California’s New Overtime Exempt Minimum Increases to $41,600 and Minimum Wage Set to Increase to $15 per Hour

Many of our business clients are still adjusting to the new California minimum wage, which increased to $10.00 per hour as of January 1, 2016. This state-wide increase has also resulted in a surge in the annual amount California employees must earn to satisfy the “salary test”—the first of two prongs in the test to determine whether an hourly employee is exempt from applicable overtime laws–to $41,600 annually. If both prongs of the test are met, then the employee may be paid a flat salary, without overtime pay. For information on the various exempt classifications which set out the requirements for the second prong of thetest, called the “duties test”, click here.

Failure to pay overtime pay to an employee who does not qualify as exempt can be costly, even if the employee works just an hour of overtime per day. Say an employer mistakenly misclassifies an hourly worker as exempt from overtime.If that misclassified employee works just an extra 60 minutes per day at $40,000 a year, he or shewill accrue an overtime amount due of $7,500 per year. Given that California law permits employees to reach back four years under the applicable statute of limitations, an employer’s liability for just one misclassified employee could reach $30,000 over four years for this one hypothetical worker.

If the same mistake is repeated for other employees, an employer could face a potentially devastating judgment against them for overtime pay owed, not to mention the costs of defending such a claim. The applicable statutes provide for a recovery of attorneys’ fees and costs from an employer if an employee prevails on an overtime claim, which: a) provides ample incentive for employees and attorneys to pursue such claims, resulting in a proliferation of such claims against employers; and, b) significantly heightens the exposure of employers to liability.

Minimum Wage Increases Yet to Come

As one of our employment law attorneys discussed in a previous article titled, Economic Justice or Economic Devastation: What Does the Proposed Minimum Wage Hike to $15 an Hour Mean to Your Business?, a recent bill signed into law by California Governor Jerry Brown will continue to raise the state minimum wage until it reaches $15 per hour. The potential cost to employers for misclassifying a worker makes it imperative that employers remain informed as to any corresponding increases to the “salary test” amount for determining exemption from overtime pay as the minimum wage rate continues to escalate under this law.

The additional increases to the minimum wage for employers who employ 26 or more employees are:

1. On January 1, 2017, the minimum wage will increase to $10.50 per hour.
2. On January 1, 2018, the minimum wage will increase to $11 per hour.
3. On January 1, 2019, the minimum wage will increase to $12 per hour.
4. On January 1, 2020, the minimum wage will increase to $13 per hour.
5. On January 1, 2021, the minimum wage will increase to $14 per hour.
6. On January 1, 2022, the minimum wage will increase to $15 per hour.

There is a short respite for employers with fewer than 26 employees; the scheduled increases are delayed at each step by one year for such employers.[1]

Conclusion

Given that overtime claims have continued to proliferate, it is critical for business owners of all sizes to ensure they are compliant with applicable overtime laws. Whether you are an employer or an employee, the attorneys at Gehres Law Group have the knowledge and experience to assist in protecting your employment law interests. Contact us for a complementary evaluation to discuss how we can help, or browse our website for more information.

[1] This article does not discuss minimum wage laws applicable to public employers, which must abide by a more complex set of rules than private employers.

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California’s “Good Faith Settlement” Law: An Example From a Recent Case

Lawsuits are expensive, as we all know, and as experienced business law litigators, we frequently find ourselves advising our business clients to settle their claims, usually at some reduced value, rather than pursue expensive, distracting litigation.  But sometimes, even where your adversary is willing to agree to pay a reasonable settlement amount, filing a lawsuit may be advantageous.  One reason for doing so, as we have discussed in a prior article on this blog, (“Suing for an Enforceable Settlement”), is that once you have lawsuit on file, you can secure any settlement involving payment over time with a stipulated Judgment which, if payment is not made as promised, you can immediately move to enforce.

Another reason for preferring a lawsuit, whether you are a plaintiff or defendant, is to take full advantage of California’s “Good Faith Settlement” statute, Code of Civil Procedure Section 877.6, (CCP § 877.6).  This statute provides a procedure to assure a settling party that they will not be dragged back into litigation on indemnity or contribution claims by another party sued for the same claim.  From the plaintiffs’ prospective, this can help encourage defendants to settle, knowing that they can be relieved of possible cross-claims for indemnity by Court order affirming their “good faith” settlement.  From the defendant’s point of view, likewise, it allows for certainty that they will not be dragged back into the matter by a non-settling party.

CCP § 877.6 applies both to contract and tort claims, as is clear from the initial paragraph of the statute:

a)(1) Any party to an action in which it is alleged that two or more parties are joint tortfeasors or co-obligors on a contract debt shall be entitled to a hearing on the issue of the good faith of a settlement entered into by the plaintiff or other claimant and one or more alleged tortfeasors or co-obligors, upon giving notice in the manner provided in subdivision (b) of Section 1005. Upon a showing of good cause, the court may shorten the time for giving the required notice to permit the determination of the issue to be made before the commencement of the trial of the action, or before the verdict or judgment if settlement is made after the trial has commenced.

The effect of a finding of “Good faith settlement” is set forth in paragraph 2(c) of the statute:

1. c) A determination by the court that the settlement was made in good faith shall bar any other joint tortfeasor or co-obligor from any further claims against the settling tortfeasor or co-obligor for equitable comparative contribution, or partial or comparative indemnity, based on comparative negligence or comparative fault.

A REAL LIFE EXAMPLE:

THE PEST CONTROL COMPANY SETTLEMENT

Our firm was recently approached by a husband and wife who were traumatized when an employee working for a pest control fumigation company was found to have engaged in lewd acts in their bedroom, captured in ugly detail on their home security camera.  They felt violated and fearful, and wanted compensation and retribution, but also desperately hoped to avoid the embarrassment and public spectacle of a lawsuit on such sensitive matters.  We agreed to take the case.

Aside from the deviant employee, there were two separate pest control companies potentially liable to our clients, i.e. the prime contractor and a subcontractor.  The prime contractor (Company “A”) was eager to settle promptly, while the subcontractor (Company “B”) was stubbornly refusing to make any significant settlement offer.  Both Company “A” and Company “B” had potential liability for negligence, and if they were both found liable for negligence after trial they would be considered “joint tortfeasors”, and would be entitled to have their liability apportioned based on their proportionate degree of fault.  Thus, if our clients’ damages were found to be $150,000, and both company “A” and “B” were found equally liable, and they both were solvent, they would each have to pay $75,000; and if one paid more than $75,000, they would be entitled to pursue the other to contribute their fair share.

Company “A”, as noted, wanted to settle promptly. We finally agreed to accept their offer, in a significant compromise of our initial demand, based on some strong technical defenses they had as the prime contractor not responsible for the subcontractor’s employee.  But Company “A” also wanted,as part of the settlement agreement, a guarantee that, after paying that settlement, they would not be dragged back into litigation on a cross-complaint for indemnity, if and when we actually filed suit against Company “B”.  This was a problem because, without a “good faith settlement” ruling by a Court, we could not guarantee that Company “B” would not later come after Company “A” to indemnify Company “B” for any liability they might incur.  Since we had not yet filed a lawsuit, we could not get a “Good Faith Settlement” ruling from any Court.  And our clients strongly preferred, if at all possible, to settle with both Company “A” and Company “B” without filing a lawsuit, which is a matter of public record.  This complication delayed our settlement negotiations with Company “A” for several weeks, but we finally convinced them to settle without the finding of “Good Faith Settlement”.

It should be noted, however, that even though we refused to make our settlement with Company “A” contingent on a finding of “Good Faith Settlement” under CCP § 877.6, Company “A” could still ask a Court for such a finding, if and when a lawsuit was filed and Company “B” brought them in on a cross-complaint.  As a practical matter, moreover, the Courts tend to be very lenient in finding that settlements have been made in good faith under CCP § 877.6.  If we had ultimately pursued a lawsuit against Company “B”, and they cross-complained against Company “A”, the very strong likelihood is that Company “A” would prevail on having that cross-complaint dismissed on a finding of “Good Faith Settlement” under CCP § 877.6.

CONCLUSION

The protections afforded settling parties under CCP § 877.6 are very significant and must be considered when determining settlement strategy in any matter which may involve multiple wrongdoers/possible defendants.  The statute applies both to tort and contract claims, including many tort and contract claims which arise in the business context.  A knowledgeable business litigation attorney can help your business evaluate the best strategy for settling such claims, whether you are the claimant or the target of the claim.

At the Gehres Law Group, our litigation attorneys are knowledgeable and experienced in such matters, and we look forward to helping you and your business.Contact us today for a complementary evaluation.

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GUARDING AGAINST PERSONAL LIABILITY FOR RENTAL PROPERTY OWNERS IN CALIFORNIA

Big rewards can be reaped by owning investment properties, but so too can big risks. One common threat real estate investors wish to avoid is personal liability for judgments resulting from a lawsuit. Even the most conscientious owner may one day find him or herself embroiled in a costly legal battle. While it is impossible to prevent lawsuits from being filed—from slip and fall claims to dog bites, environmental contamination claims, and many others–it IS possible for investors to mitigate the costs of such perils. Some of the more common methods of limiting such threats are explored in this article.

Never Hold Investment Property in Your Own Name

Smart investors know that owning rental property in their own name is not the wisest choice when the threat of personal liability is involved, as istypicallythe case with investment properties. It is critical to form and maintain a separate entity to hold title to the properties. While there are many options for holding real estate, including corporations, general and limited partnerships, and limited liability companies (“ LLC’s”), LLC’s are often the preferred choice for a variety of reasons.

A general partnership does nothing, by itself, to protect the owners against personal liability. In contrast, limited partnerships do provide such protection, but only to the limited partners. All limited partnerships must have at least one general partner who is exposed to personal liability for partnership obligations. Although the general partner may be an LLC or C Corporation, this is a more costly method for guarding against personal liability than using an LLC or C Corporation to hold the property since multiple entities must be formed and maintained. However, in some instances, such as when annual revenues exceed $250,000.00, a limited partnership may very well be the best option for investors, in order to avoid the annual LLC fee and franchise tax[1] imposed by the state of California.

For individual investors who anticipate annual revenues below this threshold, a limited partnership is not as attractive as an LLC, which protects all its members against personal liability for company obligations, including lawsuits and judgments, and is generally less expensive to set up and maintain than multiple entities or a C Corporation. LLC’s also have the advantage of avoiding the double taxation which comes with owning a C Corporation.

Many small real estate investors also hold real estate in a trust. Although living trusts are very useful for succession planning and may help protect an owner’s privacy, such trusts do not protect the owner from liabilities arising from ownership of the property, which is the focus of this writing. However, setting up a trust in conjunction with an LLC to hold real estate should be considered since it does add value to the owner in most instances.

What if You Own Multiple Rental Properties?

Real estate investors who own more than one rental property often ask our business law attorneys whether they should hold each of their properties in one LLC, or form a new LLC for each property they own. Although each set of circumstances is unique, our lawyers often advise forming an LLC for each property the client owns.

Here’s why: If someone is injured on just one of the properties owned by an LLC and thereafter sues the company, all of the assets held by the LLC are at risk to satisfy any resulting judgment. For example, ifan LLC owns three properties with estimated values of $500,000.00 each, that’s $1.5 million in assets put at risk by a lawsuit arising from any of the properties, making the LLC a more attractive target to litigants and needlessly exposing all three properties to liability in a lawsuit. By contrast, if each property were held by a separate LLC, only the property held by that particular LLC is generally put at risk, assuming there are no grounds for the injured party to argue that the companies were not properly set up and maintained.[2]In the first example, if a litigant were to obtain a judgment against the LLC, they could place a lien against all three properties until the judgment is satisfied. In the latter situation, where each property is held by a separate LLC, only the property owned by that LLC could be encumbered. As is obvious from this example, the benefit of forming separate entities for each property increases as the value of the properties held by the companies grows.

Another advantage of holding multiple properties in separate LLC’s involves a situation where the investor wishes to obtain a loan against one of the properties. Banks and other lenders often find the prospect of lending to an LLC which owns multiple properties less attractive than separately owned properties since their secured interest (the property being borrowed against) has much more exposure to liability than if they were held separately. In such instances, lenders will often seek a secured interest against all of the properties held by the LLC to ensure their interest in being repaid is well protected.

Conclusion

Owning investment property can indeed be very rewarding. However, smart investors know there are perils to consider before deciding on how to hold such property. With some thoughtful preparation and educated decision-making, investors can reap the rewards of their investment efforts while guarding against the risks.

At Gehres Law Group, P.C., our business law attorneys generally recommend a three pronged approach to limiting personal liability for activities related to investment properties. This approach includes: a) forming an entity or entities to hold title to the properties as discussed above; b) preparing well-drafted contracts in order to shift the burden of any threats to others where possible; and, c) obtaining sufficient liability insurance.

For more information, browse our website, call us locally at (858) 964-2314 or toll free at (877) 333-2420, or contact the author of this article at info@gehreslaw.com.This article does not constitute legal advice, nor does dissemination of this information, which we offer as a courtesy to our users and clients, by itself, establish an attorney-client relationship.

[1]Franchise taxes and fees imposed on LLC’s in California (in addition to any income tax withholding): $800 for LLCs with total gross income of less than $250,000; $1,700 for LLCs with total gross income of at least $250,000 but less than $500,000; $3,300 for LLCs with total gross income of at least $500,000 but less than $1,000,000; $6,800 for LLCs with total gross income of at least $1,000,000 but less than $5,000,000; $11,790 for LLCs with total gross income of $5,000,000 or more.

 

[2]See our article on Piercing the Corporate Veil: Avoiding Personal Liability for Company Debts at http://ift.tt/2cISIAw for more information on the importance of setting up and maintaining an entity properly in order to avoid personal liability for company debts.

 

 

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YOU CAN STOP TRADEMARK INFRINGMENT

You have gone through the painstaking process of starting a business, developing a brand for your business, namely, your business’ trademark, invested significant time and resources into this development, and suddenly you discover another business is using your exact trademark or a similar one. What can you do?

What are the Elements of a Trademark Infringement Claim?

When a competing business is using an established trademark or a confusingly similar one, that business is engaging in unlawful trademark infringement.  Because branding is such an important part of a business’ identity to consumers, the law provides a venue for trademark owners to seek recourse against infringers.  A trademark owner who believes its trademark is being infringed may file a civil lawsuit in either state court or federal court for trademark infringement, depending on the circumstances.  In most cases, trademark owners choose to file federal infringement cases. To support a trademark infringement claim in court, the trademark owner must prove:

1) that it owns a valid mark;

2) that it has priority (its rights in the mark(s) are “senior” to the defendant’s rights); and

3) that the defendant’s mark is likely to cause confusion in the minds of consumers about the source or sponsorship of the goods or services offered under the parties’ marks.

When a plaintiff owns a federal trademark registration with the United States Patent and Trademark Office, there is a legal presumption of the validity and ownership of the mark, as well as of the exclusive right to use the mark nationwide on or in connection with the goods or services listed in the registration, which simplifies the owner’s burden of proof in infringement cases.

What Factors do Courts Consider in Determining Whether Infringement has Occurred?

Courts will typically consider evidence addressing various factors to determine whether there is a likelihood of confusion among consumers. The key factors considered in most cases are:

1) the degree of similarity between the marks at issue; and

2) whether the parties’ goods and/or services are sufficiently related that consumers are likely to assume (mistakenly) that they come from a common source.

Other factors courts may consider include: a) how and where the parties’ goods or services are advertised, marketed, and sold; b) the purchasing conditions; c) the range of prospective purchasers of the goods or services; d) whether there is any evidence of actual confusion caused by the allegedly infringing mark; e) the defendant’s intent in adopting its mark; and f) the strength of the plaintiff’s mark.

Remedies for Trademark Infringement

If the trademark owner is able to prove infringement, available remedies include the following:

1) a court order (injunction) that the defendant stop using the accused mark;

2) an order requiring the destruction or forfeiture of infringing items;

3) monetary relief, including defendant’s profits, any damages sustained by the plaintiff, and the costs of the action; and

4) in rare cases, an order that the defendant, pay the plaintiffs’ attorneys’ fees.

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If you believe someone is infringing your trademark, the experienced and dedicated trademark attorneys at Gehres Law Group have the tools to stop this unlawful behavior. We are committed to providing the highest quality services at affordable rates. Contact us for a complementary evaluation. You’ll be glad you did.

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AN ODE TO HONESTY IN BUSINESS PRACTICES

As a trial lawyer, there is nothing I enjoy more than an honest client with a righteous case.  Hallelujah!  So many people use lawyers as henchmen, to bully their enemies and competitors, with lies.  But when I have a client who has been cheated or harmed, and is truly a victim, a victim of lies!!!!….that is the case I want.  That is, usually…a winning case!

 

The truth is powerful.  It is a powerful advantage.

 

But let’s not be too pollyanish. People can and will lie and prevaricate impressively, especially when they are motivated by money, or spite. And liars DO win in Court, often enough, especially if they have the advantage of more money and better lawyers.

 

As they say, “Court is where people go to lie”.

 

But still, I tell you: there is nothing like the truth.  Righteous truth.  Give me the truth, and I don’t care how fancy a lawyer the liar hires…my client will prevail most often.  The truth is powerful, and hard to hide.  It is consistent.  It resonates, and is recognized.  Jurors and Judges can usually feel it intuitively.

 

Life is complicated, of course, and truth is often subtle, or depends on one’s perspective, one’s point of view, or even philosophy.  Rarely, in any rancorous business dispute, is either side completely“innocent” of prevarication.  People are not, by nature, impartial.  They tend to see the world through their own particular lenses, and this is especially so when it comes to a contentious dispute with someone else.  People tend to see the truth and justice in their side of the argument, and are often blind to the other point of view.  But there are liars and then there are LIARS….capital letter LIARS who know they are lying and trying to cheat and get away with it.  As a business owner, YOU KNOW when you have been cheated by a LIAR. As a trial attorney, those are the ones I want to cross-examine!  I like to catch them in their lies; I feel as though it is my contribution to “justice” in my community.

 

Clients don’t like it sometimes, at the beginning of a case, when I tell them they are going to have to testify honestly and reveal harmful information, if questioned, rather than lie.  But I know from experience that there is nothing more harmful to your case than being caught lying.  At the outset of any case, I like to evaluate it impartially, with my client, acknowledging the weaknesses and building a litigation strategy from there: on the bedrock of “the truth” as we know it, and as we can prove it.

 

By: Stephen Lux, attorney at law

Of Counsel for Gehres Law Group, P.C.

 

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If you are looking for a trusted and highly-experienced trial attorney who handles business litigation matters, look no further. The lawyers at Gehres Law Group, P.C. have excellent reputations for integrity in the legal community. Many judges and other attorneys know this, which is a vital benefit to our clients. Contact us today for a complementary evaluation. You’ll be glad you did.

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Purchasing a Business with Seller Financing

It is often the case that a purchaser of a business does not have the resources for a full cash sale and will request that the seller finance some of the purchase price. This can be advantageous for both parties, but requires that the parties consider a number of issues, as we highlight in this article.

Advantages to the Seller

While many sellers are initially reluctant to consider financing the sale of their business due to the risk that the purchaser will not pay as agreed, sellers who do engage in self-financing deals typically find that they can obtain a higher price for their business. In addition, by financing a percentage of the purchase price, a seller increases the pool of potential purchasers, making it easier to locate a buyer for their business. Finally, some sophisticated buyers will refuse to consider the purchase of a business without some level of seller financing because they want the seller to have some “skin in the game”, which indicates to the buyer that the business is viable.

Advantages to the Buyer

The advantages to the buyer are generally more obvious. First, a seller-financed sale permits the buyer to consider purchasing a business valued at a price point beyond their own immediate resources. If the buyer negotiates a reasonable interest rate, they can avoid unattractive sources of financing, such as use of credit cards or lines of credit to purchase the business. Finally, if the buyer is seeking a bank or small business loan to cover some of the purchase price, the lender will often desire seller financing of some percentage of the costs, which indicates to the lender that the seller believes in the soundness of his or her company.

What Terms do Sellers Typically Desire in Exchange for Financing?

While each situation is unique, a seller’s note often carries an interest rate which is at or below current bank rates, depending, in part, on the perceived level of risk or other assurances that the loan will be paid in a timely manner. In addition, sellers will usually require some or all of the following terms as conditions of seller financing:

• Resumption of control of the business for default on the loan;
• Buyer assets as security, such as real estate;
• Buyer’s personal guarantee.

Since the seller’s obligations are typically fulfilled upon execution of a note, his or her greatest concern when providing seller financing is that of the buyer defaulting on the loan. In order to mitigate the impact of such a situation on the seller, he or she will typically wish to include terms permitting him or her to retake control over the business in the case of default by the buyer. This typically occurs within 30 to 60 days of an uncured default. The seller may also require periodic reports from the buyer with regard to the financial stability of the company until the loan balance is satisfied. For companies which utilize a substantial amount of inventory, sellers sometimes seek provisions requiring that the buyer maintain those inventories at or above specific levels.

When it comes to collateral to secure the loan, sellers are typically most interested in using the buyer’s real estate as security, which allows the seller to foreclose on the property in the event of the buyer’s default. However, if the buyer does not own real estate or has little equity in their property, then stocks, inventory or other assets held by the business are all commonly used as security in seller financed transactions. Some seller financed transactions do not include any assets as security, but may include the owner’s personal guarantee, meaning that if the company defaults on the loan, the owner’s personal assets can be reached to satisfy the debt.

Whether any of these or other conditions are required by the seller will often depend on a number of factors, including the relationship between the parties, the amount of financing being provided by the seller, the length of the loan, and the level of risk to the seller if the buyer defaults. If the seller is financing a fairly small amount of the purchase price, which is scheduled to be paid within a relatively short time frame, and the level of risk of default is fairly low, then the seller may simply rely on his or her remedies at law, such as a breach of contract claim, which could be brought if the buyer defaults. This, along with a provision providing that the buyer pay the attorneys’ fees and costs to pursue such a claim are typically quite effective in preventing a buyer from defaulting on a loan. In general, there are many methods which may be utilized to ensure timely payment on the loan.

Common Legal Documents in a Seller-Financed Transaction

Depending on the circumstances, there are several legal documents that should be drafted in a seller financed sale of a business, including:

• Letter of Intent setting forth the preliminary framework for negotiating terms of the sale;
• Purchase or Sales Agreement including the final negotiated terms of the sale;
• Promissory Note;
• Security Agreement or Deed of Trust if real property is used as collateral;
• Any applicable lease or transfer documents, such as vehicle and real estate title documents;
• Bill of sale transferring title of other business assets to the buyer;
• Non-Compete Agreement if not included in the Purchase or Sales Agreement;
• Bulk Sales documents if inventory is included in the sale; Click here for information on California Bulk Sales Laws;
• IRS Form 8594;
• Employment Agreement if owner remains a consultant or employee of the company following closing of the transaction.

Conclusion

In summary, buyers and sellers both stand to benefit from seller financing. However, it is important for each party to retain experienced business lawyers to assess their situation independently and advise them on how to best protect their interests in such transactions. Even for a simple sale without security, there are many issues to consider which an experienced professional can identify and address. Don’t go it alone, our trusted and knowledgeable business attorneys offer a complementary evaluation for most legal services and work diligently to protect each clients’ interests. Contact us today, you’ll be glad you did.

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When Must an LLC Membership Interest be Registered as a Security in California?

Most business owners and investors refer to corporate stock when discussing “securities”. However, other types of ownership interest fall under the definition of securities pursuant to California law, including a membership interest in a limited liability company (“LLC”). However, not all LLC membership interests fall within the definition of a security, in which case registration of the interest is not required in California. Therefore, it is important to understand if and when your LLC’s interests are subject to registration requirements.

California Corporate Securities Law

The California Corporate Securities Law, § 25019a “security,” in relevant part, as follows:

“‘Security’means any note; stock; treasury stock; membershipin an incorporated or unincorporated association; bond; debenture;evidence of indebtedness; certificate of interest or participation inany profit-sharing agreement; collateral trust certificate;preorganization certificate or subscription; transferable share;investment contract; vertical settlement contract or a fractionalizedor pooled interest therein; life settlement contract or afractionalized or pooled interest therein; voting trust certificate;certificate of deposit for a security; interest in a limited liability company and any class or series of those interests(including any fractional or other interest in that interest), except a membership interest in a limited liability company in which the person claiming this exception can prove that all of the members are actively engaged in the management of the limited liability company…” [Emphasis Added].

A plain reading of this Section of the statute makes it clear that an LLC membership interest is indeed a security, making it subject to registration with the state, unless ALL of the members of the LLC are actively engaged in the management of the LLC. Therefore, where an LLC is manager-managed and not member-managed, or where some, but not all, of its members manage the company, registration of its securities is mandatory.

California Commercial Code

In additional to the Corporate Securities Law, the California Commercial Code also governs whether a membership interest in an LLC is treated as a security. Section 8103(c) of the Commercial Code provides:

“An interest in a partnership or limited liability company isnot a security unless it is dealt in or traded on securitiesexchanges or in securities markets, its terms expressly provide thatit is a security governed by this division, or it is an investmentcompany security. However, an interest in a partnership or limitedliability company is a financial asset if it is held in a securitiesaccount.”

Most LLC’s which operate as a small or family-owned business will not be required to register their membership interests as a security. However, it is important to consider both the Corporate Securities Law and the Commercial Code when determining whether your LLC is subject to registration with the state of California in order to avoid potential penalties and/or legal action by investors.

California Securities Exemption Pursuant to Corporations Code §25102(f)

If the membership interests in an LLC are subject to registration in California because they fall within the definition of a “security” under the Corporate Securities Law, most will qualify for an exemption from federal registration because the interests are not issued through a public offering. In addition, such an issuance will typically qualify for a securities exemption in California under Corporations Code §25102(f). This Section of the Corporations Code provides:

“Any offer or sale of any security in a transaction (other thanan offer or sale to a pension or profit-sharing trust of the issuer)that meets each of the following criteria:

(1) Sales of the security are not made to more than 35 persons,including persons not in this state.

(2) All purchasers either have a preexisting personal or businessrelationship with the offeror or any of its partners, officers,directors or controlling persons, or managers (as appointed orelected by the members) if the offeror is a limited liabilitycompany, or by reason of their business or financial experience orthe business or financial experience of their professional adviserswho are unaffiliated with and who are not compensated by the issueror any affiliate or selling agent of the issuer, directly orindirectly, could be reasonably assumed to have the capacity toprotect their own interests in connection with the transaction.

(3) Each purchaser represents that the purchaser is purchasing forthe purchaser’s own account (or a trust account if the purchaser isa trustee) and not with a view to or for sale in connection with anydistribution of the security.

(4) The offer and sale of the security is not accomplished by thepublication of any advertisement. The number of purchasers referredto above is exclusive of any described in subdivision (i), any officer, director, or affiliate of the issuer, or manager (as appointed or elected by the members) if the issuer is a limitedliability company, and any other purchaser who the commissionerdesignates by rule. For purposes of this section, a husband and wife(together with any custodian or trustee acting for the account oftheir minor children) are counted as one person and a partnership,corporation, or other organization that was not specifically formedfor the purpose of purchasing the security offered in reliance uponthis exemption, is counted as one person. The commissioner shall byrule require the issuer to file a notice of transactions under thissubdivision…”

 

Our business law attorneys will provide more information on this California exemption in future articles. For purposes of this writing, it is important to note that while this exemption will apply to most LLC’s, it does not relieve an LLC from the requirement to register their securities. Rather, a Limited Offering Exemption Notice (“LOEN”) must be filed with the California Department of Corporations within 15 days of the issuance of such securities in order to avoid potential penalties from being assessed by the state.

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The business and commercial law attorneys at Gehres Law Group advise and represent clients on a vast array of laws affecting businesses in California. If you are a business owner, contemplating a new business idea, or have questions about a California company, contact us today for your complimentary evaluation, or feel free to browse our website.

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CALIFORNIA’S REAL ESTATE TRANSFER DISCLOSURE STATEMENT

If you are selling or leasing your home, you must comply with the Real Estate Transfer Disclosure Law. That law requires that sellers provide the prospective buyer with a Real Estate Transfer Disclosure Statement (“TDS”). The obligation to provide a prospective purchaser with a TDS is imposed on all owners of real property who enter into contracts to sell, exchange or lease residential property. The residential property subject to this requirement is residential property “improved with or consisting of not less than one nor more than four dwelling units.” California Civil Code §1102 (a). The statute also applies to mobile homes and manufactured homes, as well as to typical residential structures. See California Civil Code §1102 (b).

Specific Requirements of a Real Estate Transfer Disclosure Statement

Section I of the TDS simply requires the seller to provide the buyer with copies of any reports of inspections conducted on the property. Section II of the TDS that the seller make certain representations to the buyer concerning specified aspects of the property. Part A of Section II requires the seller to state whether the property has certain specified items, such as range, dishwasher, smoke detector, oven, trash compactor, satellite dish, and a host of other specified items which cover virtually any appliance or amenity one can think of. The seller must also state whether any of these items are, “to the best of Seller’s knowledge,” not in operating condition.

Part B of Section II requires the seller to state whether he is “aware” of any significant defects/malfunctions in a number of areas of the property, such as interior walls, exterior walls, windows, slabs, ceilings, doors and several other specified items. If the seller is aware of any such defects or malfunctions, he or she must provide an explanation of the nature and extent of the defects/malfunctions.

Part C of Section II of the TDS requires the seller to state whether he or she is “aware” of certain additional items, such as whether there are any environmental hazards on the property, walls or fences adjoining other properties, easements, unpermitted room additions, fill, CC & Rs, flood, drainage or grading problems, and several other conditions affecting the property.

Legal Effect of a Real Estate Transfer Disclosure Statement

The TDS is not a guarantee or warranty with respect to the items the seller must disclose. Rather, it is a tool to enable prospective buyers to decide whether they wish to purchase the property. The TDS requires the seller to disclose only specified things of which the seller is “aware.” Consequently, if, for instance, the property is built on fill, or the walls have lead-based paint on them, and the seller is not aware of these facts, the seller has not violated the law by failing to disclose these conditions.

Purchase and Sale Agreements often include a provision that the property is sold “as is” and with no warranties. Sellers have often attempted, unsuccessfully, to defend themselves from buyers’ lawsuits for failure to disclose significant problems with the property, by arguing the buyer agreed to purchase the property “as is,” meaning, with all its faults.  However, the courts have ruled that an “as is” provision in a Purchase and Sale Agreement is not a defense to a claim of violation of the transfer disclosure law. And importantly, a buyer may not waive his or her right to receive the disclosures mandated by the transfer disclosure law. Any such waiver violates public policy and is void.

So long as the seller discloses problems of which he or she is aware, an “as is” provision will protect him or her from any claims by the buyer that the property contained certain significant defects. That is true not only with respect to defects the seller disclosed, but also with respect to defects the seller did not disclose, so long as the seller was not “aware” of those defects. In addition, if a prospective buyer makes an offer to purchase a property before the seller provides him or her with the TDS, the prospective purchaser may withdraw his or her offer within three days after the TDS is personally delivered to him or her, or five days after the TDS is delivered to him or her by deposit in the mail.

Finally, the fact that a seller has failed to disclose an item he or she is aware of and is required to disclose, does not in and of itself entitle a buyer to rescind his or her purchase of the property. However, it does give the buyer a right to sue the seller for damages. The measure of damages is the difference between what the buyer paid for the property and the fair market value of the property. By this measure, if the value of the property, even with the defects/malfunctions not disclosed to the buyer, is the same as or greater than the purchase price, the buyer will have no damages.

Other Remedies for Misrepresentation by a Seller

The Real Estate Transfer Disclosure Law is intended to add to, and not supplant or change previously existing law. Thus, if the seller, for instance, makes intentional misrepresentations to the buyer concerning the property, and these misrepresentations are material, and not simply minor, the buyer may rescind the purchase contract, so long as he or she does so promptly upon learning of the misrepresentation.

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The attorneys at Gehres Law Group are experienced in real estate litigation as well as business litigation, and provide a free initial consultation to those who have been sued, or are contemplating filing a lawsuit concerning a real estate matter. Browse our website for more information about our San Diego business lawyers or contact us today for your complimentary evaluation.

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California Successor Liability

If you are purchasing an existing business or even the assets of a business in California, it is important to consider to what extent your business will have exposure to successor liability following the purchase. California successor liability laws are significantly broader than those in some states, so being informed and taking steps to mitigate your company’s exposure beforehand is critical, especially in higher risk industries.

What is Successor Liability?

Successor liability simply involves the imposition of liability against a successor company for the debts and liabilities of a predecessor. This usually occurs following the sale of a business or a merger of two entities. For example, if your new or existing business purchases the equity interest (shares or LLC membership interest) of a target company, or merges with a target company, the surviving entity will typically be liable for the target company’s past and future debts and other liabilities. See Corporations Code Section 1107(a). While a successor’s liability to creditors can be mitigated in some instances through compliance with California bulk sales laws, most of the obligations of a predecessor will remain with the successorfollowing these transactions. Click here for our discussion on California bulk sales laws.

Ways to Avoid Successor Liability

A purchasing business owner may consider one of several options to avoid the imposition of successor liability, including:

1) The owner of an existing business may create a separate subsidiary to purchase the target business. This option places the acquired liabilities in the subsidiary to avoid exposure to the parent company. This option is, of course, available only for existing companies, not new businesses, and does nothing to prevent successor liability from being imposed on the subsidiary; or,

2) The purchasing company may include certain legal provisions in the purchase agreement which shifts liability back to the seller. This choice is feasible where the selling entity survives the purchase or where a selling company’s owners have the financial ability (and are willing) to indemnify or otherwise compensate the purchasing entity should any predecessor liabilities arise following the sale or merger; or

            3) A purchasing business might also avoid the imposition of successor liability by purchasing only the assets of a target business. However, this is not a foolproof solution as discussed below.

Imposition of Successor Liability Following a Sale of Assets

While the general rule is not to impose liability on a successor business following an asset sale in California, there are a number of exceptions, as explained by the Supreme Court of California in Ray v. Alad Corp. (1977), 19 Cal.3d 22:

            “[T]he rule states that the purchaser does not assume the seller’s liabilities unless

(1) there is an express or implied agreement of assumption,

(2) the transaction amounts to a consolidation or merger of the two corporations,

(3) the purchasing corporation is a mere continuation of the seller, or

(4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller’s debts.”

In the Ray case, the Court added a fifth basis for imposing successor liability–strict tort liability for a defective product. In the context of an asset sale, California courts have been somewhat creative in finding ways to impose liability against a successor where a party has clearly been injured and there is no available remedy against the predecessor, so it is not safe to assume that a purchase of assets alone will provide adequate protection against successor liability.

Successor Liability to Governmental Authorities

Successor entities in California can also be held liable for obligations of the predecessor with regard to various governmental authorities debts, if not already paid by the predecessor. Following are examples of amounts the purchaser may seek todeduct from the purchase price as reimbursement for payments to the appropriate governmental entities.

• Contributions to the California unemployment fund, employment training fund and unemployment compensation disability fund, plus any interest and penalties.
• Franchise and income taxes, plus any interest and penalties
• Sales and use taxes

As an alternative, the purchasing business may seek to obtain, prior to closing of the sale or merger, confirmation from these governmental entities that the predecessor’s obligations have been fulfilled.

Conclusion

In conclusion, individuals or entities who are contemplating the purchase or merger of an existing business must be aware of the real potential for successor liability being imposed on their company following the acquisition of a business or its assets. Often, a combination of the options discussed here will provide the best protection for a purchasing business against the imposition of successor liability. Assessing the level of risk and determining which of the available avenues are ideal in any given situation should be done by an experienced professional. The business law attorneys at Gehres Law Group, P.C. are adept at identifying these risks and mitigating them as much as possible in a variety of situations. Contact us today for a free evaluation or browse our website for more information.

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Maximizing Your Business Profits by Licensing Your Intellectual Property

So you are an entrepreneur who started a successful business by bringing to life an idea that resulted in an amazing product or service. Congratulations! As part of your success, you have likely developed intellectual property and associated goodwill for these products or services.  However, are you maximizing your profits from these assets? Intellectual property is often the most valuable asset of your business.By licensing these assets, you can generate new revenue streams without investing a great deal of time or expense.Licensing agreements grant permission to otherbusinesses to use your company’s intellectual property in exchange for royalty payments.

If you are considering offering your products or services through a license agreement, your first step is to determine whether you own works which are protectable by copyright, trademark, patent, or some other legally recognized form or protection that can be licensed. For example, a trademark brand may not be registerable as a federal trademark unless it meets certain requirements. Without trademark protection, licensing may not be an option since most businesses will not enter into a licensing agreement with a party who does have protected or protectable intellectual property.A knowledgeable intellectual property attorney can assist you in making this initial assessment, without spending a great deal of time or money.

Once you determine that your business indeed has protected intellectual property to license, you will then seek out third party businesses who may be interested in licensing your product or service (assuming your target businesses haven’t found you already). After you find a suitable business or group of businesses, the next step will involvenegotiating and entering into the licensing agreements.  This is a crucial step to insure your business and intellectual property are protected by the specific terms of the agreement.  The most important terms of focus are: a) duration, b) exclusivity, and c) royalties.

Duration concerns the length of time the third parties will have the right to promote and sell your products and services. Licenses are not intended to be permanent, but endure for a limited period of time in which the licensee may promote and sell the product utilizing your intellectual property. Based on the success of the product, most licenses offer the parties the possibility of renewing the license at the expiration of the initialterm.

Exclusivity of use of the intellectual property is another critical provision to consider in the negotiations process. Exclusivity addresses whether you, as the licensor, will have the opportunity to grant licenses in the work to other companies, or whether you will be limited to licensing your product or service to one party.  Most commonly, the parties will agree that the license will be exclusive, but only within a limited geographic area, such as a country, region, or state, or for a specific industry.

Finally, the parties must agree on the payment provisions. The most common form of compensation in return for a license is a royalty, which is a percentage of the net sales of the goods or services that utilize the license. The calculation of royalties depends on numerous factors, including the type of products or services sold, as well as the costs involved in promoting and selling them, and typically requiressound negotiation skills by counsel on your behalfin order to reach a fair price.

If you are interested in maximizing your profits by licensing your intellectual property, be sure to consult with an experienced San Diego intellectual property law attorney. Gehres Law Group prides itself at hiring lawyers who are exceptional at what they do, have proven results, and are dedicated to obtaining the best results possible for each client. Browse our website for more information about our San Diego trademark and copyright lawyers or contact us for a free evaluation of your case.

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Anti-SLAPP Motions in Connection with Employment Law Claims

Employers and employees alike should be aware of the not-so-new litigation device known as the anti-SLAPP motion to strike. This motion, typically filed in the early stages of a case, is designed to strike a Complaint before it gets off the ground.

SLAPP refers to “Strategic Litigation Against Public Participation.”  An anti-SLAPP motion is one asking the court to strike down a Complaint (or Cross-complaint) whose effect, if left standing, would chill a defendant’s exercise of his right of free speech or right to participate in a matter of public interest.

A claim against a person arising from any act in furtherance of the person’s rights of petition or free speech under the United States or California Constitutions in connection with a public issue is subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim. Code of Civil Procedure §425.16(b)(1). The purposes of this legislation include:

1. a) to encourage continued participation in matters of public significance without that participation being chilled through abuse of the judicial process, and
2. b) to eliminate meritless litigation at an early stage.

Section 425.16 (b) (1) contains a two-part test to determine whether an action is a SLAPP suit subject to a special motion to strike. The first part of the test is whether the action is a SLAPP suit; the second part decides whether, if it is a SLAPP suit, it may nonetheless survive the motion to strike because the plaintiff has established a probability of prevailing on the complaint. Once the court determines the first prong of the statute has been met, the plaintiff must provide the court with sufficient evidence to permit it to determine whether there is a probability the plaintiff will prevail on the claim.

As used in CCP Section 425.16, an act in furtherance of a person’s right of petition or free speech in connection with a public issue includes:

(1) A written or oral statement or writing made before a . . . judicial proceeding;

(2) Any written or oral statement or writing made in connection with an issue under consideration or review by a . . .  judicial body . . .  ;

(3) any written or oral statement or writing made in a place open to the public or a public forum in connection with an issue of public interest; or

(4) any other conduct in furtherance of the exercise of the constitutional right of petition or free speech in connection with a public issue or an issue of public interest.

In Greka Integrated, Inc. v. Lowrey (2005) 133 Cal. App. 4^th 1572, the Court of Appeal affirmed the trial court’s granting of an anti-SLAPP motion and dismissal of the complaint.  In that case, Greka Integrated, Inc. (“Greka”) sued a former employee, Gary Lowrey (“Lowrey”) for breach of contract and conversion. Specifically, Greka asserted that Lowrey had breached a Nondisclosure Agreement he had signed when he came to work for Greka, by taking and providing to other third parties confidential information of Greka, and converting that confidential information to his own use and benefit.  Lowrey moved to strike the complaint as an anti-SLAPP action, claiming that Greka’s causes of action arose out of Lowrey’s protected speech and that Greka had not shown a probability of prevailing on the merits.

Greka hired Lowrey to work as a safety manager. Approximately a year later, unable to continue his employment due to stress, Lowrey took medical leave.  He claimed Greka had refused to correct unsafe conditions Lowrey had brought to Greka’s attention, causing him to experience debilitating stress. He further contended that he had permission from Greka to take home the e- mails and other documents Greka accused him of converting and providing to other third parties, and retained them only because he never returned to work. He further asserted that Greka never asked for return of the documents and e- mails.

Lowrey testified on behalf of employees of Greka who sued Greka for injuries resulting from an explosion allegedly due to unsafe conditions maintained by Greka.  Lowrey also cooperated in investigations of Greka by the District Attorney, and provided the district attorney, and his own attorney, with the e- mails and documents he retained after leaving his employment at Greka.

The trial court granted Lowrey’s motion and dismissed Greka’s complaint. The Court of Appeals affirmed, noting:

A cause of action “arises from” protected activity where the act underlying the plaintiff’s cause of action, or the act which forms the basis for it was itself an act in furtherance of the right of petition or free speech (Citation omitted). In deciding whether Lowrey has met the “arising from” requirement, we consider “the pleadings and supporting and opposing affidavits stating the facts upon which the liability or defense is based.” (Citation omitted).

Id. at 1578.

The court noted that Greka’s complaint did not identify the specific statements or documents disclosed by Lowrey that constituted a breach of the nondisclosure agreement or conversion.  Id. at 1579.  Further, in his declaration, Lowrey denied possessing or disclosing any of Greka’s confidential information.  Id.  He stated Greka authorized him to take the documents at issue, and that he disclosed information related solely to Greka’s non-compliance with the law to the district attorney, various public agencies and his own attorney, and to family and friends to explain why he could no longer work for Greka.  Id.

The Court of Appeal ruled that disclosing documents to these individuals, including Lowrey’s own counsel, were all protected activities, because they constituted statements made before a judicial proceeding or any other official proceeding authorized by law.  Id. at 1580.  Accordingly, ruled the Court, Lowrey had met his burden of showing that Greka’s complaint arose from protected speech.  Id.

The Court noted that the burden then shifted to Greka to show a probability it would prevail on the merits at trial, and that in making this determination, the court must again consider the pleadings and the supporting and opposing declarations stating the facts on which the claims are based.  Id. at 1580-1581.  The Court further noted that the only evidence that Lowrey disclosed any information about Greka (other than to state agencies and his own attorney, which admittedly constituted protected activity) was his admission that he told family and friends why he was leaving his job at Greka.  Id. at 1581.  However, Greka submitted no admissible evidence that the information Lowrey had provided family and friends contained any confidential or proprietary information. Consequently, Greka failed to sustain its burden of proving that its breach of contract claim had merit.  Id.

A different result was reached in World Financial Group, Inc. v. HBW Ins. & financial Services, Inc. (2009) 172 Cal. App. 4^th 1561. World Financial Group (“WFG”) was the prior employer of certain individual defendants who joined defendant HBW, a competitor of WFG. WFG alleged in its Complaint that its former employees had breached a Nondisclosure Agreement they had signed when they first came to work for WFJ, and had provided confidential information and trade secrets to their new employer, HBW.  WFG also asserted claims against the defendants for violation of the Uniform Trade Secrets Act, the Unfair Competition Law, and asserted claims for interference with prospective economic advantage.

Defendants filed an anti-SLAPP motion to strike the Complaint, arguing that WSG’s claims were based on defendants’ speech and conduct in furtherance of the exercise of the right of free speech in connection with a public issue, namely, “the pursuit of lawful employment,” as well as “workforce mobility and free competition,” all of which they contended were matters “a public interest and protected public policy.”

WFG successfully argued that the defendants had failed to satisfy the first aspect of the anti-SLAPP statute because, among other things, “[the] complaint involves private conduct, done in a non-public forum, resulting in the violation of a private contract and unfair misappropriation of WFG’s confidential trade secret information.” The trial court denied the motion to strike, and the Court of Appeal affirmed, agreeing that the defendants failed to show that WSG’s complaint was based on acts in furtherance of defendants’ free speech rights. The Court of Appeal ruled that, “the anti-SLAPP law applies to claims ‘arising from’ speech or conduct “in furtherance of the exercise of the constitutional right of free speech in connection with a public issue or an issue of public interest.”

The Court of Appeal noted that all of the allegedly wrongful conduct and speech were committed in a business capacity, and were directed at a competitor (WFG) and its customers for the sole purpose of promoting a competing business.

The difference between the Greka case and the World Financial Group case, is that in Greka, the conduct of the defendant which formed the basis of the complaint was itself an act in furtherance of the right of free speech or petition, whereas in World Financial Group, the conduct which was the basis of the Complaint was not such an act, but rather, was simply a breach of contract and an act of unfair competition.

*   *   *

When employers and employees part ways, their parting is oftentimes less than amicable. It is not uncommon for one to sue the other. Whether it is the employer suing the former employee for breach of an NDA, unfair competition, misappropriation of trade secrets, breach of the duty of loyalty, or the like, as in the Greka and World Financial Group cases, or the employee suing the employer for wage and hour or other Labor Code violations, as has occurred with considerable frequency of late, counsel for the parties must consider whether an anti-SLAPP motion is available to nip the lawsuit in the bud.

If you are sued in the context of an employment law dispute, be sure to consult with an experienced San Diego employment law or business litigation attorney, to see if an anti-SLAPP motion, or other legal strategy will help disentangle you at the outset of what could otherwise be very expensive and protracted litigation. Gehres Law Group prides itself at hiring lawyers who are exceptional at what they do, have proven results, and are dedicated to obtaining the best results possible for each client. Browse our website for more information about our San Diego business lawyers or contact us for a free evaluation of your case.

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BUSINESS LITIGATION: Swinging a Bigger Stick

Everyone knows that litigation is an expensive distraction from the true mission of any business.  Good management, with well drafted contracts and employee supervision, go a long way to minimize lawsuits. However, despite the “best laid plans”, things happen.  Even well-managed businesses sometimes find themselves involved in a lawsuit.  When that happens, it is often advantageous to bring a big stick…and be prepared to swing it–which involves hiring an aggressive litigation lawyer and experienced trial attorney.

PLEADING THE RIGHT CLAIMS

Lawsuits typically begin with a “complaint”: the legal document which sets forth the particular facts and legal claims of your case. Proper drafting of the complaint and other initial pleadings, including all appropriate claims, is critical to maximizing the strength of your position at the outset. Pleadings establish the framework of the entire lawsuit and control what discovery can be taken, as well as what money damages or non-monetary relief can be awarded following a trial. A savvy litigator will understand how, based on the facts that exist, to best plead his or her clients’ case.  He or she will know how to plead a claim so that it more likely will, or will not, be covered by the opposing parties’ insurers. The knowledgeable business litigation lawyer will also know how to plead, when appropriate, so that punitive damages might be recovered, which generally creates more leverage to negotiate a prompt settlement. In sum, there is simply no substitute for experience.

INCLUDING ALL RESPONSIBLE PARTIES

Less experienced lawyers often overlook strategic advantages that can result in including parties who, on first consideration, may seem unrelated or uninvolved. If suing a closely held corporation, for example, the strength of one’s case might greatly be enhanced, in appropriate circumstances, by also naming as defendants the principal shareholders, on the theory that the corporation is merely their “alter ego” where it seems likely that “piercing the corporate veil” may be successful. Likewise, the experienced business litigation attorney will investigate and consider the viability of including as named defendants, other individuals and business entities who may have “conspired” with the principal wrongdoer, or who may have some duty of indemnity. To the experienced eye, there are myriad of factual scenarios and legal theories which could support including defendants laypersons or even other lawyers may not otherwise consider.

TRIAL EXPERIENCE IMPROVES NEGOTIATING POSITON

The more your opponent fears going to trial, the stronger your settlement position.  Your bargaining position is based on their perception of the case, including their perception of your attorney.  When you have an experienced, persuasive trial attorney, you increase your bargaining position. Overall, approximately 90% of all cases settle before trial. However, the amount of compensation you might be able to recover in a settlement is often significantly impacted by the perceived strength of your case and experience of your trial lawyer, both of which make choosing a business litigation attorney extremely important. In addition to being skilled at trial, the effective trial lawyer must also be a good negotiator, in order to maximize results for the client.

Gehres Law Group prides itself at hiring attorneys who are exceptional at what they do, have proven results, and are dedicated to obtaining the best results possible for each client. Browse our website for more information about our San Diego business lawyers or contact us for a free evaluation.

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A Trustee’s Responsibilities Administering a California Living Trust

Our estate planning clients often have a lot of questions about their obligations as a trustee of their living trust. Where the acting trustee is also the creator or “grantor”[1] of the trust, the trustee typically has plenary power to act on behalf of the trust and may amend or even revoke the trust in its entirety. However, when a grantor passes away or becomes unable to administer their trust, a successor trustee typically takes over these obligations. It is after this point, when a successor trustee begins to administer the living trust, that questions often arise with regard to the trustee’s responsibilities.

For the most part, a trustee administers a living trust by its written terms, which express the grantor’s intent. See Cal. Probate Code §§16000, 21101 and 21102. However, this can be much more complicated than it sounds. California courts are more readily permitting parties to present outside evidence of a grantor’s intentions, even where the language used in the trust is clear and unambiguous. The effect of this trend is that grantors must be even more careful to consider whether their living trust describes their intentions precisely, and then take the additional step of considering whether there is sufficient other evidence to prove what their intentions are with regard to the administration of their trust assets.

Trustee’s Standard of Care

A trustee’s legal standard of care is an evolving area of law. Overall, California courts interpret a trustee’s standard to be very high. However, a grantor may restrict or expand a trustee’s obligations through the language contained in the trust instrument itself. Section 16040 of the California Probate Code sets out the general standard of trustee care:

(a) The trustee shall administer the trust with reasonable

care, skill, and caution under the circumstances then prevailing that

a prudent person acting in a like capacity would use in the conduct

of an enterprise of like character and with like aims to accomplish

the purposes of the trust as determined from the trust instrument.

 

(b) The settlor may expand or restrict the standard provided in

subdivision (a) by express provisions in the trust instrument. A

trustee is not liable to a beneficiary for the trustee’s good faith

reliance on these express provisions.

 

(c) This section does not apply to investment and management

functions governed by the Uniform Prudent Investor Act, Article 2.5

(commencing with Section 16045).

 

Where a trustee has special skills, he/she is required to use those skills with respect to administering a trust. Cal. Probate Code §16014. In addition, a trustee may not delegate responsibilities that the trustee can reasonably be expected to perform. In practice, it is not uncommon for trustees to delegate some responsibilities. See Cal. Probate Code §§16001(a), 16012, 16052, and 16247. Some of the obligations that a trustee might delegate are investment, tax, legal and accounting services, which are types of services most trustees would not be expected to perform. However, a trustee must still act prudently in selecting which agents to use, and must continue to oversee those agents. They may not simply delegate tasks to others and forget about it.

Other Trustee Duties

In many situations, a trustee will have an obligation to provide an accounting and other information to the named beneficiaries of a living trust. See Cal. Probate Code §§16060-61.5, §16061.7, §16062, and §16064. As one may expect, a trustee also has a duty of confidentiality. However, a trustee might need to disclose some information in order to administer the living trust. Perhaps most importantly, a trustee must not put his or her interests above those of the trust or the beneficiaries, and should avoid conflicts of interest with the trust and the beneficiaries. This can be an especially complicated obligation to fulfill for many trustees since they are often not only a trustee, but also one of several beneficiaries named in the living trust. Unless the trust indicates otherwise, such a trustee should not favor a particular beneficiary or class of beneficiaries and avoid even the appearance of a conflict of interest.

A living trust will usually contain some language which gives the trustee discretionary powers–the power to use his or her own best judgment in certain situations. Be careful here. Even if a trust provides a trustee with sole, absolute or uncontrolled discretion, California courts typically still require trustees to act within the established standards of care and not in bad faith or with disregard to the express purposes of the living trust. See Cal. Probate Code §§16080-81.

With regard to investing trust assets, a trustee must make decisions which are in the best interest of the beneficiaries, subject to any limitations provided for in the trust. A trustee’s authority to manage investments should be set out in the trust instrument itself. Where the declaration of trust is silent or ambiguous, investment authority is also derived by statute, case law and the circumstances of each situation. See Cal. Probate Code §16200(a) and (b) and §16047. Generally, a trustee has the obligation to invest trust assets as a “prudent investor”, which is set out in the California Uniform Prudent Investor Act (the “Act”), unless the trust provides for a greater or lesser standard of care:

16046. (a) Except as provided in subdivision (b), a trustee who

invests and manages trust assets owes a duty to the beneficiaries of

the trust to comply with the prudent investor rule.

 

(b) The settlor may expand or restrict the prudent investor rule

by express provisions in the trust instrument. A trustee is not

liable to a beneficiary for the trustee’s good faith reliance on

these express provisions.

 

 

Cal. Probate Code §§16045 through 16054.

For trustees who are handling investment assets, it is critical to carefully review the language of the Act for guidance and seek advice from an experienced estate planning lawyer if they do not fully understand their obligations.

Please remember that the law changes regularly. Do not rely on the information in this article for your particular situation. You should consult with an appropriate professional if you have questions about a specific situation. We hope this article has been instructive in describing some of the common responsibilities of trustees administering a living trust. For more information, please feel free to browse our website or contact us for a free evaluation with our knowledgeable estate planning attorney to discuss your particular needs.

[1] The terms “settlor” or “grantor” or “trustor” are used interchangeably to refer to the individual who created the trust.

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LETTER OF INTENT: IS IT ENFORCEABLE?

We previously discussed here why businesses and individuals might wish to have an attorney draft a Letter of Intent. This article focuses on the question of whether and when a Letter of Intent ^[1] is an enforceable contract.

It often happens, when negotiating business deals, that one or both of the parties wants some assurance that their negotiations are serious and will ultimately result in a binding contract rather than a waste of valuable time.  This is especially so when the parties reach the point where they have agreement on the principal elements of an agreement, such as price, for example, when negotiating a real estate sale, but need to finalize various details. In such circumstances, parties may wish to document the seriousness of their negotiations, and the integrity of their intent to proceed with the deal, barring unforeseen obstacles, by memorializing their intentions in a “Letter of Intent”. Usually, a Letter of Intent specifically states that it is not intended to serve as a binding, final contract, but rather as a non-binding expression of intent to contract in the future, and to cooperate while negotiations continue.

But what happens when, after signing such a document, one of the parties backs out of the deal?  Is the Letter of Intent enforceable?   It depends: Sometimes “Yes”, and sometimes “No”.  As usual, the “devil is in the details”, and an understanding of the applicable legal principles is critical in protecting your interests.  The smart business person will seek the representation of an experienced business lawyer when negotiating important contracts and using Letters of Intent.

California Contract Law

1. Essential Elements of Contract

Whether or not a signed Letter of Intent is a binding contract depends on whether it includes the “essential elements” of a contract, as set forth in California Civil Code §1550, which provides:

• 1550. Essential elements

It is essential to the existence of a contract that there should be:

1. Parties capable of contracting;
2. Their consent;
3. A lawful object; and,
4. A sufficient cause or consideration.

There is abundant California case law interpreting this provision, and the law of contracts generally, and the term “consent” means not only that the material terms of the contract are sufficiently specified and agreed, but also that the parties intend, by signing the agreement, that they are or will be bound to perform. Usually, however, Letters of Intent state that they are not intended to bea “final, binding agreement”, but rather a statement of their intent to enter such an agreement in the future. This, of course, can make it difficult to enforce a Letter of Intent.

But the title of the document, whether it is “Letter of Intent”, or “Memorandum of Understanding”, is not alone controlling. Rather, it is whether the “essential elements” of a contract are included in the document. The following statement by a California Court of Appeals makes this point clearly:

A letter of intent can constitute a binding contract, depending on the expectations of the parties. (Mann v. Mueller [1956] 140 Cal.App.2d 481, 487, 295 P.2d 421; see also Gavina v. Smith [1944] 25 Cal.2d 501, 504, 154 P.2d 681.) These expectations may be inferred from the conduct of the parties and surrounding circumstances. (See City of Santa Cruz v. MacGregor [1960] 178 Cal.App.2d 45, 53–54, 2 Cal.Rptr. 727.)

California Food Service Corp. v. Great American Ins. Co. (1982) 130 Cal.App.3d 892, 897 [182 Cal.Rptr. 67, 70].

2. The Element of “Consideration”; Bilateral vs. Unilateral Contracts

The essential element of “consideration” is critical to understanding contract law.  In simplest terms, “consideration” means “something of value”.  There can be no contract until and unless both parties give “consideration”, i.e. “something of value”.

Usually, this “consideration” is a legally binding promise to perform, as such performance is described in the written contract, or otherwise understood between the parties.  Where each party gives a promise as its consideration, such contracts are said to be “bilateral”, i.e. supported by mutual promises of future performance.

However, “consideration” can also consist of performance by one of the parties.  Where one party offers an agreement, and the other party accepts, and signals its consent by rendering the requested performance, a binding contract is formed by that performance. This is known as a “unilateral” contract. The distinction between unilateral and bilateral contracts is well settled in the law. Section 12 of the American Institute’s Restatement of the Law of Contracts states as follows:

A unilateral contract is one in which no promisor receives a promise as consideration for his promise. A bilateral contract is one in which there are mutual promises between two parties to the contract; each party being both a promisor and a promisee. This definition is in accord with the law of California. Chrisman v. So. Cal. Edison Co., 83 Cal. App. 249, 256 P. 618…In the case of unilateral contracts no notice of acceptance by performance is required. Section 1584 of the Civil Code provides: ‘Performance of the conditions of a proposal * * * is an acceptance of the proposal.’ See Cuthill v. Peabody, 19 Cal. App. 304, 125 P. 926; Los Angeles Traction Co. v. Wilshire, 135 Cal. 654, 67 P. 1086.

Davis v. Jacoby (1934) 1 Cal.2d 370, 378-79 [34 P.2d 1026, 1029-30].

Where parties involved in negotiations have signed a Letter of Intent, it frequently happens that, before a “final agreement” is signed, one or both parties takes actions which might reasonably be construed as “performance”. In that instance, if the other party ultimately backs out of the deal, and refuses to enter a final contact as was contemplated in the Letter of Intent, the performing party might be able to successfully argue that the Letter of Intent, along with other circumstances including its performance, is evidence of a binding unilateral contract.Indeed, when entering a Letter of Intent, both parties should understand that, if they act unfairly and violate the spirit of the agreement, the other side may in fact be able to use the Letter of Intent to support a viable contract claim.

3. The Doctrine of Promissory Estoppel

Even where a party cannot prevail in proving that a Letter of Intent forms the basis of an enforceable contract, unilateral or bilateral, it may provide grounds for seeking to enforce “performance” under the equitable theory of “promissory estoppel”.

The elements of a promissory estoppel claim are “(1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made; (3)[the] reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance.” ’ ” (Jones v. Wachovia Bank (2014) 230 Cal.App.4th 935, 945, 179 Cal.Rptr.3d 21.)53 *1179

Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1178-79 [201 Cal.Rptr.3d 390, 416-17]

If a party to a Letter of Intent reasonably relies on that letter, and promises included in it, or in other statements made by the other party in the course of the negotiations, the injured party may have a good claim for promissory estoppel to enforce the Letter of Intent.

CONCLUSIONS

Letters of Intent, while typically not intended to be final, binding contracts, can help protect parties from frivolous, time wasting negotiations.  Depending on how they are written, and the specific provisions they contain, their interpretation may be aided by reference to contemporaneous dealings and communications between the parties. A party which refuses to proceed in good faith as contemplated in the Letter of Intent may be vulnerable to legal claims for breach of contract, promissory estoppel, breach of the implied duty of good faith and fair dealing, or even fraud.

About Gehres Law Group, P.C.: The dynamic team of AV-rated and award-winning California business lawyers and business litigation lawyers at Gehres Law Group, P.C. has the knowledge and experience to provide comprehensive legal representation to small and medium-sized businesses in a number of business-related practice areas, including commercial and corporate laws, business formation, business litigation, employment law, trademark and copyright law, contract law, estate planning, and other areas of law affecting your business. We have the expertise to help businesses thrive, with over eight decades of combined experience. From routine corporate work to multi-million dollar litigation claims, we have done it all with integrity and transparency—putting our clients’ interests above all else. Please feel free to browse our website or contact us for a free evaluation.

^[1] “Memorandum of Understanding” or “MOU” are other terms used interchangeably for “Letter of Intent.”

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COPYRIGHT REGISTRATION – A PREREQUISITE FOR INFRINGMENT LITIGATION

This article discusses the importance of registering copyrights in order to provide business owners and authors significant benefits, including statutory damages and reimbursement for attorneys’ fees, in the event someone infringes on their copyrights.

A vital asset of many businesses consists of copyrights. Title 17 of the United States Code, commonly known as the federal Copyright Act, governs most copyright law issues. Section 102 of the Act provides that a copyright exists in original works of authorship fixed in any tangible medium of expression. The Copyright Act further states that works of authorship include the following categories:

(1) literary works;

(2) musical works, including any accompanying words;

(3) dramatic works, including any accompanying music;

(4) pantomimes and choreographic works;

(5) pictorial, graphic, and sculptural works;

(6) motion pictures and other audiovisual works;

(7) sound recordings; and

(8) architectural works.

 

A copyright owner automatically obtains copyright protection under this set of laws when their work is authored and published. Copyright protection consists of a bundle of exclusive rights afforded to the owner of the copyright:

(1) to reproduce the work in copies;

(2) to prepare derivative works based upon the work;

(3) to distribute copies of the work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

(4) to perform the work publicly;

(5) to display the copyrighted work publicly; and

(6) in the case of sound recordings, to perform the work publicly by means of a digital audio transmission.

Id. at §106.

However, while federal registration of copyrights is not mandatory in order to obtain copyright protection, for works that originate in the United States and certain other works, a party must have registered the work before the party can commence an action for infringement. As indicated in §411 of the Act: “No action for infringement of the copyright in any United States work shall be instituted until registration of the copyright claim has been made in accordance with this title.”

In addition to being a prerequisite for filing suit for infringement, a federal copyright registration provides a copyright owner with significant exclusive benefits. First, a registration establishes a public record of a copyright claim.  Along with the appearance of a copyright notice (not required but generally recommended), registration can potentially defeat a claim by an infringer that the infringement was “innocent,” thereby increasing the damages an owner might obtain in an infringement case.  Id. at §401 (d).  Second, if the registration is made within five years from the date the work was published, the facts in the certificate are deemed “prima facie” evidence of those facts.  Id. at §410 (c).  Finally, if the registration is made within three months after first publication of the work or prior to an infringement of the work, statutory damages and attorneys’ fees are made available to the copyright owner in court actions. Id. at §412.

These benefits can be extremely important, in part, because statutory damages can range anywhere from $750.00 up to $150,000.00 per act of infringement. Id. at §504 (c). Without the statutory damages, a claimant must prove actual damages, which can be quite difficult in infringement cases, especially if the claimant cannot provide evidence of a record of previous earnings, along with the loss of such earnings, or some other admissible evidence of provable damages.  The ability to obtain statutory damages eliminates the need to prove actual damages altogether.  In addition to the ability to collect statutory damages against an infringer, a copyright owner who has registered their copyright as set out in the Act may collect their attorneys’ fees incurred in protecting their copyright against an infringer—another potentially significant economic consideration, as well as providing the owner with critical bargaining power to compel settlement of their claim and eliminate the need to go to trial.

Therefore, the cost of registering a copyright can far outweigh the benefits and rights conveyed to a copyright owner by registering their copyrights. To receive the greatest possible protection in a case of infringement, it is vital to initiate a federal registration of your copyright as soon as possible after your work is created. If you would like to register your copyright, or if you are involved in a copyright infringement matter, you should contact an experienced attorney to discuss these matters. The knowledgeable and trusted copyright and trademark attorneys at Gehres Law Group, P.C. are committed to assisting business owners and authors to protect their intellectual property rights. Contact us today for additional information or to schedule a complementary evaluation of your intellectual property law matter or browse our website for more information.

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