Court rules that shareholder of Corporation A cannot utilize de facto merger doctrine to seek dissolution of Corporation B.

The petitioner in this case sought to dissolve a corporation of which, he was not a shareholder on the theory that it had entered into a de facto merger with another corporation in which he held a 25% stock interest. A New York Supreme Court dismissed the petition, noting that the petitioner cited “no authority that would allow a court to utilize the doctrine of de facto merger to shift his shareholder interest in one corporation to another corporation for the purpose of forced dissolution of the new corporation.”

Sidney Turner

www.SidneyTurnerllc.com

Sidney Turner

www.SidneyTurnerLLC.com

Daniel Vasquez

A Palm Beach County condo community is turning to an unusual solution to deal with foreclosure-related problems that are sapping its finances: Bankruptcy court. The approach, experts say, could point the way for other condo and homeowner communities struggling with financial problems because owners can’t pay monthly assessments.

In 2010, The Spa at Sunset Isles — with 232 units in Royal Palm Beach — was facing several common problems confronting South Florida communities. It had a large number of homeowners falling into foreclosure and unable to make mortgage or maintenance payments. Banks were reluctant to take title to “underwater” properties worth less than the mortgages owed. Last year nearly half of the owners — 104 — were in foreclosure and 160 had stopped paying maintenance fees.

Last summer the community had a bank balance of about $25,000 and was $126,000 in debt to vendors and creditors. It had to raise monthly assessments from an average of about $358 per month to $400 per month — depending on size of each home — and required owners to pay special assessments.
So to get out of financial trouble, the Spa’s board decided to file for Chapter 11 bankruptcy in August 2010 in the United States Bankruptcy Court in the Southern District of Florida West Palm Beach Division, said John T. Kinsey, the association’s attorney.

Fast forward to today: The community has emerged from Chapter 11 and now has more than $490,000 in its bank accounts and the board hopes to drop monthly assessments from a current average of $400 to $251 in 2012. John Bazos, president of the condominium association, said the board also plans to make capital improvements to the property, including repairing roads and fixing a broken water fountain at the entrance.

“The community had a complete turnaround from being destitute to being prosperous,” Bazos said. “The result is increasing the real estate value because the financial strength we were able to gain via the legal avenues of Chapter 11.”

The community still faces financial difficulties because of the downturn in the market and the region’s pressing foreclosure problems. Five years ago, a two-bedroom, two bath home in the community sold for about $280,000. Today a similar home sells for around $45,000, say board members. But Kinsey said the bankruptcy filing saved the community from financial disaster.

Kinsey said the Spa’s board had to pay about $1,000 in court fees to file for bankruptcy and accrued about $50,000 in legal fees in the process.

By filing for bankruptcy protection in federal court, the community obtained court orders requiring banks to begin paying monthly assessments to the association and take title of homes in foreclosure, Kinsey said. Once the banks take title to units, they are required by Florida law to pay the monthly assessments for those units. And while most people think of financial reorganization under Chapter 11 as being only for major corporations, such as automobile companies and major airlines, condo and homeowners communities are also entitled to file for bankruptcy.

Some of the Spa’s homes had been locked in foreclosure proceedings for as long as 36 months, which meant that the association was unable to collect assessments from previous owners that had defaulted on mortgages or from the banks that hold the mortgage notes.

Florida laws could not achieve the same results, Kinsey said, because the statutes do not require banks to pay assessments before they take title nor require them to foreclose on a particular deadline. But in bankruptcy court, Chief Judge Paul G. Hyman had the authority to make the banks involved start paying the association their share of monthly assessments.

That’s because bankruptcy laws allow any entity that pays to maintain a bank’s collateral to recover its costs. In this case, the board was paying to maintain the common areas of the homeowners community, which are tied contractually to home loans in a shared community and considered part of the bank’s collateral. The next step was Hyman’s order, handed down in February, which enabled the association to force the banks to take title to units independent of their mortgage foreclosure actions.

“The association had to file Chapter 11 in order to accomplish any and of this,” Kinsey said. So far one bank has complied with Hyman’s orders and the association has begun filing lien foreclosure suits against the rest, Kinsey said.

Bazos said the community’s budget and morale are in the best shape in years.

“Our owners are very happy because their properties are standing on financially sound ground and the properties are easier to sell because you don’t have an association that is in default and you have an association that is able to make improvements to the property.”

dvasquez@tribune.com or 954-356-4219 or 561-243-6686. Daniel Vasquez‘ condo column runs Wednesdays in Your Money and at SunSentinel.com/condos. Check out Daniel’s Condos & HOAs blog for news, information and tips related to life in community associations at SunSentinel.com/condoblog. You can also read his consumer column Mondays in Your Money and at sunsentinel.com/vasquez.

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 Phantom Income in Shareholder Buy-Out Agreement

If you have recently been bought out and received a Schedule K-1 tax form from your old company for last year that allocates to a substantial net income sum that you never received. Isn’t it outrageous, that former business partners are shifting taxes on earnings that stayed with the company for their benefit?

If as the selling shareholder, member or partner did not foresee the possibility of a positive net income allocation for that portion of the tax year preceding the buy-out’s effective date, and did not negotiate a tax payment distribution in the buy-out agreement to the extent of any non-distributed allocation of net income, you are likely to be writing a bigger check to Uncle Sam.

For example a firm of four brothers organized as a corporation which, as is typically done, elected for pass-through partnership tax treatment as a subchapter “S” corporation. The plaintiff was a 25% shareholder of the corporation. The majority shareholders filed a dissolution proceeding which was resolved by a stipulation and order of settlement. Under the stipulation, plaintiff received $150,000 in exchange for surrendering his interests in the corporation.

A follow-up lawsuit was triggered by plaintiff’s receipt the next year of an allegedly “untruthful” K-1 from his former firm allocating $75,000 net income to the plaintiff, which plaintiff denied receiving. Plaintiff sued his former firm and his three brothers individually, alleging that the $75,000 was allocated to him to lower their own personal tax liabilities; that prior to plaintiff’s departure in 2007, the firm routinely made distributions to cover the partners’ personal taxes; and that the defendants were liable for the $25,000 in additional taxes owed by plaintiff on his reported K-1 income.

The plaintiff moved for partial summary judgment against the firm defendants, for a determination that they are obligated to reimburse plaintiff for the personal taxes due on the $75,000 he never received, based on a provision in the 2007 stipulation of settlement in the dissolution case:

“Upon surrender by [plaintiff] of his shares of stock in the respondent [firm] . . . the respondent will hold plaintiff harmless for any liability for the payment of taxes or other debts of the respondent which exist December 31, 2007.

The court rejects plaintiff’s reliance on the provision and denies his motion. The hold-harmless provision, the court writes,

“does not support plaintiff’s interpretation that the defendants agreed to pay his personal income taxes. The settlement agreement was made within the context of a corporate dissolution proceeding and the “taxes” clearly refer to corporate, not personal, taxes.”

Sidney Turner

www.SidneyTurnerllc.com

“Time is money,” Benjamin Franklin once famously said, creating one of the most enduring adages in the American business world.

The cliché, of course, refers to the opportunity cost of lost time and to the ideas that costs are incurred as time passes and that revenue cannot be generated through idleness.

A key take-away from the phrase is this: the longer something takes in the process, the more it costs.

Specifically in cases that involve liquidating a company’s assets, an equally important corollary comes to mind: the longer it takes to liquidate an asset, the lower the recovery will be.

 Performing tasks in parallel rather than in sequence is a method often used by healthy businesses to get more done sooner. 

This same method of operating works in adverse situations, too.

Sidney Turner

www.SidneyTurnerllc.com

A DLOM’s basic premise is that shares of a closely held corporation cannot be readily sold on a public market and therefore should be discounted to reflect the additional risk factors associated with the time and difficulty of finding buyers for non-publicly traded shares.

Sidney Turner

www.SidneyTurnerllc.com

Inadequate and defective documentation of ownership interest in a business is an all too common feature of closely held businesses and, after a dispute arise, litigation over an assert claim by adversely effected business partner’s standing (right) to sue is challenged.

The reasons for this state of affairs are many and diverse, e.g.:

• The owners lack a sophisticated understanding of the legal formalities involved in an ownership interest in the chosen form of business entity.
• The owners are unable or unwilling to spend the money for necessary legal and accounting services.
• The owners are family members or long-time friends who trust one another and believe they don’t need any written agreement or certification of ownership interests.

These circumstances should not deter you from investing in the required documentation. Make sure you get the proper documentation and protect your interest.

Sidney Turner

www.SidneyTurnerllc.com

Jean Georges a famous chef and a restaurateur in talking about his job there “are different jobs;

One is about pleasing people with what’s on the plate; the other is about understanding the market.

I’m a chef, but I think I’m a savvy businessperson, too. The toughest decision is always whether to open a restaurant.

Two or three bad months, and you could be out of business. You don’t do a business for pleasure- You have to make money.

The hardest decision is to close one that is not making money.

That was painful; each restaurant is like a family business.

Sidney Turner

www.SidneyTurnerllc.com

I handle corporate workouts, reorganizations and dissolutions and other types of disputes among co-owners of privately owned companies, in other words I advise clients when they are experiencing adverse business situations.

But what does it really mean to be a business lawyer handling dissolution and other types of disputes among co-owners or adverse business situations? Does it require a special temperament and skill set? Here’s my take on the answers to these questions:

It Means understanding business and the relationships that make it work.

This is the Sixth of the Six Major Points Series

Number SIX of the Six Major Points Series

It Means Knowing the Purposes and Limitations of Litigation. When I give presentations on business workouts and reorganizations, I tell the audience that the vast majority of cases involving a viable business ultimately leads to a buyout settlement, and that it’s only a question of how much time, distraction and legal expense the parties are willing to bear before they realize that the legal system is not an efficient or even wise way to decide the fate of a living, breathing company. However, for many different reasons litigation can be an unavoidable and necessary tactic in reaching the strategic goal of separating business partners who no longer can co-exist as owners and managers. Sometimes there’s just no other way to grab the attention of the other side. The litigation will take its normal, unpredictable course. The parties’ expectations of a quick resolution are undermined by many delays and procedural and discovery skirmishes attendant to all litigation. As the case drags on and the legal costs mount, the clients begin to reassess the costs and benefits of a buyout settlement.

The business lawyer must be willing to take the lead in re-evaluating and advising the client of litigation and settlement prospects at every stage of the engagement.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com

I handle corporate workouts, reorganizations and dissolutions and other types of disputes among co-owners of privately owned companies, in other words I advise clients when they are experiencing adverse business situations.

But what does it really mean to be a business lawyer handling dissolution and other types of disputes among co-owners or adverse business situations? Does it require a special temperament and skill set? Here’s my take on the answers to these questions:

It Means understanding business and the relationships that make it work.

This is the Fifth of the Six Major Points Series:

Number FIVE of the Six Major Points Series

It Means Understanding Valuation Basics. In many instances, by the time lawyers are brought into the picture the relationship between the business owners has deteriorated past the point of no return. If it’s a viable business, one or the other is going to have to be bought out. The single biggest impediment to amicable resolution becomes the disparate views of the company’s value as seen through the very different lenses being worn by the potential purchaser and the potential seller. The business lawyer is not a business appraiser, but he or she must be able to elevate the client’s understanding of basic appraisal approaches and methodology, along with any applicable legal concepts such as the case-law-driven rules surrounding minority and marketability discounts in “fair value” buyout proceedings. The lawyer’s grasp of appraisal doctrine becomes even more critical when collaborating with a professional business appraiser who has been engaged to prepare a valuation report and to testify as an expert at a valuation hearing. The business lawyer must be able to speak the language of appraisal and understand its doctrinal basis to put on a persuasive valuation case.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com

I handle corporate workouts, reorganizations and dissolutions and other types of disputes among co-owners of privately owned companies, in other words I advise clients when they are experiencing adverse business situations.

But what does it really mean to be a business lawyer handling dissolution and other types of disputes among co-owners or adverse business situations? Does it require a special temperament and skill set? Here’s my take on the answers to these questions:

It Means understanding business and the relationships that make it work.

This is the Forth of the SIX Major Points Series

Number FOUR of the Six Major Points Series

It Means Understanding Finance and Accounting Basics. Almost every business divorce case involves some degree of dispute over company finances and accounting. Many small companies involved in business litigation do not prepare any financial statements; much less do they have an outside CPA who prepares audited financial statements. The company’s tax returns may present a distorted picture of the company’s income, compensation to principals, and other expenses. A business lawyer must have a basic understanding of financial and tax accounting, including the ability to comprehend financial statements, internal reports such as QuickBooks, and (last but not least) tax returns, in order to converse intelligently with the client and the client’s accountant about financial issues that likely will take center stage in the litigation.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com