What Does It Mean To Retire - a/k/a The Dangers Of Imprecise Contracts

Defining, or redefining, “retirement” is not just a topic of commercials for annuities or RVs. It is a question so meaningful that the Court of Appeals has recently issued an opinion in which a central issue was the definition of the word.

The ubiquitous Google provides a good starting point for an analysis. A Google search for definitions of the meaning of retirement quickly yielded 14 different results. These definitions share some common themes, but they also have some very distinct differences.

This illustrates the problem of using, but not defining, the word “retirement” as part of a contract. As with any legal issue, where a contract leaves a term undefined there is an opening for a dispute that may need the intervention of the courts for resolution.

In an unpublished opinion in the matter of Nardi v. Satellite Servs., Inc., the Court of Appeals took on the issue of defining retirement. As a matter of background, the plaintiff was a former employee of the defendant. As part of an employment agreement, plaintiff was entitled to certain rights if his employment ended by virtue of “retirement.” The plaintiff left the defendant and went to work for another company, he alleged that he had “retired” and was entitled to certain benefits as defined by the contract. The defendants disagreed, alleging that “retirement” meant that the plaintiff was required to stop working in any occupation. In this matter, the Court of Appeals agreed with the plaintiff:

Resolution of this issue turns on the meaning of the word “retirement,” which is not defined in the contract. Defendants argue that “retirement” means that plaintiff was required to stop working in any occupation. However, the word “retirement” means “removal or withdrawal from an office or active service.” Random House Webster’s College Dictionary (1997). As noted by the trial court, however, today Americans often continue working in some capacity after they have begun drawing retirement benefits from a previous employer. See Derr v Murphy Motor Freight Lines, 452 Mich 375, 391 n 6 (Mallett, J.); 550 NW2d 759, amended 453 Mich 1204 (1996). Therefore, the modern understanding of the word “retirement” is an employee’s withdrawal from a particular “office” to collect vested benefits that have accrued to the employee, usually from years of faithful service. The contract’s other provisions support this definition of the word “retirement.”

Keep in mind that this is an unpublished opinion, so it is not binding as a matter of legal precedent, but it is informative on this issue. Moreover, it illustrates the problem that can occur when a contract does not expressly define a key term.

In the employment arena, or with regard to succession planning (such as buy-sell agreements and shareholder agreements), I suggest you take the opportunity to review your agreements. Is the word “retirement” used without definition? Are other key terms undefined?

What other practical advice can you take away? Spending the time with a qualified attorney to carefully draft significant documents may add to the up-front expense of a project. But the additional cost of litigation that can be the direct result from a dispute based on an imprecise contract will far outweigh the benefits of any slight cost savings from trying to cut corners when creating the agreements that will affect you and your business for years to come.

Business Litigation Is Not A DIY Matter

The Internet can be a great resource and with all the available information it is tempting to think about trying new endeavors without professional assistance. Just make sure to cross off "appearing in court on behalf of a corporation" as one of those activities.

An article on allbusiness.com asks "should you hire an attorney?" Do it yourselfers rejoice? Not so fast. The first sentence of the article is already leading to a road for trouble:

The only time you should always be represented by an attorney is when you appear in a criminal matter.

STOP! This statement is far too simplistic. Most notably, in Michigan, a corporation (as well as varoius other entities) may not appear in court without representation of a licensed attorney.

Longstanding Michigan law is that non-attorneys who violate this rule are engaged in the unauthorized practice of law. An ethics article from the Michigan Bar, which arose from the context of a landlord-tenant dispute where one the parties was not an individual, plainly spells out the law:

Lay officers, directors, partners and employees of corporate or partnership entities may not represent the entity in court proceedings or sign court documents without engaging in the unauthorized practice of law.

But that is not all, oh no, that is not all.

Michigan lawyers confronted with a non-lawyer appearing in court for a corporation or partnership have an ethical duty to bring the fact to the attention of the tribunal. Informal ethics opinion RI-10.

Likewise, Michigan judges are also under an ethical duty to prevent the unauthorized practice of law.

A separate ethics opinion reaches the same result in the context of a corporation or partnership which is involved in court proceedings relating to criminal matters or in response to ordinance violations:

We find no pertinent difference between the handling of civil matters and the handling of criminal matters by a layman representative of either a corporation or a partnership.

A layman appearing for a corporation or a partnership in response to an alleged violation of an ordinance is engaged in the unauthorized practice of law.

These ethics opinion are all in line with the Michigan Court of Appeals opinion in Peters Production, Inc. v Densick Broadcasting Company which held that a non-lawyer officer or shareholder may not appear in court on behalf of the corporation:

An individual may appear in propria persona; a corporation, however, can appear only by attorney regardless of whether it is interested in its own corporate capacity or in a fiduciary capacity.

Besides the practical reasons to work with an attorney, such as an attorney's specialized knowledge of the substantive law and the procedural rules, in some cases you must work with an attorney in order to avoid the potential consequences of engaging in the unauthorized practice of law.

Have questions about the boundaries of what is permissible by a non-attorney without running afoul of the law? You can start with the source by viewing the statutes MCL 600.916 and MCL 450.681, or, better yet, post a comment or e-mail me to continue the discussion.

Is Your Company Prepared For The Threat Of Workplace Violence?

The terribly tragic recent workplace shooting in Troy, Michigan and the horrific massacre at Virginia Tech are dramatic examples of the very real danger of workplace violence. For employers, consider yourselves warned.

In addition to the moral duty to provide a safe work environment, companies also must face the reality of the potential legal and financial damages that can result from failing to take appropriate protective measures.

Although the general rule is that an employer is not liable for the acts of an employee that are outside the scope of employment, a company may still be liable under other theories, such as negligent hiring, supervision or retention. When the liability is related to workplace violence, the potential damages can be enormous and can threaten both the existence of the company and the livelihood of all the people who depend on it.

While there is no way to provide absolute protection against an incident of workplace violence, there are many important steps that your company should take in order to protect fellow employees, the company and its owners.

Take a moment and review your company’s readiness for workplace violence. In doing so, consider the following key areas:

• Are job applicants, including their employment and any criminal history, adequately screened?
• Do you have a clearly defined “no tolerance policy” towards violence and weapons?
• Do your employees know the warning signs of potential violence?
• Does your HR department know how to investigate alleged incidents of violence?
• Have your employees been provided with procedures to follow in the event of a violent incident?
• Does your HR department have a plan for the safest way to handle the termination of a potential hostile or violent employee?
• Are procedures in place to maintain building security?
• Do you have procedures to deal with a bomb threat?

These issues and more can all be addressed in policies for your employees and for management. Regardless of the size of your company, a simple and clearly defined set of workplace violence policies can be an important part of your company’s risk management program.

It is too late to plead ignorance to the threat of workplace violence, and once an incident occurs it is too late to create the policies that could have prevented the incident. Protect your company and its employees by planning ahead. As always, contact me if you have questions or if you want to discuss how these important issues.

Negligent Dancing (and other lurking workplace dangers)

A Chicago court is hearing a case based on an allegation of “negligent dancing”:

A Chicago woman is suing a man she claims flipped her into the air and dropped her on her head in a jitterbug-style dance move at a company event.

Her attorney, David M. Baum, said Prange should be accountable for the alleged injuries caused by "negligent dancing."

Why do I include this in a legal blog? First, because in scouring the internet for current legal topics I got drawn in by the headline.

But beyond the attention-grabbing caption, there are some legal lessons to be learned here.

For businesspeople, perhaps the most important is that your exposure to liability is probably greater than you think. Make sure to take the prudent steps to protect yourself and your company, including using the optimal entity (usually something that provides true limited liability protection, such as an LLC or corporation, not merely a certificate of assumed name filed with the county), always maintaining corporate formalities and keep your corporate records up to date to protect corporate integrity, and making sure you always have proper insurance in place, including any insurance needed for special events.

As usual, it all comes back to planning. Many hazards, such as the threat of being injured or exposed to liability as a result of a “negligent dancing” incident, are hard to predict. The best way to limit the damage from dangers, foreseen and unforeseeable, is to have the proper planning documents in place personally (such as a durable power of attorney, will, and medical power of attorney) and professionally (such as buy-sell agreement, fully funded by insurance, or a carefully drafted operating agreement). Don’t delay – contact your trusted attorney to start planning, or take a few minutes to review your plan, today.

You Are Not Invincible - And Neither Is Your Durable Power Of Attorney

Don’t mistake “durable” for “invincible.” Several times in the past year I have been asked whether a durable power of attorney is still effective after the death of the principle. The answer is no – sort of.

A durable power of attorney (“DPOA”) terminates when the death of the principal becomes known to the agent. See MCL 700.5504.

While the principal is still living, a DPOA allows for the management of the affairs of a principal who has become incapacitated. This is a powerful tool, but it must be created before the principal suffers the onset of the disability, as at that point it is probably too late for the principal to have the capacity to sign a valid DPOA.

What are the alternatives to a DPOA? If property is owned in a trust, under many circumstances a successor trustee can take over during a period of incapacity. For property outside the trust, though, this would not be effective. The other alternatives to a DPOA are a judicial guardianship or conservatorship. These involve judicial oversight and creation, and are generally far more costly and less desirable alternatives.

While many people understand the reality of their own mortality, they do not consider the likelihood or even possibility of their temporary incapacity, and thus they overlook incapacity planning as part of their estate plan. However, incapacity planning is an important part of estate planning and a DPOA is a document that should be included in most estate plans.

Now a word of caution. This is not a document to be drafted without professional counsel. Care must be taken in drafting the DPOA not only to assure that it is effective and controlling when it is needed, but also to include restrictions as appropriate to avoid unintended tax consequences.

This is a good time for me to restate the important restrictions noted at the top of the blog – I cannot, and by way of this blog I do not, offer legal advice without knowledge of all of the relevant facts. This blog does not provide create an attorney-client relationship and does not provide legal advice. It is designed solely to raise issues that merit further discussion and exploration. It is of utmost importance that you contact your own attorney before taking, or refraining from taking, any action that can affect your legal rights.

Does A Michigan LLC Need To Maintain A Minute Book?

In short, yes.

As an attorney, one of the misconceptions I am commonly confronted with is the idea that a Limited Liability Company (LLC) is exempt from the need to maintain the kinds of records that would typically be found in a corporate minute book.

In Michigan, LLCs are required to maintain certain records. By statute, an LLC is required to keep numerous records at its registered office or principal place of business, including copies of tax returns, financial statements, operating agreements, and records relating to distributions and voting rights. To view the statute, click here.

The statute does not use the word “minute book”, but the requirements of the statute are items that you would expect to find in a minute book for a company.

Why is this important? First, because the statute says these records “shall” be maintained. Following the requirements of the statute is not optional. Of equal, or perhaps greater, importance, is that failure to maintain corporate formalities, including keeping proper records, is a key factor in determining whether an adverse party may “pierce the corporate veil”, thereby defeating the limited liability protection of the company and allowing the adverse party to directly take action against individual members.

One other item to keep in mind is that the requirements of the statute should be viewed as a floor, not a ceiling, meaning that as a matter of practice we recommend that our clients maintain more records then just the bare minimum required by the statute. This not only eases administrative work for the company over time, it is also provides the members with greater protection against claims that seek to pierce the corporate veil.

The recordkeeping requirements of the Michigan statute are not overly burdensome and the results of failure to comply with the statute can be significant. On at least an annual basis, our office reviews the records for not only the corporations we represent, but also the LLCs we represent. Give the annual records of your company the attention they need by performing an annual review or, if you have questions, contact me to arrange a consultation to review your company’s records and to help set up an efficient recordkeeping system for your LLC.

Ditch the DBA

For most businesses, doing business under an assumed name certificate filed with the county makes as much sense as using a rotary telephone. It may get the job done, but it is has many drawbacks and there are far more attractive alternatives.

Lets start with the basics. An individual can file an assumed name certificate with the county that allows that person to do business in the county under an assumed name. The form is simple and the filing fee is small. That may sound appealing until you realize that there are few benefits, and many downsides, to structuring your business in this method.

One significant drawback to an assumed name certificate is that it does not provide the business owner with any limited liability protection. In contrast, for businesses that are formed in a way that provides limited liability protection, such as corporations and limited liability companies (“LLC”s), you are not personally liable for most debts and obligations of the business. If you do business under an assumed name filed with a county, you do not have this protection. You are the business, the business is not considered a separate entity, and you are liable for the obligations of the company.

In the past, using a business that provided limited liability protection, such as a “C” corporation, meant also having the cost of “double taxation,” meaning that income was taxed upon receipt by the corporation, and taxed again on distribution to the owners. However, there are now many forms of entities, such as S Corporations or LLCs, which allow a business to have true limited liability protection and enjoy the benefits of “partnership” or “flow-through” style taxation, as opposed to traditional “corporate” style taxation.

There are many other advantages to using a company that provides limited liability protection, such as an LLC, including the ability of the company to continue in existence after the death of an owner, increased options for succession planning and integration with an owner’s estate plan, potential options for tax planning, and value in the form of perceived legitimacy from third parties when dealing with an established company. Also keep in mind that businesses operating an assumed name should file the certificate in every county in which they transact business, in contrast to an LLC or corporation which is protected by a single statewide filing.

If you are a business owner currently using an assumed name certificate filed with the county and you have questions about converting to a more favorable form, or you are considering starting a new business and you have questions about choosing the proper form, I encourage you to contact me or your local trusted business attorney.

Protect Your Home And Your Credit

Your home is probably your largest and most important asset. It is also one of the most attractive assets to criminals and con artists. Not surprisingly, many states report that mortgage fraud is one of the most commonly reported complaints. The effect of mortgage fraud can be devastating, not only as a way of removing equity or destroying credit, but in some cases homeowners also unwittingly sign deeds giving away actual ownership and legal title to the house.

Special thanks to Emil Izrailov, a Certified Mortgage Planner with Kaye Financial Corporation, for providing a recent article that highlights a new twist in mortgage fraud, an “equity disbursement program” purportedly sponsored by the “CRA” (that sounds official, doesn’t it?):

Through direct mail advertising, consumers are being offered special "cash grant or equity disbursement" programs which claim to be linked to the Community Reinvestment Act (CRA) and, in some cases, even endorsed by the Federal Reserve.

The Federal Reserve Board cautions homeowners that "no such federal programs exist". In fact, the Federal Reserve Board does not "endorse or sponsor" any mortgage programs, and the CRA does not "entitle individuals to any grants or loans". Enacted in 1977, the CRA is a federal law designed to address unfair "redlining" practices in low-income neighborhoods, encouraging financial institutions to address the financial needs of the community as a whole.

Click here to download the rest of the helpful article.

How do you keep from falling victim to this or any of the other in a frighteningly wide array of mortgage fraud schemes including equity stripping, loan flipping, bait and switch and deceptive loan servicing? (For a further description of these and other schemes to guard against here is a link to a recent article from Nancy Kreisler). The best way to protect your home and your credit is a twofold process:

First, only work with an experienced mortgage professional who can provide exemplary references. You can even send an email directly to Emil Izrailov if you have questions about how to protect yourself from mortgage fraud or you are looking to obtain financing.

Second, before entering into any agreements for the sale of your home or for financing which is secured by your home, contact me or your other trusted attorney who is experienced in real estate, civil and consumer protection law. That attorney can review the agreements before you sign them to make sure that your interests, your home and your credit are protected.

The Problem With Going Paperless

Does anyone know your password to your online accounts? If not, they should.

That’s right, this is not a warning about security, this is a warning about the problem of making sure that your survivors have access to needed information in the event of your death or disability.

There is a growing trend towards managing assets online, oftentimes leaving your heirs with a lack of paper records and making them entirely dependent upon having access to your online accounts. If you don’t leave behind your user names and passwords, your information can be held so securely that it would require a court order, and costly legal proceedings, for your survivors just to gain access to the information. Special thanks to Michigan attorney William Josh Ard of Howard and Howard in Ann Arbor for bringing a recent article on this topic to my attention. As the author notes:

Keeping track of account passwords and Internet passwords is hard enough. Now imagine what can happen once a loved one is gone.

More and more people are using the Web to manage their financial and personal accounts. However, they don't think to leave behind user names and passwords with a trusted resource.

You may also recall the recent well-publicized court battle between the survivors of a Marine killed in Iraq and Yahoo, after the family, which did not have the account password, was denied access to the email account.

To avoid unnecessarily making your information inaccessible in the event it is needed by your loved ones, be sure to keep a current and complete list of all your accounts and login information. The list should be comprehensive, including everything from email accounts to bank accounts, investment accounts, credit cards - any other account that is password protected. Then, decide who else will receive or have access to the list, such as your spouse, adult children, financial advisor or estate planning attorney.

These problems apply equally to individuals and businesses. If your business depends on online accounts, make sure that the information on those accounts will be accessible to future owners, managers or employees who may need to take over the accounts with little or no advance notice.

Do you have a comment on this article or a suggestion as to how to maintain records of your online comments? I invite you to contact me or post a comment below.

Do You Plan To Work Forever?

Nobody lives and works forever so succession is inevitable for every business. But owners can get so busy in the day-to-day workings of the business that they never set aside the time to plan for the future.

If you’ve worked hard to build a business, make sure you have also put together a plan for an orderly transfer of ownership. Poor or non-existent planning has resulted in the end of many businesses and, particularly in the case of family owned businesses, can lead to financial problems and even breaking families apart. Failing to plan can also result in excessive estate taxes and in some cases the need to sell the company or valuable assets in order to pay taxes, administration expenses and debts.

A key part of a succession plan is often a buy-sell agreement, sometimes referred to as a shareholders agreement. This agreement can be used to provide a market for each owner’s interest in the event of certain triggering events (such as death or disability), promote continuity and stability, potentially freeze the value of an owner’s interest for business or estate tax purposes, help to retain S-corporation status and serve as a way to resolve a dispute or deadlock among owners. If nothing else, the agreement can be used to lay the groundwork for long-term planning.

Planning is a process, and it’s never too early to start. To preserve your business for the future, do the practical thing and start working on you succession plan today. To further address this topic or to talk about the options that are available, please contact me to continue the discussion.