Despite what many would consider a poor economic climate, the State of Wisconsin Department of Financial Institutions is reporting that the number of new businesses started in the state has increased from last year.  Selecting the proper entity is an important first step in creating a new business or reorganizing an existing one.  There are several different factors to consider, including costs of startup, formal requirements, management, functionality, tax implications and, most importantly, liability protection.  Choosing an entity structure individually tailored to your needs is essential to the ease and success of operating your business.  If you are thinking about starting a new business, or about reorganizing the business you currently operate, it may be wise to seek the advice of an experienced attorney who understands small business and can help explain the relevant factors and guide you down the path to success.

POSTING ON DFI WEBSITE: www.dfi.org

“(Madison) – The number of new businesses created in Wisconsin for the first eight months of 2011 stands at 22,602, up 3.1 percent from the same period of a year ago. The data was compiled by the DFI’s Division of Corporate and Consumer Services, which is the filing office for the creation of business entities in the state, including corporations, limited liability companies, cooperatives, non-profits and limited partnerships. The division tracks new business creation on a monthly basis and posts it on the DFI website.”

You may also see the PDF spreadsheet of the DFI’s numbers by clicking here.

In late 2010, reports surfaced uncovering fraud and cover-up on the part of some of this country’s largest loan servicers. It was discovered that many lending institutions and loan servicers were instructing clueless employees to rapidly sign foreclosure documents without even reading them, a process referred to as “robo-signing”. Homeowners and foreclosure defense attorneys alleged that, in thousands of foreclosure actions throughout the country, the foreclosing entity did not have legal standing to bring the action.

To have standing to bring an action for foreclosure, the foreclosing party must own, most commonly through assignment, both the original promissory note and the mortgage securing payment of the note. When mortgages are bundled together and sold as securities, the notes are often transferred to a trust, with the investors of that trust being the owners of the note. The note is what gives the owner the right to foreclose. Recently, it was discovered that some notes were not properly transferred to the trust, and the owners of the note had no idea where the actual document was. In many cases, it was destroyed.
As mortgage securities became more popular, loan servicers began to digitize and centralize the documents detailing the loans and mortgages. The Mortgage Electronic Registration System (“MERS”) was created to serve as an efficient electronic repository and as a means of transferring the note to an investment trust without going through the formalities involved with the endorsement and assignment of the notes.
As the robo-signing scandal unfolded, many judges became skeptical of cases where MERS was named as the foreclosing party. In response, loan services throughout the country attempted get around the MERS problem by electronically recreating original promissory notes which had been previously destroyed, or creating an assignment from MERS to the loan servicer.

In the past, most foreclosure judgments were granted by default or upon summary judgment with little effort on the part of the foreclosing party. The reason for this, in large part, was that homeowners did not dispute the fact that they were in default of their loan, and believed that the foreclosing party was honest when it represented its standing to the court.

It is becoming increasingly frequent practice for defense attorneys to demand that the foreclosing party demonstrate proof that it has standing to sue, whether it be through a timely motion to dismiss, or through a discovery demand. In some cases, the mere demand for the original note is sufficient to defeat standing as this document may be unavailable to the party claiming to be the current note holder. In other cases, a savvy defense attorney will closely examine the documents supporting all assignment and look for irregularities, such as a signor located in one state and a notary in another state, or other evidence of robo-signing.

Defaulting pro se homeowners and defense attorneys are no longer sitting back and accepting a judgment of foreclosure. In fact, given the widespread attention this matter has received in the media, it may be considered malpractice for an attorney to fail to require the foreclosing entity to establish its standing to foreclose.

While it is important to note that the majority of foreclosure actions have been deemed valid, loan servicers would nonetheless be wise to ensure that they are able to demonstrate their ownership of the note and mortgage, as well as provide a proper accounting of the amount due, prior to initiating suit. Courts are giving increased scrutiny to the documents submitted in support of foreclosure and will no longer assume that the representations of standing made by plaintiff’s counsel are true.

Many successful small businesses will need money to expand for purchasing, leasing, or building.  The U.S. Small Business Administration (SBA) Certified Development Company loan program is a long-term financing tool for economic development within a community.  The 504 Program provides start-up and growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.

Certified Development Companies (CDCs) are nonprofit corporations that facilitate the 504 program and are set up to contribute to the economic development of its community.  CDC’s work with the SBA and financial institutions to provide financing to small businesses.  The 504 program is designed to get below market fixed-rate financing in the hands of small business owners.  It is essentially a second mortgage-type product for commercial real estate.

Over 90% of small businesses are eligible for a 504 Loan.  The business must be a for-profit business, however, and there are certain restrictions related to gambling, speculation, investment real estate, and businesses that discriminate.

Proceeds from 504 loans must be used for fixed asset projects such as purchasing land and improvements including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term useful life machinery and equipment.

The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.  It is primarily designed to get fixed rate money in the hands of small businesses that are financing owner-occupied real estate.

There are three aspects to a 504 Loan.  First, there is a mortgage that is made by a private financing institution, usually a local bank that covers up to 50% of the project cost.  In addition, there is a second mortgage for up to 40% of the project that is made by a CDC and guaranteed by the SBA.  Finally, the third aspect is a 10% to 20% down payment that is provided by the borrower.

The SBA requires the down payment on behalf of the borrower to make sure that they have a stake in the business.  The second mortgage portion, for up to 40%, has a 100% guarantee from the US Government on it.  Therefore, that percentage is sold by the development companies to investors at below market fixed rates.  The maximum debenture is typically about $1.5 million, although in some cases the debenture can be as high as $4 million if the borrower is a manufacturer.

The two basic maturities of the 504 program are either 10 years or 20 years.  The loans do amortize over that period of time and there are some fees involved.  There is an upfront fee that is paid by the borrower at the time the loan is funded.  There are also fees at the time of funding that are included in the loan amount and there is an ongoing monitoring fee that is paid as part of the monthly loan payment.

Recent Supreme Court Decision May Affect Those Who Personally Guaranty

Written By: Attorney Nicholas J. Linz

Given the current restrictions being placed on lending institutions, it is becoming increasingly difficult for small businesses to obtain the financing necessary to support growth or even sustain their current operations.  In addition to obtaining a mortgage to secure a loan, it is not uncommon for banks to further require small business owners to personally guaranty payment of the note.  Those who do personally guaranty loans made to their business should be aware that their obligation may survive foreclosure, and may exist even after the business’s obligation has been extinguished.

Generally speaking, if a business defaults on its loan, the bank will initiate a foreclosure action and attempt to repossess or sell any collateral offered to secure the note.  If the note is secured by real property, in the form of a mortgage, Wisconsin Statutes allow for a period of redemption, after the judgment of foreclosure is issued, to allow the debtor property owner additional time to pay off the judgment debt and retain ownership of the real property.  The period of redemption depends on the status of the mortgaged property.  For one-to-four family, owner-occupied residences, farms, churches, or other tax-exempt charitable organizations, there is a twelve-month redemption period.  For all other property types, there is a six-month redemption period.
If you business is unable to redeem the property, it will be sold at sheriff’s sale.  Often, this results in a sale price lower than the appraised value of the property and lower than the amount of the foreclosure judgment.  In such cases, the lender is entitled to a deficiency judgment in an amount equal to the unpaid balance of the loan, which is not covered by the sale of the property.  By law, a lender may shorten the applicable redemption period to six or three months, respectively, by electing to waive its right to a deficiency judgment against any party who is personally liable for the debt secured by the mortgage.

In the past, this language has been interpreted to require lenders wishing to shorten the statutory redemption period to waive the right to obtain a deficiency judgment against, in addition to the borrower, all personal guarantors.  At first glance, the common perception is that the phrase “any party who is personally liable for the debt secured by the mortgage”, must include personal guarantors.  However, in its recent decision of Bank Mutual v. S.J. Boyer Construction, Inc., the Wisconsin Supreme Court stated that the legislature intended the phrase “any party who is personally liable for the debt secured by the mortgage” to be defined in accordance with its legal meaning, as opposed to its common and ordinary meaning.
In Bank Mutual v. S.J. Boyer Construction, Inc., S.J. Boyer Construction, Inc. obtained several business loans from Bank Mutual.  Each note was secured by a mortgage on a piece of real property owned by the company.  The notes were further secured by the personal guaranties of the company’s owners, Steven and Marcy Boyer.  When Boyer Construction defaulted on the loans, Bank Mutual foreclosed on the mortgages issued to secure the notes.  In favor of a shorter redemption period, Bank Mutual elected to waive its right to a deficiency judgment.  In turn, the mortgaged properties were sold at sheriff’s sale three months from the date of entry of the foreclosure judgment.  Giving the statutes their common meaning, the Boyer’s assumed that their obligations under the personal guaranties they signed were extinguished when Bank Mutual waived its right to seek a deficiency judgment.

Instead, the court awarded Bank Mutual a deficiency judgment against the Boyer’s, individually.  In its decision, the court stated that the liability of a personal guarantor arises from a separate contract than the mortgage.  Therefore, guarantors are not members of the class of persons against whom a lender must waive judgment when invoking a shorter redemption period.  The legal meaning of the phrase, “any party who is personally liable for the debt secured by the mortgage”, does not include personal guarantors because they are not liable for the debt secured by the mortgage.  Only the borrower, in this case Boyer Construction, is liable for that debt.  The Boyer’s are liable for the debt arising out of their personal guaranty, which is a separate contract.

This case illustrates the importance of fully understanding the ramifications of an obligation before you enter into it.  If you are considering a transaction wherein you will be required to personally guaranty payment of a loan on behalf of your business, or if you have already executed a personal guaranty and your business is in danger of defaulting on the loan, you may want to seek the advice of legal counsel to keep you fully informed of what may lie ahead.

Introduction

Everyone has heard it before, “the only sure things are death and taxes.” Well this can be true even after the death of a company or corporation. As most small business owners know, their business must pay a form of Unemployment Insurance (“UI”) to the State. This UI can then be used to pay benefits to its eligible unemployed workers based on their respective wages and lengths of service.

Unfortunately, business owners may not be aware that Wisconsin Statute 108.22(9) allows the State to collect UI from any individual that holds at least a 20% ownership interest of a corporation or limited liability company (“LLC”).

Wis. Stat. 108.22(9)

The controlling statute states that any 20% owner of a corporation or LLC that has control or supervision of or responsibility for making payments of contributions (taxes) that willfully fails to file such reports or make such payments can be held personally liable for the unpaid amount. The statute goes on to state that this liability survives any “dissolution, reorganization, bankruptcy, receivership, assignment for the benefit of creditors . . . or any analogous situation of the corporation or [LLC].”

This means that even if your business has declared bankruptcy, the State can pursue you the business owner, for the unpaid contributions.

Case Law

There are four elements the State must show to determine that the individual is responsible for payment of the corporate responsibility: (1) the individual must own at least a 20% share, (2) the individual must have control or supervision of or responsibility for making payments, (3) the individual’s decision not to make the payments must be “willful” and (4) the state must have been unsuccessful in instituting proper collection proceedings against the business. See Cory Wilson, Hearing No. S0600098MW, LIRC (Mar. 13, 2008).

Clearly there will not be much debate over the first and fourth elements. It should be clear that a person owns or does not own a 20% share of a business. The State can go after any 20% shareholder; it does not necessarily have to be the President of the corporation. Further, it will be clear that the State has instituted proper collection proceedings against the business and been unsuccessful in collecting.

However, the second and third elements do allow for some debate. The second element requires the state to show that the individual has supervision of or responsibility for making the contribution payments. This individual liability cannot be avoided by merely delegating away the responsibility. See, In the matter of S B R, Inc., Hearing No. S9900041MD, LIRC (Nov. 24, 1999) citing Hornsby v. Internal Revenue Service, 588 F.2d 952, 953 (5th Cir. 1979); Burroughs v. Fields, 546 F.2d 215, 217 (7th Cir. 1976). Therefore, if you are the President of the corporation and you put the Treasurer in charge of making payments, you can still be held personally liable for unpaid amounts.

The third element requires a “willful” decision not to pay the required contributions. Willfulness can be proven showing a “intentional, knowing and voluntary choice.” In the matter of Clark E. Olson, Hearing No. S9900256GB, LIRC (Jan. 31, 2002) citing Monday v. United States, 421 F.2d 1210 (7th Cir. 1970). This willfulness can be demonstrated by something as simple as a decision to pay certain creditors or payroll but not the State UI.

A “willful” decision can also be one that is made with “reckless disregard.” Reckless disregard is shown when the allegedly responsible individual ought to have known that the taxes were not being paid and was in a position to find this out very easily. See, Cory Wilson, citing U.S. v. Running, 7 F.3d 1293, 1298-99 (7th Cir. 1993). Therefore, once you receive notice from the State that these contributions are not being paid you must make every effort to pay them. A determination of reckless disregard requires a showing of clear and convincing evidence. See Kuehn v. Kuehn, 11 Wis. 2d 15, 104 N.W.2d 138 (1960) see also In re Contribution Liability of Henry A. Warner, UI Dec. Hearing No. S9100679 (LIRC July 16, 1993), aff’d, Warner v. LIRC, Case No. 93-CV-3157 (Dane Cty. Cir. Ct. May 18, 1994). However it does not take much evidence to demonstrate that the individual was in a position to find out that the contributions were not being paid.

Conclusions

There are many individual protections gained by incorporating or forming an LLC. However, those protections do not extend to unpaid State contributions. If you are worried a business you hold a 20% stake or greater in has unpaid contributions or have received a notice from the State regarding unpaid UI, please do not hesitate to contact Gerbers Law.

The year 2010 was often called “the best year to die rich.” Let me be the first to coin 2011 and 2012 as “the best years for the rich to gift.” Estate tax levels were set to revert back to pre-2001 levels at the end of the 2010, but, thanks to the last minute actions of the current administration, the estate tax holiday was extended through 2012.

This extension, with the passing of the 2010 Tax Relief Act (TRA), provides significant estate planning opportunities to consider. With the passing of the TRA, not only are the individual estate tax exemptions extended ($5 million/individual or $10 million combined portable marital exemption), additionally the gift tax exemption was unified with the estate tax exemption. In other words, you don’t have to die to take full advantage of this 2 year extension!

In 2010, the gift tax exemption was limited to $1 million, and taxed at up to 35% thereafter. For 2011 and 2012, an individual or married couple can make tax exempt gifts up to $5 million (individual)/$10 million (couple). Keep in mind this gift tax exemption is unified with the estate tax exemption, thus any amounts passed by gift or estate over and above these amounts will be subject to the applicable gift/estate tax rates in place at that time.

However, given the uncertainty of how long these exemptions will last, gifting over the next two years is an attractive consideration. This two year window is not only an ideal opportunity to reduce the size and tax exposure of your estate, it is also as favorable of a climate we have seen for transitioning family businesses.

The Wisconsin constitution requires a balanced budget. In recent years, the legislature has knowingly operated with a budget deficit. Additionally, our representatives have robbed from Peter to pay Paul, including the recent raid of the patient’s compensation fund which the state has been ordered by the Wisconsin Supreme Court to return to the fund. The time has come that something needs to be done before the state is insolvent. The question is, “should it come at the expense of state employee unions?”

Unions have generally served a significant and purposeful role in employment matters. The right to unionize has been recognized for the better part of the last century. Governor Walker has claimed the state and local governments can not bargain when they have nothing to offer. Do these circumstances give rise to disregarding collective bargaining agreements?

Regardless of one’s position on this issue, one thing is clear: the time has come for our government to be fiscally responsible. Requiring state workers to contribute to benefits similar to those employed in the private sector would appear to be a better alternative than mass layoffs.

It appears that the National Arbitration Forum has closed its doors (mostly). In settlement of the claims against it by the Minnesota Attorney General, the NAF has agreed to cease almost all arbitrations that it currently offers (it has retained the right to do internet domain name arbitrations).

This is significant in that the NAF was one of the go to arbitration panels utilized by credit card companies in their mandatory arbitration clauses. What will this do to the arbitration clauses? Who will become the arbitrator of record? What does this do to cases that went through arbitration to conclusion? At this point we will wait and see.

Thanks to http://www.indisputably.org/ for their coverage of this case.

In a very interesting announcement, the American Arbitration Association has announced that it will follow the NAF in ceasing to do consumer debt arbitrations.

It appears that the not-for-profit AAA did not have the same legal issues that the NAF had, nor had the AAA been sued for the same things the NAF were sued for. However, the AAA said it will cease taking this type of arbitration cases “until some standards or safeguards are established.”

Read more about the AAA decision here: http://blogs.wsj.com/law/2009/07/22/an-arbitration-revolution-aaa-joins-naf-stops-taking-new-cases/

This furthers the questions I raised in my earlier blog post. As a consumer, now that NAF and AAA are out of the picture, does this now grant me the right to sue in state court, even though I signed away that right in the agreement?

There is a legal adage that every first year law student has likely heard, if not recited numerous times: “the man who represents himself has a fool for a client.” While there are certainly instances of untrained intelligent people winning cases in a court of law, the saying might never be truer than for business owners in Wisconsin. This is because in many instances, the failure to hire an attorney might not only be unwise, but also give the opposing party the easy route to an automatic win.

One popular business form boasts well established rules. Wisconsin corporations are bound by statute to be represented in court (excluding small claims cases) by an attorney. This provision can be especially relevant for business owners choosing the S-corp form of business. While many attorneys advise their clients on the tax benefits of pass-through taxation for an S-corp, relatively few address the ramifications with their new business owner clients.While nearly every entrepreneur gets into business with the intention of running an honest, respectable business that is beyond legal reproach, lawsuits are inevitable. Whether it be a customer who can not be satisfied, a vendor who overcharges, or simply someone not paying a bill, if any controversy exceeding $5,000 (with few exceptions) ends up in court, the corporation may be in a precarious position. Many business owners, whether for economic reasons, or the belief that they are equipped to handle the opposing party in court, choose to represent themselves. The effects can be far reaching. As a practical matter, this means the owner is in violation of the Wisconsin statute and the judge may not be forgiving.

When a Complaint is filed in any lawsuit, an Answer needs to be filed shortly thereafter. Failure to do so can result in the court granting the party filing the lawsuit a default judgment, which in effect, means the non-answering party admits all of the allegations in the lawsuit, and the plaintiff is usually granted whatever relief they sought. When a business is a party to the lawsuit, many owners believe they may appear in court and file an Answer on behalf of the company they own. In many cases, owners file their Answer within the statutory period for doing so. However, savvy Plaintiff’s lawyers are increasingly recognizing the lack of an attorney’s signature on the Answer. Wisconsin cases have recognized that the statute requires an attorney to represent the corporation, and the Answer, unsigned by a licensed practitioner of the law, is not legally recognized. The Plaintiff is able to ask the court for a default judgment as if no action had been taken by the Defendant at all, and they had simply let the time period for answering lapse.

Once the default judgment has been granted, even the subsequent hiring of an attorney might not be enough to get a fair hearing in court. The attorney must move to reopen the case, and judges are not always inclined to allow a reopening, even for parties with compelling cases that may have attempted to make an answer previously. Upon receiving a judgment, the Plaintiff can establish a lien against the assets of the corporation.

While the rules for the corporation are well defined, the rules for an entity operating as a Limited Liability Company or “LLC” are less absolute. The statutes do not specifically mention an LLC as an entity that requires representation by an attorney in lawsuits, and to date, there is no case clearly defining whether the LLC falls within the scope of the statute. However, there are good reasons to believe the requirement of legal representation extends to this type of entity. The LLC, in most legal respects, is treated like a corporation. Members, like shareholders of a corporation, enjoy legal protections from liabilities of the company. While there are differences between the types of business entity, this seems the most compelling and important one when considering the LLC. If the LLC is treated like the corporation, and indeed, in lower courts it has happened on numerous occasions, the LLC may also face the possibility of having default judgment entered against it, even in cases where a member or owner has filed an otherwise appropriate Answer.

A new business owner has many choices when deciding upon the type of entity for its operations. Do not let your company incur debt by failing to follow the statutory requirements of legal representation.