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| NEWS YOU CAN USE |
Vol. 1, Issue 2, OCTOBER 2008 |
| 425 California Street, Suite 1800, San Francisco, CA 94104 |
415-394-5700 | |
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Our Second Issue!
Welcome to the second issue of Pinnacle News! Our inaugural newsletter gave you current information on new limits on creditors rights for Delaware corporations, allocating the purchase price between buyer and seller in an asset purchase transaction, and part one of an article dealing with real estate brokers who find themselves practicing law. In this issue, we give you part two of that article (the consequences of brokers practicing law), the pros and cons of pre-trial mediation, and a brief survey of the tax consequences resulting from the cancellation of debt.
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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In The Office
Each of our quarterly newsletters will feature one of our attorneys or staff members. This quarter we're spotlighting John Fitzgerald, one of the founders of Pinnacle Law Group, LLP.
Co-Founding Partner John Fitzgerald
John Fitzgerald, one of the founders of Pinnacle Law Group, LLP, has been practicing law for twenty-two years.
John began his legal career at Cotchett & Illston, where his practice emphasized business litigation. John has since continued to represent clients in a broad range of commercial disputes, including trade secret, antitrust, employment and securities litigation. His clients have included small business entrepreneurs, real estate developers, university professors, officers of publicly traded companies, and executives of NFL teams.
John was born in San Francisco, and grew up in the Bay Area. He currently a resident of San Mateo, where he lives with his wife, Pam, and their three young children. John is a graduate of the University of Notre Dame, where he received a bachelor's degree in economics. He is a 1986 graduate of Santa Clara University School of Law. John's interests include sailing, golfing and bicycling. He is an avid sports fan, rooting for local teams, though still very loyal to the Fighting Irish of his alma mater.
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LITIGATION
by Eric J. Farber, Principal
Alternatives To Litigation - Part I
Clients often come to us with problems that may involve a lawsuit. The buyer of their home has cancelled a contract, the seller refuses to honor the contract, another business has infringed on their trademark, etc, etc. Because the litigation or lawsuit process is generally long, burdensome and expensive, as part of the case analysis, examining every alternative is always critical.
Part I of this article is a short overview of the alternatives to lawsuits and discusses mediation in more detail. Part II of the article will continue to explore the alternatives to lawsuits with a more in depth discussion of the arbitration process.
Alternatives to a lawsuit (or ADR - Alternative Dispute Resolution) come in three basic forms: 1. Mediation, 2. Arbitration, and 3. Early Neutral Evaluation.
Mediation is a process where all the parties meet together with a neutral third party to discuss and ultimately try to settle the case. When all parties are amenable to discussing the case and understand the perils of litigation, mediation generally proves fruitful. Mediation only began taking a foothold as the preferred method of alternative dispute resolution in the last twenty years. A number of companies have sprung up to meet the growing demand for mediation. JAMS/Endispute, AAA (American Arbitration Association), and ADR are three examples of arbitration companies who now perform thousands of mediations every year.
"Make Love, Not War" is a threshold motto of mediation. A good mediator is trained to take the "war" aspect out of the dispute. The theory being that once the adversarial tone is taken out, the parties can work together to come up with a solution that is beneficial for everyone.
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Many times the catharsis of mediation is just what is needed to begin to bridge any impasse to settlement.
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The process is much like a business meeting. The parties arrive and sign confidentiality documents. (The mediator has already been made familiar with the case by the parties submitting summaries and key documents.) The parties will meet together and tell their side of the story to the mediator. It is often important for the mediator to hear it directly from the people themselves. Both so that the mediator gets to plumb the depths of the litigants' emotional and financial investment in the case and so that the party has an opportunity to fully explain their perspective of the matter to a neutral party in the presence of the opposing party. Many times the catharsis of this process is just what is needed to begin to bridge any impasse to settlement. After that, the mediator generally separates the parties and goes back and forth discussing the case, and discussing numbers.
Separating the parties while discussing more sensitive areas of the case is standard practice in mediation. It allows people to speak confidentially with their attorneys, ask questions, talk privately to the mediator and most importantly keeps the parties separated form each other to ensure that tensions do not go awry.
A good mediator can separate the parties physically and bring them together mentally. Once the mediator has had success explaining the case to the parties as a "neutral third party" then the parties can begin to understand what they can expect to get (or pay) in the case.
Because mediation is a voluntary process, the parties are able to choose a mediator together. This allows the parties to pick a mediator that is much more familiar with a certain area of law than most judges. Properly choosing a mediator can almost be an art form. There are plenty of mediators to choose from: practicing lawyers, retired judges, and experienced professionals working in specific areas (such as real estate) that are neither lawyers nor judges. The decision of who shall mediate a dispute can often mean the difference between settlement and filing a lawsuit. This is an area in which your attorney can be of tremendous assistance, working with you to determine which mediator is best for your case but at the same time choosing someone who the other side will agree to use as well. Too many suggestions of completely self-serving mediators generally end up driving the other side to the courthouse steps.
The benefits to a successful mediation are many. Early settlement of the case means plaintiffs get resolution quickly and defendants can limit their exposure and attorneys' fees. What is more, old issues of collecting or entering a judgment are then moot.
I have found that mediation has worked very well in a variety of cases: financial fraud, real estate, breach of contract disputes, and intellectual property matters.
In the next issue . . . Arbitration.
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TAX CORNER
Tax Consequences of the Cancellation of Debt: How the IRS puts the OMG in your COD
Seems everyone owes everyone money these days. Credit cards, mortgages, auto loans, suppliers . . . most of us have not heeded the words of Polonius, "Neither a borrower nor a lender be." In the days that "Hamlet" was first staged, borrowing was epidemic among the gentry, many of whom were selling off their estates piece by piece to maintain an ostentatious lifestyle in London. Today's borrowers are running out of things to sell, and not all of us are going to get bailed out. But what happens if you are lucky enough to have your debts disappear, or they're forgiven or settled?
Generally speaking, where a creditor cancels or reduces your debt, the result is taxable income to you, usually called "discharge of indebtedness," "debt forgiveness," or "cancellation of debt" ("COD income").
Credit Card Debt?
The amount of COD income where debt on a credit card account is forgiven is the difference between the entire amount due on the account -- including interest, balance transfers, credit card charges, checks, operation charges, and penalties -- and the amount paid for the discharge. So, if the entire amount of your credit card is forgiven, you have COD income for the entire amount. But if you pay the credit company something, and the balance is forgiven, then it's the amount of the forgiven balance that results in taxable income to you.
What About Settling Disputed Debts?
If you have a legitimate dispute with the creditor about whether you owe any part of an alleged debt, and you and the creditor reach a settlement, the difference between the alleged amount of the debt and the amount of the settlement isn't COD income to you, since you were never legally liable for the entire amount of the claim. Where two claims are set off against each other, there is no cancellation of indebtedness income.
Foreclosures?
There are two general tax concerns with a foreclosure. First, the foreclosure is considered a disposition, i.e., a sale of real estate resulting in a realized gain or loss. Second, the foreclosure may result in the bank writing down or writing off the debt, resulting in COD income to you. Because most foreclosures are on personal residences, disposition gains may be excluded and losses disallowed under the $250,000 exclusion of capital gains ($500,000 for married couples). However, the debt that is forgiven by the bank is includable in your gross income.
In California, when you take out a loan to purchase a home, you are generally not liable for any deficiency on a foreclosure. In other words, if the bank forecloses, and sells the home, and the bank receives less for the property than you owed, you do not have to pay the balance on the loan (known as the deficiency). Since you do not owe the balance, you would not have COD income, since there is nothing to forgive.
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The rules regarding COD income were born out of the Depression, when individuals and corporations found themselves increasing their wealth without having to pay any income tax.
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But what if you are liable? This can happen if you take out a second loan, or you refinance (i.e., refinancing in California, for example, generally converts your loan from a loan that you could have walked away from into a loan that exposes you to personal liability). In such a situation, you can get hit with COD income, as well as gain (or loss), created by the foreclosure (gain or loss would occur whether or not you had personal liability for the loan).
COD Income Relief in Foreclosures
You were given some relief from tax on COD income by Congress for foreclosures that occur anytime during 2007 through 2009. The amount that can be excluded from income (i.e., your COD income would have included it but for this Congressional relief) is $2,000,000 (i.e., a loan in that amount), or $1,000,000 if married filing separately. This relief applies only to qualified principal residence indebtedness.
This exclusion applies where you restructure your acquisition debt on a principal residence or lose your principal residence in a foreclosure. Your basis (typically your purchase price, plus the cost of improvements; basis is the number used to calculate profit, which is used, in turn, to calculate your tax on the profit) in your residence must be reduced (the lower your basis, the bigger your profit/tax). The basis reduction, which would typically result in a (higher) gain, may have little effect, though, due to the $250/$500k exclusion.
For example: You (who aren't in bankruptcy and aren't insolvent) own a principal residence subject to a $500,000 mortgage for which you are personally liable. The creditor forecloses and your home is sold for $380,000 in satisfaction of the debt. You have no COD income from the discharge of indebtedness. The result would be the same if the creditor restructured the loan and reduced the principal amount to $380,000.
For this exclusion of COD income to apply, the debt must be "qualified principal residence indebtedness"; it must have been used to acquire, construct, or substantially improve your principal residence and must have been secured by that residence. Debt used to refinance qualified principal residence indebtedness is eligible for the exclusion up to the amount of the old mortgage principal just before any refinancing. Home equity loan debt used for any purpose other than to substantially improve the principal residence is not excluded (i.e., is included as COD income, subject to other possible exceptions). In other words, if you refinanced, and used the proceeds to pay for medical expenses, and then the loan was forgiven, this exception to COD income would not be available to you.
The exclusion doesn't apply to debt forgiven on second homes, business property, or rental property. It also doesn't apply to credit cards or auto loans.
The Form
Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. Check the Form 1099-C carefully, particularly the figures shown for the amount of debt forgiven and the value of the home. If any information on the form is incorrect, the lender should be notified immediately.
Exceptions
So when is COD income not COD income? Exceptions to the debt-cancellation-as-income rule include cancellations: (1) that are gifts to the debtor, (2) that are reductions of the debtor's purchase price, (3) where the debtor received no tax benefit from certain debts that were deductible items, (4) where a tax benefit would have resulted if the cancelled debt had been paid, (5) where no consideration had been given the debtor for incurring the debt in the first place, and (6) that involve the forgiveness of certain student loans. In addition, debtors who are insolvent, in bankruptcy, or (in certain cases) farmers and noncorporate debtors whose debt is qualified real property business indebtedness do not recognize income on a cancellation of a debt, but instead must reduce their loss or tax credit carryovers or the basis in their assets.
Whew! As Polonius said of Hamlet's ramblings, "Though this be madness, yet there is method in't." Perhaps.
The legal caveat: This article is intended as a general guideline. The rules are complex, and changing continually. Please consult your tax advisor.
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 Consequences of Practicing Law Without a License
As a broker, it is tempting to give a client as much information as possible to help them decide whether and how to pursue a purchase or sale. This desire can conflict with the prohibition against practicing law without a license. In our July 2008 Newsletter, we discussed what constitutes the practice of law in the broker context. The consequences of doing so can be dire.
It's a Misdemeanor
California Business and Professions ("B&P") Code section 6126(a) states, "Any person advertising or holding himself or herself out as practicing or entitled to practice law or otherwise practicing law who is not an active member of the State Bar, or otherwise authorized pursuant to statute or court rule to practice law in this state at the time of doing so, is guilty of a misdemeanor punishable by up to one year in a county jail or by a fine of up to one thousand dollars ($1,000), or by both that fine and imprisonment."[1] In addition to jail time, a broker may also be subject to monetary penalties pursuant to B & P section 6126.5 and the California Code of Civil Procedure ("CCP") section 1029.8(a) for which there is no indemnification insurance.[2]
Penalties
A broker may also be subject to statutory penalties for unfair competition and false or misleading statements pursuant to B&P sections 17206(a), 17206.1(a)(1) and 17500 as a result of practicing law without a license.[3] In other words, a broker engaging in the unauthorized practice of law on any single occasion could face (1) all monetary penalties provided under (i) B&P sections 6126.5, 17206(a), 17206.1(a)(1) and 17500, and (ii) CCP section 1029.8(a), and (2) imprisonment for two consecutive terms pursuant to B&P sections 6126(a) and 17500.[4]
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Any person practicing law who is not authorized is guilty of a misdemeanor punishable by up to one year in jail or by a fine, or both.
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In addition to the foregoing statutory penalties and as a result of the same instance of practicing law without a license, a broker could be subject to monetary sanctions under the established California common law of negligence. For example, "[a] broker who drafts [a] sales contract by preparing the unprinted terms of sale undertakes the responsibility of drafting a legal document on which the parties will rely. . . . If the agreement between the parties is unenforceable because it is ambiguous or otherwise drafted improperly, or liability or risk of loss is imposed on a party contrary to his or her intentions, or without his or her understanding, the broker would be liable to the injured party for damages."[5] In determining whether a broker is negligent, the court will impose the heightened standard of care applicable to a practicing attorney if such broker has drafted a document, or given advice, or performed any act that could constitute the "practice of law."[6] This, of course, increases the likelihood that a court will find a broker liable for damages under the California common law for document preparation or other acts that could constitute the practice of law.
Losing Your License
A broker could also lose his/her real estate license when engaging in the unauthorized practice of law. B&P sections 10177 (c), (g) and (j) state that "the commissioner may suspend or revoke the license of a real estate licensee, who has knowingly authorized, directed, connived at, or aided in the publication, advertisement, distribution, or circulation of a material false statement or representation concerning his or her designation or certification of special education, credential, trade organization membership, or business, or concerning a business opportunity, demonstrated negligence or incompetence in performing an act for which he or she is required to hold a license, or engaged in any other conduct, whether of the same or a different character than specified in this section, which constitutes fraud or dishonest dealing."[7] Based on the foregoing, a broker is essentially putting his/her own livelihood at stake when engaging in the unauthorized practice of law.
Losing NAR Membership
Brokers who are members of the National Association of Realtors® also put their membership in jeopardy when engaging in the unauthorized practice of law. Article 13 of the National Association of Realtors® Code of Ethics states that "Realtors® shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it." Disciplinary actions for the violation of Article 13 include, without limitation, fines or probation, suspension and/or termination of membership. Thus, brokers run the risk of losing their membership status as well as the inherent privileges when practicing law without a license.
Clearly, a broker should work actively to avoid the unauthorized practice of law. At the end of the day, the consequences a broker faces for practicing without a license are not worth the risk.
[1] Cal. Bus. & Prof. Code § 6126(a).
[2] Cal. Bus. & Prof. Code § 6126.5; Cal. Code Civ. Proc. § 1029.8(a); Cal. Ins. Code § 253.
[3] Miller & Starr, California Real Estate (3rd ed. 2007) § 3:52.
[4] Cal. Bus. & Prof. Code §§ 6126.5, 17206(a), 17206.1(a)(1), 17500, 6126(a); Cal. Code Civ. Proc. § 1029.8(a).
[5] Miller & Starr, California Real Estate (3rd ed. 2007) § 3:52.
[6] Biakanja v. Irving (1958) 49 Cal.2d 647.
[7] Cal. Bus. & Prof. Code § 10177 (c), (g) and (j).
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BuildingSearch.com is a vertical online search engine for commercial real estate. Through its online marketplace, BuildingSearch.com helps companies not only find the right available space, but everything required to create and operate the workspace.
"We have been growing rapidly over the last year and pushing the envelope in all aspects of rolling out BuildingSearch.com," says Jon Condrey, the company's CEO. "Our growth is a testament of that fact that people are looking for more efficient ways to tour real estate online and avoid car trips to save time and the environment. We have relied heavily on Pinnacle Law Group to help us work through some of the complexities of navigating our marketplace. I've been very impressed with their knowledge base in our domain in particular, and their expertise in Internet, media, and real estate matters. We approached them initially with a complex problem, and within a few hours Pinnacle came up to speed and started adding value when we needed it most.
Jon emphasizes that it's easy for a business to feel like it's "just another client". "I think of a law firm as an integral partner in my business," he says. "The attorneys and staff at Pinnacle understand that things for us happen quickly. Not only do they respond quickly, we can rely on the advice we are getting. Pinnacle's expertise allows me to focus on other issues and know that we are heading in the right direction." |
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Pinnacle Law Group
7th Annual Golf Tournament
The seventh annual Pinnacle Law Group Golf Tournament was a great success this year. Held every September at the Richmond Country Club in the East Bay, this year's event was attended by 80 golfers, including many of PLG's clients, business colleagues and friends. PLG awarded prizes to several of the players for their achievements on the course. Members of the lowest scoring team this year were Noel Wixsom, Mark Brittain, Thomas Packer, and Frank Melon. Marc Fishleder won the award for the longest drive for men, and Julie Down garnered that achievement for women. The putting contest awards were given to Jerry Cisek, Jeff Gall, and Phil Wang. Closest to the hole off the tee was Pete Sorenson. Congratulations to everyone.
Thanks to all of the PLG staff for making this event go so smoothly, and thank you to all of you who joined us for a great day of golfing.
Pinnacle Law Group Attorneys and Staff
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