Articles Posted in Business

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In my last post I discussed how a designed officer / broker, who places their real estate license with a corporation, is not liable to third parties for failing to supervise the corporations employees as required under the Business and Professions Code. Another argument used by experienced Sacramento and Yolo real estate litigation attorneys is to claim that the broker is liable under traditional agency law. In this case, however, something more is needed.

principal agent agency.jpgIn Sandler v Sanchez the plaintiff was trying to make the corporation’s designated officer – broker liable for misrepresentations of a salesman. The plaintiff also argued that the designated officer/broker could be held vicariously liable, under principal -agent law, for failure to supervise the salesman. Generally, a corporate employee acts on behalf of the corporation, and not its owner or officer. But here the plaintiff argued that, though the salesman was not the broker’s employee, he was his agent, and on that basis there could be liability. The plaintiff directed the court to federal court decisions (which the state court does not need to follow), saying that a right to directly control the salesman allows liability to third parties. However, the U.S. Supreme Court has held that aright to control, by itself, does not create a principal – agent relationship that would make the principal (here, the designated officer) vicariously liable for the salesman’s conduct. There need to be additional factors to create this liability.

The federal court case involved a designated officer/broker and the offending salesman. There was evidence in that decision that decision that the broker intended to turn the real estate business over to the salesman so the broker could pursue another career, and “it was agreed” that the broker would remain the designated officer/broker until the salesman got his own broker’s license. Although the broker understood that he remained personally responsible to supervise the real estate salespeople, he agreed to delegate that duty to the salesman so that the salesman could continue to run the corporation as a real estate brokerage. Also, the evidence established that the salesperson agreed to this arrangement. This is much more that the broker’s simply abandoning the statutory duty to supervise.

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Recently a federal court in Northern California found that a document which one party claimed was a non-binding proposal was really a binding ground lease agreement with purchase options, which resulted in a 16 million dollar damage award. The proposal concerned development of the Santana Row project in San Jose. Generally, creating of a valid contract requires mutual assent. An “agreement to agree, ” without more, does not create a contract. In this case the court found more.

Santana Row.jpgIn First National v. Federal Realty, First National controlled the property but did not want to sell it yet. Federal unsuccessfully offered to buy, and the parties entered negotiations for a ground lease that lasted several years. They exchanged several proposals, including a “counter proposal” and a “revised proposal.” Finally the both signed a document titled “Final Proposal,” a one page document. Earlier proposals stated that they were non-binding; the final did not include this language. It stated that it was “accepted by the parties subject only to approval of the terms and conditions of a formal agreement,” and Federal was to prepare a formal legal agreement. And it provided that First National could require Federal to buy the property any time over a period of ten years; and that Federal could force First National to sell at the end of ten years (the “Put and Call”). Federal never prepared a formal agreement, and decided it did not want the lease.

The court First looked at the specific language of the Final Proposal. It did not include the standard non-binding clause, and said that its terms were “hereby accepted by the parties subject to” only a formal agreement. The court then looked at the surrounding circumstances. There was the passage from counter to revised to final proposal.

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Sometimes a debt may be disputed between the parties. In the early days of my practice I heard stories of people sending a check to their creditor for less then it was due, marked “payment in full” with the hope that the creditor would not notice, cash it and be tricked into accepting less than was due. The rules then were thought to be clear, but they turn out not to be so obvious, so anyone with the situation who is not sure of the consequences should consult with an experienced Sacramento, El Dorado, or Yolo Business Lawyer.

“Accord and Satisfaction” is a legal term for an agreement to accept something different from what a contract provides for in order to satisfy the requirements of the contract. Something different can be less money than due, or it can be different in kind, such a bushel of apples instead of a peck of peppers. The creditors acceptance of something different than required extinguishes the contract (or ‘satisfies’ it). Civil Code section1521, 1523.

check_book_and_statement.jpgRegarding checks, in 1987 the California legislature enacted Civil Code section 1526. It provides that for a a check mark “payment in full,” acceptance does not create an accord and satisfaction if the creditor protests by deleting the notation, or accepts the check inadvertently or without knowledge of the notation. There are exceptions to this rule where the check is tendered in conjunction with a release of a claim, or under a composition or extension agreement with creditors.

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It often happen that creditors and plaintiffs against corporations and LLCs in California find that the corporation has no assets from which to collect. They then want to collect from the individuals behind the entity. A shareholder (or LLC member) may also be liable for the corporation or LLC’s obligations under the common law “alter ego” doctrine (called ‘piercing the corporate veil’). Courts regard the alter ego doctrine as a drastic remedy and do not easily disregard the corporate form, so Creditors and plaintiffs should consult with an experienced Sacramento and El Dorado business attorney.

The corporate entity may be disregarded and the shareholders held personally liable for corporate debts because of the manner in which they have dealt with the corporation. There are two requirements:

Unity of interests: First, the shareholders sought to be held liable have treated the corporation as their “alter ego,” rather than as a separate entity; and Resulting injustice: Second, it would “sanction a fraud or promote an injustice” to uphold the corporate entity and allow the shareholders to escape personal liability for its debts.

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I recently wrote about the California Public Benefit Corporations law recently enacted in California. Enacted at the same time was legislation for creating a different type of corporation. Called a flexible purpose, it allows as its name described- joint purposes of profit and public benefit.

The standard corporation obligates directors to promote the long-term value growth and maximize profits for shareholders; nothing else. the business judgment rule rises as a presumption that the directors exercised good faith in pursuing the corporation’s interest; however, as experienced Sacramento and El Dorado Business Attorneys advise their clients, the rule does not arise is there is no reasonable connection between the directors’ actions and achieving and maintaining profitability.

New Corporations code section 2602 requires the flexible purpose corporation articles to state two things:

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California recently enacted Assembly Bill 361, which allows formation of “Benefit Corporations.” Maryland was the first state to enact such a law, California is the sixth. The law allows formation of corporations that have goals other then maximizing profits. In the traditional form, corporation directors have a fiduciary duty to shareholders to maximize profits and promote the long-term value growth for shareholders. As experienced Sacramento Business Lawyers advise their clients, the business judgment rule rises as a presumption that the directors exercised good faith in pursuing the corporation’s interest; however it does not arise is there is no reasonable connection between the goal and their actions. In the benefit corporation however, the directors have a legal duty to take into account the public interest.

A benefit corporation must l have the purpose of “creating general public benefit” stated in its Articles. General public benefit means a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation. -There’s the rub- the third party standard. There are a number of organizations who have established standards, and you can be qualified by them for an annual fee. The benefit corporation may also identify in its Articles one or more specific benefits that shall be the purpose or purposes of the benefit corporation.

pen_and_book.jpg Specific benefits can be:

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A right of first refusal is a preemptive right which gives the right-holder a contract right to buy the asset or real property if the owner decides to sell. It is different than an option because, under an option, the optionee/buyer can require the optionor/seller to sell the property. But the right of first refusal only gives the buyer a chance if the owner decides to sell. Occasionally the distinction is not no clear, and parties need to consult with experienced Sacramento, Yolo, and San Joaquin real estate attorneys.

The right of first refusal is commonly granted to a tenant in a commercial lease. The Right is part of the consideration for the tenant’s covenants under the lease. The Right is triggered when the events stated in the contract occur. Usually, the contract requires that the seller receive a bona fide offer from a third party. It also usually requires the holder of the Right to buy on the exact same terms and conditions offered by a third party. In the usual transaction, this can be done and must be enforced. However, the third party offer may include terms that the holder of the right could never satisfy; in this case the courts take a closer look at the offers.

In C. Robert Nattress & Associates v. Cidco the third party offer provided the seller with $270,000 cash from escrow. The tenant’s right of first refusal was to be “on the same terms and conditions so offered.” The tenant’s offer was a combination of cash plus credit against the seller’s note. While not on identical terms, the tenant’s offer provided that the seller “…was to receive the same amount from [buyers] as would have been received if the property were sold to plaintiffs.

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Tender of performance is a critical concept that only arises in the event of a dispute. The general rule is that to claim the other party is in breach of contract, you have to first tender performance.

1. Tender must be made at the proper time and place. If the agreement does not provide a specific time, then at a reasonable time.

2. Tender must be by the proper method. If the agreement requires a deposit in escrow, it must be deposited; if performance is required by certified mail, it must be so.

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The California Limited Liability Company (“LLC’) is often used as an entity to limit personal liability in operating a business or holding assets such as real estate. An LLC’s members do not have personal liability for the debts of the LLC, as long as they respect the separateness of the LLC entity. An LCC is governed by the terms of an Operating Agreement Some licensed professions, however, such as real estate brokers and attorneys, are not allowed to use the LLC entity.

Not available under California law however is the “Series LLC”. A series LLC is a single LLC entity which can be composed of a number of ‘series;’ separate sub-entities which can hold different assets, and there is no crossover in liability between the series. Of course, the series have to each be treated as arms-length separate series, without commingling funds, but if they are they provide a unique protection. An experienced Sacramento Business Attorney can assist you in ensuring that you do not risk losing the protection of limited liability company.

996021_shortline_railroad_bond_1906.jpgAs an example of how the series LLC works, suppose the John Doe LLC holds, in Series 1, a commercial property operated as a rifle range. Series 2 holds a 12 unit apartment building. If there is a tragic accident at the shooting range resulting in liability for the owner of the commercial property, a judgment can only be enforced against Series 1 assets, not Series 2 assets. This is equivalent to forming two separate California LLCs for the two properties. Delaware, Nevada, Illinois, Oklahoma, and Iowa all allow for series LLC.

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The California Board of Equalization (“BOE”) is responsible for collection of sales and use taxes. When you buy a product in California and are charged sales tax, the seller is required to file a return, and pay the tax, to the BOE. Sales taxes are imposed by the state, as well as local government, on personal property purchased in California. Use taxes are imposed on personal property bought out-of state, and then brought into California for use.

In most instances, the BOE considers a construction contractor to be a consumer of “materials” which they furnish and install in their construction projects. Such items as lumber, nails, and concrete become part of the construction project itself. They lose their identity and become an integral part of the completed structure. The contractor, as consumer, pays sales tax on these items.

However, the contractor is considered a retailer of “fixtures” which they supply to the job and install. Fixtures is defined by the BOE as items which are accessory to a building or other structure and do not lose their identity as accessories when installed. Such items as lighting and plumbing fixtures, and custom fabricated seating. As retailer, the contractor must charge his customer a tax measured by the retail selling price which, in the case of a lump sum contract, is the cost price of the fixture to the contractor. A fixture has a specific meaning in real property law; however, the meaning of the term for sales tax purposes is separate and governed by state regulation.

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