Purpose Driven General Counsel

Recent Case Law: Lesson to Real Estate Investors

I represent a number of real estate investors, some of whom purchase and rehab distressed properties – before, at, or after a foreclosure sale has taken place.

Distressed properties are suited for entrepreneurs – they are “high risk, high reward” investments.

An investor can get a great deal at these sales. However, these sales are inherent with pitfalls – some of which can be costly for an unwary investor.

I was reminded of this today when I read a July 30, 2015 Michigan Court of Appeals case – Hunter v BOA and Moma. You can check out the opinion here

Brief Facts:

There, Bank of America foreclosed on an approx. $200,000 mortgage. BOA was the high bidder at the sale in March 2010.

The redemption period expired in September 2010 and Hunter, the mortgagor/ homeowner, failed to redeem. Thereafter Hunter sued BOA for unlawful foreclosure. The case was dismissed in 2011.

In 2012 BOA still had this property in its possession and sold it to Moma.

The lawsuit by Hunter against BOA was dismissed, so Moma is in the clear to pick up a good deal, right?

Not if Hunter has anything to say about it.

After purchasing the Property, Moma evidently noticed that mortgagor was still in possession of the Property and so in February 2013 Moma sued Hunter for eviction.

Hunter filed suit against BOA and Moma in Circuit Court alleging Moma has no rights to the Property because BOA fraudulently foreclosed.

The Circuit Court ended up dismissing Hunter/mortgagor’s lawsuit, and granting full ownership to Moma. The Court found, rightly, that since redemption had expired, the mortgagor had no interest in the Property and no standing to challenge the foreclosure. The Court of Appeals affirmed.

Lesson for Investors:

Certainly, a take away from this case is that investors need to do their due diligence when purchasing distressed property. Investors need to look at “red flags”. Here, the fact that the Bank was selling property that (a) was occupied (b) by someone who filed a lawsuit against the Bank should have been a red flag that purchasing this property could be costly.

Don’t hear me wrong – the investor, Moma, eventually got what he was entitled to. But at what cost?

Answer: Three years in litigation and who knows how much in legal fees.

To be sure, the Circuit Court did not think fondly of the mortgagor’s lawsuit. The Judge held:

I’m really quite frankly appalled by what’s gone on [in this case.] [Hunter] has failed at any turn here to establish any factual basis for the claims that are alleged. And the factual basis that is implied . . . is exactly the same as was previously decided by [the Oakland Circuit Court and the 46th District Court]

Be that as it may, mortgagor still maintained possession of the property for years after she was foreclosed on.

Distressed Property – high risk, high reward.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Recent Court Decision Provides an Important Lesson for Businesses

I just read an interesting opinion from the Court of Appeals. The case involved a dispute between a property management company and an out of state construction company.

You can check out the case here New River Construction LLC v National Field Network

Why this case was interesting to me…

This case illustrates a classic example of why you should read your contracts before and after you sign them.

The Facts…

The case involved a typical business dispute. National Field Network (NFN) hired New River Construction (New River) to perform property preservation work for real estate located in Michigan.

The Court notes at very beginning of its opinion (to emphasize the importance of this fact) at the onset of the relationship the parties signed an Agreement..

The parties’ Agreement included a “choice of law provision” and “arbitration” clause.

About two years ago I wrote a post about the merits of including arbitration clauses in contracts – you can check that post out here. My post provides business owners with points to consider when deciding whether or not to include such a clause in your standard business contracts.

But back to our story…

The business relationship deteriorated at some point. NFN began making “partial payments” on invoices to New River, protesting that it had not performed services properly.

NFN demanded arbitration in New Jersey, pursuant to the arbitration clause in the Agreement.

New River ignored the demand for arbitration and filed a lawsuit in Michigan claiming $728,740.89 in damages.

There were some interesting exchanges between the lawyers on both sides, which resulted in what the Trial Judge called “a race to the courthouse” but ultimately New River “won” that race and ended up with a default judgment for $578,688.71 – about $150,000 less than it claimed it was owed. No explanation given as to why New River claimed a lesser amount..

NFN’s counsel filed a motion to set aside the default judgment.

It was denied by the Trial Court who upheld the default judgment.

The Court of Appeals REVERSED.

It held that the plain language of the arbitration clause was good cause enough to dismiss the case in its entirety. New Jersey law, like Michigan law favors resolving disputes through arbitration. the parties signed the Agreement and should be bound.

Important Lesson:

1. Understand Your Contract Before Signing.

Contracts are about risk allocation. In a business relationship you need to decide what risk you are willing to bear, and what risk you will allocate away. I am sure in this case New River did not foresee a dispute arising, and therefore was willing to bear the risk in the event of a dispute to arbitrate, and to arbitrate in an inconvenient forum.

2. Understand Your Contract After Signing.

Your business contract will dictate what your rights and duties are. Here, New River had the contractual duty to pursue its dispute in arbitration, and in New Jersey. Its attempt to avoid abiding by the contract was a costly mistake.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Michigan Entrepreneurs: News and Info on Raising Capital and Crowdfunding

Good morning and Happy Monday!

Entrepreneurs may want to take advantage of some free guidance provided by the State of Michigan.

The State of Michigan’s Department of Licensing and Regulatory Affairs (LARA) announced today that it is hosting a workshop – “Understanding Your Options for Raising Capital in Michigan”. You can Register here The seminar will be held in Lansing and other locations all across Michigan.

According to the press release, the Seminar will discuss

legal and structural basics;
key formation and other often overlooked issues;
private offerings using regulation D or intrastate exemptions (504/SCOR, 504/202(1)(n) and 201(g));
Michigan intrastate crowdfunding;
crafting a winning investor pitch; venture capital; long-term planning for a potential IPO;
protecting yourself from arbitration, civil litigation and potential criminal liability.

Its good to hear that one of LARA’s topics will be crowdfunding under the MILE Act.

As I’ve previously written about, Michigan’s intrastate crowdfunding exemption could be a useful tool for entrepreneurs, but it hasn’t gained much traction. There are many “unknowns” that are detracting entrepreneurs from pursuing local crowdfunding (and many lawyers who are educating their clients about the risk of these “unknowns”).

Still, more and more states are enacting intrastate crowdfunding laws in order to provide another tool for local entrepreneurs in funding their ventures.

In Michigan, a house bill was proposed back in February to amend the MILE Act to permit issuers to open escrow accounts with financial institutions outside of the State of Michigan. You can see the text of the bill here. It doesn’t appear that the Bill has gained much traction. However, it is a good sign that the legislature is still evaluating ways to make the MILE Act a useful tool for local entrepreneurs.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Michigan Business Law Update: A Tool for Business in Fighting Against Patent Trolls

Routinely I will get an e-mail from a business client who received some e-mail “notice” from some “legal department” across the country/world about a photo or other media that my client may have innocently posted to their business website.

You may know the scenario I’m referring to – those who apparently patrol cyberspace in search of anyone using a stock photo without giving credit to the owner. Once they find you – you get a demand letter and a request for a quick cash pay off.

I am not an Intellectual Property attorney – but representing businesses, I come to rely on IP attorneys. Occasionally I’ve had to pick up the phone and call a good IP attorney and ask them “what’s going on with these demand letters my clients are getting?”

Two words:

Patent Trolls.

Last year the Washington Post published an article that stated 67% of new IP lawsuit were filed by “patent trolls”.

Some Michigan legislators want to give businesses a tool to fight against bad faith patent trolls.

The Michigan Senate just introduced Senate Bill 289 the “Bad Faith Patent Infringement Claim Act” check out the bill analysis

It would prohibit the making of bad faith patent infringement claims.

On its face, the Bill looks to have some teeth to it:

Allow the AG’s office to initiate investigations and prosecute claims:
Provide an aggrieved party with a private cause of action, including the recovery of “treble damages”

I will be sure to track the progress of this legislation.

From my perspective, it would be great to have another tool for my business clients to refer to the next time they face an over-aggressive claim of patent infringement for innocently posting a photo to their website.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Recent Delaware Law and Closely Held Business Disputes

I just read in the ABAJournal article that Delaware passed a law favorable to shareholders in litigation.

“A law banning corporate bylaws that impose a hefty price on investors who file unsuccessful shareholder derivative suits has been signed by Delaware’s governor.”

The Delaware legislature apparently recognizes the challenges that minority shareholders can face in closely held businesses.

In my practice, one fundamental challenge that I have seen is this:

In a closely held company it is very easy for one group of owner[s] to freeze out another owner.

I guess the first question is, “freeze out from what*?”

Control – Decision-making

Disclosures of Company Business

Profits in the Company

Employment in the Company.

What should a business owner/operator do to protect himself/herself?

Well, you have two readily apparent choices – address the issue before the business is formed, or address it once the problem arises.

1. addressing the problems before the business starts.

The easiest way is this option: Get an Attorney involved at the onset of the business relationship.

Many of these business disputes in closely held companies could be resolved if, before going into business, the parties openly communicated their expectations, concerns, and clearly articulated in the formation documents (articles of incorporation/organization, Bylaws, Operating Agreement) a way out of the business relationship.

This could be the most cost-effective way to ensure to resolve business disputes – address them before they happen – with open communication, and clearly and concisely drafted (and executed!) documents.

2. addressing the problems once they occur: Shareholder/Member Oppression Lawsuit.

I have had several clients recently who have had to proceed with this second option – in one instance my client, the minority shareholder, wanted out of the business and the controlling shareholders, who had not made distributions to my client in over a decade, while they paid themselves hefty salaries, would not “buy him out” according to, based upon our interpretation, the proper mechanism called for in the formation documents.

The problem was that the documents did not clearly spell out the proper mechanism for buying a shareholder out (and importantly to me, this document was drafted by some other law firm :))

So, Michigan law provided my client a cause of action against the shareholders:

Minority Shareholder Oppression, MCL 450.1489

“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:illegal; fraudulent; or willfully unfair and oppressive to the corporation or to the shareholder.” (*this is most often the scenario where these cases arise – from the “freezing out” the minority owners from the business)“

If the shareholder establishes grounds for relief, the circuit court may make an order or grant relief as it considers appropriate, including, without limitation, an order providing for any of the following:(a) The dissolution and liquidation of the assets and business of the corporation.(b) The cancellation or alteration of a provision contained in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.(c) The cancellation, alteration, or injunction against a resolution or other act of the corporation.(d) The direction or prohibition of an act of the corporation or of shareholders, directors, officers, or other persons party to the action.(e) The purchase at fair value of the shares of a shareholder, either by the corporation or by the officers, directors, or other shareholders responsible for the wrongful acts.”

Although this Statute applies to closely held corporations, there is also a similar Michigan statute that applies to LLCs.

Therefore, if a court finds that those in control of the business committed misconduct against a minority owner, it has broad discretion to create the type of relief it deems is best.

Although sometimes filing a law suit for Minority Oppression is warranted due to the egregious misconduct of those in control of the company- it is always best to avoid litigation when possible. The obvious take away points are two-fold:

1. Get an attorney involved before the business relationship begins and clearly document the business relationship, especially an exit strategy.

2. If you are being frozen out of control in a business – Michigan law gives you broad remedies, including the minority shareholder oppression statute.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Michigan Startups: Funding through Crowdfunding

I read an article this morning on MIBiz

Filling the Funding Gap: More capital required to meet $1.3 billion need from existing Michigan companies

Recognizing this gap in funding, John Kerschen, managing partner of Charter Capital Partners said this:

“Institutional investors have been reluctant to put money into the small, first-time funds in Michigan that have formed over the last decade and first want to see a track record of success”

This is a point well-taken. Small business start-ups have traditionally suffered from a lack of conventional funding options.

As the MiBiz article recognizes – there is a funding gap in Michigan – particularly related to early-stage businesses.

While we are consistently seeing crowdfunding being utilized in Michigan for community revitalization, particularly through the MEDC’s matching grant program, we are still at the beginning stages of seeing the utilization of equity crowdfunding through Michigan’s MILE Act.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Crowdfunding News Update

Happy Friday!

For those of you who’ve read my posts in the past, you know I promote crowdfunding as a untapped resource for social entrepreneurs. Below are a few headlines about what’s going on in the world of crowdfunding.

Locally:

“Localized crowdfunding platforms grow through grant matching program”

Michigan’s MEDC matching grant program has been a great way for local communities to utilize crowdfunding to fund community development.

Across the U.S.

NextSeed Becomes First Texas Crowdfunding Platform to Leverage Intrastate Rules |

Like Michigan, Texas enacted its own intrastate crowdfunding exemption, it was recently utilized by NextSeed to raise $25,000 in equity for a small business – Texas’ first.

One of NextSeed’s co-founders, Youngro Lee is a private equity lawyer who provided some good in-sight into what he sees as the untapped upside in reaching unaccredited investors through local crowdfunding exemptions.

Across the Ocean…

Crowdfunder UK Launches Community Shares to “Revolutionize” Community Funding

“Crowdfunder UK just launched a new concept in crowdfunding on their platform: Community Shares. A type of hybrid mix between charity and ownership, investors in these organizations own part of an entity they believe in supporting.”

“a type of hybrid mix between charity and ownership” sounds a lot like L3Cs – which are viable business entities for social entrepreneurs.

It’s great to see innovative ways that social entrepreneurship is being promoted in other parts of the world.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Robin Williams’ Estate: Lessons to be learned from Estate Litigation.

I previously wrote an article on the dispute between Robin Williams’ widow and his children, you can check out that post here

Today, the ABAJournal posted an update on this lawsuit – you can check that out here

This story is 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.

Here, a large part of the dispute centers around ownership of Robin Williams’ personal belongings.

Latest Development…

Per the ABAJournal’s article, It appears that the family members are making headway through mediation.

It is great news because, as I’ve indicated in prior posts

Mediation works.

Not every case that is mediated ends in a successful resolution. But more often than not, the cases that I have been involved in where both parties submit to mediation have been successfully resolved.

Mediation makes sense.

In estate litigation, such as the Robin Williams’ estate, mediation makes sense.

When I am representing a business in a business dispute, it can be much easier to avoid a lengthy drawn out court battle, given that business owners are much more inclined to make a good business decision and settle the case.

Not so with estate lawsuits. the issues are much more emotionally charged.

Locally, there are mediators who understand this dynamic – such as Anne Bachle Fifer

I wonder how much cost and emotional turmoil could have been avoided if the parties agreed to mediate the case prior to filing suit….

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

LINC Real Estate Development News, and Lessons from Recent Court Decision

Happy Friday!

News in local real estate development….

Yesterday, the Grand Rapids Planning Commission approved a $15 Million Project. Article here.

The Project, 70 housing units with retail on the first story, is being developed by LINC – a Grand Rapids based non-profit focused on Community Revitalization.

LINC is great example of a local non-profit doing good work in community revitalization. LINC, per its website defines its views on economic development efforts for local communities:

“to develop the entrepreneurial spirit of our community, boost business ideas and expand the business base of our communities, thus creating viable businesses that strengthen the fabric of our neighborhoods”

Business can strengthen local neighborhoods. That’s what local business should do.

I blog a lot about crowdfunding, and how I believe it has potential to be a tool for social entrepreneurship and community revitalization.

On the flip side, I am always reminded that any time an investor is considering taking part in a local project, they should take great care to perform their own due diligence. They need to understand the risks of what they are buying into.

Lessons for Investors in Real Estate Development: The Dinoto Case.

This morning I was reading a court case decided on May 21st, regarding a dispute between an investor and a developer (and its various entities).

Dinoto v Nu Way Investments, LLC, et al

You can check out the case here

Brief facts;

Dinoto was an investor in a real estate development company owned by a relative of his.

Dinoto’s investment was apparently intended to fund the purchase and development of commercial real estate.

Ultimately, Dinoto lost his entire investment, and the real estate was foreclosed on.

Dinoto thereafter sued for an “Accounting” – apparently he suspected his money had been misused.

After undergoing discovery, Dinoto wanted to amend his lawsuit to file various claims for breach of fiduciary duty, embezzlement, and to pierce the corporate veils of various affiliate entities.

Ultimately his case was dismissed. The Court of Appeals affirmed the decision.

Lesson from Dinoto

I don’t believe there is any real significant legal holding that came out of this case.

I do think it provides a practical warning for investors in real estate.

Perform your due diligence ahead of time – not afterwards.

Dinoto apparently invested in the project and asked questions later. When it was too late. Finding out answers to key questions is not best left for your lawyer via a lawsuit – where it is going to cost you potentially your entire investment, plus additional tens of thousands of dollars in legal fees.

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com