The Problem with the Number “2” in Business

Author: Dustin Wetton

Many great things can be made from the combination of two people: a beautiful marriage, a great duet, a first kiss, and even an agreement. However, in business formation, this is often a problematic number. Many lawyers find joy in forming a business for an individual or for three or more partners, but with two there seems to be too many problems.

Take for example the two friends that decide to open a business together. As friends, these two people choose to be fair with each other and split everything equally down the middle. There is trust, respect, and a mutual desire to do what’s best for the business. However, what happens when one of the friends is forced to file personnel bankruptcy? What if they get a divorce and their disgruntle former spouse seeks to have a quarter of the business interest? Or what if the friend for some reason decides not to be a friend anymore and this lack of friendship turns into a lack of mutual respect and turns from a desire to do best for the business into a desire to do what is best for that person. What happens to that business 9 out of 10 times? It fails.

This is found too often in business and in all types of entities. It doesn’t matter if the business is a corporation or a basic partnership, when the company is formed with just two shareholders, two partners, two managing members, and no other actions are taken, the company is headed for disaster.

One of the best solutions to this dilemma is a buy/sell agreement. This simple tool is very similar to a pre-nuptial agreement, but unlike marriage, it has what is best for the business at heart. A buy/sell agreement can be used to create triggers that would allow the one business partner have more control than the other partner in making management decisions, often ending the control of the person who causes the trigger. For instance, if a partner files personal bankruptcy, that partner can lose their ownership interest in the company and it protects the company from that bankruptcy. There can also be triggers if the two owners cannot decide on any shareholder agreement or partnership agreement, a trigger that would allow a break in the stagnation.

It’s good to form a business with a friend, but both friends want to be smart and know that eventually something can happen to wrong them or a disagreement about how to manage things can come about. It is best to accept that Murphy’s Law is most often true; otherwise it wouldn’t be called a “law”. If you are in a business of two, or are going to form one, do the right thing, draft a good buy/sell agreement.

www.lauruslaw.com

What to do with that 2nd Deed of Trust

During a period of Laurus Law Group’s existence, we operated business as a tenant inside of a Coldwell Banker building. This unique location brought in a variety of clients, but more relative to today’s article, it brought in many questions from real estate agents. One question, or request, was to “lienstrip” the 2nd Deed of Trust from a house through a bankruptcy. This request was normally asked so that the property could more easily been involved in a short-sale as it was headed to foreclosure. I always responded the same to every request, no. I did this because the real estate agents had a misconceived idea of what lienstripping meant.

In understanding the idea of “lienstripping”, let me start more generally. A 2nd Deed of Trust on a home is more commonly known as a 2nd mortgage, line of credit, or sometimes just a lien on a home that has attached after the 1st mortgage is already attached. In foreclosure law, this 2nd Deed of Trust (DOT) is 2nd in line of priorities. Therefore, the 1st DOT has a priority in obtaining any money from a foreclosure in front of any 2nd, 3rd, or more DOT’s on the property. Thus, when property holders faced a foreclosure from the 1st, many people believed that if you can strip the obligation of the property holder to pay the 2nd DOT, then they can prove that they can continue making payments on the 1st DOT and stall a foreclosure sale.

The idea of lienstripping comes from bankruptcy. In a bankruptcy, a person can rid itself of personal obligations on contracts, lawsuits, and yes, even DOT’s. This is done regardless of what chapter bankruptcy you file. The way the law sees it, there is in personom and in rem lien obligations. In personom (the property holder) obligation to pay can be wiped clean in a bankruptcy. Therefore, that debtor will have no duty to pay the DOT and cannot be held liable for any deficiency in the future. However, bankruptcy does not get rid of in rem (property) lien obligations. Therefore, even after a discharge in bankruptcy is granted, all secured liens stay with the property. This means that after a sale, the liens must be paid off first. It also means that if the debtor decided to stop paying a 2nd DOT, that lien holder may decide to proceed with a nonjudicial foreclosure and take the house. While the debtor would have no obligation to pay any deficiency and cannot be sued by the 2nd DOT for failure to make payments, they may still loose their home for failure to make payments.

Thus, if you want to keep your home, make payments to the lien holders. If you are so behind that you cannot catch up in time to save your home from foreclosure, consider a chapter 13 bankruptcy to allow you to catch up and keep your home.

If you have any questions or comments regarding this blog email us at blog@lauruslaw.com.

www.lauruslaw.com

Pregnancy and Taxes: When does your child qualify as a dependent?

Author: Dustin Wetton

Even though the government has pushed back the tax deadline from April 15th to April 18th this year due to a government shut-down, this article is still a bit late for this last year’s tax filing season. However, because the topic is about pregnancy, this article can apply to anyone who is pregnant now, or will be pregnant the rest of the year. Did you know that most middle-income families can save up to $1,300 per year on their federal taxes by having a child? With such savings, you have to ask just how can pregnancy affect your taxes. The answer is, it really doesn’t.

Pregnancy is a momentous occasion, bringing joy, much change, and of course, life into the world. With all such potential happiness, according to the US Department of Agriculture, the average, middle-income family will spend nearly $300,000 on each child. These expenses don’t start the day of your child’s birth, but instead, start to accrue the day you find out you are pregnant, or even before that if you are planning on having a child. Pregnancy expenses are not cheap either. They can range from healthcare costs and maternity clothing, to pregnancy classes and nursery preparation. Thus, how are taxes not affected by such a change?

Normally, there are many tax benefits to having a child. First, there is the Child Tax Credit, which is a flat tax credit based upon living status, age, and income. Further, there are many expenses that beneficially affect taxes, such as healthcare costs, day-care, and education costs. While these expenses are heavily related to those costs accrued during pregnancy, the IRS does not see it that way. To claim your baby for the tax year he/she would have to be born by 11:59:59 on December 31. The IRS has made this matter very simple compared to adoption legislation and case summaries, the children are not dependents until they are actually born.

While this law keeps things simple, it may be something that should be reanalyzed by our government, you.

If you have any questions or comments regarding this blog email us at blog@lauruslaw.com.

www.lauruslaw.com

Advanced Healthcare Directive: What is it and Why You Need One

Author: Dustin Wetton

How many times have you been in a serious accident, and while checking into the emergency room you are asked if you have an advanced healthcare directive and had no idea what they were talking about? That used to be me, but luckily law school and experience opened my eyes to the beauty and necessity of an advanced healthcare directive.

This often simple document wields an immense amount of power. Remember the Terri Schiavo case? If she had an advance healthcare directive, the battle between her spouse and her parents over her life would have had a chance to be solved peacefully. Unfortunately, she did not have one, and she made national news because of it. Before I go into why her case was such a mess, let me first explain what an Advanced Healthcare Directive (AHD) is. An AHD is a written document that lets your physician, family, and friends know your healthcare preferences, including the types of special treatment you want or don't want at the end of life, your desire for diagnostic testing, surgical procedures, cardiopulmonary resuscitation, organ donation, and more. It is normally recorded with your primary physician, your attorney, your appointed agent, and yourself. The document is able to tell everyone your wishes and requests you when you are unable to make them yourselves, and they are implemented by your appointed agent who has the power to make care and treatment decisions on your behalf, and give instructions about their healthcare wishes.

The AHD is not something that you should wait for. It is necessary whenever you are in a state of incapacitation, which can vary anywhere from a surgical procedure to an enduring coma. Therefore, in the estate planning world, an AHD is one of the first documents that you should have, as it is necessary once you reach 18. Also, let me be clear, that an AHD is not the same thing as a Power of Attorney or a Living Will. A Power of Attorney is another great document to have, but its powers do not extend to the medical decisions necessary for your life. Therefore, this document is often irrelevant in a critical medical situation. The Living Will document is another good document, but in recent years attorneys have been using the AHD in place of the Living Will because it gives more specific and practical authority to the agents under its power, where the Living Will was often too vague to apply in many situations.

Now that you have a better understanding of what an AHD is, let me tell you why not having one can cause many problems, as it did with the Shiavo case. Most Doctors are limited in their ability to provide upmost care to their patients because of fears of acting against the wishes of their patients, and therefore running the risk of malpractice. Consequently, physicians look to close family members and friends for advice of the wishes of their patients in many life-threatening and life-sustaining situations. Thus, problems arise where the parents, spouse, friends, and the dog disagree about what is best for their loved ones. If unmarried, common-law will have no legal authority to make any healthcare decisions on your behalf. Even when you're married, the parents may have more legal authority than your spouse. Thus, the disagreements can end up in never-ending legal battles. Most of these issues can be resolved though an AHD where the physician understands their patients wishes. Also, family and friends can feel better knowing that even if they personally wanted something else, in the end, their loved ones received what they wished for.

In closing, it is a good idea to have this document. However, be aware that these decisions are not easy to think about. How long would you like to be on life-sustaining machines? Would you like to receive artificial nutrition and hydration while in a vegetative state, if so, how long? Funeral requests? Each of these decisions are moralistic, realistic, and philosophical, and therefore take time to come to a conclusion. Yet, they are all real concerns, so put your thinking caps on and get to work.

If you have any questions or comments regarding this blog email us at blog@lauruslaw.com

www.lauruslaw.com

How to Run an Effective Zone Defense against Workplace Romance

Author: Casey Rocha

Now that the NCAA champ has been crowned, I can stop thinking about basketball and focus on non-fraternization policies. “What a random medley of thoughts,” you say. Agreed, but rather than explore the rich tapestry of my inner psyche, let’s press on. There are profound doctrinal points to be made here.

How many of you have read your employment handbooks from front to back? I’ll bet not many. Yes, it’s long and soul-crushingly boring, but if you manage to get through it without falling asleep or lighting the document on fire, you at least have a quantitative sense of your legal rights and responsibilities.

Now let’s zero in on the paragraph(s) entitled, “Non-Fraternization Policy”. What does “fraternization” really mean? The dictionary defines it as the act of associating or forming a friendship with someone. In the context of employment, fraternization is commonly extended to romantic relationships between colleagues.

How can interpersonal relationships be prohibited in an employment handbook? Is this enforceable?? As is so often the case in the law, the answer is “maybe”.

Why adopt a non-fraternization policy? Primarily, an employer does so to limit the potential for on-the-job distractions and resulting negligence, thereby minimizing exposure to liability. They promote integrity, professionalism and discipline in the workplace. They protect against claims of favoritism based on personal bias and minimize cause for professional scrutiny. They eliminate conflicts of interest, etc. These provisions have become relatively commonplace in a wide range of settings, from small organizations to the U.S. armed forces.

It seems to be a simple, straight forward tool for limiting liability, right? Nope. On the one hand, you want these provisions to be effective. However on the flip side, you don't want them to be so far-reaching that they become unenforceable. Finding the balance can be tricky. A spate of civil lawsuits has challenged the parameters of these policies, requiring that they be sufficiently narrow to avoid interference with other types statutorily protected conduct. For example, an overly broad or ambiguous non-fraternization policy may be unenforceable if it improperly discourages union activity under the National Labor Relations Board. I doubt that you want to navigate these murky legal waters unaccompanied. I recommend that you hire an attorney to draft an ironclad non-fraternization policy for you.

Non-fraternization policies are worth their weight in gold when drafted properly, but they can be worthless if not appropriately and uniformly enforced.

Imagine the following scenario: you are the chief executive at a hospital. You learn that two of your employees have become romantically involved. You foresee problems… catastrophic ones. Nonetheless, you elect not to enforce your non-fraternization policy. Now imagine that the unthinkable happens—you’re slapped with a medical malpractice lawsuit arising from injuries caused by one of those employees. An employer’s failure to swiftly and effectively end the offending behavior may contribute to the allegation that the employer was negligent in overseeing its employees. In addition, the lack of consistency may ultimately weaken the employer’s potency in a general sense.

Ultimately, your best bet for combating workplace romances is two-fold. First, you want to make sure you have a legally enforceable policy in place. Second, you should establish and implement policies and procedures for enforcing that provision. Consulting with an attorney on the matter can help you preemptively address these risks & close up the gaps in your defense against fraternization in the workplace.

If you have any questions or comments regarding this blog email us at blog@lauruslaw.com

www.lauruslaw.com

A Marital Compromise: Filing Bankruptcy without your Spouse

Author: Dustin Wetton

Filing bankruptcy is a tremendously difficult decision to make, especially if the consequences of that decision may disrupt marital peace. To keep things harmonious on the home-front, an important option to consider is whether spouses should file together or separately.

A common misconception is that all debts of a marriage are each spouse’s responsibility, called “community debts.” While there are instances where community debts do exist, many debts are not community debts and therefore are not the liability of both spouses. Generally marriage alone does not make community debts, it is often through contracts and agreements between the lenders and the debtors. Commonly, only persons who signed for a loan or credit are liable for such debt. Thus, while finances and situations may be leading your family towards considering bankruptcy, it is very important to analyze each and every debt to see if it is in the best interest of your family to have only one spouse file bankruptcy.

A bankruptcy filing by one spouse is allowed under the Bankruptcy Code, and this filing does not bring the other spouse into the bankruptcy. While this may sound great, I must reiterate the necessity to analyze all of the debts to ensure that most, if not all, of the debt is that of the filing spouse, i.e. “separate debt.” I say this because if it is community debt, the protections of filing bankruptcy, called the automatic stay, will not be allocated to the non-filing spouse. Therefore, if there is community debt, and only one spouse is filing bankruptcy, then the non-filing spouse will be 100% liable for that debt themselves and the creditors will come after them hard as they would be aware of the other spouse filing bankruptcy. Thus, it is important to make sure what debt is what and how much at risk the other spouse may be.

Another important consideration is joint property. Under California law, property purchased during marriage is community property. Therefore, in bankruptcy, the bankruptcy estate will consist of rights to the community property. So even if only one spouse is filing, both halves of the community property rights enter the estate and all of it is both protected if it can be exempted, or is available for paying creditors. Therefore, it is important to analyze what properties may be at risk and to ensure that there are allowable exemptions or other protections available.

In sum, even if you are married, only one of you can file bankruptcy without affecting the others credit record, however, to do this without causing turmoil at home, be sure to have your debts and properties properly analyzed.

If you have questions regarding this blog or any comments, email us at blog@lauruslaw.com

www.lauruslaw.com

Immortal? When should you have an estate plan?

Author: Dustin Wetton

Chuck Palahniuk once advised that “we all die. The goal isn't to live forever; the goal is to create something that will.” Many of us have the difficult problem of making the mistake that we are immortal, or that it will never happen, yet, despite our best efforts, we must remember Chuck’s advice, “we all die.” Thus, to leave behind anything the way that we want to, we need to have an estate plan. Many people are also confused to when they need an estate plan. The are many common mistakes that I hear of : 1)You don’t need an estate plan unless you are getting old, 2) you don’t need an estate plan unless you have something to give away, and 3) my family will know what to do with my things.

Each of this three sayings are incorrect, and for various reasons. Mostly, what is incorrect with them is that an estate plan is not for the rich, the old, and for those with good family relations. An estate plan is a way to govern your life when you are not capable of doing it yourself. Its called planning for the future, and is as important, if not more important, than saving for a retirement, creating a savings account, or planning for your child’s future. A customized estate plan will ensure that you are best protected, that your family and the nest that you created are managed and guarded as best as possible, and that you don’t leave a burden on those left behind. Estate plans are also not just for your death, but also are used for many other purposes. For instance, a power of attorney can be used to buy property out of the state, and a healthcare directive can help guide medical decisions on your behalf when you are not conscious to do so yourself.

In the end, an estate plan can do many things, but when should you really have one? I guess the best answer would be that everyone should have some sort of estate plan, customized to your current situation, but people normally don’t like that answer. So I came up with three scenarios where you really should have an estate plan. (1) You are the parent of minor children. Whether or not you are married, regardless if the other parent is alive, each parent should have an estate plan in place. Their plan should consist of at the minimum a Nomination of Guardianship, a pour-over will, and a Guardianship/Minor Trust. The idea here is to protect your minor children, both with a nominated guardian and financially, in case you become incapacitated or unexpectedly die. Next, (2) you have property that you care about. If you own any kind of property, whether it be a house or jewelry, and care about how it will be taken care of once you are not able to control it, you should have an estate plan with at least a will. If you are really particular about controlling its positioning, then a trust might be a better solution for you. Lastly, (3) you care about your health care treatment. This is important because if you become unconscious, or are in a life-threatening medical emergency, you will need someone to make medical decisions for you. In this situation, you would want a healthcare directive, so that you can inform your family and the doctors of your health care treatment desires and other related request. You also may want to have a durable power of attorney to make sure that any necessary legal documents can be signed on your behalf.

Thus, while you may feel immortal, or sometimes forget that no matter how hard we try, we will all perish someday, it is best to remember that while death may be scary, its fate is imminent, and therefore a plan is always necessary. A good idea may be to use your upcoming tax return to plan for you and your family best. Then you can truly enjoy the fulfillment in the saying “death and taxes.”

If you have any questions or comments regarding this blog email us at blog@lauruslaw.com

www.lauruslaw.com