Trotter” hat keeps my mind going…

What becomes of these people? Maybe they end up sleeping in their car. Hopefully they end up receiving help – to meet them where they are at. Places likeMel Trotter Ministries, that will take in families and care for them –  provide them time to get into affordable housing. Since January 1, MTM has put 37 families into permanent homes.   

I see firsthand the tension:

 We should encourage entrepreneurs to revitalize blighted property – we should do everything we can to place families in affordable housing.

There is a tension: and it needs to be embraced.

I get these words of wisdom – to “embrace the tension” we see in our daily lives from a man I admire named Fred Keller – founder and Chair of Cascade Engineering.

For me, the answer isn’t ignoring the tension on complex matters – which is why I am writing this post. I embrace it.

 

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

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Real Estate Law Update: Michigan Supreme Court Holds Full Credit Bid did not Bar Contract Claim against Third-Party.

Happy Friday, all!

Real Estate Investors and anyone involved in the foreclosure process is aware that a “full credit bid” at the foreclosure sale by the bank/mortgage holder “extinguishes the underlying debt.” You can check out my prior posts on this subject.

A case that has been on appeal for years is Bank of America v First American Title, et. al.

Two days ago the Michigan Supreme Issued an Opinion that has legal and precedential significance.

The Michigan Supreme Court was asked to, among other things, address “the scope of the full credit bid rule.” Bank of Am. v. First Am. Title Ins. Co., 2016 Mich. LEXIS 660, *1 (Mich. Apr. 13, 2016).

Regarding that scope, the Court held that “the full credit bid rule does not bar contract claims by a mortgagee against nonborrower third parties.” Id. pg 29.

In so doing, the Court overruled prior case law.

FACTS

This case was factually interesting in that it was based on BOA’s financing the purchase of 4 properties (with inflated property values), the borrowers turned out to be “straw borrowers” who took the money, ran, and defaulted on the loans.   BOA foreclosed and bid the full amount (a full credit bid) on two of the properties, and then took a $7 million hit when it thereafter sold the properties.

ISSUES: CPLs and the Scope of the Full Credit Bid Rule

The issues are varied, including the enforceability of closing protection letters (CPLs) issued by title insurance companies under certain circumstances.

What is a Closing Protection Letter?

As the Supreme Court explains, A CPL “is a contract between the title company and the lender whereby the title insurance company agrees to indemnify the lender for any losses caused by the failure of the title agent to follow the lender’s closing instructions.” Id pg 37.

“[a] lender who also wants the title insurer to be responsible for the agent’s acts in connection with escrow closing activities and services must separately contract with the title insurer for such additional protection by entering into an ‘insured closing letter’ or ‘closing protection letter.” Id.

In BOA’s case, it was on the hook for a huge loss and wanted to point to the Title Company and say “you should have caught that, you must indemnify me!”

Words Matter.

A word (literally) on the CPL issue – the Court made a distinction between the inclusion of the word “in” in the CPL in the prior case, and the “exclusion” of the word “in” in the instant case. In the Court’s determination:

“Although the distinction is slight—the only difference is the word “in”—the distinction is legally significant.” Id. page 43.

“[i]f the word ‘in’ is not included, as is the case here, the phrase ‘handling your funds or documents in connection with . . . closings’ simply defines or identifies the closing agent, effectively broadening the indemnification coverage to any acts of fraud or dishonesty by the closing agent related to a closing.” In light of this distinction, the fraud or dishonesty by Westminster or Patriot need not be tied to their handling of Bank of America’s funds or documents.” Bank of Am. v. First Am. Title Ins. Co.id. at page *44 (Mich. Apr. 13, 2016)

Words matter!

Takeaways:

1. The Full Credit Bid Rule applies to the borrower/lender.  It does not apply to third-parties and will not affect any contracts or claims between a lender and a third party.

2. Words matter! As the Supreme Court opined – one word can be “legally significant.” It could determine liability for millions of dollars…

E-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

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Landlords & Property Managers: Time to Review your Tenant Applications – Beware Blanket Bans on Renting to those with Criminal Convictions

“Private landlords who have blanket bans on renting to people with criminal records are in violation of the Fair Housing Act and can be sued and face penalties for discrimination.” The New York Times Also check out theABAJournal

According to the Times article ” In particular, blanket bans violate fair housing law because they have a disparate impact on minorities, who are arrested and convicted in disproportionately high numbers, officials said.”

You can review the guidance that came out of HUD’s General Counsel office.

Per the NYTimes:  the guidelines discuss “how the fair housing law applies to policies that exclude people with criminal records, a group that is not explicitly protected by the act but falls under it in certain circumstances”

The Counsel’s report is about 10 pages the first page lists some pretty staggering statistics:

“As many as 100 million U.S. adults – or nearly one-third of the population – have a criminal record of some sort.”

“The United States prison population of 2.2 million adults is by far the largest in the world.”

For a discussion on some of the policy arguments surrounding the FHA- you can check out NPQuarterly’s article from today.

Bottom Line for Landlords: No Blanket bans on Tenant applicants just because someone has been convicted of a crime.

A good piece of advise from Debra Carlton  a spokeswoman with the California Apartment Association, which represents 50,000 rental property owners,  quoted in the NY Times article: “We always urge owners not to use a blanket policy and to look at the tenant’s ability to pay rent and be a good tenant,”

Michigan Business Law Update on Non-Competition Agreements.

I received a question in response to a recent post on non-competition legislation. The question was: “are non-competition agreements unenforceable in Michigan?”

I will give you the typical lawyer answer: “it depends“.

In theory, CNCs are enforceable in Michigan.

Under certain circumstances, they are not.

A February 18, 2016 unpublished Michigan Court of Appeals decision is helpful to illustrate when a CNC may be enforceable and when it may not be.

The Case:     Mid Mich. Med. Billing Service. v. Williams

Facts:

  • Plaintiff, Mid Michigan Billing Service, Inc. (“MMBS”) provides medical billing services in Flint, Michigan (another topic for another day).
  • Defendant, Lindsey Williams (“Williams”) was employed as an office manager for MMBS between 2002 and 2013″ Check out the opinion here. Mich. Med. Billing Serv. v. Williams, 2016 Mich. App. LEXIS 319, *1-2 (Mich. Ct. App. Feb. 18, 2016).
  • “One of Williams’ responsibilities was overseeing client relations.” (important detail).
  • Williams signed an employment agreement and employee handbook that contained a 12 month covenant not to compete, and not to solicit (indefinite).
  • In May 2013, Williams voluntarily left her employment with MMBS and began her own  medical billing business out of her home. One of her clients was a former client of MMBS.
  • On August 14, 2013, MMBS filed a complaint and motion for a preliminary injunction, alleging a breach of contract claim based on the noncompetition provisions in the employee handbook and the employment agreement.
  • In particular, MMBS alleged that Williams violated the terms of the noncompetition provisions by performing medical billing out of her home, by contacting and soliciting the business of MMBS’s clients, by performing “medical billing for one of [p]laintiff’s current clients,” by employing one or two former employees of plaintiff, and by inducing others to terminate their employment with plaintiff.

II. The Trial Court decision:

After trial, the Court ordered Williams, “to pay damages and enjoin[ed her from] from (1) “engaging in any conduct . . . competitive with a service provided by Plaintiff . . . within 50 miles of Plaintiff’s principal place of business . . . for a period of one year” from the entry of the September 10, 2013 interim order; and (2) “from obtaining employment, either directly or indirectly, from any current or previously contracted client of [plaintiff],” regardless of geographic distance or duration.” (Emphasis added). Id. pg 5-6.

Williams appealed. She did not challenge the fact that she signed the non-compete documents and agreed to be bound. Rather, Williams argued that the Judge failed to inquire and determine whether the restrictions were reasonable.

Question to ask yourself: Is it reasonable to limit a former employee of yours from soliciting your customers, past or present, forever? (hint…answer below).

III. The Court of Appeals: CNCs need to be Reasonable.

The Court of appeals found that “A Court must assess the reasonableness of a noncompetition clause if a party has challenged its enforceability.” Id. Citing Coates v Bastian Bros, Inc. 276 Mich App 498 (2007).

Whether or not a clause is reasonable and enforceable is a “fact specific inquiry”. Id.

The relevant question: “whether the noncompetition provision protects an employer’s “reasonable competitive business interest” in the context of [the employer’s] specific business.”  Medical Billing, supra. pg 8.

Reasonable  = more than merely preventing competition.

The Court goes on state that if a CNC is going to be “reasonable” “an employer’s business interest justifying a restrictive covenant must be greater than merely preventing competition.” Id. at pg 10.

Reasonable = prevent an employee’s unfair advantage.

In order to be reasonable the CNC “must protect against the employee’s gaining some unfair advantage in competition with the employer, but not prohibit the employee from using general knowledge or skill.” Id. citing Coates.

The Court held that MMBS could “place reasonable restrictions on [Williams’] use of plaintiff’s client information and relationships.”  However, the Court found it “unreasonable to permanently prohibit her from pursuing employment opportunities, directly from any…client of plaintiff.” Id.

The Court affirmed in part the trial court’s grant of the non-competition, but reversed on the issue of the non-solicitation, finding that it was not reasonable to permanently enjoin a former employee from soliciting customers of former employer.  (“restrictive covenant must be reasonable as between the parties, and it must not be specially injurious to the public.”) Id. at pg 12, citing Coates

.It is injurious to the public if, at some level, you do not let them choose who they can get services from.

Takeaways:

1. CNCs may generally be enforceable in Michigan.

2. CNCs must be reasonable.

3. Courts will reform a CNC to make them reasonable if they are not reasonable.

4.  It is reasonable to protect a former employee from using confidential information to gain an unfair advantage in competing.

5. It is not reasonable to prohibit a former employee from using “general knowledge or skill”.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

www.dwlawpc.com

Business Litigation News: Dispute Resolution…Online?

The ABAJournal reported on “Online Dispute Resolution” (“ODR”) Is online dispute resolution the wave of the future?

In the past, I’ve posted about the benefits of alternative dispute resolution for businesses.

The primary benefit:

litigation is expensive!

 

According to the ABAJournal, Colin Rule, the founder of an online dispute resolution software, Modria, had this to say about ODR:

“There will always be cases that require the attention of skilled individuals…But we know we have crisis of access to justice. Technology may be a way we help solve that problem.”

Indeed, there is an access to justice problem for consumers, start-up businesses.  This article to me points out that ODR may be a “wave of the future” as it relates to individual disputes; but complex business disputes may stay in the realm of person-to-person dispute resolution.

At least for the time being.

My thoughts – the benefits of alternative dispute resolution are – efficiency, privacy, and cost-effective. ODR seems, at first glance, to enhance those benefits.     Seems like a good idea.

 

Thoughts?

e-mail: Jeshua@dwlawpc.com

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twitter: @JeshuaTLauka

Drunk Driving Shatters Lives: Statewide Crackdown on Drunk Driving Begins Today.

Today, the Michigan State Police along with 150 other police agencies begin acrackdown on drunk driving that will extend through April 4th.  The effort is coordinated by the Office of Highway Safety Planning and is supported by federal traffic safety funds.

Drunk Driving Shatters Lives.

My friend, Michael Mayes, lost two sisters, Shannon and Heather, in 2000. Yesterday, during a press conference at the Michigan State Police Tri-City Post in Williams Township, Mike’s dad, Ron Mayes shared the gut wrenching details of how he first learned he lost his daughters.

I can’t help but tear up reading the article.  The Mayes’ family will never be the same because of the senseless decision of a 20 year-old to drive drunk.  My prayers are always with the Mayes’ family.

 

Statistics From Past Drunk Driving Enforcement Matters.

Some staggering statistics on drunken driving in Michigan provided by the OHSP:

  • During the same grant-enforcement period in 2015, extra police patrolsarrested 538 drunken drivers. Of those, 78 were charged under the state’s “super drunk” law, of having a blood alcohol level of 0.17 or higher. In Michigan, a person is legally intoxicated when their blood alcohol level is at 0.08 or higher.
  • Throughout the state in that same period in 2015, police arrested a total of 2,182 drunken drivers. Of those, 672 were charged with being super drunk.
  • In all of 2014, police arrested 35,060 intoxicated and impaired motorists, or 96 per day.
  • Also in 2014, 319 people were killed as a result of alcohol- and/or drug-involved traffic crashes, a 9 percent increase from 2013.

Michigan State Police cited St. Patrick’s Day celebrations, the onset of spring, spring breaks, and the NCAA basketball tournaments as being likely contributors to this uptick.

 

New Proposed Michigan laws to combat driving under the influence.

A Bill has been passed by the Senate that would authorize the Michigan Department of State Police (MSP) to establish a one-year pilot program in five counties for roadside drug testing to determine whether an individual was operating a vehicle while under the influence of a controlled substance.

You can check out the status of that bill here.

 

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

Small Business, Social Entrepreneurs and Crowdfunding

Just a few days ago I posted on the Michigan House Resolution supporting Equity Crowdfunding.

This morning I read an article on CrowdfundInsider on the topic of financing for small businesses.

Access to Capital: What are the Options for Small Company Finance?

Candace Klein Chief Strategy Officer at DealStruck was Interviewed 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.”

 

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.

Comments? Questions?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka