That recently changed, as a wave of panic swept through the local real estate bar in recent weeks.  And boy oh boy, are there some shocked and angry real estate lawyers out there.  This is a horrible new law in that it makes it unlawful for many people to sell their own real estate on contract.

It has been such a rude awakening for so many lawyers that a Continuing Legal Education class was quickly organized for next Friday in a matter of weeks.  Usually, CLE’s are planned months and months in advance.

Congratulations to those of you who listened to my teleclass on the SAFE Act or who read my blog.  You knew about this crazy new law long before many real estate lawyers did.

If you want to learn more about the SAFE Act and the several new laws that have passed recently, register for the July 17 real estate class.  Details are here.

You can also listen to the teleclass on this blog.

Here’s another article about the dangers of buying legal forms from websites that are not owned and operated by lawyers licensed in your state-  http://indianavirtuallaw.com/news/avoid-legal-forms-companies

Shareholder disputes are time-consuming, expensive and counter-productive. Shareholders disputes are easy to avoid, if you agree on basic principles before shareholders come together as business partners. The basic principles include-

1. Who does what jobs.
2. Who gets paid what and when. (I include a provision to cover taxes.)
3. What happens if someone stops working or completing their job duties.
4. What happens if there is a buy-sell “triggering event” such as death, divorce, dissolution of the entity, disability, etc.
5. How elections are held to select company leaders.

The key to solving shareholder disputes is to AVOID them in the first place through buy-sell agreements, operating agreement and similar documents. Do NOT form your business partnership without addressing these issues IN WRITING AT THE START.

One final thought. . . pick your partners well. I have myself had to endure difficult and unreasonable business partners. So, trust me when I urge you to be cautious in selecting your partners. Assume each partner will be unreasonable at some point.

And get it in writing at the start!

As the costs of litigating disputes continue to increase, litigants are increasingly settling their disputes through arbitration. Arbitration is a process in which a neutral third person (arbitrator) or panel, usually of three persons, considers the facts and arguments presented by the parties and then renders a decision. By utilizing arbitration, litigants can avoid trial, and the lengthy and expensive process of getting to trial. Arbitration usually results in a quicker decision than could be had by going to court. After the arbitrator renders a decision, that decision can be enforced by the courts. However, the courts cannot hear an appeal of an arbitration decision, except in the case fraud.

Arbitration is often preferable for the plaintiff who wants quick redress for the harm he or she has suffered, but defendants may prefer the longer and slower processes of trial and appeal in the courts. The rules of evidence in arbitration differ from those in trial. There are other differences between the two processes. Consequently, before a party agrees to submit to arbitration, thereby waiving the right to trial, careful consideration should be made as to which process is more likely to yield the better result.

How do parties choose arbitration over trial? They simply agree to arbitrate, usually in a written agreement. Written agreements to submit a dispute to arbitration can be signed before or after a dispute arises. So, for example, an employment agreement might include a provision requiring an employee to submit a wage dispute to arbitration. Nearly any agreement can contain an arbitration provision. Agreements can even be written to require mandatory arbitration only if requested by one but not the other party to the agreement.

Whether arbitration is right for you depends on a number of factors particular to your circumstances. However, all parties to an agreement in which significant disputes might arise should consider whether arbitration is a preferable alternative to resolving those potential disputes.

Question for Matt-

“Matt-

I am in litigation with a company I had a 3 year non-compete. They litigate many of their former dealers. It has been almost 4 years since I left, and I have one the preliminary injunction hearing in December. My attorney now wants $50,000 up front to continue the case, my small growing business is struggling because of the suit. I am worried about the small amount of assets I have left – I don’t think its possible for me to fight the case this summer – when its slatted for trial. If I fight, if possible, I risk all I have, but if I don’t – I am in the same boat.

I can’t get a straight answer from my attorney about if I loose, although she is great about fighting the case.

Any help?

CM”

Matt’s answer-

First of all, your lawyer stinks at her job!

If she can’t help you understand your case, the law governing your case, your options and the costs-benefits of your options, then she is doing a horrible job.  A lawyer is first and foremost an educator.  We TEACH our clients what the law is.  We TEACH judges what the law is or should be.  And we TEACH juries what the facts of a case are and how they mesh with the law.

Good lawyers even TEACH opposing counsel about the strengths and weakness of a case or what the controlling law is, as part of a lawyer’s advocacy for the client.

If you can’t get basic guidance from your lawyer, you have to question everything she does.  TEACHING is job #1 for a lawyer.  If she can’t TEACH, she can’t “lawyer.” 

How is your lawyer going to explain your case to a judge or jury, if she can’t even explain it to you?

Fire your lawyer and find one who can communicate well enough to do the job!

As to your particular covenant not to compete, I would need to read it.  I’ve enforced many covenants, and I’ve defeated many covenants here in Indiana.  Each case is different, as the facts and the contracts differ from case to case.  Also, I am unsure of where you live or what state’s law will control.  In some states, restrictive covenants are harder to enforce.  So, I would need more details.  Sorry, but that’s an honest answer.

I think you might start your analysis with getting a second opinion from a new lawyer!

You can also read Are Covenants Not To Compete Really Enforceable?  That’s a blog I posted here several weeks ago.

Best of luck!

Stay out of court, because courts often make bad decisions that can have enormous impact on your business, your personal life and your finances.  If you stay out of court, you increase your chances of controlling your own fate.  If you let a judge decide, you have no control.

One of my law partners has a great expression about clients who get themselves entangled in lawsuits:

“When a client has to file a lawsuit or gets sued, he has already lost.”

What’s that mean?

It means lawsuits cost.  They cost you or your business:

• Time spent in the courtroom, in depositions, reading documents, talking to your lawyer, in mediation, reading court documents, searching for evidence, etc.
• Money for attorneys’ fees, expert witness fees, photocopies, travel, etc.
• Opportunities to make money elsewhere doing other things, to grow your business, or to take personal time to be with family and friends.
• Your health.  Lawsuits are stressful.  The only thing more stressful than getting sued is having to file a lawsuit.  Lawsuits are fun for lawyers.  I love them, from a professional vantage point.  I get to exhibit and sharpen my advocacy and strategy skills, but lawsuits are no fun for my clients.
• Goodwill or reputation.  Getting sued can hurt the image people have of your business or you.  The newspapers rarely report stories accurately.  Allegations and even rumors are often reported as facts.  People who really, truly know you and your ethos will be unaffected.  Everyone else,  including your customers, vendors and potential customers, will develop doubt in you to some degree.

A good lawyer-friend of mine just got a horrible ruling from a judge in a divorce case.  The judge was wrong and should be appealed, but at what cost to the client?  The judge robbed a father of all time with his children in a visitation ruling.  The father in the case is not a bad guy at all, but the judge, for whatever reason, decided that the man should no longer see his own children. 

Amazing isn’t it?  How can one human being exercise that much power over another human being.  This father is dying inside, because he no longer can see the children he loves so much.  It’s very sad, and that judge should be ashamed of himself.

In a divorce case, there is not much you can do in advance to avoid a divorce lawsuit.  Save your marriage, if you can.  Or, don’t marry THAT woman in the first place.  Ladies, don’t marry THAT man!  That is the only lawsuit prevention available in a divorce context.

But what about your business affairs?

Do you take these preventative measures:

• Meet with your lawyer when you are unsure of your rights?
• Meet with your CPA, lawyer and insurance agent at least once every year?
• Have your lawyer draft or review all your contracts?
• Have your lawyer develop an asset protection plan?
• Use limited liability entities properly to create a “corporate shield?”
• Train your staff on a regular basis?
• Have processes and procedures developed into an operations manual?
• Properly use insurance to transfer liability risks away from you or your business?
• Etc.

If you answered “no” to any of these questions, then it’s time to go see your lawyer.

Question from one of Matt’s readers-

“Dear Mr. Griffith,

I rented an apartment in West Lafayette IN for six months and the lease ended on DEC 31, 2008. I had vacated the apartment on DEC 22, 2008 and left the keys and forwarding address with the landlord. Does the 45 days count from the date my lease ends or the date I left the forwarding address? I will appreciate your response.

Thanks,

S.A.”

Matt’s Answer-

Your question concerns Indiana’s security deposit statute, also known as the 45-Day Letter Rule.  Most states have a similar rule.  The 45-Day Letter Rule governs how a landlord of a residential property must handle the tenant’s security deposit after the lease is terminated.

In Indiana, the 45-day triggering event is the date the landlord regains possession. For you, that would be the date you returned the keys.

The statute requires the landlord to provide you (via US mail is acceptable) with an itemized list of any damages, which can include unpaid rent, and the balance of your security deposit, if any.

I represent far, far more landlords and property managers than tenants.  So, I can say with great confidence that the 45-Day Letter Rule is not well understood or even known by most landlords.  In fact, when I speak at the “Ask Matt” portion of the monthly meetings for CIREIA, I often ask how many attendees (real estate investors) do not know about the 45-Day Letter, and there are no fewer than 10 hands raised each time.

For more information on this law, visit the "Ask Matt" page at CIREIA’s website-  http://www.cireia.org/clubportal/ClubStatic.cfm?clubID=1507&pubmenuoptID=21366

Another question from one of Matt’s readers

"I was at the CIREIA meeting tues. and had a few questions about the 45 day rule.

1. Does it apply to section 8 also?

2.Does this also apply to section 8 unpaid utilities and any damages after they move out?

Thanks for your time,

B.H."

Matt’s Answer-

The 45-Day Letter Rule applies whenever any landlord takes any "security deposit" from any residential tenant in Indiana.

A "security deposit" is anything beyond the first month’s rent.  So, if you take the first and last months’ rent, you have a security deposit in the form of the last month’s rent.

What’s CIREIA?   

It is the Central Indiana Real Estate Investors Association.  I’ve been its Legal Affairs Chairman for more than 15 years.  For more information on CIREIA, go to its website- CIREIA’s Website.  If you are serious about owning investment real estate in Indiana, you should be a member of CIREIA.  Joining CIREIA for $150/year-  that’s a “no-brainer.”

.

The best way to resolve a dispute is to AVOID disputes in the first place!  Seriously.  Think about it.

Lawyers spend as much or more time resolving disputes than they do preventing them.  The cynic in me thinks that lawyers prefer lawsuits, because lawsuits are time consuming and generate more fees for lawyers.  When a client gets sued, the client has few options- settle on unfavorable terms, bankruptcy or fight the lawsuit.  There are costs associated with each of these three options.

There is a better way. . . well drafted and implemented contracts and legal forms.

Sadly, many clients do not want to pay a lawyer for the time it actually takes to create a good contract.  Yet, a good contract is like insurance, in that sense that you can pass on liabilities and risks to another person through contracts.  Actually, insurance is a contract between you and the insurer.  A good B2B or B2C contract transfers risks from your business to another business or your customer, much like insurance.

Best of all, contracts set expectations.  Everyone signing a good contract knows what the result of a lawsuit will likely be, resulting in fewer reasons to file lawsuits.  Think about this- Why would you defend a lawsuit, if you knew you were going to lose in court?  If your contract tells you that you’re going to lose, then settle and write a better contract next time.

The difficult lawsuits are those where (1) there is a bad contract in place or (2) the facts are uncertain.  Those are the cases that should go to court.

However, before you run to the courthouse, consider four other ways to resolve a dispute:

1.  Try it again.     Reformulate the relationship by drafting a new contract to replace the one you signed.  Presumably, you and your “opponent” wanted to do business together when you signed the first contract.  If the contract form you signed was poorly written, consider efforts to save the relationship and sign the contract you wanted from the beginning.  If all trust is lost, then this option won’t work.

2.  Try talking.   Try settlement negotiations with or without your lawyers present.  It is amazing how easy it is to resolve disputes over a cup or coffee or a beer.  Try it.

3.  Mediation.  This is a process available before or after a lawsuit is filed.  A mediator is hired to assist you in negotiating a settlement.  The process depends on the willingness of the parties to settle.  Note that the rules governing mediation differ depending on whether mediation is done before or after a lawsuit is filed.

4.  Arbitration.  Essentially, you hire a private judge.  The advantage of arbitration is that it is faster and cheaper than going to court.

In a future blog, I’ll talk about these four options in more detail.  There is an article on arbitration clauses in contracts on my law firm’s website-  www.indiana-attorneys.com.

A buy-sell agreement (“BSA”) is a great document.  BSA’s can be used for corporations, limited liability companies and partnerships.  Often, a BSA is embedded in the Operating Agreement of an LLC or the Partnership Agreement of a general, limited or limited liability partnership.  The form of a BSA is far less important than are its contents.  So, don’t get confused by the name of the agreement.  Rather, consider the purpose and content of a BSA.  I’ll write about the substance of BSA’s in a future blog.  Here, I want you to consider WHY you should consider a BSA for your business partnership.

BSA’s serve several important purposes, such as these:

• A BSA can prevent disputes over control of a company.

HOW?  A well-written BSA establishes when and how one owner may or must buy the ownership of another owner.  If disputing owners know the outcome of their power struggle, they are less like to fight.  The end result is already decided.  Generally, people fight, when they believe they can make gains through the process.  BSA’s reduce the opportunities to gain through struggle, and thus reduce disputes/lawsuits.

• A BSA creates a market for your ownership interests.

HOW?   There is no market to sell partial ownership interests in most small companies.  There is no stock exchange for such “closely-held” companies.  A BSA can create a market by requiring one owner to  buy the other owner’s shares under certain circumstances, which we call “triggering events.” 

    “Triggering events” are bad things that can happen to any business owner.  The key triggering events are: 

• The death of an owner.
• Marital divorce.
• The disability of an owner.
• Unwillingness of an owner to continue the business.  I call this “disinterest.”
• Retirement by an owner.
• Dissolution of the company.

• A BSA can further your Asset Protection Plan.

HOW?   Under certain circumstances, a BSA can make it extremely difficult for the creditors of an company to get at the ownership interests of an owner.

• A BSA enables you to keep your company longer.

HOW?   If your partner “triggers” your buy-sell agreement, you can agree in the BSA to a payment plan.  So, in other words, if you have to pay $80,000 to buy your partner’s ownership interests, the BSA can provide for terms.  Typically, you agree to a down-payment, a modest interest rate on the balance and payments over time.  That enables the “buying” owner to keep the business going, rather than being forced to sell the company or key company assets.  Having to buy-out your partner is an extraordinary expense.  A BSA can make those payments manageable.

• Much, much more.

There are other advantages to BSA’s.  There are also disadvantages.  Whether a BSA is right for you depends on a number of factors.  Your CPA and attorney can help you determine if and how a BSA should be used.

Times are tough.  Now more than ever, you need to make sure that you get paid for every product and service you provide.  Make no mistake about it- your clients and customers are watching THEIR cash flow closer today than in many years past.  So, you need to make sure that your customers’ cash flow difficulties don’t become your accounts receivable problems.

Every business has experienced some difficulty in getting paid at one point or another, and many business plans are formed with the presumption that a certain percentage of the business’ accounts receivable will go uncollected. The problem of collecting accounts receivable is not usually the cause of a business’ failure, as more businesses fail from undercapitalization.  However, collections problems can prevent a business from growing and will always negatively affect the business’ profitability.

So, how do you avoid the risks that an account receivable will become uncollectible? As is usually the case, preventing the problem from occurring is far less costly than curing the problem once a client or customer fails or refuses to pay you for your goods and services.  Try following these basic collections rules.

Get It In Writing.

Have signed contracts and forms.  Any change in terms should also be in writing and signed.

Get Paid In Advance.

You should require substantial deposits and down payments before you begin ordering parts or using materials. And you should require payment-in-full before you begin performing services or relinquish control of your property.

If You Don’t Get Paid In Advance, Get Security.

This rule does not apply to leasing agreements or the simple cash transaction such as the sale of a dozen doughnuts. In larger transactions, particular those involving the sale of moveable personal property and real estate, the seller should demand a security interest in something of value. A mortgage, a recorded land contract, a mechanic’s lien and a lien on personal property are familiar examples of security interests.

If The Customer is Credit Risky, Demand A Guarantee.

If you fear that a customer is a credit risk, ask for the signature of a guarantor who promises to pay the customer’s debt to you in the event the customer does not. Remember, however, that the guarantee is only as good as the guarantor is creditworthy.  An owner of a business is the natural person to guarantee the debt of his or her own company.

If Your Contract Does Not Allow For Collection Costs,

You Cannot Get Them.

The “American Rule” is that litigants pay their own attorneys’ fees. So, if you must retain an attorney to collect a debt, you will pay the attorneys’ fees and most other collections costs. The exceptions to the American Rule are the existence of a written contract allowing the recovery of attorneys’ fees, a statute allowing such recovery; or the assertion of a frivolous, unreasonable or groundless claim or defense. The easy solution to the American Rule is to include a provision in your contracts allowing YOU to recover your attorneys’ fees, collections and court costs. Your customers should not have the same right to recover against you.

The Check Is Never Truly In The Mail.

The lesson here is to begin legal proceedings as soon as possible and not to delay in collecting your money or retrieving your property.

Call Your Lawyer Early.

As a final suggestion, consult your attorneys as soon as you suspect difficulty in collecting a debt. Often a stern letter from an attorney on a law firm’s letterhead can have a dramatic effect on a delinquent customer. You also should consider consulting your attorneys to review your entire billing and collections processes. A good lawyer does his/her best work before problems arise.  I have assisted businesses whose agreements, leases and other forms were outdated or lacking important provisions which would allow the business to pursue additional remedies against a delinquent customer.  That’s when I’m most effective- in preventing problems rather than solving them.

For a more detailed version of this article/blog, go to my law firm’s website:  http://www.indiana-attorneys.com/articles_news/index.htm