Posts in: April

Owner’s Liability After Your LLC is Closed or Dissolved?

April 25, 2017 Asset Protection, Business planning Comments Off on Owner’s Liability After Your LLC is Closed or Dissolved?

Many business owners wonder whether their LLC will protect them from claims and liabilities after their LLC is closed. Does the limited liability protection of the LLC still apply? Does it only apply for claims when the LLC was active? What about after the LLC is closed or dissolved? What if the claim is about something that arose when the LLC was in good standing but was something you never knew and filed after the LLC is dissolved?

Here are a five tips that answer these questions and that will help you decide when to dissolve your LLC.

First, when you close an LLC, a process known as dissolution, you must pay off known/present LLC creditors before distributing assets and profits to the owners of the LLC.  If you fail to pay off known creditors the LLC and if you instead distribute assets of the LLC to the owners, then the owners can be sued by those creditors to collect on the assets distributed from the company.  Part of the process of properly dissolving an entity includes sending notice to known creditors.  In other words, if the LLC has current debts/liabilities and/or known creditors, you can’t simply “shut down the doors”, take all of the assets personally, and refuse to pay the creditors.   If the LLC is insolvent (i.e. the debts exceed the assets) and if their are no assets distributed to the LLC owners, then their is no personal assets which a creditor can pursue against the LLC owners.

Second, dissolve the LLC once business operations have ceased and once known creditors have been paid or otherwise resolved. If your have known creditors in your business, you cannot close down an LLC for the sole purpose of evading those creditors and then re-open your business with another LLC if it’s essentially the same business. As a precautionary measure, if you are aware of a liability issue but you are unsure whether it is a legitimate claim, you should wait until the statute of limitations for that potential claim has passed until you dissolve the LLC.

Third, follow the LLC operating agreement and/or state statutes regarding the voting rights required for dissolution and for the order of events to dissolve and LLC. A common order of events is as follows; pay-off all known creditors, return contributed capital to the members, distribute profits/assets to the members.  Many states have a notice requirement to creditors of the LLC which can actually be helpful in some cases to shorten the time limit they may have to file a claim. If you have known creditors you will want to send them notice of the dissolution to shorten the period upon which they have to file a claim for the assets of the LLC.

Fourth, if you dissolve the LLC when no known/present LLC creditors exist, the owners of the LLC are still afforded the protection from creditors for any claims that arose when the LLC was in good standing.  For example, if you dissolved your company in 2015 and were later sued in 2017 for an act that occurred in 2014, then so long as the company was unaware of the incident giving rise to the claim then the members of the LLC would be personally protected from the liabilities of the business.

Fifth, if you are aware of a potential liability (no judgement or lawsuit exists) and dissolve the LLC, the members may be personally liable up to the amount distributed from the LLC upon dissolution. This situation was the 2014 case of CB Richard Ellis v. Terra NostraIn this case, an LLC property owned failed to pay a commission to their broker pursuant to a listing agreement and then dissolved their LLC. The real estate broker eventually obtained a judgement against the dissolved LLC and was able to pursue the members of the LLC for the liability of the LLC up to the amounts distributed to the LLC owners.

In Sum, if the purpose of the LLC has legitimately come to an end, and there aren’t any known/present creditors, then depending on the laws in your state and your situation, you may decide either to (a) keep the LLC open until, for example, the statute of limitations runs out, or (b) shut down the LLC so long as it was in existence and in good standing during the time in which the business had operations. If you dissolve the LLC when there are known/present creditors, the members of the LLC will generally be liable for amounts distributed from the LLC to the member.

Note:  This article, like all of our articles, is to provide some general guidelines – always get specific advice for your situation.

What Being Dragged Off a United can Flight Teach Us about Contract Law?

April 18, 2017 Business planning, Law, Litigation, Small Business Comments Off on What Being Dragged Off a United can Flight Teach Us about Contract Law?

Unless you’ve been in a coma for the past week or so, you’ve probably seen the cell phone camera footage of airport police dragging a kicking and screaming Dr. David Dao off a United Airlines flight at Chicago’s O’Hare Airport last week.

At this point, the story is well known.  United needed to get four additional flight crew employees on Dr. Dao’s flight, so they asked paying customers to give up their seats voluntarily, for increasing levels of compensation.  When there were no takers, United selected four passengers “at random” for involuntary removal from the flight.  Dr. Dao was one of the “lucky” four selected.  However, when the time came to make the walk of shame down the aisle and off the plane, Dr. Dao refused to get up.  That’s when airport security was called in to physically remove him and cell phone cameras started to roll.

This fiasco, and the seemingly incessant media coverage thereof, has been a PR nightmare for United Airlines.  It has also brought an unprecedented amount of attention to the legal term “contract of carriage.”  Simply put, a contract of carriage is an agreement between a carrier of goods or passengers (such as an airline) and the consignor, consignee or passenger. These agreements define the rights, duties and liabilities of both the airline and the passenger.

You agree to your chosen airline’s contract of carriage when you buy your ticket.  The very broad framework for these agreements is established by federal law and the FAA (for domestic airlines), but the contracts can, and do, vary considerably from airline to airline.  Among other things, in your contract of carriage, you agree that you can be bumped from your seat due to overbooking, or because the airline needs to move employees.  You also agree (at least in the contracts of carriage for the four largest U.S. carriers) that you can be removed from or denied boarding to the plane for the following reasons (among many others):

  1. You decided shoes are overrated – boarding can be denied to those who are barefoot or not properly clothed.
  2. You decided showering is overrated – airlines can refuse to board individuals who have or cause a malodorous condition.
  3. You spent your entire long layover in the airport bar – airlines don’t have to board folks who appear to be intoxicated or under the influence of drugs to the degree that they could endanger other passengers or crew members.
  4. You spent your entire long layover in the airport’s all-you-can-eat buffet – if you are unable to sit in a single seat with the seat belt properly secured or are unable to put down armrests between seats for an entire flight, the airline isn’t obligated to give you a seat (or two).

What can we learn from all of this (other than to make sure to wear shoes to the airport)?  I think the takeaway is that even if we don’t know we’re doing so, most of us enter into legal agreements (i.e. contracts) multiple times each day, and it behooves us to know (and when we can do so, also to control) what is in those contracts.

This is especially important in your business.  Do you have a written contract with your vendors/suppliers/customers?  If not, then what happens if there is a dispute?  What is the basis of your agreement?  An email chain?  A phone call?  A face-to-face meeting that ended with a handshake?  If you do have a written contract, when was the last time you looked at it?  Do you understand the language in the contract and your rights and responsibilities under that language?  Have you had a trusted, experienced attorney review the contract to make sure it is in your best interest?

As Dr. Dao’s experience has taught us, the consequences of a contract can be serious, and can even put us in the national spotlight.  Taking the time to review and, if necessary, to change the contracts that you rely on to run your business is absolutely worth the time and effort.  The few hundred bucks you might spend could save you thousands in defending or pursuing a lawsuit regarding a poorly drafted or non-existent contract.

What Do I Need to Know About Title Insurance

April 4, 2017 Real Estate Comments Off on What Do I Need to Know About Title Insurance

We all know that title insurance is a necessity when purchasing real estate, but many do not have a sufficient understanding of what title insurance is really for and steps we can take to deal with title insurance companies to prevent being embroiled in a title dispute. Litigating title disputes can often be long, expensive, and often difficult to predict the outcome with any certainty. For that reason, having a solid grasp of what title insurance can do and cannot do is important for any would be purchaser of real estate.

The condition of title is one of the most important due diligence items for a buyer of real estate.   Purchasers usually want title to real estate to be clean, or as lawyers describe it to be “marketable.” Marketable title does not mean title that is completely free from any liens or claims, but merely title that is sufficiently free from doubt that an informed and reasonable buyer would accept it. For example, some legal descriptions for properties will exclude mineral rights, or contain easements for sewer, gas, or other utility lines. Technically, these are claims or “encumbrances” against title, but most would not consider these types of claims to be a sufficient “cloud” on title to render it unmarketable since those types of claims typically do not affect a buyer’s right to enjoy the property.

WHAT IT A PRELIMINARY TITLE REPORT?

Title insurance does not remove defects nor does it guarantee marketable title, but merely provides a means of recovery if title does prove unmarketable for a reason that is covered under the policy. In a typical real estate transaction, one of the initial first steps in escrow is that the title insurer will issue a “Preliminary Title Report” (“Prelim”). This is a crucial document for buyers to understand as part of their overall due diligence.   Contrary to popular belief, a Prelim is not a guarantee of the condition of title and title companies are generally not liable for errors appearing on the Prelim. I’ve seen cases where title insurance companies made mistakes on the Prelim, but unfortunately there was no recourse against the title insurance company because the Prelim is merely an offer, not a binding representation of title.  Therefore, although Prelim is a good starting point for conducting due diligence on the condition of title, but depending on the property, additional due diligence may be needed above and beyond what appears on the Prelim. Additionally, following a Prelim the Title Company issues a commitment for title and issues their title policy off of this commitment. It is the terms of the actual policy that comes from the Title Commitment that you need to be most certain about as the Prelim is not binding on the insurance company.

UNDERSTAND THE EXCEPTIONS TO YOUR POLICY

The most important part of reading the Prelim and the Commitment that follows is understanding the exceptions. The Commitment will list the exceptions which are items that would not be covered under the policy. Exceptions may be specifically listed, such as existing mortgages, unpaid taxes, federal tax liens, recorded easements, etc.   There are also general exceptions that are typically listed as an Exhibit to the Prelim or Commitment as a “Schedule B” Exception. These exceptions are usually described very generally and in legalese (i.e. most purchasers don’t pay attention to it). However, it is important for the purchaser to have a general understanding of these general exclusions so that if there is a potential issue on the property that is possibly excluded under these general exceptions, the purchaser can consult with the right professionals (lawyers, inspectors, surveyors, etc.) to determine what are the risks, and what steps can be taken to fix the defect (or else re- negotiate the price or cancel the deal).

For example, boundary disputes and encroachments from neighbors are typically not covered under a title policy. If the physical inspection of the property shows some doubts as to the boundary lines (e.g. no walls or physical marker showing the boundary lines or trees along the property line that create doubt as to whose side of the property it is on), then further due diligence, hiring professionals, or conducting a survey would be recommended. Even though standard policies may not cover certain risks, additional coverage might be available to cover these types of claims for an additional fee if you inquire.

Furthermore, standard title policies typically cover only matters in the public record (recorded liens, easements, judgments, etc.) and do not cover issues not shown in the public records.

As such, the Prelim and Commitment should not be the sole resource for determining whether there are issues with title, but if there are any doubts, these should be independently researched, or any doubt should be addressed directly with the seller and/or title rep.   For example, if the seller has been sued, or owes taxes to the IRS, these issues may not appear on the Prelim or Commitment if nothing has yet been recorded, but those issues could definitely affect your interest in the property, and so consider confirming with your seller that they are not aware of any unrecorded interests that could affect title or conduct your own independent due diligence. In addition, Prelims and Commitments may disclose the existence of a lien, but fails to provide specific information about its details, and in those cases, actual copies of the lien documents should be obtained from title or the seller.

GETTING A SPECIAL ENDORSEMENT

Any questions regarding the condition of title should be discussed with the title officer and/or attorney so that further investigation can be done to determine what can be done with respect to any title issues that arise during escrow. Sometimes a title insurer may be willing to issue a “special endorsement” to cover a particular title issue that would not otherwise be covered under the policy, but it is incumbent on the buyer as part of his/her due diligence to inquire about these issues, and of course, preferably during the due diligence period while the buyer still has the right to negotiate or cancel the deal. These types of inquiries should be made in writing so there is a record documenting the discussion.   I have experienced situations where a title insurer initially denies coverage for a claim stating that they were not aware of the issue, but then had to reverse course when presented with written evidence that the issue was discussed with the title company during escrow.

Finally, as with any insurance company, it is important to make sure you are working with a reputable company that will be there for the long haul. Getting a policy on the cheap from an unknown company will be useless if that company goes out of business. Choice of title companies are negotiable, although if the seller is paying for title insurance, they will usually insist on their own title company. Make sure that company is legitimate and has an established history and track record.

Fortunately, most homeowners will never need to make a claim on their title insurance. However, anyone who has experience litigating these types of disputes knows that the outcome is frequently hard to predict, and is often determined by which party has the most resources. If a claim ever arises requiring litigation, you’ll want to have the resources of an insurance company defending your interests, and in order to maximize that possibility, it is important to perform your due diligence on the property, on the title insurance company, and the details of the policy they propose to issue for your property.