What Businesses Should Know About the California Consumer Privacy Act

The California Consumer Privacy Act (CCPA), or AB-375 as it is officially known, was enacted in 2018 and goes into effect on January 1, 2020. This landmark legislation provides the broadest protections for consumers’ personal information of any state in the country. For California consumers, it is a game-changer. For many companies who do business in California, it is one more potential land mine to navigate.

New Consumer Rights Under the CCPA

• The right to know what personal information is collected, used, shared or sold, both as to the categories and specific pieces of personal information collected by a company;
• The right to delete personal information held by businesses and by extension, a business’s service provider;
• The right to opt-out of sale of personal information. Under the CCPA, consumers are now able to direct a business that sells personal information to stop selling that information;
• Minors under the age of 16 must provide opt in consent, with a parent or guardian consenting for children under 13;
• The right to non-discrimination in terms of price or service when a consumer exercises a privacy right under the CCPA.

Which California Businesses Does the CCPA Apply to?

• Any companies which do business in the State of California, and who have gross annual revenues in excess of $25 million;[1] or,
• Buys, receives, or sells the personal information of 50,000 or more consumers, households; or devices; or,
• Derives 50 percent or more of its annual revenues from selling consumers’ personal information.

Note: As proposed by the draft regulations slated to go into effect on the same date as the CCPA, businesses that handle the personal information of more than four million consumers will have additional obligations.

Specific Obligations on Businesses under the CCPA

• Businesses subject to the CCPA must provide notice to consumers at or before data collection;
• Businesses must create procedures to respond to requests from consumers regarding their right to opt-out, know, and delete;
• For requests to opt-out, businesses must provide a “Do Not Sell My Info” link on their website or mobile app;
• Businesses must respond to requests from consumers to know, delete, and opt-out within specific time frames;
• As proposed by the draft regulations, businesses must treat user-enabled privacy settings that signal a consumer’s choice to opt-out as a validly submitted opt-out request;
• Businesses must now verify the identity of consumers who make requests to know and to delete, whether or not the consumer maintains a password-protected account with the business;
• As proposed by the draft regulations, if a business is unable to verify a request, it may deny it, but must comply to the greatest extent it can. For example, it must treat a request to delete as a request to opt-out;
• As proposed by the draft regulations, businesses must disclose financial incentives offered in exchange for the retention or sale of a consumer’s personal information, and explain how they calculate the value of the personal information. Businesses must also explain how the incentive is permitted under the CCPA;
• As proposed by the draft regulations, businesses must maintain records of requests and how they responded for 24 months in order to demonstrate their compliance;
• Businesses that collect, buy, or sell the personal information of more than 4 million consumers have additional record-keeping and training obligations.

For more information on this sweeping new law, click here or reach out to the trusted attorneys of Gehres Law Group to assist your company in avoiding these new land mines. Call us at 858-964-2314 or send us an email to info@gehreslaw.com.

[1] Insurance institutions, agents, and support organizations are expressly exempted from coverage by the CCPA as they are already subject to similar regulations under California’s Insurance Information and Privacy Protection Act (IIPPA).

 

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NON-JUDICIAL FORECLOSURE IN CALIFORNIA

Introduction

Consider the typical situation when a person wishes to purchase a home. The purchaser typically puts a certain amount of money down, say 10% of the purchase price, and finances the remaining 90% through a loan from a bank or other mortgage lender. The purchaser then signs a promissory note in favor of the lender and executes a trust deed or mortgage on the property to secure the lender. The trust deed on a mortgage provides the lender with security in the event the purchaser fails to make required payments on the loan. Typically, the loan would be paid off over a 30-year or 15-year fixed period, or when the property is sold and transferred to a new purchaser.

However, in some instances, the purchaser is unable to continue making monthly mortgage payments, and he defaults on the loan. In that instance, the lender will “foreclose,” and seek to recover the remaining balance on the loan. There are two ways for the lender to proceed. One way is for the lender to bring a judicial foreclosure action, which is a legal proceeding in court. The other, more common method of foreclosure in California, is for the lender to institute a non-judicial foreclosure, also known as a “private sale.”

Since a judicial foreclosure proceeding is an action in court, it may take a year or more to resolve, and will be subject to the all of the defenses a borrower may have in a breach of contract action, including the statutes of limitation applicable to such actions. In the case of a judicial foreclosure action, the four-year statute of limitations for breach of a written contract would apply. Since this type of foreclosure requires full court proceedings, the lender would typically need to hire an attorney to prosecute the action.

Non-Judicial Foreclosures

A non-judicial foreclosure action, on the other hand, is not an action filed in court and, therefore, is not subject to a statute of limitations defense. Moreover, a non-judicial foreclosure may result in a foreclosure sale, with proceeds paid to the lender, in a much shorter period of time than would be the case in a judicial foreclosure action.  That period of time may be as short as 110 days from the time the lender provides the purchaser with notice of default. Nonjudicial foreclosure proceedings are also less expensive than judicial foreclosure proceedings, since the lender may not require the assistance of an attorney.

Since non-judicial foreclosure proceedings are quicker and less expensive than judicial foreclosure proceedings, the question arises, why would a lender proceed judicially? The answer is that, in some cases, a lender may be able to obtain not only the amount for which the property is sold, but also the difference between the sale price and the full amount the lender is owed (i.e., the “deficiency”), in the event the sale proceeds are less than what the lender is owed.  In that instance, the lender will be made whole through a judicial foreclosure proceeding.  In contrast, in a non-judicial “private sale,” the lender may not recover any deficiency.

California Anti-Deficiency Statutes

However, a judicial foreclosure proceeding is not available in many, if not most instances in California. Consider the typical scenario mentioned above: a purchaser obtains a loan in order to purchase a home in which he intends to live. In that situation, the “anti-deficiency” statutes apply. The anti-deficiency statutes provide that a lender may not obtain a deficiency judgment under a deed of trust or mortgage given to the lender to secure repayment of a loan that was in fact used to pay all or part of the purchase price of the dwelling, if the dwelling is occupied entirely or in part by the purchaser. In the case of such a “purchase money loan,” no deficiency may be collected by the lender.

One Form of Action Rule

Also relevant in the typical scenario referred to above is California’s “one-form-of-action rule.” This rule provides that foreclosure is the only form of action that may be pursued by a lender to recover any debt or enforce any right secured by a trust deed or mortgage. Under the one-form-of-action rule, if the purchaser/borrower defaults on the loan secured by a deed of trust or mortgage given to the bank or other mortgage lender, the lender must look to recover what the lender is owed first — and perhaps only — from the security, that is, the property subject to the trust deed or mortgage. Moreover, in the “purchase money loan” scenario described above, the lender will not be able to seek or obtain a “deficiency” and, therefore, must proceed by way of non-judicial foreclosure, rather than a judicial foreclosure action.

In the event the property is sold in a non-judicial foreclosure proceeding, the lender will be paid first out of the proceeds of sale. If the lender is paid in full, any remaining funds will be paid to the purchaser/borrower if there are no other lenders with security interests in the property, or to any such secured lenders subordinate to the bank or other mortgage lender which provided the original loan enabling the purchaser/borrower to purchase the subject property. Of course, typically the proceeds of sale will not be sufficient to pay the original lender, so there will be nothing left after partial payment of the loan is made to the original lender out of the proceeds of sale.

Junior Liens

It is not uncommon for a producer/borrower to obtain a home equity line of credit (HELOC) or other form of second loan, giving the second lender a trust deed or mortgage on the same property. In that instance, the second lender, or “junior lienor,” will have security in the property for repayment of the loan, but that security will be subordinate to the original lender who holds a first trust deed or mortgage on the property.

In that situation, in what position does the second trust deed holder find himself if the original purchaser/borrower defaults on the loan he obtained from the original lender? In a typical situation, the original lender will institute a non-judicial foreclosure proceeding. If there are insufficient funds from the sale of the property to fully pay off the first trust deed holder, there will be nothing left to pay off the second trust deed holder. In that event, the second trust deed holder, also referred to as a “sold-out junior lienor,” will not benefit from a foreclosure proceeding, either judicial or non-judicial, because his security for the property will have been wiped out. Since he no longer has a security interest in the property, he is not constrained by the one-form-of-action rule, and may seek a personal judgment against the borrower.

Co-signors

One final note: the one-form-of-action rule in the anti-deficiency statutes does not apply to in the event the lender has obtained a guarantee of the loan from a third-party. In that event, if the purchaser/borrower has defaulted on the loan, the lender may file a legal action against the guarantor on the guarantee, and may collect the full amount of the unpaid loan from the guarantor.

For further information, contact our team of trusted attorneys at Gehres Law Group.

Applicable statutes include: CA Civil Code §2924; CA Civ. Proc. §580d; CA Civil Code §2932-33; CA Civ. Proc. §580b; CA Civ. Proc. §726(a).

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2019 – A Vintage Year for Irrevocable Living Trusts

Although California produces stellar wine vintages year after year, there has been relatively little production of anything new or positive for California non-grantor trusts. But the landscape has changed, the conditions are ideal, and the time is ripe. A recent crop of legislation and cases, including California’s new Uniform Trust Decanting Act and the Paula Trust case, might make 2019 a vintage year for updating irrevocable trusts, overhauling estate/gifting plans, and potentially reducing California tax exposure.

CA Decanting

The California Uniform Trust Decanting Act (“CUTDA”), which took effect January 1, 2019, has significantly eased restrictions and limitations on trust fiduciaries when it comes to “updating” irrevocable trusts in California. “Decanting” an old trust, similar to decanting an old wine, is literally the act of pouring the assets and provisions from an outdated irrevocable trust into a brand-new irrevocable trust. The crucial difference is that wine decanting involves pouring the same wine into a different container. Trust decanting, on the other hand, allows fiduciaries the ability to modify the trust’s terms and provisions, resulting in a substantially different and improved container.

Before passage of the CUTDA, a fiduciary’s ability to modify the terms and provisions of an irrevocable trust in California, with certain exceptions, was limited, time consuming and expensive. In most cases, the fiduciary was required to obtain the consent of all the trust’s beneficiaries, and a court hearing was needed to make any proposed changes. And even if the fiduciary was able to overcome these obstacles, their power to make substantive modifications to the original trust instrument was severely restricted.

Under the CUTDA, a fiduciary now has the power to decant and modify an irrevocable trust without the consent of the settlor, beneficiaries, or the court.  The fiduciary must still provide notice to all of the interested parties above (as well as the California Attorney General if the trust has charitable components), but their approval and consent is no longer required.

Fiduciaries can use decanting to make administrative changes and, depending upon the authority granted to them by the original trust, they may also have the power to make significant substantive changes. Fiduciaries with “expanded distributive discretion” can alter both administrative and dispositive provisions, including modifications to distributions, beneficiaries, appointments and trust duration.  Decanting power does not mean unlimited power and unfettered discretion – the decanted trust’s “juice” can be modified and fortified, but it can’t be replaced with an entirely different product. Fiduciaries are still restricted when it comes to modifying their own powers, liabilities and compensation. In addition, they are barred from making any changes that alter the trust’s charitable components and/or negatively affect its tax status.

Fiduciaries are free, however, to make changes that positively affect the trust’s tax status. The Paula Trust case, coupled with the new decanting powers under CUTDA, could very well provide trustees with a perfect window to make that happen.

The Paula Trust Case

In general, the income of a non-grantor trust is subject to taxation in California if that trust’s fiduciary or beneficiary is a resident of California.^[1] The California Franchise Tax Board (“FTB”) has generally taken the position that all California-source income is subject to taxation and all other trust income is eligible for apportionment according to a formula involving the trust’s fiduciaries and beneficiaries.^[2]

The Paula Trust v. FTB ^[3] decision rejected the FTB’s historic position and held that all of the Paula Trust’s income, including all of its California-source income, was eligible for apportionment. A 2007 sale of the Paula Trust’s property resulted in a $2.8M capital gain in California, and the Paula Trust successfully argued that the same tax structure should be applicable to both California-source and non-California-source income. By applying the apportionment formula, the Paula Trust was able to defer California taxes on roughly $1.4M of the gain. The Paula Trust decision is being appealed by the FTB, but it’s currently the law of California.

Dust Off Your California Irrevocable Trust and Pop the Cork

There are additional compelling factors making 2019 an opportune time to evaluate and overhaul existing estate and gifting strategies, including the potential sunsetting of the high federal basic exclusion amount at the end of 2025, CA Senate Bill 378 which could establish a separate and punitive estate tax regime in California, and the availability of new insurance products that can help mitigate tax burdens.

An effective estate plan, like a vintage Napa cabernet or First Growth Bordeaux, is a precious and enduring gift that needs to be preserved and protected for future generations to enjoy and cherish.  If you are a trustee or fiduciary of a non-grantor California trust that is past its prime, the Decanting Statute and Paula Trust decision may empower you to make substantive changes that better serve the evolving needs of the trust’s beneficiaries while significantly reducing (and possibly eliminating altogether) California tax exposure. The attorneys at Gehres Law Group can help guide you through the options and find the right fit that integrates your business and personal goals, mitigates risk and uncertainty, and maximizes potential benefits for your family and loved ones regardless of what the future may hold.

[1] Cal. Rev. & Tax Code §17742(a)

[2] Cal. Code Regs. tit. 18, §17743

[3] Paula Trust v. Cal. Franchise Tax Bd., 2018 Cal. Super. LEXIS 644 (currently under appeal by FTB)

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Can I Really Tell You Everything? California Attorney/Client Privilege

Introduction

Most of us are familiar with the attorney–client privilege in terms of protections provided in criminal cases and prosecutions. But what about its application to civil and business related matters? Through television and movies, most of us have learned that if you tell your lawyer all your dirty deeds he or she can’t tell anyone about it. This is true for the most part, as set out in California Evidence Code 954, as well as case law and standards established by federal, state courts and the American Bar Association. Confidential communications between clients and their attorney are generally privileged. However, like most rules, there are exceptions. Two more common exceptions are: 1) you convey an intent to do future harm (not your past bad deeds or crimes); or, 2) matters of fraud.

Matters of Fraud

It’s this second exception that comes into play most often when entering the civil law forum. If you convey to your attorney an intent to commit, and in fact do so commit, a fraud upon the court, through submission of false testimony or false documents, your privilege may not protect you. Using this exception, courts can order an attorney to reveal otherwise privileged or confidential information in circumstances relating to major crimes and fraud. In addition, this exception requires an attorney to disclose information to a court if a client reveals that he or she is planning to carry out a crime or fraud, or is in the process of doing so. However, an attorney is not required to reveal whether a past crime has been committed.

For example, if you or your business is involved in a civil suit regarding allegations of stolen funds, the judge can order your counsel to turn over documentation of conversations between the two of you which involve plans or methods to commit acts for the purpose of misappropriating funds. See United States v. Zolin, 491 U.S. 554 (1989); See also Geilim v. Superior Court, 234 Cal. App. 3d 166, 285 Cal. Rptr. 602 (1991).

Attorney/Client Relationship

In order for the privilege to be in effect, and your communications to be protected, there must exist a valid attorney-client relationship. Money does not necessarily need to exchange hands. However, it is typically advisable to withhold details and information from an attorney until they confirm in writing that the privilege applies, as this constitutes nearly irrefutable evidence that the parties intended to and did enter into an attorney-client relationship.  Any information given for the purposes of retaining an attorney, for example, during consultation, is typically considered privileged, but should there be a dispute about whether such a relationship was formed, written evidence is usually the best evidence. And of course, information gained during the course of representation is protected by the privilege, absent one of the narrow exceptions; this includes verbal communications as well as documents shared with your attorney and documents prepared during the course of or in furtherance of representation.

Work-Product

Attorney work product privilege, as provided in the California Code of Civil Procedure, acts for the purpose of allowing attorneys to:

• “…prepare cases for trial with that degree of privacy necessary to encourage them to prepare their cases thoroughly and to investigate not only the favorable but the unfavorable aspects of those cases” (CCP 2018.020(a)); and,
• “prevent attorneys from taking undue advantage of their adversary’s industry and efforts” (CCP 2018.020(b)).

Writings that reflect an attorney’s “impressions, conclusion, opinions, or legal research or theories” (CCP 2018.030(a)) are also not discoverable, or, in other words, are “protected”. All other material considered to be work product can become discoverable if a court determines that the party seeking the information or documents will be unfairly prejudiced without such disclosure (CCP 2018.030(b)).

Privilege Log

Your attorney can create a “privilege log,” either in anticipation of requests by outside parties for discovery, or simply as a proactive measure to ensure protection of communications and documents you would like to ensure are privileged. Entire documents and other documentations of communications can be listed and then designated as privileged, and the reasons for the privilege given for each item. Documents otherwise discoverable can be redacted for sensitive information and those redactions may be noted with the corresponding privilege and reasons for the privilege clearly stated.

Waiver of Privilege by the Client

A client can intentionally waive the privilege and allow confidential information to be released by their attorney.  More often than not, however, the privilege is waived unintentionally by the client or in a careless way. For example, having third parties present during communications with your attorney can waive the privilege. Speaking publicly or releasing information over social media can also waive the privilege. Similarly, having a conversation with another person which could reasonably be heard by a third party does not create a privilege between you and that third party, so it is important to remember that the privilege does not apply to third parties. Rather, the attorney-client privilege is only between you and your counsel.

Duty of Confidentiality

Clients are afforded an extra layer of protection in addition to the attorney-client privilege under the Duty of Confidentiality, as proscribed by the Code of Ethics and ABA standards. This means that a lawyer must keep their clients’ confidences and “secrets” even after representation ends or after the death of their client. As determined by the various state bar rule making authorities, it is in the best interest of the system as a whole that a client feel comfortable and willing to be honest with their attorney.

Conclusion

Overall, there exists a very broad blanket of security for communications between a client and their attorney, and the exceptions are typically interpreted quite narrowly. However, because there are some exceptions, it is important to ask your attorney if you have any concerns of confidentiality during consultation, and work with your attorney to make sure important communications and documents remain protected and secure.

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THE CALIFORNIA UCC AND ME

Why should I care and what should I know?

Whether you’re a small business owner who’s hoping to expand, or just getting started; or, as often times in today’s economy, in need of some extra capital to stay afloat, you’re more than likely going to come into contact with a UCC Form-1 filing.

What is the UCC?

The UCC, or Uniform Commercial Code, is a uniform set of laws established to regulate sales of personal property and other business transactions. It contains legal rules and regulations governing commercial or business dealings and transactions. Each state has adopted sections of the code as state law, including California. In this discussion, we focus on the UCC-1 Financial Statement filing or lien as it may affect you and your business transactions. For additional information on which of the UCC articles that have been adopted in California, click here.

UCC-1 Financial Statement

According to the California Secretary of State’s website, a UCC-1 filing is:

a financial statement … filed to perfect a security interest in named collateral and establishes priority in case of debtor default or bankruptcy…

Ok, so what does that mean?  Simply put, it is a method for a lender to secure personal property as collateral on a loan to ensure they are repaid. Should the borrower default, the lender has the right to seize and sell the encumbered assets to satisfy the debt.

In contrast, it is important to note that real property is typically secured by a lien on the property, which is filed with the county recorder of deeds office where the property is located, not with the state. However, when you secure a loan using personal property, which is basically anything except real property (real estate), the lender will file a UCC-1 Filing Statement giving them a right to collect on the loan amount by repossessing or seizing your personal property or their liquidated assets. It also provides notice to future potential creditors that the assets have been encumbered, giving priority to the first creditor to file a lien against the asset in the event the borrower defaults or files for bankruptcy protection.

Example Scenarios

There are numerous ways that these filings can come into play.  For example, if you purchase on credit an expensive piece of manufacturing equipment or a tangible asset specific to your business needs, the seller can (and most likely will) file a UCC- 1 Form.  In this case, if you default on your payment arrangements the seller can simply come and take back the product. Or, perhaps you’ve entered into a security agreement on a note to purchase business assets. In that case, the lender can either a) list specific property that amounts to the value of the loan; or b) include a blanket lien whereby the lender may seize any and all of your business assets to the extent of your liability on the note. Assuming the security agreement permits foreclosure without obtaining a judgment against the borrower, the lender may unilaterally take possession of the assets, sometimes without notice, and sell them to satisfy the amount due, which usually includes the costs of foreclosure.

UCC-1 Filings and Your Business Credit Rating

If you have one or more UCC-1 liens in connection with your business assets, it is critical that you actively keep track of how they show on your credit report.  If you satisfy a lien, the UCC-1 is NOT AUTOMATICALLY REMOVED from your credit report.  Let’s say a lien is reported on your business credit report on a specific piece of equipment. You made all the required payments pursuant to your loan agreement and the lender stopped sending you invoices. It is not safe to assume, under these circumstances, that the UCC lien has been extinguished; you still have to make sure the lender files a Form-3 that effectively removes the original lien.

Failing to ensure UCC-1 liens are removed will negatively affect your ability to get additional or future loans, financing, etc.  If a prospective lender or purchaser of your business assets runs a check on your business and sees outstanding UCC-1 filings, that can directly affect the image and attractiveness of your business, and your business credit rating. Ultimately, the more encumbrances there are on your business assets, the less attractive you become as a borrower.

Be aware, also, that you cannot typically use personal property to secure a loan if a lien has already been filed against it, unless the lender expressly agrees to take second priority, which usually results in a much higher interest rate. This is another important reason to make sure that you not only keep close track of any active UCC-1 filings, but when one has been satisfied, you ensure the original lender files the proper documents to release the lien, which will then be reflected on your business credit report.

How We Can Help

The award-winning and AV-rated attorneys at Gehres Law Group, P.C. handle a variety of business and contract law matters, including asset protection, forming and maintaining businesses and corporations as well as arbitration, mediation and even litigation should the need arise. Contact us at (858) 964-2314 or by e-mail at info@gehreslaw.com for a complementary evaluation (for new clients).

© 2019 Gehres Law Group, P.C. We hope you found this article helpful and appreciate any comments or suggestions you may have. It is for general information only and should not be construed to constitute formal legal advice nor the formation of a lawyer/client relationship.

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WHAT CONSTITUTES FRAUD IN CALIFORNIA

In California, a cause of action for fraud can arise when a party misrepresents material facts, makes false promises, or otherwise deceives another party with the intention of depriving them of their money, property, and/or rights. Fraud and deceit are generally defined in California Civil Code Sections 1572, 1709, and 1710. Following are the types of fraud claims permitted under California law.

Intentional Misrepresentation

Intentional misrepresentation occurs when a party intentionally convinces another party to rely on false assertions of fact, which the other party reasonably relies on and sustains damages therefrom.

Intentional misrepresentation requires the following elements:

• A party makes a false statement of fact knowing the statement is not true.  Statements of opinion or general embellishment, like a salesperson bragging about a product they wish to sell, is permitted, even if the opinion exaggerates the product’s performance or benefits. See Hauter v. Zogarts (1975) 14 Cal. 3d 104, 112.
•  There was an intent by the party making the false statement to defraud another party with the false statement.
•  The other party reasonably relied on the false statement, which was a substantial factor in causing harm to them.
•   The other party suffered damages as an actual and proximate result of the intentional misrepresentation.

Negligent Misrepresentation

•  A party makes a false statement of fact to another party, with no reasonable basis for believing the statement is true (as determined by a judge or jury), even if the party making the statement believes it is true.
•  The party making the false statement intended that the other party rely on the misrepresentation of fact.
•  The other party did reasonably rely on the false statement, which was a substantial factor in causing harm to them.
•  The other party suffered damages as an actual and proximate result of the negligent misrepresentation.

Concealment

•  A party had a fiduciary relationship with another party, which imposed a duty to disclose facts, but the party did not disclose such facts. Such fiduciary relationships are imposed by law upon business partners, trustees, licensed professionals and others.
•  The party accused of concealment either:

a) Intentionally failed to disclose certain facts; or

b) Disclosed some facts but failed to disclose other facts, making the disclosure deceptive; or

c) Intentionally failed to disclose certain facts that were known only to the concealing party, and that the                            other party could not have discovered; or

d) Prevented the other party from discovering certain facts.

•  In failing to disclose certain facts, the concealing party intended to deceive the other party.
•  The other party was not aware of the concealed facts, and had they been aware, they reasonably would have behaved differently.
•  The other party suffered harm and the concealment was a substantial factor in causing such harm.

False Promise

False promise fraud requires the following:

•  A party makes a promise which they do not intend to perform at the time they make the promise.
•  The party making the promise intended that the other party would rely on the promise, and the other party did, in fact, reasonably rely on the promise.
•  The party making the promise does not fulfill that promise.
•  The other party suffered harm and the false statement was a substantial factor in causing such harm.

Summary

Asserting a viable claim of fraud based on any of these theories can open the door to substantially larger damage awards than most breach of contract claims, or can provide additional leverage to the party asserting them in an effort to negotiate a prompt settlement. This is primarily due to the availability of punitive damages for proving fraud. Punitive damages are meant to punish the wrongdoer and are often based on a percentage of the wrongdoer’s revenue, which is otherwise not considered in awarding damages.

If you are engaged in a dispute involving fraud or alleged fraud, the trusted and highly experienced litigation attorneys at Gehres Law Group can provide valuable insights and skilled representation. Contact us today for your complimentary consultation.

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TOP 5 REASONS TO HAVE A LIVING TRUST IN CALIFORNIA

Many of our California based clients have heard that having a living trust can benefit them, but often don’t understand why it is beneficial to have a living trust. Below are some of the more common ways a living trust can aid in achieving your estate planning objectives.

1. Avoid probate.

Avoiding probate is a common goal of many clients in California since the cost of preparing and administering a trust is typically a fraction of the expense involved in probating a will. It is important to note, however, that simply having a living trust is not enough. The trustees of the trust must fund the trust by transferring assets into the trust. Pursuant to the California Probate Code Section 13100, if assets valued at more than $150,000.00 remain outside of the trust on the grantor’s death, then full probate is still required.

2. Avoid conservatorship.

Avoiding Conservatorship is also a commonly stated goal of our clients. Together with a durable power of attorney, clients can predetermine who will manage their assets in the event of their incapacity, as well as how they will be managed, saving thousands of dollars in court and administrative costs.

3. Flexibility.

While a will is capable of devising assets at death through probate, only a living trust has the flexibility to provide for delayed distribution, protection of beneficiaries from creditor claims, as well as other objectives, all without the need for probate. A trust can be administered for years following the grantor’s passing for the purpose of ensuring that the trust beneficiaries reach a certain age or milestone before receiving a distribution from the trust, or allow for periodic distributions to beneficiaries.

4. Enforcement.

A living trust can include provisions such as a no-contest clause, spendthrift clause, and governing law provisions, which preserve the distribution provisions and protect against the potential for disgruntled beneficiaries. Such provisions aid in ensuring the grantor’s wishes are carried out under a variety of possible scenarios without court intervention.

5. Privacy.

A living trust, unlike a Will, does not typically become part of the public record, which aids in maintaining the grantor’s privacy in many respects. Rather than requiring court oversight, a living trust is administered by a trustee appointed by the grantor, often a capable and trusted friend or family member.

A living trust can be created by anyone, but licensed attorneys draw up trust documents that are specifically tailored to unique family situations. Providing for a family’s future is one of the most important tasks a father, mother, husband or wife will ever undertake. A living trust drafted by an estate planning attorney is an excellent way to retain asset control and provide uninterrupted financial continuity. Contact our experienced living trust attorneys for a free evaluation. For more information, see our Estate Planning Fee Packages or browse our Estate Planning related blog articles.

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SCOTUS RULING STRIKES DOWN BAN ON SCANDALOUS AND IMMORAL TRADEMARKS

For decades the U.S. Patent and Trademark Office (“USPTO”) has refused to register trademarks consisting of words or symbols deemed “immoral’ or ‘scandalous’, in accordance with Section 2(a) of The Lanham Act.  In recent weeks, however, the Supreme Court of the United States struck down this long-held prohibition when it ruled that the refusal to register such trademarks violates the First Amendment to the U.S. Constitution, namely free speech of the trademark owner. For additional information on this ruling, see this National Law Journal article.

What exactly is an “immoral’ or ‘scandalous’ trademark?

Generally speaking, trademarks are used by an individual or business to brand and sell goods or services. Trademarks create identity, brand recognition and goodwill to the consumer. The previously banned scandalous or immoral trademarks typically contain profanity, are lewd, sexually explicit, or relate to drug use, religion or terrorism. So, why would a business owner want to brand their goods or services with a trademark that is “immoral’ or ‘scandalous’?  The answer to this question depends on the individual trademark owner, what goods or services they are selling, and most importantly, who their target market is. For example, a business who wishes to market their product to a younger group of consumers may use profanity to appeal to the rebellious side of their target consumer, which may shock most other groups of people, but the shock factor can be a very useful marketing tool.

Undoubtedly, there are individuals who are wholly unoffended by what the USPTO constitutes ‘immoral’ or scandalous’.  In fact, there are many generations of consumers who even resonate with the “offensive” terms or message.  Apparel and related goods is an industry often heavily impacted by the prior “immoral’ or ‘scandalous’ trademark ban.  Many apparel businesses have attempted to create brands consisting of terms that violate Section 2(a), only to have their applications rejected.  An example consists of four-letter word trademarks or logos depicting of  drug paraphernalia or sexuality used on clothing, hats or handbags.  Indeed, we have counseled many clients in the past seeking to trademark such brands.  The Court’s ruling allows businesses to move forward with these trademarks and seek federal protection.

What does this mean?

This 180 degree change in the law is likely to open the floodgates of applicants seeking to register trademarks once banned.  In fact, there have been hundreds of recent filings at the USPTO and this will continue to grow.  How will this affect businesses and consumers?  Businesses are now free to create and define a brand that best represents their message, profane or not, and they will be able to seek the broadest protection in their trademark with a U.S. registration. On the other hand, consumers will be exposed to bold trademarks and branding that appeals to some and which is highly offensive to others.  There is no doubt that this ruling will affect branding on a whole new level.     

Conclusion

Gehres Law Group, P.C. can provide assistance with determining if your creative work is eligible to be trademarked or if you should use an alternate approach, such as filing a patent or copyrighting your work product. Our legal team will also guide you through the formal process of applying to register your trademark, which can be a difficult process that begins with choosing the correct application. Just give us a call at 858-964-2314 or contact us online to find out how we can help; we offer free consultations for new clients. Learn more about our trademark flat fee packages here.

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WHERE TO INCORPORATE YOUR SMALL BUSINESS

Introduction

Many California business owners have heard and read that Delaware is the best state in which to form their entity due to their business-favorable laws. In particular, Delaware has historically offered:

• the most favorable franchise tax rules and been the most pro-management from a legislative and judicial perspective;

• broader protection for board members against derivative suits (lawsuits initiated by shareholders on behalf of the corporation);

• less legal protection for minority shareholders than California (e.g., cumulative voting is not required and staggered boards are allowed); and,

• limited statutory protection against hostile takeovers.

However, despite the ease and potentially favorable factors that point to Delaware as a destination for business formation and incorporation, there are some factors that California business owners, especially those who own small businesses, should consider before jumping on the Delaware bandwagon.

Cost Comparison Between California and Delaware

It currently costs $89 to file articles of incorporation in Delaware. The required annual report filing fee for all non-exempt domestic corporations is $50, plus taxes. The minimum Delaware corporation tax is $175 for corporations using the Authorized Shares method, and a minimum tax of $350 for corporations using the Assumed Par Value Capital method.

In contrast, the fee for filing articles of incorporation in California is $100. There is also a requirement to file an initial report within 90 days of incorporation which provides detailed information about your company and includes a fee of $25. In addition, the state requires the filing of an annual report along with a filing fee of $25. Most corporations will also pay a minimum annual franchise tax of $800 to the California Franchise Tax Board.

LLCs in Delaware are a little different. LLCs are $90 to form and are not required to file an annual report. However, they are required to pay an annual tax of $300.

LLCs in California do pay less than corporations in most cases. The formation fee is $85 and the 90 day Statement of Information fee is $20. Unlike California corporations, LLC’s must file a report with the state every other year rather than every year, along with a fee of $20. And the annual minimum tax payable to the Franchise Tax Board remains at $800.

While it may appear, from the outset, that Delaware is the preferable place to form your business based on a cost analysis, if your company does business in or from California, it must be registered in California whether it was formed in another state or not. This means that companies who conduct any business in or from California will remain subject to the filing fees charged by the California Secretary of State’s office, and must pay the minimum franchise tax of $800. Furthermore, a Delaware corporation operating in California must maintain a registered agent in Delaware (in addition to having one in California), which generally costs a minimum of $100 per year.

As you can see, if your company does business in or from California, incorporating in Delaware substantially increases the costs of formation and annual reporting. Click on the following links for the Secretary of State’s office of California and Delaware, respectively https://www.sos.ca.gov/business-programs/business-entities/ and https://corp.delaware.gov/.

Corporate Laws

The corporate laws of Delaware are very well developed and, as mentioned previously, business friendly, especially for businesses that have a national customer base and also for venture capitalists. However, it is important to consider how your business will be structured before determining the optimal state in which to incorporate. For example, if your business is structured as a single-member LLC, the business-friendly laws of Delaware are unlikely to be of any benefit to your business.

Other factors to consider are your business goals, where you will conduct business, and where you will bank. If you plan to bank and do the lion’s share of your business in California, then the decision is usually fairly straightforward, you would be better off ,in most cases, to incorporate in California. And, as previously discussed, if your business will generate California source revenue, or is operated from California, it must be registered in California.

If a California based business is incorporated in Delaware, lawsuits against the business may be filed and litigated in Delaware. While the outcome of such lawsuits could potentially be more favorable in a Delaware court, there is no guarantee that will occur. And, if your business is located outside of California, litigating a lawsuit in Delaware obviously becomes more expensive and inconvenient for a California based business owner since there will be significant costs associated with that scenario, like traveling to and from Delaware. As a result, you may incur extensive expense without any real benefit.

The good news, and another reason to choose the California versus Delaware option for forming your business, is that California has now incorporated a large portion of the Delaware General Corporations Law into its statutes and regulations thereby bringing many of the benefits of filing in Delaware to California.

Conclusion

With some exceptions, large corporations, not small or medium-sized businesses operating in California, will typically benefit from incorporating in Delaware or another state outside of California. When you are considering the type of business entity or structure to utilize for your business, or the most favorable state in which to incorporate, contact our trusted Business and Corporate Attorneys at the Gehres Law Group for a complimentary consultation. We’re confident that you’ll be glad you did.

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CALIFORNIA EMPLOYMENT LAW UPDATE 2019

Even though we are well into 2019, it is important for employers to be aware of and understand the importance and ramifications of the changes to California’s employment law landscape, which can affect their day to day operations. Some highlighted changes in California law are discussed below. The experienced employment law attorneys at Gehres Law Group are ready to assist employers in navigating the sometimes confusing and ever-changing employment laws in this State.

Wage Law Changes

First up is a reminder that California’s minimum wage went up to $12.00 per hour for employers with 26 or more employees, and $11.00 per hour for employers with 25 or fewer employees.  Minimum wage increases will continue at the rate of $1.00 per hour until January 1, 2022 for larger employers, and January 1, 2023 for smaller employers. See California Labor Code Section 1182.12. Higher rates may be in effect for employers located in certain cities which have enacted their own minimum wage rates.

Exemptions for agricultural workers relating to overtime and other working conditions have been repealed or changed.  Beginning January 1, 2019, agricultural employees must receive overtime at one and a half times the employee’s regular rate of pay for all hours worked in excess of nine and a half hours in one workday or 55 hours in one work week.  The overtime threshold is reduced by one-half hour per day or five hours per week every year until January 1, 2022 when the threshold matches the eight hours per day/40 hours per week requirements applicable to most other workers. The double-time threshold will be set at 12 hours per day beginning January 1, 2022. The timeline for compliance is delayed by three years for small employers–those with 25 or fewer employees.

The labor code was also amended to clarify that an employer may ask applicants their salary expectations for the position applied for. The law also authorizes employers to make compensation decisions based on employees’ current salaries, only if any wage differential is justified by one or more specified factors, including a seniority system or a merit system. See California Labor Code Sections 432.2 and 1197.5.

Under the State’s paid family leave law, employers are now allowed to require employees to take up to two weeks of earned, but unused, vacation leave before, and as a condition of, employees receiving paid family leave benefits.

Although not set into effect yet, beginning January 1, 2021 California’s existing paid family leave program will expand to employees who request time off related to their own active duty military service, or that of a close family member.  Current law only provides partial wage replacement to employees who take off due to the serious illness of themselves or a family member, or to bond with a new child.

Finally, employers are now required to provide copies of an employee’s payroll records within 21 days of the employee’s request. This new law involves a change in the language to ensure that employers understand they are required to make and provide the copies itself, as opposed to making the records available for the employee to copy.

Sexual Harassment

A new law in California requires employers with five or more employees to provide sexual harassment training to their employees by January 1, 2020, and then every two years after that. Specifically, employers must provide supervisors with two hours of training and nonsupervisory with one hour of training. Previously, only employers with 50 or more employees were required to provide the training. The new law also requires the Department of Fair Employment and Housing to develop compliant sexual harassment training courses.

An amendment to the FEHA made clear that a single incident of harassing conduct is sufficient to create a triable issue of hostile work environment, if the conduct interfered with an employee’s work performance or, otherwise created an intimidating, hostile, or offensive work environment.  The law explicitly overrides the prior standard for hostile work environment set by the 9th Circuit in Brooks v. City of San Mateo, 229 F.3d 917 (9th Cir. 2000), which held that a single incident of sexual harassment did not support a cause of action.

Also, as a part of the amendments to the FEHA, California Government Code §§12900 – 12996, employers are now clearly liable for any unlawful harassment by non-employees, not just sexual harassment as was the previous case. Non-employees include applicants, unpaid interns or volunteers or persons providing services pursuant to a contract in the workplace. With few exceptions, employers are now prohibited from requiring or inducing employees to release a claim or right under FEHA or require employees to sign non-disparagement agreements which prevent the employee from disclosing information about unlawful acts in the workplace, including sexual harassment.

Finally, FEHA now authorizes courts to award prevailing parties in civil actions, under the FEHA, reasonable attorney’s fees and costs including expert witness fees. It restricts courts’ ability to award reasonable attorney’s fees and costs to prevailing defendants to only those times when the court determines the action was frivolous, unreasonable, or groundless when brought, or that the plaintiff continued to litigate after it clearly became so.

Other Discrimination and Accommodation Issues

Lactation accommodation rules were also modified for 2019. Existing law requires employer to provide a location, other than a toilet stall, to be used for lactation (or at least make reasonable efforts to do so). The location should be permanent, unless the employer is unable to provide a permanent location and the temporary location is private and not used for other purposes while being used for lactation.  There is some flexibility for agricultural employers, allowing them to comply by providing an air-conditioned cab of a truck or tractor. See California Labor Code Section 1031.

The statutes governing employee criminal background checks and hiring/employment decisions under The Fair Chance Act were also amended. Except in specific situations, employers have previously not been permitted to use in hiring or employment decisions, information disclosed an employee concerning the employee’s participation in a pretrial or posttrial diversion program or concerning a conviction that has been judicially dismissed or ordered sealed. The new law makes changes to the specific situations when the general prohibition does not apply. These exceptions to the general prohibition include situations where (1) the employer is required by law (State or Federal) to obtain information regarding the particular conviction of the applicant, regardless of whether the conviction has been expunged, judicially ordered sealed, statutorily eradicated, or judicially dismissed following probation, (2) the applicant would be required to possess or use a firearm in the course of his or her employment, (3) an individual with a particular conviction is prohibited by law from holding the position sought, regardless of whether the conviction has been expunged, judicially ordered sealed, statutorily eradicated, or judicially dismissed following probation, or (4) the employer is prohibited by law from hiring an applicant who has that particular conviction, regardless of whether the conviction has been expunged, judicially ordered sealed, statutorily eradicated, or judicially dismissed following probation.

If your business is in need of further clarifications, updates or just a review of your employment practices and policies, please contact our experienced Employment and Business Law attorneys at the Gehres Law Group PC for a consultation.

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HOW DOES PAGA EFFECT EMPLOYERS IN CALIFORNIA?

Introduction

This article provides guidance to employers in understanding and defending against claims brought under California’s Private Attorneys General Act of 2004 (“PAGA), Labor Code § 2699 et seq. Under PAGA, aggrieved employees are allowed to step into the State’s shoes, specifically California’s Labor & Workforce Development Agency (LWDA), to bring legal actions against employers for alleged violations of California Labor Code that would otherwise, absent this statute, be limited to the LWDA. It is a unique mechanism through which employees can file suit on behalf of other similarly situated “aggrieved” employees without bringing claims as class actions, which can be a very unwieldy and difficult legal process.

PAGA Claims and Penalties

The potential recovery in a PAGA claim can be mindboggling. PAGA divides Labor Code violations into three categories: 1) Serious Labor Code Violations; 2) Health and Safety Violations; and 3) Other Labor Code Violations. If the Labor Code provision underlying the PAGA claim already provides for a civil penalty, then an employee may seek to collect that penalty for themselves and, on behalf of other aggrieved employees. In cases where the underlying Labor Code section does not already provide a civil penalty, the PAGA penalty is equal to $100 for each employee per pay period for the initial violation, and $200 for each employee per pay period for each subsequent violation, of which an aggrieved employee may keep 25% of the penalties recovered.

Moreover, PAGA provides for the recovery of costs and attorney’s fees, which are often a significant percentage of a judgment in such cases, so there is an incentive to settle such claims promptly if they have any merit. While the statute of limitations period is only one year, that merely dictates what the timeline for filing suit is, and doesn’t limit the damages, which continue to run for any violation that is continuing after suit is filed. In other words, if a wage and hour violation continues to run throughout the course of the litigation, then the recovery will be based on the full period starting from when the violation began to when the finding on behalf of the plaintiff is entered. See Williams v. Superior Court of Los Angeles, CASC, DAR p. 6879.

The legislative intent behind the law is to allow employees to bring to light blatant and broad violations of labor laws by unscrupulous employers. The result though has been to punish employers who may not be aware of their requirements under California Labor Code and regardless of how small, technical, or short-lived the alleged violation. All hope, however, is not lost as there are some technical, in addition to factual, defenses available to employers in a PAGA claim.

Defenses to PAGA Claims

Over and above any factual defense the employer may have, PAGA requires employees to notify the LWDA (and the employer) describing the specific provision alleged to have been violated, including the facts and theories to support the alleged violation.  Then, only if LWDA chooses not to pursue a Labor Code violation claim, or issue a citation against the offending employer, is the employee allowed to proceed with the PAGA suit. Because the notice is required before bringing the PAGA claim to court, a PAGA claim can be dismissed outright if the notice is deficient. In other words, if an employee fails to provide proper notice to the LWDA or fails to file the PAGA claim within the one-year statute of limitation period, then the PAGA case will fail. Additionally, although no specific defenses to this statute are set forth in the law itself, normal defenses to claims of underlying alleged violations of the Labor Code are available. Click here for the notice requirements.

Unfortunately, both the California Supreme Court and the Ninth Circuit Court of Appeals have ruled that PAGA claims may not be waived as a part of an employment arbitration agreement. See Smigelski v. PennyMac Financial Services, Inc., CA3. On the positive side, it is settled in the California courts that the nonparty employees who were included as other “aggrieved” employees, as well as the State (LWDA), are bound by judgments in PAGA claims. In other words, if the original plaintiff settles or obtains a judgement, or there is a dismissal with prejudice, the facts may not be re-litigated by any of the parties. See Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (2009) 46 Cal. 4th 993.

Conclusion

It is imperative, though, that an employer consult our experienced Employment Litigation Defense Attorneys if they have any questions about compliance with California Labor Code or if they receive notice of a PAGA claim in any form. By far, an employer’s best defense in avoiding significant exposure under a PAGA claim is to regularly review and update internal policies, handbooks and procedures, to ensure their business practices comply with the ever-changing California employment and labor laws. The sooner our experienced Attorneys at Gehres Law Group get involved, the more likely we will be successful in assisting your Company in avoiding the worst possible outcome. Contact us today for a complimentary consultation.

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Corporate Leaders’ Duty of Loyalty and Conflicts of Interest in California

This article outlines the duty of loyalty imposed on corporate leaders, how the business judgment rule provides protection against liability for directors if they act with reasonable care, and how conflicts of interest should be handled by corporate leaders.

I. Duty of Loyalty

California law imposes certain fiduciary duties on officers and directors of a corporation, duties which are owed to the corporation’s shareholders and to the corporation itself. One such duty is referred to as the duty of loyalty, which requires that officers and directors act in the best interests of the corporation and its shareholders. Any breach of this duty by corporate leaders exposes them to civil liability, and can expose them to criminal charges as well, depending on the circumstances.

Guidance on how to interpret this duty of loyalty is provided by the California Corporations Code, which provides, in part, that a director of a corporation operating in California has a duty to act “in good faith…in the best interests of the corporation and its shareholders,” with a level of care, “including reasonable inquiry, that an ordinarily prudent person in a like position would use.” Cal. Corp. Code § 309(a). See also Small v. Fritz Companies, Inc., 132 Cal.Rptr.2d 490, 499 (2003).

II. Conflicts of Interest

Self-dealing, such as when an officer or director has a conflict of interest with the corporation and acts in his or her own interest, and against the corporation’s interests, is a frequent example of a breach of the duty of loyalty. California law states that an interested director can avoid violating the Corporations Code if he or she discloses to the other directors the material facts of any transaction in which they have a conflict of interest, and a majority of the non-conflicted directors approves the transaction. Cal. Corp. Code § 310. It is important to note that the fact that a conflict of interest is present does not prevent a director from fulfilling his or her obligations to the corporation, but the director should act with the utmost candor concerning the facts of such transactions and abstain from voting on such matters.

III. Business Judgment Rule

Where a conflict of interest is alleged to have occurred, the business judgment rule will often come into play as well. Courts will not typically intervene in corporate decisions if the decision-makers acted in good faith and with the reasonable belief that their actions were in the corporation’s best interest. However, pursuant to long-standing legal precedent, this protection is NOT extended to corporate officers, who must act with a higher level of prudence and should carry adequate insurance to protect against the possibility of civil liability being imposed for their business decisions. See Gaillard v. Natomas Co., 208 Cal.App.3d 1250 (1989)

For further discussion on the business judgment rule, both statutory and common law, see our article:How Does the Business Judgement Rule Protect Corporate Executives?

Summary

In determining whether a decision-maker has violated his or her duty of loyalty or otherwise engaged in conduct for which legal action may be instituted, the interplay between the various legal duties and protections often involves a complex analysis in applying the law to the facts of each case. As such, it is important to reach out to an experienced business attorney to assess such situations. The trusted team of lawyers at Gehres Law Group, P.C. has the expertise to advise corporations of all sizes on such matters. Contact us today for a complimentary consultation.

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PROTECTING PERSONAL ASSETS AGAINST LIABILITY FOR BUSINESS DEBTS IN CALIFORNIA

Although no business owner ever wants to consider the likelihood of being sued for unpaid business debts, breach of contract, or damages caused by their employees, business activities, or the like, these events do happen. What’s more, if businesses do not plan properly, owners may become personally liable for the debts of the business. This article discusses some ways to avoid personal liability in the unfortunate case that a business’s activities results in litigation.

The business attorneys at Gehres Law Group often recommend a three-pronged approach to aid clients in ensuring they are protected from personal liability for their company’s debts. The first step is to make sure that the business itself is structured as a business entity that protects and separates personal assets/liability from business assets/liability. The second step is to enter into agreements in a manner which will limit a business owner/officer/director’s personal liability. As a final step, obtaining appropriate insurance coverage, over and above what is required by law, that covers common business risks in the company’s specific industry, is also important in controlling personal liability exposure.

BUSINESS ENTITY CONSIDERATIONS

If you’re operating a business as a sole proprietorship, you and your business are, from a legal perspective, the same entity. That means that you personally, in addition to being entitled to the income of the business, are liable for all of your business debts. It also means that all, or most, of your personal assets can be attached, or considered for collection, by your creditors. Likewise, in a general partnership each partner is personally liable for 100% of the business’s debts. Therefore, if there aren’t enough business assets to pay the partnership’s debts, and your partner is broke, creditors can come after your personal assets to pay all of the business’s debts, not just your pro rata share of the debts.

On the other hand, if your business is formed as a corporation or LLC, you and your business are separate legal entities. As such, assuming that you do not otherwise expose yourself to personal liability, and your corporation or LLC is properly formed and maintained, you would have no personal liability for the debts of the business, even if the business can’t pay them. Our highly experienced San Diego Business Attorneys can assist you in determining not only the best type of entity structure for your specific needs, but also in preparing your corporate and other legal documents in a manner which provides you with maximum protection against personal liability for business obligations.

Maintaining corporate compliance once an entity is formed is also critical, such as preparing annual corporate minutes, ensuring the entity is adequately capitalized as required by the California Corporations Code, as well as addressing other compliance issues is also critical to ensure business owners are well protected. See our related articles on this topic here and here.

ENTERING INTO AGREEMENTS ON BEHALF OF YOUR BUSINESS

Once you have settled on the proper structure of your business ventures, it is important to also be cognizant of potential situations where your actions might undermine the protection you have tried to maintain by that formation against personal liability for the business’s debts.

One way that you may inadvertently waive your right to personal liability protection is to sign a personal guarantee for a business loan or line of credit. Any debt that you obtain using this method is yours personally should your business assets not be sufficient to satisfy the debt.

The next way that you might unknowingly expose your personal assets to attachment for business debts is by signing a contract or agreement in your personal name versus on behalf of the Company. For example, John Smith, who is President of ABC Corporation, would need to sign John Smith, President, on any documents related to the business/corporation when he is representing that business. If he simply signs John Smith, without including his capacity as an officer or agent of the Company, he may have just set himself up for personal liability for that debt. Seems harmless, but it could be an expensive mistake.

An additional way for a business owner/officer to subject themselves to personal liability is to use personally owned collateral or credit cards (not in the business’s name) to underwrite or accumulate debt on behalf of the Company. It is very important to remember not to comingle personal assets and debts with business debts.

Finally, along these same lines, if a business owner personally misrepresented or lied about any facts when applying for a loan or credit on behalf of the corporation or LLC, they could be held personally liable for the debt, as well as potential personal exposure for fraud, both civil and criminal. Also, as touched on previously, if a business fails to maintain a formal legal separation between the business’s and the owner/officer’s personal financial affairs, creditors will likely try to have a court hold those owners/officers personally responsible for the business’s debts under a theory known as “piercing the corporate veil.”  

INSURANCE CONSIDERATIONS IN PROTECTING THE ASSETS OF THE BUSINESS AND THE OWNERS/OFFICERS

Over and above the necessity to ensure that a business entity is complying with both statute and contract by maintaining the required insurance coverage, such as workers compensation, vehicle coverage, general liability, including “acts and omissions” when appropriate, and property (real and business). An umbrella policy is often a good choice when underlying liability insurance may not be enough to cover a catastrophic loss or claim. This provides an added layer of protection for your company, and potentially the owners/officers if there is an attempt to obtain personal liability against them for the company’s debts.

Along those lines, obtaining a management liability policy could be invaluable for the following types of situations: 1. Directors and officers — basically this protects directors and officers, as well as the business entity, when there are allegations that their decisions resulted in the mismanagement of the company, causing a loss to others. 2.  Employment practices liability —coverage that protects the directors, officers and the entity when there are allegations of discrimination, harassment and failure to promote and similar employment legal issues. 3. Fiduciary liability — If an officer or director acts in a role for example, the entity’s investment advisory board and there is a loss for the investors or employees, as in the case of a 401(k) plan, this type of insurance generally operates to protect the plan fiduciaries when there are allegations that they failed to fulfill their duties to the plan participants, assuming that there was no fraudulent intent or gross negligence.

In summary, taking steps to limit personal liability when starting and running a business provides peace of mind for a business owner and it is vital to consider at the beginning of the business cycle. Our San Diego Business Attorneys can discuss your concerns and options with you as well as assist you in setting up and maintaining your business entity in a manner designed to ensure the least amount of personal financial exposure possible in your circumstance. Contact us today for your complimentary consultation.

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ISSUES OF FRAUD IN BUSINESS CONTRACTS

Contracts are the foundation that businesses, small or large, depend on daily to carry out their mission.  Most businesses exist by virtue of contracts, agreements of mutually dependent promises and obligations such as partnership agreements, articles of incorporation and shareholder agreements, limited liability operating agreements, service agreements, licensing agreements, and many others.  Businesses hire their employees by contract, or quasi contract, either in writing or orally.  And, of course, business suppliers and customers supply and purchase in conjunction with purchase and sales orders/contracts.  So, it is not surprising that business litigation, for the most part, is centered on the interpretation and enforcement of these agreements, and the recovery of damages for alleged breaches of contract, issues of their formation, or execution of the duties under these agreements. 

As a major subset of contract law are cases where fraud is alleged, either in the formation of a contract or later in the delivery and execution of the terms of the contract–or, in some cases, where an agreement doesn’t rise to the level of a contract, but fraud in the inducement is present. In essence, “fraud” is present when there is dishonesty or deception at some point in the business relationship which is material to the terms of the contract or transaction. Experienced business litigation lawyers know that, when suing for compensation for breach of contract, the addition of legitimate fraud claims can make their client’s case much stronger, especially from a damages perspective. 

In California, for example, to prove a fraudulent inducement claim, a plaintiff must prove the following elements:

• At least one misrepresentation — false statement — was made or at least one important (material) fact was concealed by the defendant, or their agent;
• The falsity/concealment was known to the defendant, or their agent, at the time it was made;
• The party making the false statement made the false statement in order to induce the other party to enter into the contract;
• There was justifiable or reasonable reliance by the other party; and,
• No contract would have been entered into had the truth been known.

The Law of Damages for Breach of Contract vs Damages for Fraud

Breach of Contract:

When contract disputes cannot be resolved by negotiation, our San Diego business lawyers often find themselves having to file or defend lawsuits for breach of contract.  California Civil Jury Instruction 350, which is used by California courts to instruct juries in such cases, provides a good summary of the types of money damages which may be awarded for breach of contract:

350. Introduction to Contract Damages

If you decide that [name of plaintiff] has proved [his/her/its] claim against [name of defendant] for breach of contract, you also must decide how much money will reasonably compensate [name of plaintiff] for the harm caused by the breach. This compensation is called “damages.” The purpose of such damages is to put [name of plaintiff] in as good a position as [he/she/it] would have been if [name of defendant] had performed as promised.

To recover damages for any harm, [name of plaintiff] must prove that when the contract was made, both parties knew or could reasonably have foreseen that the harm was likely to occur in the ordinary course of events as result of the breach of the contract.

[Name of plaintiff] also must prove the amount of [his/her/its] damages according to the following instructions. [He/She/It] does not have to prove the exact amount of damages. You must not speculate or guess in awarding damages.

Notably, as our contract lawyers or business attorneys can tell you, contract damages are limited to compensating for harm which the parties knew or could reasonably have foreseen.

Damages in Fraud Claims Cases:

There are various types of fraud in law, however the principal statute that applies to business contracts is set California Civil Code section 1572, which provides:  

Actual fraud, within the meaning of this Chapter, consists in any of the following acts, committed by a party to the contract, or with his connivance, with intent to deceive another party thereto, or to induce him to enter into the contract:

1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

2. The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

3. The suppression of that which is true, by one having knowledge or belief of the fact;

4. A promise made without any intention of performing it; or,

5. Any other act fitted to deceive.

Fraud is also considered a Tort (a civil wrong that can be found even if a “contract” is not found to exist), and the general “tort” measure of damages is set forth in California Code of Civil section 3333, which provides:

For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.

The difference between alleging a breach of contract or the tort of fraud is significant under California law since punitive damages are allowed under tort law whereas they are not under contract law and, in addition, the damages do not have to have been foreseeable.

See California Civil Code Section 3294, which provides, in part:

Exemplary damages; when allowable, definitions

(a) In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.

…

(emphasis added).

This opportunity to plead and prove punitive damages, which are typically a percentage of the defendant’s revenue or profits, and meant to punish the defendant, can provide significant leverage for a business litigation lawyer to negotiate a larger settlement on behalf of their client.

If you believe that your business may have been the subject of a fraud, or if you are being sued for fraud, contact our experienced business litigation lawyers today to assist you. There is no charge for an initial evaluation of your case.

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PARTNERSHIP DISPUTES AND HOW TO AVOID THEM

Our San Diego business lawyers have previously written about corporate governance and compliance issues and the many benefits to business owners of addressing their Company’s corporate compliance.  In this article, we focus on another reason to engage in best practices when it comes to corporate governance—Partnership Disputes and How to Avoid Them.

Many clients contact our business litigation attorneys after a dispute arises. When that happens, the costs and stress of resolution, including possible litigation, can mount. Here are some relatively simple and cost-effective measures to help you avoid a partnership dispute down the road.

Planning to Avoid Partnership Disputes

As an initial matter, if you have either no agreement, or one that is silent about how, where and when disputes are resolved, you and your partners will be left to resort to the remedies and relief offered by the various California statutes and case law that govern partnerships in this State. Unfortunately, in most cases, the relief and remedies provided by statute are relatively weak, “one size fits all” provisions designed to provide a minimum standardized set of rules. In contrast, our business law attorneys are adept at preparing customized remedies and processes you and your partners can agree to from the outset, those which clearly define how you want the business to operate and how you will resolve any disputes which may arise. If the partners haven’t agreed to such terms beforehand, then once there is a disagreement, resolution is often hard to come by and costly litigation is more likely. Therefore it is imperative that you plan ahead for disputes.

As we all know, most relationships between people, whether family, friends or business partners, will involve disagreements now and then. It is a reality that is easy, but potentially expensive, to overlook in business. If business owners accept this reality and commit to determining how partnership disputes will be resolved from the outset, they will be driving the train and not vice versa. For instance, the partners should discuss the possibility of including mediation or arbitration provisions in their governing documents, whether that includes an Operating Agreement, Partnership Agreement, Shareholder Agreement, a Buy Sell Contract, or a combination of governing documents. Mediation and arbitration are typically far more cost-effective options than litigation. Without mandating this resolution in a dispute in governing/formation documents there will be no requirement for the parties to engage in alternative dispute resolution.

Other important issues to discuss in the planning phase include what will happen in the event one of the key owners becomes unable to perform his or her obligations to the business partnership, or decides to sell their interest in the business. If your business’ controlling documents don’t provide a roadmap to address these and other common issues, then you could end up with a new partner in the business that you can’t work with, don’t want to work with, or even worse, one who’s interests are not aligned with the well-being of the business. Many business partnerships have failed because of completely foreseeable events simply because the partners did not plan for worst case scenarios.

One additional consideration your business law attorney may recommend that you address includes how to value shares or partnership interest in the company. The governing documents can be very detailed at assisting partners in determining how their interests will be valued when it comes time to sell or transfer them, without having to resort to a lawsuit. This could include language providing non-selling partners, or the partnership itself, with a right of first refusal to purchase a selling partner’s interest.

Hiring an Experienced Business Law Attorney to Avoid Partnership Disputes

Once you have started thinking about and discussing your options for addressing your partnership issues, it is in your best interest to hire an experienced business law attorney to help you reduce your agreements to writing, in order to ensure they are legally enforceable and meet your company’s particular needs. The key to lasting continuity of your company’s operations, and its continuing success, often lies in well-drafted legal documents, from Partnership Agreements, Operating Agreements, Shareholders Agreements, Buy/Sell Agreements, or other documents as your company’s needs dictate.

Then, if disputes arise, as they often do, the partners can look to these documents for guidance; they should inform the owners of the process by which they are bound to resolve their disputes, for example mediation and arbitration, as we previously referred to. Our business law attorneys usually do recommend mediation provisions, at a minimum, as well as language that permits the prevailing party to recover their attorney’s fees and costs in the event of a dispute. Without them, potentially destructive litigation is often the result.

In summary, planning ahead for partnership disputes is what business lawyers are trained and experienced in handling. Put our experience and knowledge to work for you and let us help you avoid a costly partnership dispute. Feel free to contact our business lawyers for a free evaluation or browse our website for more information.

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