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Annual Minutes: The Importance of Corporate Formalities

December 19, 2011 By

While the failure to file the required Annual Report with the Division of Corporations will lead to administrative dissolution of the corporation, failure to keep at least Annual Minutes is a little less cut and dried. Annual Minutes are not required to be filed with the Division of Corporations. There is no penalty for failure to complete and maintain Annual Minutes.

Yet there is every reason to document corporate action in the form of minutes which should be maintained by the corporation. Creditors will always seek to attach individual liability for debts to shareholders.

If corporate formalities, such as completing your Organizational Minutes and keeping regular Minutes of Meetings, have not been followed then you have created a red flag. Though Florida Corporate law requires that there be some fraud in forming the corporation or actions by individual shareholders to defraud creditors through the corporation, if you do not follow corporate formalities, chances are allegations of fraud in running the corporation as your personal piggy bank won’t be far behind.

In addition, failure to properly document loans made to the corporation could result in the IRS re-characterizing loans as capital contributions greatly changing your tax liability for capital gains should you seek to later sell your company.

The great thing about Annual Minutes is you can address all actions taken for which you did not have separate Meeting Minutes. Here is a checklist of certain items, though not exhaustive, that should make it to your Corporate Minute Book:

1. Election of Directors and appointment of officers
2. Review of corporate financial statements
3. Changes in salaries of officers
4. Changes in compensation of managerial level corporate employees
5. Amendment of Articles of Incorporation
6. Adoption of employee benefit plans
7. Purchase, sale, or lease of real property or equipment
8. Approval of corporate loans taken or made
9. Authorizing additional stock or approving the issuance of authorized stock
10. Indemnification of Directors, officers, employees or agents

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Florida Power of Attorney Law

November 11, 2011 By

Have you ever had the need for a Florida Power of Attorney? If you have lately then know that effective October 1, 2011, new requirements provided by the Florida Power of Attorney Act must be satisfied. Changes to existing law are not retroactive so if you have a Power of Attorney from before October 1, 2011, it is still valid. Still, it’s wise to have new documents prepared and executed at this time.

A Power of Attorney is a document which provides a grant of authority to an agent to act on behalf of the principal in place of the principal. The principal executes a Power of Attorney to grant such authority to his agent or “attorney in fact.”

Florida’s revisions to the power of attorney law were designed to more closely track the Uniform Power of Attorney Act already law in many states. Florida’s new Power of Attorney Act modifies and clarifies the agent’s duties including:

+ No Delegation of Duties: the agent must perform all duties and may not delegate authority (except in the case of certain investment functions);

+ Record Keeping: the agent must keep records of all receipts, disbursements and transactions;

+ No Contrary Actions: the agent may not act contrary to the principal’s interests and reasonable expectations;

+ Specific Authority: the agent may only perform specific acts as provided in the Power of Attorney and blanket authority such as “to do everything the grantor could do,” is now invalid.

Changes in Florida Power of Attorney Law

The Florida Power of Attorney Act provides many new requirements including:

Every Power of Attorney must be formally executed – signed by the principal and by two subscribing witnesses and acknowledged by the principal before a notary public.

There can be no springing power of attorney under the new law. A springing POA is a power of attorney that becomes effective upon some future event or occurrence (with exceptions for military POAs);

Every Florida Power of Attorney that is a durable power of attorney (remains in effect notwithstanding the principal’s subsequent incapacity) must contain such words as “This durable power of attorney is not terminated by subsequent incapacity of the principal except as provided in chapter 709, Florida Statutes”;

A Grantor’s initials are required for provisions that allow for:

- gifting, changing the beneficiaries of a retirement account,

- changing any beneficiary of an annuity,

- changing the ownership or beneficiary of a life insurance policy,

- amending, modifying, creating, revoking or terminating a trust,

- waiving the principal’s right to be a beneficiary of a joint and survivor annuity, including survivor benefits under a retirement plan, or

- disclaiming property and powers of appointment;

Multiple agents may each act unilaterally, absent explicit direction otherwise. Previously the presumption was that if multiple agents were named they had to act together;

Third parties must accept a copy of the power of attorney (not require an original), though they may insist on an affidavit swearing the POA is still in effect; and

By executing a new power of attorney, there is no revocation of a previous power of attorney unless the new POA so provides.

Specified Attorney in Fact Powers Prohibited

Agents are not permitted to perform the following acts under a power of attorney:

· any duties under a contract that require personal services of the principal;

· making affidavits based on the personal knowledge of the principal;

· voting in any public election on behalf of the principal;

· executing or revoking any will or codicil for the principal; or

· exercising any powers or authority granted to the principal as trustee or as court-appointed fiduciary.

Most people should include a Durable Power of Attorney in even the most basic Estate Plan. Since it gives your chosen agent authority to act for you if you become incapacitated, it’s a valuable tool for any estate plan.

It may be time to revisit your existing Power of Attorney. Even though older documents will still be recognized, unintended results may occur or difficulties may arise in using a Power of Attorney that does not comply with current Florida law.

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Florida Limited Liability Companies: How Limited is Your Liability?

October 14, 2011 By

A limited liability company (“LLC”) is a form of business entity available under the Florida Limited Liability Company Act. An LLC is controlled either by a Manager or by a Managing Member pursuant to the LLC “operating agreement.” Members hold their investment in an LLC in the form of membership interests.

Similar to S-Corporations and general partnerships, an LLC is a “flow through” entity such that only its members are liable for income tax. The business entity itself, unlike with C-Corporations, is not liable for income tax on its profits. Yet though similar in structure to a general partnership, an LLC enjoys limited liability for its “members” similar to corporate shareholders.

Subject to restrictions in the operating agreement of an LLC, a membership interest, being intangible property, is assignable and transferable. As such, though an individual member may not be liable for company debts, a member’s interest may be taken to satisfy a judgment against him – that is unless there is a statute that says otherwise. Florida has such a statute that until recently was less than clear.

In Florida, a judgment creditor was faced with Section 608.433, Florida Statutes, which allowed a judgment creditor to obtain a “charging order” against a judgment debtor’s LLC membership interest. A charging order only allows a creditor to receive LLC distributions normally payable to the member against whom there is the judgment. Of course, the LLC could always decide against distributions leaving the creditor empty handed.

What Section 608.433, Florida Statutes, did not expressly provide was the charging order as the ONLY remedy for judgment creditors.

The Supreme Court – Olmstead

The Florida Supreme Court’s decision in Olmstead v. Federal Trade Commission, 44 So. 3d 76 (Fla. 2010), interpreted the statute and Florida law to mean that in a Florida single-member LLC, a charging order is NOT the creditor’s exclusive remedy. The court ordered the judgment debtor to surrender all of his right, title, and interest in his LLC to the creditor to satisfy the judgment.

The widespread uncertainty created by Olmstead immediately got the attention of concerned business attorneys and their clients. Did the reasoning in Olmstead only apply to single-member LLCs or could it, and in any case would it, be used against multiple-member LLCs? The ruling appeared to most as contrary to Section 608.433 and the Florida Legislature’s intent.

Legislative Amendment – The Olmstead Patch

The legislature took action quickly and amended Section 608.433, Florida Statutes, which amendment became effective May 31, 2011, and is known as the Olmstead Patch.

The amendment expressly provides that a charging order is the exclusive remedy available to creditors seeking to enforce judgments using the interests of LLC members. This exclusive remedy applies in both single-member and multiple-member LLC contexts. However, and only in the case of single-member LLCs, if a creditor shows that charging order distributions will not satisfy the judgment in a reasonable time, a court may permit the foreclosure of the membership interest.

The amended statute does NOT address treating a multiple-member LLC as a single-member LLC where additional members are added with only nominal interests. This will no doubt be an area of future commercial litigation.

Benefits of Doing Business as a Limited Liability Company

LLCs are useful because they are flexible as to how membership interests can be held (by other business entities or trusts) without losing their flow through income tax treatment as would otherwise occur in the case of an S-Corporation.

LLCs are also useful for asset protection and with the Olmstead Patch, even more so. Compare the treatment of a membership interest in an LLC with the fact that shareholders’ stock certificates in corporations can be taken by a judgment creditor.

Where a charging order is obtained, the creditor must wait for profits to be distributed or distributions to be made upon closing a business run as an LLC. The LLC can meanwhile loan money to the debtor-member or pay a salary to him which, if head of household, is further given exempt treatment.

Meanwhile, a 1997 Revenue Ruling may create a tax liability for the creditor where distributions are not made, the creditor has a charging order, and profits are allocated to the debtor-member. The income tax liability on that member’s allocated income may need to be paid by the judgment creditor.

The Florida Department of State on its website reports there were almost 550,000 LLCs and 743,000 corporations in Florida by the end of 2010. LLCs are being increasingly utilized with over 138,000 Florida LLCs formed in 2010 to the approximate 104,000 Florida corporations formed.

As such, the LLC has become an increasingly important business structure in Florida.

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Foreclosure Attorney General Investigation: What It Really Means

September 18, 2011 By

The foreclosure investigation of all 50 states’ Attorney Generals that began in October 2010 has led to a proposed settlement among the largest banks for up to $20 Billion dollars and commitments to alter their foreclosure practices.  The issue erupted when it was discovered that many documents, included documents filed in state court foreclosure actions, where the product of “robo-signers.” Nowhere has this been more a problem than in Florida Foreclosure Defense.

Robo-signers are mortgage default personnel that had no personal knowledge of the particulars of a mortgage but signed affidavits filed with courts swearing they had reviewed the home loan file and were familiar with the circumstances of the loan default. In the name of expediency, robo-signers were used to simply sign pre-prepared documents in order to complete mortgage foreclosure.

Recently the New York Attorney General has objected to the proposed settlement spear headed by the Iowa Attorney General. The big disagreement appears to be whether banks will be released from future civil liability in connection with the way they securitized the loans.

Banks wish to avoid continued lawsuits against them. They are currently being sued by investors who claim improper and incomplete disclosures were given about the mortgage backed securities they purchased through which billions have been lost. And most recently, the Federal Housing Finance Agency filed suit claiming that banks misrepresented the quality of the mortgage loans sold to Fannie Mae and Freddie Mac.

The robo-signing practices of the largest banks involved in the settlement (the banks do not admit liability in this matter), resulted in thousands of falsified foreclosure documents filed in loan foreclosure actions across the country. When you consider that the banks involved include Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, and Ally Financial, another problem arises for the economy trying to get past the mortgage foreclosure crisis.

When the Mortgage Loan Foreclosure Machine Starts Up Again

Many of these banks have halted or significantly slowed their foreclosure activities. Cases recently filed remain pending without any movement toward final resolution. Cases that are about to be filed are held back. Finally, loans that are already in default are not being moved forward at all.

Meanwhile, HAMP loan modifications are not alleviating this building pressure. Because HAMP modifications are voluntary on the part of the lender and because the lender and the “Investor” in the mortgage backed securities covering the particular mortgage in question need to agree on the loan modification, loan modifications are painfully slow – even though the government is footing part of the bill to get loans modified.

What this means is that without drastic relief, the dam of overflowing loans in default could break resulting in another sudden explosion in foreclosures when and if the Attorney Generals finally settle the investigation with mortgage lenders.

Troubled homeowners in loan default should nonetheless vigorously pursue the HAMP loan modification process and stay on top of it. Every request for additional information that lenders invariably ask for to get the loan modification should be provided immediately. Lender representatives spoken to over the phone should be made note of together with their extension number and full details of the conversation including the time and date. All correspondence should be in writing and copies should be maintained in good order.

For troubled homeowners who have a very good paper trail, they may be in the best position to resolve a potential foreclosure filing once lenders restart their foreclosure machine.

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The Florida Fair Foreclosure Act – Is The Latest Version Out There Real?

August 17, 2011 By

Florida is going through a foreclosure crisis. With shoddy lender paperwork, the courts are clogged with foreclosure cases. Cases sit for months even where homeowners are NOT represented by an attorney.

The latest version of HB 1191 has something for lenders and borrowers. The new right of the lender to proceed without judicial sale of the property could be problematic and cost borrowers who have substantial equity in their homes (rare) real money. But the flip side is that if the lender so elects, they cannot pursue the homeowner for a deficiency judgment (great if you’re underwater on your home – and not so rare).

There are other provisions however that turns existing Florida law on its head. The version of HB 1191 currently circulating the Internet is a far cry from what is available online at the Florida House of Representatives website.

HB 1191 begins with “Once suit has been filed, the public interest is served by moving foreclosure cases to final resolution expeditiously in order to get real property back into the stream of commerce.” Given that Florida communities all over the state have months of inventory, I’m not sure that makes a difference. Of the “The Ten Housing Markets That Will Collapse This Year” reported by 24/7 Wall St., on August 9, 2011, three of them are in Florida.

Let’s take a look.

 

In any action or proceeding in which a party seeks to set aside, invalidate, or challenge the validity of a final judgment of foreclosure or to establish or re-establish a lien or encumbrance on the property in abrogation of the final judgment of foreclosure, the court shall treat such request solely as a claim for money damages and shall not grant relief which adversely affects the quality or character of the title to the property…

Comments:

  • What about the horrible mistakes reported where a homeowner is foreclosed upon and didn’t even have a mortgage?
  • Still the person prohibited from challenging the foreclosure would have had to have been properly served the foreclosure action and even if they were, they would still be entitled to money damages.

 

In any mortgage foreclosure action, upon the court’s initiative or motion of any party, the court shall award a reasonable attorney’s fee, including prejudgment interest, to be paid to the prevailing party in equal amounts by the losing party and the losing party’s attorney.

Comments:

  • The act repeals the existing similar attorney’s fee statute, Section 57.105.
  • This new provision applies equally to the lender and the borrower.
  • But it is unusual that it mandates half to be paid by the attorney and will have a chilling effect on getting an attorney to represent you.
  • It also is unusual that Section 57.105 that applied to all types of cases, not just foreclosures, will not be available at all outside the foreclosure context.

 

Where the amount of principal and interest, exclusive of fees and costs, owed to a foreclosing lender equals or exceeds 120% of the just value of the property subject to foreclosure, as determined by the county property appraiser in the most recent certified tax roll, the foreclosing lender may elect to foreclose without a judicial sale of the property.

Comments:

  • This one is the most interesting of all but does not mean you don’t get sued and I believe judicial foreclosure, at least as far as first being served with a complaint, is still intact.
  • On the other hand, if a lender elects to proceed in this manner and you are upside down on your home, the lender waives their right to get a money judgment against you for the deficiency or amount of value your home has lost compared to the amount of the loan you took.

I was not able to find this version of HB 1191 on any Florida government site. But it does look like something like this may be coming. As is, its effective date would be October 1, 2012, and would apply to all foreclosure filings after that date.

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Seven Reasons to Run Your Florida Business Out Of a Corporation

July 4, 2011 By

Florida is one of the leading states when it comes to new business formation according to the State of Florida, Division of Corporations. There are a lot of variables and advantages to consider in incorporating your business. But Florida Corporations enjoy a lot of advantages compared to other forms of doing business.

Corporations in the State of Florida not only enjoy having no state corporate income tax, but here are an additional 7 reasons why running your Florida business out of a corporation is the wise choice:

1. Limited Liability

If this isn’t reason enough, then what is? With limited liability, shareholders or company principals are protected from personal liability in almost all cases. For instance, if a corporation in Florida is indebted, creditors won’t be able to collect from shareholders. If you sign a personal guaranty, then you are liable for that agreement only.

2. Tax Advantage

You’ll be able to deduct expenses from your reportable income for Federal income tax purposes. Deductions will include salaries and retirement and health plan contributions. There also is no self employment tax which you may have to pay as a sole proprietor or sole member Limited Liability Company. And again, there is no Florida state corporate income tax.

3. Perpetual Existence

Corporations in Florida enjoy a continuous existence regardless of any changes in ownership.

4. Professional Appearance

Running your Florida business as a corporation gives you a more professional appearance, which is important in your marketing efforts, and helps when trying to obtain bank loans.

5. Employee Benefits

You’re better structured to accommodate employees with attractive benefits that will greatly assist your business in hiring the best candidates.

6. Lower Fees

In Florida, corporations enjoy low filing fees by as much as 25% compared to other states.

7. Undertake All Lawful Activities

The State of Florida allows corporations to conduct any type of business activities that are lawful. In view of this, all legitimate businesses should incorporate.

These are just seven of the reasons why operating your Florida business as a corporation is the ideal way to go. The State of Florida, Division of Corporations, provides a pro-business atmosphere to attract and help investors and entrepreneurs.

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Foreclosure Investigation: New Servicer Requirements

May 3, 2011 By

The Wall Street Journal reported on April 28, 2011, that the Foreclosure Investigation has lead regulators to give the banks a new deadline. They have until mid-June to develop a plan to reorganize their foreclosure operations and until August to implement them.

U.S. regulators have outlined various requirements designed to force lenders to overhaul their foreclosure practices. The federal Home Affordable Modification Program or HAMP, has been largely ineffective because of the frustrations of dealing with banks even though voluntarily participating in the program. Invariably, the Foreclosure Action then follows and distressed homeowners lose their homes.

Regulators outlined the following requirements:

  • A Single Point of Contact – Distressed homeowners must be given a single point of contact for their mortgage issues (of course this is not unlike present laws which have been ignored).
  • Deadlines for Determining Qualification for Loan Modifications – This addresses the waiting game which leads to being told your documents are too out of date and you must start you Loan Modification Application over again.
  • Staffing Levels – Banks have insufficient personnel to handle Loan Modifications and Foreclosure Suits. This results in denied Loan Modification applications and negligent supervision of third-party service providers such as foreclosure attorneys and law firms that handle foreclosure actions for them.

The requirements come after a three month review leading some of the biggest banks to suspend foreclosures. Our current foreclosure mess is in large part due to what the regulators found – robo-signers executing affidavits attesting to mortgage balances owed when they had no knowledge, notes lost and unable to be found, and homeowners being foreclosed upon by banks that no longer held their mortgage.

Meanwhile, regulators will also determine fines to levy against the offenders. Also, the various state Attorney Generals’ investigation continues.

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