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Disclaimer: The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entries may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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Anatomy of a Contract – Introduction

Posted By on May 3, 2013

This is the first in a series of articles walking through the anatomy of a contract.  The intent is to demystify the various components/legalese that comprise a contract.

Clients often draft and sign contracts without advice of counsel.  Such agreements typically do a good job in summarizing the business deal but frequently contain nothing else.  While it is critical for contracts to memorialize the business terms, it is equally important to specify the mechanism to enforce those terms and how the text should be interpreted.  Without specifying such a mechanism the parties are subject to the applicable default legal provisions, which may have unintended consequences.

It is also important to understand what law will apply to a transaction.  For example, sales of goods are covered by Article 2 of the Uniform Commercial Code of the applicable state.  Service contracts are generally subject to common law decisions.  Equipment leases may fall under Article 2A of the Uniform Commercial Code.  However, if the lease is actually a secured lien it may fall under Article 9 of the Uniform Commercial Code.  Real estate transactions (leases, mortgages, etc.) are not covered by the Uniform Commercial Code and different rules apply for commercial and consumer transactions.

Once the relevant body of law is identified, it is important to identify which state’s law applies and where the litigation (or arbitration) will be conducted.  Other contract interpretation rules address the agreements of the parties that comprise the contract and those which should be excluded.

Contracts can be over-lawyered.  However, it is useful for clients to understand the general layout of a contract to avoid being intimidated by the legalese and to know when to get help of counsel.   These issues will be discussed in subsequent articles.

If you have any questions about the above or your contracts please contact us.

The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entires may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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Landlord overreach in commercial lease assignments

Posted By on March 17, 2011

First time commercial tenants are often intimidated by the verbiage of commercial leases.  Unlike typical commercial contracts the language is alarmingly one-sided.  Commercial tenants typically do not have the regulatory protections granted to residential tenants.  They are presumed to have greater business acumen than residential tenants and must therefore peruse lease language throughly.  Many landlords rely on form leases which sometimes contain over-broad language that can have unintended consequences.

An example comes from lease language that seeks to capture any consideration paid to to the tenant for assigning the lease or subletting the property.  On its face this is reasonable.  The landlord owns the property and should recieve the rental income earned from it.  But in an attempt to prevent the tenant from finding loopholes, the lease language sometimes overreaches.  Some leases close out  the section adressing consideration paid by sublessee or assignee to the tenant with language similar to that below:

If Tenant sells the business being operated at the Premises (either directly or indirectly, including, without limitation by way of selling, assigning and/or transferring control of Tenant), to an entity or person not controlled by or under common control with Tenant, then Tenant shall pay to Landlord, at the time of the closing of such sale, an amount equal to twenty percent (20%) of the gross sales price.

Alternatively, the consideration for the sale of business is included in the definition of consideration received from assignee or sublessee.

And just like that a sentence snuck into an otherwise innocent provision appears to give the landlord rights to 20% of the value of the tenant’s business.  Even worse, if the tenant operates multiple locations the landlord for this one location is claiming 20% of the total sales proceeds of the tenant’s entire business.

I have yet to come across a landlord who tried to justify this language and objected to its deletion.  However, the language above highlights the necessity of tenants reviewing their leases thoroughly before executing them.

If you have any questions about the above or your commercial leases please contact us.

The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entires may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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Legal uncertainties triggered by the foreclosure fiasco

Posted By on October 2, 2010

With Chase, GMAC, Bank of America and other banks suspending home foreclosures a legal nightmare can be added to the economic devastation caused by the mortgage crisis.  Complaints about the foreclosure process have been building up for a while and the dam finally burst this week.  Having seen at least one client sued for a loan he did not take based on unsigned loan documents (to a different borrower) and a phantom (and unrecorded) deed transfer to the actual borrower, I am not surprised at the stories of shoddy documentation that triggered this suspension.

The legal and economic uncertainties include:

  • questions as to who actually has title to the property subject to foreclosure if the creditor cannot produce proper loan documentation;
  • the validity of improperly documented debt and the identity of the creditor entitled to the payments;
  • uncertainty for tenants trapped between a landlord defaulting on their loans and lenders who may be unable to prove their rights to the property; and
  • the effect on the housing market if (or perhaps when) title insurance companies decline to provide “clear title” guarantees to purchasers of foreclosed property.

So far the foreclosure fiasco appears concentrated in the personal housing market, where lenders also have to comply with addition consumer protection rules during foreclosure.  Time will tell if (and how much) the commercial real estate market is affected by this.  It also serves as a reminder for creditors to make sure that have dotted the i’s and crossed the t’s in their loan and security documents.  If not, this is a good time to use the section of the Loan Agreement requiring continuing cooperation of the borrowers to bring their collateral house to order.

The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entires may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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Asset Protection with Single Member LLCs in the aftermath of Olmstead

Posted By on August 27, 2010

The long awaited decision in Olmstead v. FTC raises questions as to how much the plain language of the various LLC acts apply to single-member LLCs.  Even though LLCs are rooted in partnership law they bear many corporate characteristics (the ability to have just one member being one of them).  But even as the various legislatures allowed LLCs to stray from their partnership roots they did not address the loophole created by allowing partnership protections like charging orders to remain when there is no “partnership”.  Needless to say legal practitioners eagerly embraced this loophole to try to shield assets unconnected with business purposes.  Commentators like Larry Ribstein noted this problem and warned that the legislatures rather than the courts should fix these anomalies.

That horse is now out of the barn.  Olmstead is the latest case where the courts have ignored the LLC Act to allow a creditor to seize the membership interest of a single-member LLC.  At least one commentator has noted that the majority opinion is not a model of clarity and ultimately relies on the difference in the practical effect of the assignment of the entire interest of a member in a single-member LLC as opposed to a multi-member LLC.  The result, as the dissent notes, is that “[d]espite the majority‘s claim that it is not creating an exception to the charging order provision of the statute for single-member LLCs, its analysis necessarily does so in contravention of the plain statutory language and general principles of Florida law.”

Now whether such protections against creditors are justified on policy grounds is a different question entirely.  It is unlikely the legislatures intended to shield the type of conduct alleged in Olmstead.  As noted in other articles in this blog, this is probably another example of legislators amending a statute (to allow single-member LLCs) without making sure that other portions of the LLC Act did not need modification.

Olmstead also stands out because it is the first state supreme court decision to make such a reading of its own LLC Act.  Previous deviations from the plain language of the LLC Acts have come from bankruptcy courts.  Florida is unlikely to be the last state to limit the charging order protections for single-member LLCs.  Next comes a question whether “charging orders [are] intended to be an integral component of an interest in an LLC, rather than merely a remedy.”   The answer to that question will decide whether various state courts respect the charging order protections granted to LLCs formed in other states.

This draws into doubt the common strategy of using single member LLCs to shield assets from creditors.  The efficacy or newer and more exotic creations like Series LLCs (particularly across state lines) is even more doubtful.

The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entires may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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“Fair Value” ambiguity in Illinois

Posted By on March 30, 2010

Effective 2007 Illinois amended the definition of “fair value” in the Business Corporation Act (Sections 805 ILCS 5/6.15, 11.70(j)(1), and 12.56(e)) to exclude the use of minority discounts and, absent extraordinary circumstance, lack of marketability in valuing shares.  This provided legislative guidance to the courts on how to determine fair value by remedying the absence of a definition in the original statute.  Previous Illinois court decisions using minority discounts to value shares have now been superseded.  But ambiguity remains.

Many commentators have noted the failure to define what “extraordinary circumstances” permit the use of marketability discounts.  This is an issue that will be litigated in the courts.  Even more glaring is the failure to coordinate the changes with the statutes for other business entities.  Even with the franchise tax oddities noted in the previous post, LLCs have grown in popularity.  But the legislature failed to make similar changes to the fair value definitions in the LLC Act.  See 805 ILCS 180/35‑65.

As a result, while the Business Corporation Act reflects the legislature’s intent to protect minority shareholders of Illinois corporations the LLC Act does not provide similar protection to minority members.  Of course there is no guarantee that the courts will rely on the plain language of the statute.  It is possible that the courts will ignore the plain language of the statute to read in an unexpressed legislative intent.  This is what has started happening to charging order protections in single member LLCs.  Even with unambiguous statutes that makes no distinction on the number of members in the LLC, courts in various states have started using the underlying rationale of the rule (to prevent a forced partnership) to invalidate the protection.

With corporations no longer the automatic default entity chosen by business owners the legislature should coordinate future changes to the various business entity statutes.  Alternatively, it should provide some clear direction of legislative intent as to why only one statute was amended.  It will prevent situations like this from recurring.

The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entires may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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Filing fees and entity choice in Illinois

Posted By on March 28, 2010

A couple of hundred dollars should not deter an entrepreneur from his or her desired entity choice.  But it often does.  A new venture typically does not have a revenue stream set up and business owners are eager to limit their cash out flow.  Illinois does not help matters with an odd filing fee structure that ends up steering business owners towards corporations rather than limited liability companies.

Business owners naturally gravitate towards the $175 (plus the filing fee at the county level) required for a corporation instead of paying $500 to set up an LLC.  But the oddities in Illinois’s filing fee structure do not end there.  The annual franchise tax for corporations is based on a percentage of paid in capital.  LLCs pay a flat fee of $250.  As a result businesses with heavy capital investments by their owners are better off (solely for franchise tax reasons) operating as an LLC.  Given the state’s fiscal condition, one would expect Illinois to modify the franchise tax for LLCs to capture currently lost revenue.

While franchise taxes can dictate the choice of entity, they should not be the sole deciding factor.  Business owners should consider other factors for entity choice including income tax issues, the desirability of charging order protections, ease of administering various entities, employment taxes for owners, etc.  These issues can easily trump the few hundred dollars paid to Illinois.

In an ideal world the filing fees for various legal entities would be harmonized so that business owners can look at more important business related issues in choosing their entity.  Similarly, when the legislature amends the Business Corporation Act one would hope that they coordinate the changes with similar provisions of the Limited Liability Company Act, the Limited Partnership Act, etc.  As will be discussed in another post, the legislature’s failure to do so often creates legal ambiguities.

The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entires may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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