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| NEWS YOU CAN USE |
Vol. 1, Issue 1, JULY 2008 |
| 425 California Street, Suite 1800, San Francisco, CA 94104 |
415-394-5700 | |
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WELCOME!
Welcome to the first edition of Pinnacle News! Our quarterly newsletter will give you insights into common legal questions, updates on the latest events in the legal and business worlds, and brief tips and thoughts that you can use every day.
In this inaugural edition, read our articles on what happens to real estate brokers when they find themselves practicing law, and how directors of a Delaware corporation can get out from under their fiduciary duty obligation, even in an insolvency situation. The Tax Corner provides useful information on the Tax Allocation of the purchase price when selling the assets of a business.
Pinnacle Law Group, LLP is a full-service law firm located in downtown San Francisco. The attorneys at Pinnacle bring years of experience and successes in Real Estate, Business Transactions, Insolvency, Reorganization, Bankruptcy, complex Civil Litigation, Intellectual Property, Sports and Entertainment Law, and Tax Advice. Click here to read more about Pinnacle's practice areas.
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NEWS AND HAPPENINGS AT PINNACLE |
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Here We Grow Again!
Pinnacle Law Group welcomes Farber & Company Attorneys, PC to its ranks. Principal Eric Farber brings with him a wealth of experience in business, intellectual property and sports & entertainment law, including celebrity rights of publicity and sports properties. He has also represented numerous entertainers in record, television, film and literary properties. Mr. Farber also advises numerous small to medium sized businesses in a variety of arenas including employment, intellectual property, real estate transaction and site leasing, branding and brand management, media and internet compliance, fundraising and day-to-day legal affairs.
Senior Counsel William Schofield (profiled below) is an experienced litigator, having handled clients in complex litigation in a variety of industries.
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 In The News
Pinnacle Files Helicopter Students' Class Action Against KeyBank, Student Loan Xpress and Others For Predatory Lending Practices
Pinnacle Law Group, LLP filed the first class action lawsuit in the country on behalf of former students of the nation's largest helicopter flight training school, Silver State Helicopters ("Silver State"). The lawsuit against KeyBank, Student Loan Xpress and affiliated lenders seeks to prohibit the banks from enforcing loans they made to California students who enrolled in Silver State but had not completed their education when the school shut its doors without warning on Super Bowl Sunday and filed for bankruptcy the next day.
The suit, brought under California's consumer protection law, alleges a scheme of predatory practices by lenders who, purporting to hide behind the shield of Ohio's staunchly pro-bank/anti-consumer laws, team up with operators of private unlicensed and unregulated sham vocational schools and dupe prospective students into accepting loans with the defendant lenders. The suit alleges that the banks pay the loan funds directly to the schools long before the students complete the course, which fuels the schools' enrollment Ponzi schemes. Further, that when the schools shutter their doors because the scheme collapses, the training ceases, and the students end up with no accreditation and no employment prospects, but they are still obligated to repay the loans.
Bank Omits Required Notice
The suit alleges that KeyBank engaged in a pattern and practice of intentionally omitting from its loan documents a notice required by the Federal Trade Commission's consumer protection regulations. The notice, known as the "FTC Holder Rule," expressly provides in this context that it is an unfair and deceptive act or practice to enter into consumer credit contracts (such as student loan agreements) without including very specific language that the borrower (i.e., the students) has the same claims and defenses against the lender they have against the school. The suit also alleges that KeyBank insures that its partner vocational schools also omit the Holder Rule Notice from their agreements, thus facilitating the violation of federal law.
Sham vocational schools could not exist without partner lenders that provide liquidity. These lenders hide behind legally repugnant forum selection and choice of law provisions and openly flaunt federal law as they continue to fuel fraud. Through this class action, we are hopeful of ending this practice.
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Pinnacle's Day on a Mountain
A great time had by PLG's attorneys, staff, friends and family
By Mike Terry, Legal Assistant
On June 7, 2008, Pinnacle was "off to see the wizard!" Joining 4,000 regular attendees of the 95th annual Mountain Play, several of the Pinnacle partners, employees, their families and friends (40 strong) followed the yellow brick road (er, winding mountain roads) to see a spectacular performance of the "Wizard of Oz" atop Mt. Tamalpais. Great weather, great performances, delicious picnic lunches, great fun was had by all. For the fourth year in a row, Pinnacle has hosted a group that has grown in size and enthusiasm. We hope you'll join us next year for "Man of La Mancha." Pinnacle is an "Associate Producer" sponsor of the Mountain Play Association. For more information, visit the website: http://www.mountainplay.org. |
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In The Office
Each of our quarterly newsletters will feature one of our attorneys or staff members. This quarter we're spotlighting William Schofield, a recent addition to Pinnacle, who joined Pinnacle as Senior Counsel with the arrival of Farber & Company Attorneys, P.C.
Pinnacle Welcomes William W. Schofield as Senior Counsel
William W. Schofield, a resident of Moraga, joined Farber & Co. in 2007. He began his legal career in Oakland hitting the ground running, joining what was then Crosby, Heafey, Roach & May (now Reed Smith). In 1997, Bill and five other Crosby Heafy attorneys migrated to Paul Hastings to set up its litigation department in a newly-created San Francisco office. Bill's extensive litigation background includes business torts, unfair business practices, and toxic tort. He has represented clients in a variety of industries, including real estate development, internet service, aerospace, and public entities. Bill now manages high profile litigation for the firm's NFL clients and real estate developers. Bill and his wife, Carol, have been married for 37 years. While raising their four children, Bill spent many years coaching youth baseball. Their three sons are now in the commercial real estate business, and their daughter works in real estate as well in the title insurance area. Staying true to his alma mater, Bill is an avid Cal football and basketball fan.
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Delaware Supreme Court Limits Creditors' Rights To Assert Direct Claims for Breach of Fiduciary Duty Against a Corporation's Directors
The Supreme Court of Delaware has held that under Delaware law, creditors of a corporation that is either insolvent or in the "zone of insolvency" have no right to assert direct claims against the corporation's directors for breach of fiduciary duty.[1] This decision is important because it limits the fiduciary duties owed to creditors by directors. Other courts have expanded those fiduciary duties to instances where the corporation was not necessarily insolvent, but was in the "zone" or "vicinity" of insolvency.[2] Although the decision is binding only on those corporations who operate under Delaware law, it may signal a new trend away from expanding creditors' rights which courts in other jurisdictions may follow.
The general rule is that directors owe fiduciary duties to the corporation and its shareholders. Directors do not typically owe any fiduciary duty to creditors because the relationship between debtor and creditor is contractual in nature, and creditors already have remedies under state law if the debtor breaches the contract. Creditors are protected not only by contracts, but also by fraud and fraudulent conveyance law, implied covenants of good faith and fair dealing, bankruptcy law, and general commercial law. However, when a corporation becomes insolvent, its creditors take the place of its shareholders and it is the creditors, not the shareholders, who benefit if any value is realized from the insolvent corporation.
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"Zone of insolvency" adds protection.
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If a corporation is solvent, its shareholders may bring derivative actions against directors whom they believe are breaching their fiduciary duties. If the corporation is insolvent, the creditors step into the shareholders' shoes, and may bring derivative actions against directors whom they believe are breaching their fiduciary duties. But Delaware had not decided whether shareholders or creditors had the right to bring derivative actions if the corporation was operating in the "zone of insolvency." (Although the term "zone of insolvency" has not been precisely defined, it exists where a corporation cannot generate and/or obtain enough cash to pay for its projected obligations and fund its business requirements for working capital and capital expenditures with a reasonable cushion to cover the variability of its business needs over time.[3])
The Gheewalla Court held that creditors could not bring derivative actions when the corporation was in the "zone of insolvency." It agreed with the reasoning of the lower court, which had explained "'an otherwise solvent corporation operating in the zone of insolvency is one in most need of effective and proactive leadership-as well as the ability to negotiate in good faith with its creditors-a goal which would likely be significantly undermined by the prospect of individual liability arising from the pursuit of direct claims by creditors.'"[4]
Gheewalla is an important decision for both directors and shareholders. It gives broader protection to the former and one less remedy to the latter. Though it only affects corporations operating under Delaware law, directors and shareholders in other jurisdictions must be mindful of the decision, as other courts may decide to follow its reasoning.
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[1] N. Am. Catholic Educ. Programming Found. v. Gheewalla, 930 A.2d 92 (Del. 2007) (hereinafter, Gheewalla).
[2] See, e.g., Pereira v. Cogan, 294 B.R. 449 (S.D.N.Y. 2003).
[3] Id. at pp. 520-521.
[4] Gheewalla, supra, at pp. 100-101.
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TAX CORNER
Allocation, Allocation, Allocation
Starting your own business can be daunting, especially in a struggling economy. But you want to be your own boss, and you don't want to build from scratch. Opportunity knocks, and you open the door. You negotiate for the purchase of the assets of the business. Someone asks you how much of your purchase price you want to allocate to the furniture, and you say, huh? You thought you were writing a check, and maybe taking on some debt. But now you need to figure out how much of your purchase price to assign to an bookcase?
Assets come in all different shapes and sizes. So do their tax treatments. Buying the assets of an ongoing business is just like buying them from a store or a wholesale supplier, though some assets can only be bought when purchasing a business, such as goodwill. As a capital asset, the purchase of goodwill, for example, is depreciable over 15 years. The sale of goodwill results in capital gain to the seller. Since a seller typically has no basis (basis, in tax-speak, is what a taxpayer has paid for an asset, subject to certain adjustments) in goodwill, the entire amount allocated to goodwill usually ends being taxed, though at capital gains rates.
Equipment, a common asset sold as part of any business, is also a capital asset. As the buyer, you'll be able to take depreciation deductions over 3 to 7 years. Since it's a relatively short depreciation schedule, as the buyer, you will want to allocate much of the purchase price in this category.
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The challenge is that both parties should agree on how to divvy up the purchase price among the assets.
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Inventory is, well, inventory. When you buy it, there's typically no consequence. When you sell it, any profit you make is taxed at ordinary rates. The same is true on the seller's side, whether selling it to the public, or to you.
As with goodwill, generally speaking, any intangible, such as a trademark, is a capital asset, and falls into the 15-year depreciation category. A liquor license falls into this category as well.
The list goes on: leasehold improvements, customer lists, covenant not to compete, vehicles, the lease itself, and so on. All of these items need to be allocated as part of the purchase price.
Consistency between the parties is a key component in avoiding an audit; make sure your allocations make real-world sense, and are reported the same on both sides of the transaction - your purchase agreement should make that representation. As a caveat, some parties try to beg this issue by stating in their purchase contract that the allocation will be determined after the deal is signed. It's up to the parties, ultimately, but I generally advise, given what could be at stake, to decide the allocation up front. It'll also help to smoke out the cooperation level of the other party as you go through the purchase and sale process.
The rules in this area continually change; this article is intended only to provide a heads-up and some general guidelines.
Happy buying!
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The Unauthorized Practice of Law . . .
a Real Estate Broker's Nightmare
Given the increasing complexity of commercial real estate transactions and the consequences of practicing law without a license, a real estate broker should exercise particular care in representing a client's interests and recommend more often than not that an attorney be consulted. The unauthorized practice of law is prohibited by California Business and Professions Code sections (hereinafter "B & P") 6125 and 6126, California common law and Article 13 of the National Association of Realtors® Code of Ethics. Practicing law without a license may also subject a violator to statutory penalties for unfair competition and false or misleading statements under B & P sections 17200 et seq. and 17500 et seq. and result in the suspension and/or revocation of a real estate broker's license pursuant to B & P sections 10177(g) and (j).[1] Additionally, other jurisdictions have concluded that the unauthorized practice of law establishes a violation of an agent's duties under the listing agreement with the broker.[2] It is clearly in a broker's best interest to ensure that his/her conduct does not constitute the unauthorized practice of law.
What actions then constitute the unauthorized practice of law? As early as 1922, the California courts defined the practice of law to "include legal advice and counsel and the preparation of legal instruments and contracts by which legal rights are secured."[3] Merchants expands Indiana's definition of the practice of law to include "do[ing] the work . . . that is commonly and usually done by lawyers in this country."[4] In People v. Landlords Professional Services, the court found that providing legal forms and asking questions of the clients necessary to complete such forms and explaining the procedure involved constituted a violation of B & P sections 6125 and 6126.[5]
Moreover, the performance of a single act can constitute the practice of law.[6] In People v. Sipper, the court held that a real estate broker had practiced law when he advised a husband and wife as to the kind of legal document they should execute in order to secure a loan, i.e., the work he performed was something more than the simple clerical service of filling in blanks on a form.[7] The California courts have drawn a distinction between the clerical service of filling in the blanks of a form (i.e., a broker inserting such information as the names, dates, property address and price specified by the parties) and selecting the particular form of document to be used (i.e., a broker choosing a form deed of trust instead of a mortgage document) with the latter being interpreted as practicing law.[8] The courts clearly want lawyers, not brokers, advising clients on all matters that require any degree of judgment.
A broker will engage in the unauthorized practice of law if he/she gives advice relating to or strays beyond transferring nominal information to standard real estate contract forms. Regardless of the inconvenience or expense arising from the hiring of an attorney, a smart broker will leave the selection and modification of legal forms to an attorney and limit his/her actions, if any, to only filling in dates, names and addresses.
NEXT NEWSLETTER:
CONSEQUENCES OF PRACTICING LAW WITHOUT A LICENSE
[1] Miller & Starr, California Real Estate (3rd ed. 2007) § 3:52; Cal. Bus. & Prof. Code § 10177(g), (j).
[2] Crutchley v. First Trust and Savings Bank (Iowa 1990) 450 N.W.2d 877, 880.
[3] People v. Merchants Protective Corp. (1922) 189 Cal. 531, 535 quoting Eley v. Miller (Indiana 1893) 7 Ind. App. 529 (hereinafter, Merchants).
[4] Merchants quoting People v. Alfani (New York 1919) 227 N.Y. 334; also see Baron v. City of Los Angeles (1970) 2 Cal.3d 535, 542.
[5] People v. Landlords Professional Services (1989) 215 Cal. App.3d 1599, 1609.
[6] Miller & Starr, California Real Estate (3rd ed. 2007) § 3:52.
[7] People v. Sipper (1943) 61 Cal.App.2d Supp. 844, 846-848.
[8] Mickel v. Murphy (1957) 147 Cal.App.2d 718, 720-721; People v. Landlords Professional Services supra at 1609; Sipper supra at 848.
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CLIENT PROFILE
Mmmmm . . . Cheesecake! Who doesn't love cheesecake. Well, apparently, a lot more of us than in the past. And who knew this before anyone else? Maybe you, after you had that conversation with your pocketbook. But TickerMine, a combination of old-school data researching and high-tech web-based fact gathering, knew it on a real-time level that investors could take serious advantage of.
TickerMine is a new start-up business, the brainchild of Casey Ryan, its CEO. TickerMine generates data and reports on a daily basis using a proprietary electronic methodology to gather data on sales trends, consumer preferences, and buying patterns at the grass-roots level. TickerMine generates new information daily on retail categories including apparel, automotive, restaurant, electronics, financials, entertainment, and energy that can give investors clues about trends before they have an impact on stock prices.
"We came to Pinnacle to get help with all sorts of start-up needs," says Ryan. "Pinnacle helped us with everything . . . from general operational documents to our first private offering. It was great to know that we could go to one law firm for everything we needed."
BUT WHAT ABOUT THE CHEESECAKE?
So how'd they find out that our taste for cheesecake was souring? How else . . . TickerMine's staff hung out at restaurants, checked out the wait times, researched how much everyone was spending. Two weeks after TickerMine released its data on dropping sales at the Cheesecake Factory, the company reported first-quarter profit had dropped 22 percent. Among the reasons given: a decline in guest traffic.
"This is grass roots data," says Ryan, the company's principal and manager. "It's the most up-to-date financial information anyone can use. The facts don't lie." |
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ON THE GREEN
Pinnacle Law Group 7th Annual Golf Tournament
It's time again for the Pinnacle Law Group Annual Golf Tournament. Pinnacle has hosted its annual fall invitational golf tournament since 2002, in association with Ad Valorem Solutions. Clients, judges, fellow attorneys and suppliers join PLG attorneys for an afternoon event at Richmond Country Club. Played in a "shamble" format, the event allows even those infrequent golfers to enjoy some high-spirited team competition, as groups vie to win tickets to sporting events, dinners in SF, golf merchandise and other prizes. Players are kept well fed and hydrated by PLG staff who continuously circulate throughout the course. The outing enables us to show our appreciation to clients and allows our guests the chance to meet the various attorneys and staff at PLG. This year's event is set for September 22; many clients and friends of the firm have been saving the date since last September! A fun day at the edge of the San Francisco Bay. |
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NEXT ISSUE
Coming up in October . . .
Year-End Tax Planning
Brokers Practicing Law Without a License - Part II
Alternative Dispute Resolution
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