Purpose Driven General Counsel

Lesson From Court: Pitfalls of a “Backwards Business Formation”

I was recently in Court for a hearing that involved a contentious business dispute. Suffice it to say, that parties will not be doing business together any time soon.

This case provides an excellent illustration to individuals and companies considering creating a new business relationship It reveals some of the pitfalls that anyone could fall into. I can guarantee you this, neither my client, nor their former business partner thought that their business relationship would end with a lawsuit.

I. Facts;

The basis facts are as follows:

The case surrounds two individuals who entered a business relationship.

Thereafter the individuals formed a limited liability company.

One of the partners solely funded the start up of the business.

Thereafter they could not agree on the written terms that defined their business relationship.

When written business documents were produced by one partner, the other partner claimed “that’s not what we agreed to!” and refused to sign.

Actions were taken and lawsuits filed over control of the Company.

YIKES.

II. Legal Issues:

There were a jumble of legal issues created out of this “backwards business formation.”

Some of those include: Claims for Membership Oppression: For more about this claim see a previous article: https://jeshualaukalegalnews.wordpress.com/2013/06/08/shareholder-oppression-when-relationships-in-closely-held-businesses-go-bad/

a. Was the party in control oppressing the other member?

b. Because an operating agreement was never agreed, who are the members? MCL 450.4501 provides for a way to admit members, what if those ways aren’t met, and there is no written documents to evidence who owns any interest in the company?

c. If all the parties are members, did one or more breach a duty owed to the Company?

d. Was their an “oral” agreement to pay money?

e. etc…..

– What a mess. And a mess that needs to be sorted out in Court means a substantial cost in attorney fees to each side.

III. Takeaway Lessons:

a. Pitfalls of a Backwards Business Formation

This case was an example of what I would call a backwards business formation.

The process should have been:

individuals discuss with their respective counsel the business relationship they want to form, including obligations and rights of all owners:

individuals memorialize their business relationship in writing, resulting in

the formation of the Limited Liability Company, Articles of Organization and Operating Agreement.

b. Businesses need to be formed based on clear communication ahead of time, and planning for a way out, if things go bad.

If the parties would have memorialized their relationship in writing, then even if the business relationship deteriorated, most likely the parties could agree on a way out. Because the “way out” would be clearly spelled out in the Partnership, or “Operating” Agreement.

One thing is for certain, these parties would have undoubtedly been better suited by consulting legal counsel prior to forming the business relationship. Who knows, maybe if they communicated their intentions, the relationship might never have been agreed to in the first place, to everyone’s benefit.

c. Communicating Business Expectations ahead of time in writing can also sometimes avoid entering in business relationships that have the unforeseen potential to end in Disputes.

I have a client who asked me to draft a Joint Venture Agreement a few weeks back. I drafted the document and sent it to my clients. I met with them a week ago and they informed me that they could not agree on mutually beneficial terms with the other side, so they decided to walk away. They recognized that they were glad to have a contract that clearly formalized their intentions to present to the other side. The fact that they couldn’t reach an agreement was unfortunate, but it would have been much more unfortunate if my client just signed a form document, or worse, no agreement, and then relied on the other side to follow through with what they perceived the agreement to be.

As I already indicated, such decisions could prove costly in litigating over what is owed.

Do you have an interesting issue related to business or real estate? I’d love to hear about it.

Email or call me. Email: Jeshua@dwlawpc.com / Ph: (616) 454-3883.

Real Estate Law Update: Proposed Michigan HB 4830 Would Allow Businesses to Represent Themselves at Landlord/Tenant Hearings

In order to limit liability, many real estate owners will form a Limited Liability Company to hold their investment property. In order to enforce the LLC’s rights in court, the most common scenario being evicting a non paying tenant, Michigan law requires a business entity to have an attorney appear on the entity’s behalf. Otherwise such individual would be practicing law on behalf of another, the LLC – this is deemed unauthorized practice of law.

However, some states have gone away with this requirement and carved out an exception. A House Bill proposed back on June 13th would allow an officer of a Corporation, or a member of a Limited Liability Company to appear in court under limited circumstances. See the text to this bill, at the link below:

http://www.legislature.mi.gov/(S(5aezevnneutdy1fhsnodqb55))/mileg.aspx?page=GetObject&objectname=2013-HB-4830

I understand the economic reasons for state legislatures to create such exceptions, but for reasons that I have mentioned in a previous blog post https://jeshualaukalegalnews.wordpress.com/2013/05/24/lessons-from-court-potential-pitfalls-in-managing-your-own-investment-real-estate/ I would always recommend retaining counsel, if you economically can do so. That being said, there are many real estate professionals who are more than competent in such arena. However, the old saying goes “a person who is his own attorney has a fool for a client.”

The State Bar of Michigan Committee on Civil Procedure and Courts has taken a position opposing this Bill, see http://www.michbar.org/publicpolicy/positionpdfs/positionPDF1357.pdf

Do you have an interesting issue related to business or real estate? I’d love to hear about it.

Email or call me. Email: Jeshua@dwlawpc.com / Ph: (616) 454-3883.

The Recent 6th Circuit Court of Appeals Decision of In Re Miller and Why Banks Should Bid Thoughtfully at Sheriff Sales.

The pressure to “get it right” when bidding at sheriff Sales.

Simply put, it can be a costly decision.

I have a case right now where we will be holding an evidentiary hearing to determine whether or not the Judge will set a minimum sale price that can be bid at foreclosure

I was reminded of this case and the pressure that a lender faces when bidding its credit bid at a foreclosure sale. An example of what can go wrong is evidenced in the recent case of In re Miller, 513 F. App’x 566 (6th Cir. 2013). In Re Miller is an unpublished 6th Circuit Court of Appeals Case that was decided February 5th, 2013.

I. Basic Facts

Miller owned a home in Wisconsin, known as the “Spread Eagle property.”

Miller signed a promissory note to the Bank in the principal amount of $221,444.29, secured by a mortgage on the Spread Eagle property (“the Wisconsin mortgage”). The Wisconsin mortgage included a clause providing that it secured the October 16 promissory note as well as all of Miller’s obligations, debts, and liabilities then existing or arising later.

On January 20, 2007, Miller signed a second promissory note to borrow $400,000 from the Bank, pledging as collateral his Moon Lake residence and three 40–acre parcels of land located in Michigan.

Miller defaulted on his payments.

The Bank published a notice of foreclosure by advertisement in Michigan scheduling a sheriff’s sale of the three 40–acre parcels.

To decide what amount to bid at the sheriff’s sale, Michigan counsel conferred with the Lender, who informed counsel that Miller owed the Bank a total of $413,560.27 on the Wisconsin and Michigan promissory notes.

After this conversation, Michigan counsel attended the sheriff’s sale on behalf of the Bank and credit bid the entire amount of Miller’s debt to the Bank in the amount of $413,560.27.

Although the record does not disclose the value of the three 40–acre parcels of land at the time of the sheriff’s sale, it appears that the Bank’s credit bid created a surplus between $172,500 and $187,500.

The Bank bid too high!

The sheriff’s deed, drafted by the Bank’s Michigan attorney, was recorded in Michigan. The sheriff’s deed specified that the three 40–acre parcels were sold to the Bank as highest bidder for $413,560.27, and that the deed would become operative upon expiration of the one-year redemption period

Miller filed Bankruptcy, and the Lender asked the Bankruptcy Court to allow it to foreclose on the Wisconsin Property so that it could satisfy the amount owed on the Wisconsin Promissory Note (confusing, I know.)

Instead, of granting the bank’s request, the bankruptcy court determined that Miller did not owe the Bank any amount of money because, applying either Michigan or Wisconsin law, the Bank’s credit bid for the total amount of Miller’s debt at the Michigan sheriff’s sale satisfied the entire debt.

II. LAW:

An overbid at a Sheriff’s sale extinguishes the entire debt.

The Court cited the Michigan Appeals Court decision of In Pulleyblank v. Cape, 179 Mich.App. 690, 446 N.W.2d 345 (1989) (per curiam), where the mortgagees bid the full amount of the debt owed to them at a foreclosure sale conducted under the Michigan foreclosure by advertisement statutes. When the mortgagees realized that the foreclosed property was worth less than the debt, they tried to foreclose on a second parcel of property and credit the mortgagor with only the fair market value of the original foreclosed property. The Michigan Court of Appeals prohibited the second foreclosure proceeding, holding that:

the mortgagees, as the purchasers at the foreclosure sale, stood in the same position as any other purchaser, and because they bid the full amount of the debt, they were required to apply the entire amount of their bid to the debt. Id. at 347.

The court noted “[i]t would defy logic to allow [the mortgagees] to bid an inflated price on a piece of property to ensure that they would not be overbid and to defeat the equity of redemption and to then claim that the ‘true value’ was less than half of the value of the bid.” Id. at 348. The court decided that the mortgagees, by their own actions, extinguished the debt by bidding the full amount of the debt, so that no debt remained to support a second foreclosure on another property. Id. at 348. In re Miller, 513 F. App’x 566 (6th Cir. 2013).

Although the lender made a mistake, this didn’t affect the Court’s opinion:

“The rule is clear in both jurisdictions that a purchaser who overbids at a sheriff’s sale based on a unilateral mistake must accept the consequences of that decision, unless the purchaser can show fraud or other improper inducement in the making the bid.” In re Miller, 513 F. App’x 566 (6th Cir. 2013)

III. Lesson:

As a result of the bank’s overbid, Miller walked away with his Wisconsin Property free and clear, to the detriment of the Bank. The lesson is simple – the direct cost to the Bank was a few hundred thousand dollars.

Banks should take care in how they bid at a foreclosure sale.

Guest Blog Post with GRAPE – Are Business Owners & HR Professionals Affected By The Medical Marijuana Issue?

I recently posted an article regarding employee handbooks and how they benefit businesses – primarily by avoiding liability and claims from former employees.

I authored a guest blog article for Grand Rapids Area Professionals For Excellence. Learn more about GRAPE here at: http://grapegr.com/

Issues have arisen as of late regarding marijuana usage of employees and the Michigan Medical Marijuana Act (“MMMA”). Should an employer fear liability for terminating an employee who has failed a drug test?

See my article below.

http://grapegr.com/small-business-networking-blog/are-business-owners-hr-professionals-affected-by-the-medical-marijuana-issue/?goback=%2Egde_2729599_member_261763290

Do you have an interesting issue related to business or real estate? I’d love to hear about it.

Email or call me. Email: Jeshua@dwlawpc.com / Ph: (616) 454-3883.

Lesson For Banks: When Fighting over Mortgage Priority – Don’t Forget about the Property Owner.

An interesting unpublished decision came out on June 27, 2013 – JPMorgan Chase Bank, N.A. v. First Michigan Bank, 309857, 2013 WL 3239983 (Mich. Ct. App. June 27, 2013).

The case essentially involved a fight over whose mortgage had priority: Chase or First Michigan Bank.

FACTS:

JP Morgan Chase Bank and First Michigan Bank had mortgages on property in West Bloomfield, Michigan.

The property was owned by a married couple, the Zairs.

The lender of the first mortgage, Peoples State Bank (PSB), foreclosed on the mortgage and the property was sold at a sheriff’s sale.

The security interest of the second lender, JP Morgan Chase Bank, was extinguished.

Chase sued and claimed that its lien had priority due to a “Subordination Agreement” it entered into with PSB.

The assignee of PSB’s rights to the property, First Michigan Bank, argued that the subordination agreement was not effective and that any breach of the agreement by PSB did not entitle Chase to relief against First Michigan.

During the litigation, Chase and First Michigan Bank made a deal pursuant to a “Consent Order” – they agreed to undo the foreclosure sale and stipulated that Chase’s mortgage would have priority. over First Michigan’s mortgage.

This was all fine and well……EXCEPT

The Banks evidently forgot to ask what the Zairs thought about all this.

Well, not really, the Banks thought they didn’t need to include the Zairs, in their Consent Order they indicated that “the Zairs had not consented but their consent was not necessary.”

The Zairs Appealed the decision, claiming that, as owners of the Property, they were parties to the lawsuit and the banks needed their permission to enter any Consent Order.

LAW:

under MICHIGAN COURT RULE 2.507(G):

An agreement or consent between the parties or their attorneys respecting the proceedings in an action is not binding unless it was made in open court, or unless evidence of the agreement is in writing, subscribed by the party against whom the agreement is offered or by that party’s attorney.

Essentially, the Zairs said – hey, Banks, wait a second – we are parties to this lawsuit – we didn’t agree to any Order!

The Court of Appeals agreed with the Zairs, and rejected the Consent Order, and remanded the case back to circuit Court.

LESSON:

The gist of this case was a simple dispute over a subordination agreement, and the case didn’t really result in a new development in real estate law. However, I believe there is a larger take away point here. The two banks were wrapped up in resolving a contract dispute between themselves and took for granted that the property owners had a legitimate interest – as parties – that needed to be accounted for. The homeowners also had a legitimate interest in the property, albeit a “redemption interest” that would likely be extinguished within 6 months after the foreclosure. Now, the banks will need have their case remanded back to Circuit Court which, regardless of the outcome, will result in additional expenses for everyone.

Do you have an interesting issue related to business or real estate? I’d love to hear about it.

Email or call me. Ph: (616) 454-3883; Email: Jeshua@dwlawpc.com

Closely Held Businesses: Why the Words You Use in Your Formation Documents Matter.

Another example demonstrating the significance of the words you agree to bind your business relationship.

On July 3rd the Michigan Supreme Court came out with an (I think) interesting Order reversing an appellate Court decision, Levine v. O’Dorisio, 299639, 2011 WL 5609825 (Mich. Ct. App. Nov. 17, 2011) rev’d, 494 Mich. 874 (2013).

FACTS:

The parties were two cardiothoracic surgeons in practice together. The operation of a vascular laboratory was part of the parties’ practice. The parties formed a Professional Limited Liability Company and entered into an operating agreement in 1996; the agreement covered the parties’ entire practice, including a “vascular laboratory.”

The PLLC was dissolved in January 2004 per its operating agreement.

After the dissolution of the PLLC, one of the owners, Levine, sued the other owner, O’Dorisiom for specific performance of O’Dorisio’s contractual obligation to resign, and for an accounting and distribution of the PLLC’s assets.

Procedurally, this case went back and forth several times – from the trial court to the court of appeals, and finally, as of July 3rd, to the Michigan Supreme Court which granted an order reversing in part the court of appeal’s decision.

The owners of the company recognized that Levine received profits of approximately $1,020,000 from his continued operation of the business between: the date of dissolution AND the date of sale of the business. The primary issues that it seems the Court of Appeals in the trial court could not agree on were regarding distribution of funds – what was included in the definition of “business assets” that were supposed to be distributed? Those profits that Levine received after dissolution, but before the sale or winding up of the business?

Ultimately, the Michigan Supreme Court issued an order reversing the Court Appeals in part, providing as follows:

we REVERSE that part of the Court of Appeals opinion holding that the trial court erred by failing to equally divide between the parties the profits from use of the vascular laboratory from the date of dissolution to the date of the sale of the laboratory. MCL 450.4404(5) is not applicable to this case. Instead, the division of the profits of the company are governed by the operating agreement, which provides that the PLLC “shall be dissolved” upon the occurrence of a withdrawal event. ¶ 12.1. Thus, the PLLC was dissolved on January 13, 2004, when the hospital and the defendant entered their memorandum of understanding making the defendant’s loss of staff privileges permanent. The value of the PLLC should be assessed as of that date. The defendant is not entitled to any profits derived from the plaintiff’s use of the laboratory between January 13, 2004, and the date that the laboratory was sold. Levine v. O’Dorisio, 494 Mich. 874 (2013)

RESULT:

An Operating Agreement/Bylaws/Partnership Agreement is a contract.

The Court will enforce the language that the parties agreed to. In this instance Levine was not required to pay any amount as profits for the funds he gained using the business equipment after dissolution, but before sale.

LESSON:

This is another reason why it pays to hire legal counsel to draft your business partnership agreement; whether formed as an LLC or a corporation.

Lesson from Court: Why an Employee Handbook Matters.

Recently I was in court for a hearing representing a business client being sued by a former employee. In that case, the former employee claimed it had a guaranteed contract for employment for a specific term. This provided an opportunity for me to highlight some brief, but key aspects of Michigan law and the importance of an Employee Handbook.

I. In general – We are an At-Will Employment State

Michigan is an at-will employment state. “Employment contracts for an indefinite duration are presumptively terminable at the will of either party for any reason or for no reason at all.” Rood v. Gen. Dynamics Corp., 444 Mich. 107, 116, 507 N.W.2d 591, 597 (1993).

Although it is a presumption that businesses can terminate employment for any reason at all, it does not stop former employees from raising claims of “oral agreements” that they were guaranteed employment as long as they

did not committed any serious offenses (for cause employment) or that they were guaranteed employment for a specific duration. This is where an employee handbook can be very helpful at the beginning of an employment relationship.
II. Employee Handbooks – in general

Employee handbook or manual is a useful tool for an employer to engage its employees at the onset of the employment relationship with its mission statement and clarify its policies. However, the primary purpose of every good handbook should be to protect the employer from claims of any discrimination or wrongful termination.

III. Some particulars

A good employee handbook will be concise and will state with particularity that all employment is at-will and that the document is not a contract that guarantees employment for any specific term.

It will also notify the employee of how they showed raise grievances for any harassment or discrimination or other workforce complaints; it will also notify the employee of the various federal and state laws that offer them protections, and for which the business complies with – this again is a layer of protection from liability for the business.

An employee handbook may also contain specific agreements to arbitrate any dispute, or hold certain information confidential.

IV. When a company has an employee handbook – some common problems that could result in issues of the company is sued:

1. The Handbook is a form handbook that is not narrowly tailored to the company.

One size handbook doesn’t fit every company. Further, an employer should be careful not to create a policy which it has no intention of abiding by, and thereby give the impression that the handbook really isn’t a document meant to be enforced. So if a certain policy will not be followed – remove it from the handbook! Narrowly tailor the handbook to your specific company.

2. The handbook should be signed by the employee.

Lastly – an employee handbook should be signed by the employee and dated, indicating they have read and agree to the terms of employment contained therein – and the signature page kept in the employee’s personnel file. This document will be highly valuable evidence that the former employee knew and agreed that employment was at-will (in case of a claim for a specific term of employment. In the case that the claim is one related to wrongful discharge, the handbook will clearly outline that the former employee knew about the discipline procedures, who to report to, etc…
Questions to ask yourself:

Does your business have an employee handbook?
If yes, is it narrowly tailored, or just a form document that you purchased?

“Squatters Rights” – How Easy Is It To Acquire Property By Adverse Possession?

I had a client recently come to me about a concern about her boundary line – she was concerned that her neighbor’s actions towards her property might mean that he now owns the property.

She raised a good question – how easy is it go gain property by adverse possession?

The answer to this question is, in general, – not too easy.

A Recent Unpublished Michigan Court of Appeals case highlights this fact. Arbour v. Albert, 307234, 2013 WL 2278124 (Mich. Ct. App. May 23, 2013)

I. Facts:

Plaintiffs Richard and Debra Arbour purchased a lot along the Escanaba River in 1994. Because untrained individuals imprecisely divided and described the lots decades earlier, the Arbours believed that their northern border was a triangle marked by a copse of trees. That triangular piece of land actually belonged to the Arbours’ northern neighbor, currently Katrina Albert.

In 2010, after two years of disagreement regarding the boundary line, the Arbours filed suit to quiet title to the disputed land. The Arbours claimed title by adverse possession or, in the alternative, that the neighbors had acquiesced to a new border for the statutory period.

During a bench trial, the parties presented conflicting evidence regarding their historical use of the disputed land and the dates on which significant events occurred.

II. Law:

MCL 600.5801(4) – “Squatters Rights” – More formally Known as Acquiring Title by Adverse Possession

Anyone claiming ownership by adverse possession has the burden to establish all the required elements, by “clear and cogent” evidence.2 Beach v. Lima Twp, 489 Mich. 99, 106; 802 NW2d 1 (2011), citing Burns v. Foster, 348 Mich. 8, 14; 81 NW2d 386 (1957).

A Court must strictly construe the evidence “with every presumption … in favor of the record owner of the land.” Rozmarek v. Plamondon, 419 Mich. 287, 292; 351 NW2d 558 (1984).

Therefore a party claiming squatters rights must bring a high level of evidence – “clear and cogent” that all the following elements were met:

have had actual;
visible,
open,
notorious,
exclusive,
uninterrupted possession,
hostile to the owner and
under cover of claim of right,”
for a period of 15 years.

Arbour v. Albert, 307234, 2013 WL 2278124 (Mich. Ct. App. May 23, 2013).

Any of these elements not met by clear and cogent proof is fatal to a claim for ownership by adverse possession.

III. Result in Arbour:

In the case of Arbour, the Court affirmed the trial Court’s decision denying that the Arbours’ acquired the property by adverse possession, finding that the Arbour’s ownership was not exclusive. The Arbours’ testified that it was exclusive, but Ms. Albert testified otherwise – and the court found her testimony more credible. Case over.

IV. Application:

There are situations where a property owner should be legitimately concerned about an adverse possession claim; however, the presumption is against it. In fact a high level of proof of various elements must be proven, the most obvious element being possession for 15 consecutive years.

Questions? Comments?

Email me at: Jeshua@dwlawpc.com

Real Estate Transaction Mistakes: Consequences of Forgetting About “Dower” Interests

I was finalizing creating an easement agreement for a client of mine – a married couple. They reminded me of a recent case that I read this week, Zaher v Miotke, Docket NO. 307394 (March 28, 2013), concerning a married couple who forgot to include the spouse when he created an easement document.

The case of Zaher v Miotke

In Zaher, the husband, Greg Hoover (“Greg”) granted an easement to his neighbor and did not include his wife’s, Linda Hoover, (“Linda”) name in the easement. Greg didn’t think he needed to include Linda in this easement document since he owned the property individually, he did not have Linda’s name on the document.

I see Greg’s logic. It makes sense, right?

Well, not in Michigan, where our laws recognize a married woman’s right of a “dower interest” in real estate.

i. What is a Dower Right?

Michigan Compiled Laws 558.1 governs a wife’s dower interest:

“The widow of every deceased person, shall be entitled to dower, or the use during her natural life, of 1/3 part of all the lands whereof her husband was seized of an estate of inheritance, at any time during the marriage, unless she is lawfully barred thereof.”

Basically, dower provides a wife a life estate to one-third of her husband’s real property after his death. Stearns v. Perrin, 130 Mich. 456, 459; 90 NW 297 (1902)

So as you can see, Greg granted his neighbor an easement, and an easement under Michigan law is an interest in land. Forge v Smith, 458 Mich 198, 205 (1998).

The problem is readily apparent – Linda has a rights in Greg’s property, and she didn’t sign off on the easement. This transaction therefore violated Michigan law, particularly what is known as the “statute of frauds” which provides that every conveyance of interest in land must be in writing for it to be valid. MCL 566.108.

ii. Moving on to the Facts:

Greg granted his neighbor, Zaher, a “joint driveway easement” over part of his lot, so that Zaher could have a larger access to his driveway. The easement was recorded.

The problem comes into play when Greg sells his house to Miotke. Miotke doesn’t like the Joint Driveway and actively puts brick pavers in and plants rose bushes to divide the driveway. Zaher was out of town at the time and returned to his home to discover he could no longer park his vehicles in his garages.

Thus the litigation begins.

Zaher sought an injunction to return the property to the way that it had been before, Miotke sought an order compelling Zaher to demolish his garage – you can tell from the facts that emotions must have been flying high on both sides.

Miotke argued that the joint driveway easement was void from its inception, since it did not include Linda’s dower interest.

Zaher argued that Linda’s failure to sign the easement did not render it “void” but merely created an uncertainty in title – that would only be realized if Greg died before Linda.

iii. The Court’s Ruling

The Court went into an in depth analysis of case law that seemed to offer rulings in favor of both parties. However, at the end of the day the Court of Appeals held that the failure to include Linda does not void the Easement. That “an inchoate dower interest is merely a potential future interest….This is not an ownership interest that prevents a current transfer to another.”

The court recognized that both parties in the case were asking the Court to make an “equitable decision”. They weren’t asking specifically for money damages, but they were asking the Court to order the other party to do something. The Court made the equitable decision here. As it noted: “[p]roperty law is equitable at its core and voiding a contract because of a murky potential interest can be unjust.“

Lesson:

Real Estate Transactions can be nuanced. Making sure all the right parties are signing off in a conveyance is crucial.

I think another takeaway is simply this: real estate disputes involved “equity”. A Court judging a dispute in equity will look at whether injustice would result if the Judge does what a party is asking. In Zaher the court realized that if it would do what Miotke asked it to do – an injustice would result. That certainly played a role in its decision.

Shareholder Oppression? When Relationships In Closely Held Businesses Go Bad.

Yesterday I posted an encouraging statistic – that more business entities in Michigan have been formed in the last fiscal year than in years – since fiscal year 2005. That is encouraging news!

It also reminded me that most of these new businesses are likely smaller closely held companies – typically either owned and operated by family members or by a small group of individuals. These types of business relationships are valuable – since they are often formed between people who know each others’ strengths and weaknesses and based on the assumption they would work well together, decided to go into business together.

These closely held businesses also pose unique challenges. The 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.

(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 virtually 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.

Lesson:

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.