The Law - Stevens

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Issue 268 - December 18, 2006
FISCAL YEAR END: DOT YOUR
“I”S AND CROSS YOUR “T”S
© November, 2004, Lisa Welch Stevens, Esq.

If you are a small business owner, whether a sole proprietorship, general partnership, “S” corporation, LLC or other entity, chances are you have a December 31st fiscal year end (FYE). Your FYE is the perfect time to make sure your business’ legal affairs are in order.

As an owner, you may have formed a “corporate” entity to own and operate your business. If so, congratulations – you have gained some protection from personal liability for debts or other claims arising out of your business’ operations. Your FYE is the perfect time to take the additional step of maintaining that corporate shield by observing an important formality: drafting annual minutes. (For purposes of this article, the term “corporate” or “corporation” shall refer to any type of entity registered with the Office of the Secretary of State of Colorado, which offers limited liability to its owners.)

Colorado law permits corporate entities to prepare annual consent minutes, in lieu of holding annual meetings, so long as all of the shareholders and directors (or, in the case of LLCs, members and/or managers) unanimously approve such minutes, and so long as the necessary statutory language and citations are included.

Annual minutes should list and briefly describe all major transactions entered into by the business during the past fiscal year. Examples of items to be approved include: (1) appointment of officers/managers and election of directors for the next fiscal year; (2) salary changes for owner/employees; (3) election or revocation of “S” election; (4) loans to or from the business; (5) substantial changes in business operations; (6) equipment or real estate lease agreements; (7) changes in registered office or agent; etc.

It may seem silly to go through this formality, especially where your business has only one or two owners. But by observing this and other corporate formalities you are treating your business like the separate legal entity it is meant to be, and not as your alter ego. The more you treat it as a separate entity, the more likely courts are to respect the corporate form, and to not pierce your corporate veil. Consult with your business’ legal advisor regarding your specific situation, and dot those “I”s and cross those “T”s: that small investment of time may buy a lot of “insurance” down the road.

Issue 270 - January 1, 2007
INTANGIBLE ASSETS: YOUR NAME,
YOUR BRAND, YOUR IDENTITY
© December, 2004, Lisa Welch Stevens, Esq.

You’ve invested years of your time, sweat and equity in building up your business. You’ve formed an entity to run and operate your business, protecting yourself personally, and your personal and other assets, from any liabilities from that business. Congratulations! but have you done everything you can to protect all of the assets of that business?

Like most prudent business owners, you undoubtedly have purchased business insurance of one type or another, insuring against loss or damage to the hard assets of your business. But what about the intangible assets? If your business has been successful, such intangible assets as the name of the business itself, or, if you sell products, the names of those products, have value in and of themselves. You may have invested substantial sums to promote your business’ or your products identities to consumers – customers seek out your business or product, under those names. But with success comes the risk that another might seek to cash in on your investment by using those names in competition with you.

The good news is that, just by using a business or product name in commerce, without doing more, you have common law trademark and/or service mark rights to those names. However, the protection afforded by those common law rights is limited to the specific geographical area in which you are using the names. For example, you might have rights to the name in El Paso County, but those rights are not exclusive; a competitor could set up shop in Douglas County or metro Denver using the same name. If you potentially want to expand your business outside your original geographic region, this could present a problem.

In order to obtain exclusive rights to the names within the State of Colorado, you can register the name as a trademark with the Colorado Secretary of State. And, to obtain exclusive rights nationwide, you can register the names as either or both trademarks or service marks with the United States Patent & Trademark Office. Such registrations can serve not only to protect your business against unfair competition, but can also increase the value of your business to a potential purchaser. Contact your legal advisor regarding your particular situation.

Issue 272 - January 15, 2007
WHAT’S IN A NAME: PERHAPS
NOT AS MUCH AS YOU THINK
© Lisa Welch Stevens, Esq., February 2005

Last month I discussed the value of a business’ intangible assets. One such asset can be the business’ name. But such value and the protection afforded it under state law can vary widely, depending upon the business’ legal form and how and where the name is registered or recorded.

Colorado does not have a uniform system for the filing and recording of business names. If a business is owned through any of the limited liability entities (corporations, LLCs, etc.), its entity name (and its “trade name”, if any) is recorded with the Secretary of State. If a business is a sole proprietorship or general partnership, and it operates under a name other than the owner(s) personal name(s), that trade name is registered with the Department of Revenue.

Limited liability entities’ names and trade names, as recorded with the Secretary of State, are accorded some exclusivity: they must be distinguishable on the record from those of other limited liability entities. Sole proprietorships’ and general partnerships’ Registrations of Trade Name with the Department of Revenue are accorded no exclusivity at all: anyone can file to use the same trade name as another. Because the databases of the Secretary of State and the Department of Revenue are separate, an entity filing a Statement of Trade Name with the Secretary of State is not put on notice of similar or identical Registrations of Trade Name with the Department of Revenue, and vice-versa.

After May 30, 2006, the Department of Revenue will no longer register trade names; all such registrations shall be with the Secretary of State. Businesses will know if others are using the same name as they. However the Secretary of State’s office will no longer require that trade names be distinguishable on the record from other trade names and entity names; forming your business under a particular entity name, or registering a particular trade name, will result in no exclusive rights to that name at all.

A business can seek to protect its good name from usurpation by competitors, and to increase its value as an intangible asset, by turning to trademark law. However, for this to be effective action must be taken before another has the opportunity to start using the name. Consult your legal advisor regarding the specifics of your situation.

Issue 274 - January 29, 2007
BUYING OR SELLING A BUSINESS:
STRUCTURING THE LEGAL TRANSACTION
© March, 2005, Lisa Welch Stevens, Esq.

Whether you are currently a business owner, looking to exit your business while reaping some financial return on your years of investment, or an individual contemplating purchasing an existing business rather than facing the greater uncertainties of a start-up, the issue of how to structure the sale or purchase of a business from a legal point of view may be more significant than you think.

Essentially, you need to decide whether to structure the transaction as an asset purchase or, if the business is operated through some type of limited liability entity, as a “stock” purchase. (For purposes of this discussion, “stock” purchase shall also include the purchase of any type of ownership interest in a limited liability entity.)

An asset purchase is one in which the buyer purchases from the seller substantially all of the assets used in the operation of the business. This may include the name of the business as well as other intangible assets. A “stock” purchase is one in which the buyer purchases from the seller some or all of the ownership interests in the entity which owns and operates the business.

After an asset purchase, the seller still “owns” some of the “business”: he not only continues to own the entity (if any) through which he owned and operated the business, he usually continues to “own” the choate liabilities as well. In addition, he continues to “own” any inchoate liabilities, such as for future claims for events, debts, acts or omissions during the period of time he or his entity owned and operated the business.

After a “stock” purchase, however, the seller usually no longer owns any part of the business at all. The entity continues in existence, and continues to own and operate the business; there simply are different people who own that entity. As a result, the entity usually continues to own not only the assets of the business, but the liabilities as well, whether choate or inchoate.

Thus, a “stock” transaction is usually more attractive to sellers; an asset purchase is usually more attractive to buyers. However, negotiation and careful drafting of the transaction documents may be used to alter to some degree the legal ramifications of the choice of transaction. As always, it is best to consult your legal advisor regarding your specific situation.

Issue 276 - February 12, 2007
BUYING OR SELLING A BUSINESS:
WHAT DO YOU NEED TO DO?
© April, 2005, Lisa Welch Stevens, Esq.

In my practice I have dealt with transactions ranging from a $5,000 purchase of intellectual property to a $13,000,000 sale of a chain of jewelry stores. More documentation is advisable with the latter than with the former, and there are those who want to do business with just a handshake. There are two major legal problems and one major practical problem with conducting the transaction so informally. On the legal side, title to the business and/or its assets may not be effectively transferred in the absence of at least a bill of sale. In addition, depending upon the type of entity through which the business was owned and operated, a sale of all or substantially all of the assets may legally require formal approvals by the entities and individuals involved. On the practical side, particularly where payment is to be made over time, it may be difficult to enforce a party’s rights in the absence of legal documentation.

With respect to an asset purchase/sale, at a minimum I recommend the following documents:

▪ Asset Purchase Agreement, with schedules and exhibits;
▪ Promissory Note, if payment is to be made over time;
▪ Security Agreement, securing payment of the Promissory Note;
▪ Deeds of Trust or UCC-1s, depending upon the type of collateral in which the security interest is to be held;
▪ Bill of Sale;
▪ Lease or Lease Assumption, if applicable;
▪ Corporate, Board of Directors’ and/or Shareholders’ Resolutions, where applicable.

With respect to a stock purchase/sale, in addition to the above documents (with a stock purchase agreement substituting for an asset purchase agreement), at a minimum I recommend the following additional documents:

▪ Stock Certificates and Stock Powers;
▪ Directors’ and Officers’ Resignations;
▪ Certificate(s) of Good Standing;
▪ Corporate Secretary’s Certificates regarding Articles of Incorporation, Bylaws, and Stock Records.

This is the minimum documentation I would recommend. Ultimately, the decision on how much legal documentation is necessary is highly dependent upon the amount of money at issue, the nature and circumstances of the specific business, sellers, and purchasers, and the risk tolerance of the parties involved. Consult with your legal advisor regarding your specific situation.

Issue 278 - February 26, 2007
FRANCHISING YOUR BUSINESS:
WHERE DO YOU BEGIN?
© May, 2005, Lisa Welch Stevens, Esq.

Your dreams have come true – your business has succeeded. You would like to expand into other geographic areas without risking your own capital to do so. Franchising your business format might be the right path to take. But what do you need to do from a legal point of view to make it happen? Franchising is regulated by the federal government and many states, and it is important to comply with those federal and state regulations.

First, you need at least one registered trademark or service mark, identifying your business’ goods or services, which you will be licensing franchisees to use in following your business format. This trademark or service mark may be registered with either a state’s Secretary of State’s Office or with the United States Patent & Trademark Office. State registration is considerably less expensive and more quickly obtained than federal registration, but provides protection only within that state. If you intend to franchise out of state, it is best to apply also for federal registration.

Second, you must have a proposed franchise agreement, setting forth in considerable detail the rights and obligations of both the Franchisor and the Franchisee.

Third, you must have an offering circular or prospectus prepared in accordance with federal and/or state guidelines, which must contain certain mandatory disclosures. This must be registered with the Federal Trade Commission, and with certain states in which you intend to offer franchises. Not all states require state registration in addition to the federal registration. Colorado is not a state that requires state registration.

Before you offer a franchise to or enter into negotiations with any prospective franchisee, you must provide that prospective franchisee with a copy of the offering circular or prospectus at the earlier of ten (10) business days before either execution of a binding contract, or payment of consideration, or the first personal meeting between the franchisor and the prospective franchisee.

It is important to note that you cannot avoid federal and state regulation by calling your arrangement something other than a franchise; if it looks like a franchise and acts like a franchise, it will be treated as a franchise.

This is only an extremely brief introduction to what is a complex topic; as always, consult your legal advisor regarding your specific situation.

Issue 280 - March 12, 2007
FROM THE BEGINNING OF YOUR
BUSINESS, PLAN FOR THE ENDING
© June, 2005, Lisa Welch Stevens, Esq.

From the beginning, one of the most important things you need to do is to plan for exiting your business. Nowhere is this more important than when you are in business with others. Partnerships, corporations and limited liability companies owned by two or more individuals need to have exit strategies in place in order to avoid costly and needless negotiation and/or litigation in the future.

By exit strategies, I mean mechanisms put in place, through a written agreement, providing for events triggering an exit of individuals from the business, the purchase of ownership interests, valuation, timing and payment. Exit strategies may be included in a buy-sell agreement, a partnership agreement, or an operating agreement.

Many small business owners are reluctant to discuss exit planning. They may be concerned that partners will think they are not committed to the business, or that they don’t trust them. They may also wish to avoid legal fees in connection with such planning.

Exit planning actually shows a strong commitment to the business: you believe it will succeed and that, because of death, disability, or other events an exit plan will be necessary. Having a written agreement does not indicate a lack of trust in your partners: in the event of a death or disability the remaining partners will be forced to deal with third parties; and putting agreements in writing is the professional way to run a business.

It is less expensive to pay a few hundred dollars for exit planning than to pay tens of thousands of dollars to negotiate or litigate the terms of an exit. And the terms of that exit will be known and certain. In the event of an exit of a partner from the business there is likely to be disagreement over the terms. Without a written exit plan the terms will be determined by a judge, or dependent upon the agreement of the remaining partners.

Finally, a binding, written agreement as to the valuation of ownership interests can be of significant tax benefit upon the death of a partner.

Exit planning is simply good business planning for multiple owner businesses. As always, consult your legal advisor regarding your specific situation.

Issue 282 - March 26, 2007
BUSINESS CONTRACTS:
THE ESSENTIALS
© July, 2005, Lisa Welch Stevens, Esq.

When entering into an agreement, the surest way to avoid disputes is to put the terms in writing. At a small claims trial I tried last month the judge put it best: “We all know why we are here. It’s why we’re always here. Nobody put anything in writing.” Many small business people are reluctant to ask for a written agreement, thinking it unnecessary, or that it implies a distrust of the other party. I can assure you: written agreements avoid disputes, and provide a type of “insurance” against deals gone bad.

Obviously, the ideal situation is to have an attorney draft the contract, tailored to your situation. However, not all small business people want to do that. There are form agreements available in business supply stores, over the Internet, in form books, etc. You can try adapting such forms to your situation. However, it is important to be careful: not all form agreements comply with Colorado law, and not all forms are well-drafted. You can also write up your agreement yourself; something is better than nothing.

As a checklist, here are some provisions that should be included:

Names of the parties, and types of entities;
Effective date, and termination date if any;
Purpose of the agreement;
Representations, warranties, guarantees, definitions;
Performances and payments required of the parties;
Events of default or breach;
Remedies for default or breach;
Releases and indemnifications;
Disclaimers;
Merger clause;
Choice of law provision;
Jurisdiction and venue clause;
Survival clause;
Attorney’s Fees clause;
Waiver of Breach clause;
Severability clause;
Provisions for contract to bind heirs, successors and assigns;
Notice clause;
Interpretation clause;
Signatures.

It is not distrustful to ask others to sign a contract – it is the professional way to run your business. A written contract makes all parties secure in the terms of their agreement, and saves money in the long run, through avoiding costly litigation and lost relationships because of bad feelings. Anyone unwilling to sign a fair, simple contract is probably not someone you want to be doing business anyway – it is sign of potential problems down the road. As always, consult your legal advisor regarding your specific situation.

Issue 284 - April 9, 2007
WHAT TO DO IF YOUR LIMITED
LIABLITY ENTITY IS DISSOLVED
© August 2005, Lisa Welch Stevens, Esq.

Business owners choose to own or operate their business through a limited liability entity to protect against personal liability for that business, or to segregate liabilities of different businesses or investments. However many fail to monitor the existence and good standing of that entity. Entities may be dissolved, often without the owners’ knowledge. The business continues to operate without that protective corporate shield.

Entities may be dissolved in several ways: (1) voluntarily; (2) administratively; (3) judicially; and (4) miscellaneous other ways. My discussion is focused on administrative dissolutions. The Secretary of State may administratively dissolve an entity because:

(a) the entity does not pay any taxes, fees, or penalties imposed by the Colorado Business Corporation Act when they are due;
(b) the entity does not supply its annual report;
(c) the entity does not provide for a registered agent and office for service of process; or
(d) the entity’s stated period of duration expires.

When the Secretary of State has determined that grounds for dissolution exist, it mails notice to the entity. The entity has 60 days to correct those grounds. If it does not the Secretary of State administratively dissolves the entity, mailing notice of dissolution thereof. It is important to realize that legally, a dissolved entity is no longer permitted to own or operate its business, only to wind up its affairs and liquidate. If the business does continue, the owners are exposed to personal liability.

Quite often owners never receive the notices or realize they have been administratively dissolved.

A dissolved entity can apply for reinstatement, if certain requirements are met, by filing Articles of Reinstatement. It may not be reinstated under the same name, depending upon availability; however, if unavailable, it may use that name immediately followed by the word “Reinstated” with the year of reinstatement. The good news is, if reinstatement is granted, the entity can continue with its business as if the dissolution never occurred. The bad news is, the rights of anyone who relied on the dissolution before they had notice of the reinstatement may not be adversely affected by the reinstatement.

It is important to monitor your entity’s status with the Secretary of State’s Office, and to make all required filings and payments.
Consult your legal advisor regarding your specific situation.

Issue 286 - April 23, 2007
REAL ESTATE INVESTMENT TRUSTS, OR
REITS: NOT A GOOD IDEA FOR COLORADO
© September, 2005, Lisa Welch Stevens, Esq.

REITS, or real estate investment trusts, are very popular in many states as a vehicle for real estate investment. Under federal tax law they are permissible and may qualify for pass-through taxation (i.e., income taxed only at the personal not the entity level) if properly structured. At first glance, this makes them very attractive. However, I do not necessarily recommend them for investment in real property located in Colorado.

Colorado currently has no case or statutory law on the treatment of real estate investment trusts, other than a single statute regarding their taxation, described below. While land may be held in trust in Colorado, existing Colorado law does not deal with real estate investment trusts. Therefore, it is uncertain how such trusts will be treated under Colorado law.

In other states there are two clear lines of treatment of ownership of land trust assets. Some states vest both legal and equitable title to the real property with the trustee; the land trust beneficiaries retain a personal property interest in the trust itself, not a direct interest in the real property itself. Other states vest legal title to the real property in the trustee, and equitable title in the beneficiaries. Colorado, with trusts in general, follows the first line of treatment; there is no specific indication how real estate investment trust property would be treated.

Where a trust has been formed by a group who pool their capital for real estate investment, it is treated by some states as a general partnership, with the beneficiaries each having joint and several personal liability for all trust liabilities, the trust res, and one another, and with any beneficiary having the power to bind the “partnership” and the other “partners”. It is unclear how Colorado would come down on this issue. This may create significant liability exposure .

Finally, as discussed above, the chief attraction of REITS is the possibility of pass-through tax treatment under federal law. However, under Colorado law, C.R.S. §39-22-503 specifically provides that, in the case of an organization that qualifies as a “real estate investment trust” under the Internal Revenue Code, the “net income” of that organization shall be the income of the trust; this would appear to indicate that such income will subject to Colorado taxation at the trust level as well as the beneficiary level.

As always, please consult your legal advisor regarding the facts of your specific situation.

Issue 288 - May 7, 2007
LEGAL VS. ACCOUNTING
ISSUES IN INCORPORATION
© October, 2005, Lisa Welch Stevens, Esq.

Often after I have discussed with clients the pros and cons of incorporating their business, and the best choice of limited liability entity, I receive a call questioning the necessity of doing so. Invariably this is because, at my urging, they have consulted with an accountant, and he has told them they don’t need to incorporate. The accountant may note – correctly – that they are not yet generating sufficient income from the business to realize any of the tax benefits incorporation can bring. The problem is that the accountant is so focused on tax and other financial issues that he has lost sight of the legal issues.

Limited liability entities are first and foremost creatures of LAW, created fundamentally for legal reasons. The intent behind permitting such entities is to shield business people from personal liability should their businesses fail or face legal claims, and to segregate the liabilities of and potential claims against different business ventures one from the other. The result is to encourage business formation, investment and development, and to permit fresh starts.

Some businesses clearly face more risk than others. I have told clients with businesses facing little or no liability risk that they probably need not incorporate for any legal reasons. An example might be a client who works as an independent contractor providing administrative office services. However, I had one client, an electrician, who was working in private residences and commercial establishments repairing and installing electrical wiring. Clearly, he potentially faced a huge risk of personal liability in the event of a resultant electrical fire or the like. I strongly recommended he incorporate his business; his accountant tried to talk him out of it on the grounds there was not yet any tax benefit to doing so. Fortunately, when I pointed out to my client his legal liability risks, he did incorporate.

Just as an accountant may be so focused on tax or other financial issues that he or she neglects to consider the legal issues surrounding the decision to incorporate, so may an attorney be so focused on the legal issues that he or she neglects to consider the tax or financial issues. For this reason I always recommend that my clients consult their accountant as well in order to insure that ALL important issues and factors are considered.

Issue 290 - May 21, 2007
COLLECTING BAD DEBTS:
WHAT ARE YOUR LEGAL OPTIONS
© November, 2005, Lisa Welch Stevens, Esq.

Every small business owner is faced with the problem of the deadbeat client. You can choose to write off the debt, or you can choose to sell the debt to or hire a collection agency. Finally, you can choose to collect on the debt through the court system.

In Colorado if the debt is $7,500 or less you can file an action in small claims court. Small claims court provides a highly expedited, informal process to prosecute legal claims. You fill out either a simple carbon form obtained from the court clerk’s office, or a Word or PDF form available on the Colorado State Judicial Branch website at www.courts.state.co.us. That website also has an information handbook available with step by step instructions and information.

If the deadbeat you are seeking to collect from is any of the limited liability entities, you will need to check with the Colorado Secretary of State’s website for the name and address of the business’ registered agent and office, to know on whom to serve the Notice, Summons and Complaint.

File the Notice, Summons, and Complaint with the Clerk of the Court at the courthouse for the county in which the defendant resides or does business. The filing fee is currently about $39, and you may use a credit card or check. The Clerk will tell you what days and times are available for trial. You will be given back a copy to serve on the defendant, a copy for your records, and a copy with an affidavit of service to return to the court after the defendant has been served. Anyone over the age of 18 years who is not a party or a relative of a party to the case can serve the defendant. Whoever serves the defendant completes and signs the affidavit of service of process, which you must then file with the Clerk of the Court.

The defendant may file a response, or he may simply show up in court for the trial. If he does not file a response or appear at the trial, the magistrate may enter a default judgment against him. The defendant may elect to be represented by an attorney, at which point you may choose to be represented by an attorney yourself; most parties in small claims represent themselves.

Next month, we will discuss how to prepare and present your case at a small claims trial.

Issue 292 - June 4, 2007
COLLECTING BAD DEBTS: PRESENTING
YOUR CASE IN SMALL CLAIMS COURT
© December, 2005, Lisa Welch Stevens, Esq.

If the defendant is represented by an attorney, then you may have an attorney represent you, although it is not necessary. Small claims is designed to be less complicated than regular civil court: the rules of procedure and evidence are relaxed. The magistrate judge does not expect you to formally present your case; he simply wants to hear your story.

The most important thing is to BE PREPARED. First, write out a timeline of events. This will help you present your case logically, and insure that you do not forget anything. Second, gather together your originals (including your court filings and affidavits of service on the defendant), and at least three copies of any documentation you have. Have your evidence in order, ready to present as you come to it in your timeline. Make sure you give the magistrate the originals, and give copies to the defendant. If you do not have originals, explain why. Third, have your questions written down, so you do not forget to ask anything important.

Fourth, STAY CALM. Be very professional and business-like. This will add to your credibility. Fifth, treat the court and the magistrate with RESPECT. You do not have to dress up, but wear clean neat clothes such as you wear to work. If you are wearing a hat, remove it in the courtroom. Arrive at the courthouse a half-hour early; it takes time to get through security. Ask the magistrate’s permission before approaching the bench. Stand as the magistrate enters or leaves the courtroom.

There will be many cases set for trial for the same time as yours; the magistrate will first ask everyone to meet to try to reach a settlement. Cases that settle may be dealt with first. Next, the magistrate may deal with cases with attorneys. Then, the magistrate may deal with the pro se cases. Finally, he may call the cases where one or more of the parties have not appeared. Your case may be set for 1:30 PM, but may not be called for several hours.

If the defendant does not appear, the magistrate will still want to hear you present your case; then he may issue a default judgment against the defendant. In any event, in small claims the magistrate usually renders judgment immediately. If the defendant is present and the judgment is against him, he must make payment right then and there. If he does not, that night the judgment goes on his credit report.

Next month, we will discuss options for collecting on a small claims judgment.

Issue 294 - June 18, 2007
COLLECTING BAD DEBT:
GETTING THE JUDGMENT PAID
© January, 2005, Lisa Welch Stevens, Esq.

Winning your small claims case is not the end, but the beginning. Often the hardest part of an action to collect on a debt is getting actual payment from the debtor.

If the debtor did appear in court, he is supposed to pay immediately. However, the magistrate might give him a period of time in which to pay you, and he fails to do so. Or, he might write you a check which bounces. In these events, or if a default judgment was entered, you will have to take further steps on your own to attempt to actually collect payment

A judgment creditor has several options for pursuing payment. You can either garnish the debtor’s wages; you can garnish the debtor’s bank or savings accounts or other assets; or you can request a lien against the debtor’s real estate. To garnish the debtor’s wages, you will need to complete a Writ of Continuing Garnishment (Form 26); a Calculation of the Amount of Exempt Earnings (Form 27); an Objection to Calculation of the Amount of Exempt Earnings (Form 28), and self-addressed stamped envelopes. To garnish the debtor’s bank or savings account or other financial assets you will need to complete a Writ of Garnishment with Notice of Exemption and Pending Levy (Form 29); and a Claim of Exemption to Writ of Garnishment with Notice (Form 30). (These forms are available at www.courts.co.us. ) File the appropriate documents with the court, and pay the $25 filing fee. Next, have the writ and other forms served upon the garnishee by the sheriff, a private process server, or anyone 18 or older not involved in the case. Once the garnishee has been served, file with the court an original, signed Return of Service. The garnishee completes the writ, and gives a copy to the debtor, together with the other documents, and files the answer to the writ with the court, sending a copy to you. If the debtor doesn’t object to the garnishment to the court within 10 days of receiving his copy of the writ, the garnishee must send the authorized amount to you, through the court. (If the garnishee is a bank holding money, or if it has possession of property, you will first need to also serve on the garnishee a Motion and Order to Pay in Funds (Form 89). If the debtor does object, you will get a copy of his objection and the court will set a hearing within 10 days.

To file a lien against real property owned by the debtor, you will first need to request a Transcript of Judgment from the court. The fee for this is $15.00. You then record the Transcript of Judgment with the county clerk and recorder where the real estate is located. There is a fee for recordation. Notify the debtor of the lien, and that he cannot sell or mortgage the real estate until he pays you and you release the lien. Your small claims money judgment is good for 6 years.

If you do not know where the debtor owns real estate, works, or has bank or savings accounts or other assets, you can first ask the court to order the debtor to answer Interrogatories disclosing such information, under penalty of perjury and/or contempt of court.

Issue 296 - July 2, 2007
BIG MONEY AND
LEGAL OUTCOMES
© February, 2006, by Lisa Welch Stevens, Esq.

The criminal prosecution of O.J. Simpson dramatically brought forth a reality of the American legal system, the “Golden Rule”: he who has the gold, rules. While the American legal system is one of the most highly developed and, as structured, one of the fairest systems in the world, one of its drawbacks is that it is extremely expensive and very time-consuming to actually seek redress in the courts. From my personal observations, an unfortunate truth about the system is that quite often, it is the party who can outspend and outlast the other party who “wins”, and not the party with the strongest case.

If a case is brought in District Court, it would be extremely difficult for a private individual to negotiation the maze of rules and procedures. As a result most parties are obligated to obtain the services of an attorney. Under the American system of justice, each party to an action is responsible for his own attorneys’ fees and other legal costs. Absent a specific statutory or contractual provision providing for the contrary, attorneys’ fees are rarely granted to the prevailing party. Such fees and costs, if a case went all the way to trial, quickly amount to $30,000 or more, depending upon the billing rate of the particular attorney. Quite often the amount of money at issue is insufficient to warrant the incurring of such legal fees.

In addition, a well-heeled plaintiff or defendant can, by filing multiple motions in a case, all of which must be responded to by opposing counsel, really “churn the file”, forcing the opposing party to incur even more expense, and further delaying trial. Cases often take a year or more to actually go to trial.

Litigation is unpleasant as well as expensive. Often clients with a very strong case will simply give up, because they just can’t or won’t deal with the unpleasantness and stress anymore. Opposing parties, knowing this, will deliberately drag matters out, being extremely confrontational and emotionally abusive.

I recently represented a client in a civil litigation over an unpaid debt, for merchandise sold and delivered to an extremely wealthy individual, who then refused to pay my clients. At mediation, the opposing counsel offered an insultingly low settlement offer. He admitted that we would probably prevail at trial and get back twice or more what he was offering. However, because of the amount at issue, the reality was that that additional amount we would have been awarded at trial would undoubtedly been eaten up by my additional legal fees to further litigate the matter. Good for me; not good for my client. Ironically, said wealthy individual probably paid out to his attorney as much if not more of the amounts due from him to my client. He was out the same amount of money, but it went to his attorney rather than the individuals to which money was owed. A fair and just result? No – but he who had the gold, ruled.

Recently I have seen more and more well-heeled individuals basically extorting money from ordinary people, filing claims in district court, rather than small claims court, for ridiculously small amounts of money. Most people pay, regardless of how unjustified the complaint, because it is much cheaper than attempting to defend in court. For example, a multi-millionaire businessman who purchases and owns multiple rental properties, sued my clients, a middleclass couple, in district court for about $800. In small claims court, my clients could easily and inexpensively defend themselves; in district court, probably not.

Deciding to proceed to litigation is a very serious decision, not to be entered into lightly. It is expensive, time-consuming, and so stressful that I have seen it tear apart marriages and business partnership. If you decide to litigate, do so prepared to invest significant sums of time and money to do so, and be prepared to yourself outlast, survive the process.

Issue 298 - July 16, 2007
DOING BUSINESS
ON A HANDSHAKE
© April, 2006, Lisa Welch Stevens, Esq.

In my practice I specialize in representing small businesses and the owners of small businesses in the Tri Lakes and northern Colorado Springs. And one of the nicest things about that practice is that I know, or get to know, my clients personally, as they themselves also get to know me, and the other people and businesses with which they transact business. In many ways, Tri Lakes has very much a small town atmosphere, even though if one looks at revenues, business in Tri Lakes is quite often “Big Business.”

Part of that small town atmosphere which those of us who live and/or work in Tri Lakes enjoy so much is the often informal nature of business relationships. Many of my clients take pride in “doing business on a handshake”; and, indeed, it is always more comfortable to do business with those you know and feel you can trust. In addition, it seems far less expensive and time consuming, as well as more efficient, to do so rather than to document the terms of your relationship in writing. That being said, it is important to note several things. One, it is legally required that certain types of transactions be put into writing, or they legally do not take place. Two, in the event of a dispute over the exact terms and conditions of an agreement, it is easier to prove what those terms and conditions are if they are in writing. And three, putting things in writing often avoids disputes.

The American legal system largely evolved from the English legal system. Since 1677, the Statute of Frauds (now codified in the statutes of the various American states), has required that certain conveyances of real and personal property, and certain business transactions, be put in a writing signed by the parties. If not put in writing, legally it is if such transactions never took place. And the Statute of Frauds further requires that certain specific material terms must be embodied in said writing for that conveyance or other transaction at issue to have occurred. The most obvious example, of course, is transfers of real property by deed, but other transactions must be put in writing as well. I recently had a client who was unable to collect on an invoice for goods sold to a customer because the customer had not signed the invoice; his name and address had simply been inputted into a computer invoicing system. We were ultimately able to collect under other legal theories, but only after the incurring of significant legal fees by my client.

Entering into a business transaction or relationship is in many ways like entering into a marriage; no one ever goes into it expecting it not to work. But there is always a risk that it won’t work out. If the parties’ agreement is not in writing, the dispute may revert to a “he said/she said” situation. In that event, a party faces the choice of either giving in to his partner’s version of the terms of the agreement, or embarking upon expensive litigation.

I have actually seen written agreements prevent disputes from occurring. I wrote an asset purchase agreement for a client who was buying a small business, which was to be funded by payment by him to the seller of a percentage of the revenues generated by the business after the sale. The seller, several months later, felt he wasn’t being paid what he was owed. My client was able to point out to him in the agreement exactly the amount and timing of the payments to be made to him. The seller was reassured, the transaction continued forward successfully, and a potentially expensive dispute was avoided. Please contact your legal advisor regarding the facts of your specific situation.

Issue 300 - July 30, 2007
DO CONTINGENCY FEE ARRANGEMENTS
REALLY EXIST, OR ARE THEY JUST A MYTH?
© June, 2006, Lisa Welch Stevens, Esq.

Recently I met with a prospective client, who had an employment law matter. She had a potentially good case, but I was not able to take her on as a client. She wanted me to undertake the matter on a contingency basis, which I do not do. She had been told the same by several another attorneys, and she asked me, “Are contingency fee arrangements just a myth?” Well, no, they are not a myth, but they are not nearly as common as Hollywood and other media may lead you to think.

Most attorneys require payment on a monthly or twice a month basis, whether that payment is made at the time of billing or drawn against a retainer amount. And in fact, attorneys are not permitted to take on certain types of matters on a contingency basis at all. Examples of such types of matters listed in Chapter 23.3 of the Colorado Rules of Civil Procedure, Rule 3 are: (1) the procuring of an acquittal upon any favorable disposition of a criminal charge; (2) the procuring of a dissolution of marriage, determination of invalidity of marriage, or legal separation; (3) in connection with any case or proceeding where a contingency method of a determination of attorneys’ fees is otherwise prohibited by law, the Colorado Rules of Professional Conduct, or governmental agency rule; or (4) if it is unconscionable, unreasonable, and unfair. And even where such arrangements are permitted, they are highly regulated, and require mandatory disclosures and terms in the written contingency fee agreements.

Regulations aside, very few solo or small firm attorneys outside the personal injury law firm “mills” will agree to take matters under contingency. This is for very simple economic reasons – the overhead on operating a law firm is quite expensive. The attorney must pay, of course, the normal expenses of an office, such as rent, utilities, salaries for staff, insurance, office supplies, bookkeeping and accounting, and marketing. In addition, however, there are costs unique to attorneys, such as annual dues to maintain one’s law licenses, malpractice insurance, subscription fees to online legal research services, fees to online electronic case filing systems for both state and federal court, subscription fees to online document services, legal books and forms and annual updates to such books, tuition for mandatory continuing legal education courses, and professional association dues. In addition, there are financial costs to any litigation: court filing fees, service fees, etc. Most lawsuits take at least a year to go to trial; very few solo or small law firms have the financial reserves to be able to front their expenses for that period of time.

Contingency fee arrangements are not a myth, but it can be very difficult to find an attorney willing to agree to one. And a client requesting one should be aware that they are in fact asking the attorney to make a very large financial sacrifice.

Issue 302 - August 13, 2007
THAT’S MINE, NOT YOURS: HOW TO
GET YOUR PROPERTY BACK, CIVILLY
© November, 2006 Lisa Welch Stevens, Esq.

When a third party unlawfully removes your personal property from your possession, you know what to do – call the police. But what do you do in the situation where you have initially permitted a third party to possess your personal property, but he refuses to return it to you? You may call the police but very often you will simply be told that the dispute is a civil matter, and that you will have to handle it yourself. What do you then?

The law provides for a fairly simple, accelerated procedure by which you may seek return of your personal property through the civil courts: replevin. Replevin is one of those old legal terms; actually “law French”. Replevin provides not only a way to get a final determination as to the party to whom personal property rightfully belongs, and its return, but also a provisional remedy by which a claimant may get the property immediately (within ten days) returned to him. Replevin in the context of seeking the return of personal property is analogous to actions in Forcible Entry and Unlawful Detainer (commonly referred to as “eviction”) in the context of seeking the return of real property.

In order to initiate action to get your personal property back, you simply fill out and file with the county court (if the value of the property is $15,000 or less), or district court (if the value of the property is more than $15,000), a Verified Complaint in Replevin, a Summons with Return of Service, and a proposed Order to Show Cause, together with a filing fee ($46 in county court; $136 in district court). You will need to have the defendant personally served with those documents together with a blank Answer, and then file a Return of Service with the court, proving he was served.

At the time you file the Complaint the court will schedule a “Show Cause” hearing date within ten days of filing, at which time the defendant must “show cause” why he should not immediately turn over possession of the property to you. At that hearing you will need to have with you a prepared Judgment and Order for Possession, a Prejudgment Order for Possession After Hearing, and a Bond in Replevin. At that hearing, the judge may, or may not, order that the defendant immediately turn over possession of the personal property to you, either definitively (you win), or temporarily pending the final hearing. You may either take possession of the property yourself, or the Sheriff may hold it in its custody pending a final order. The judge might also find in favor of the defendant, and dismiss your claim.

Replevin provides a relatively quick (in legal time) way to regain possession of personal property, where you have clear proof that the property does belong to you and was wrongfully retained by a third party. As always, consult with your legal counsel regarding your specific situation.

Issue 304 - August 27, 2007
REAL ESTATE INVESTMENTS: ASSET
PROTECTION AND LIABILITY REDUCTION
© Lisa Welch Stevens, Esq., June, 2004

More and more individuals are investing in real estate, a trend that accelerated after steep declines in the stock market. Real estate can be a more secure form of investment. As with any type of investment, however, there are risks. These include such financial risks as decreases in property value or difficulty in maintaining rental income flow. Most individuals are aware of these risks. However another type of risk of which many are less aware is legal liability arising from real property ownership. It is possible, though, to avoid or minimize such liability if one structures ownership and operation properly.

Legal liability can range from classic tort liability for various dangerous conditions or hazards associated with the property itself (for example, “slip and fall cases” or defective heating units) to liability for environmental conditions such as asbestos or methamphetamine lab contamination. As a private owner one can become subject to personal liability for damages. To avoid or limit personal liability it may be advisable to form a legal entity to actually acquire, own, control, and operate one’s real estate investment.

By forming a subchapter “S” corporation, LLC, LLP or other entity, and having that entity be the legal owner/operator of the real property, one can limit or avoid personal liability for any liabilities that accrue to the “owner” of the real property. The choice of a particular entity is fact specific but, so long as the owner(s) of the entity are careful in making their choice and maintaining any necessary formalities, personal liability can be limited or avoided. And through the use of separate entities to own separate properties it is possible to segregate liabilities so that they do not extend to unrelated properties.

Thus the use of legal entities to hold ownership of and/or to operate real property can serve as a type of “insurance” or asset protection device, minimizing the risk of personal liability and segregating entity liabilities. The choice of a particular entity should be determined in consultation with your legal and real estate advisors.

Next month: a discussion of the advantages and disadvantages of various entity choices, including alternatives to the use of such entities.

Issue 308 - September 24, 2007
CHOICE OF ENTITY: PROTECTING YOURSELF
AND YOUR REAL ESTATE INVESTMENT
©Lisa Welch Stevens, Esq., July, 2004

Entities can be used to limit personal liability for damages, debts, etc., connected with real estate investments, and separate entities can be used to segregate liabilities. For a single owner, several choices are available. Title may be held: (1) in one’s own name (a sole proprietorship); (2) in a single-member limited liability company (an LLC); (3) in a subchapter “S” corporation; (4) in a “C” corporation; or (5) in a land or other trust.

Holding title in one’s own name has the advantage of simplicity. There are no corporate formalities to maintain and no entity filing fees. The disadvantage is potential personal liability. The use of a single-member LLC limits personal liability, with the caveat that if one opts for treatment as a disregarded entity (taxed only at the individual level) it is easier for a court to “pierce the corporate veil” and impose personal liability. Single member LLCs offer fewer formalities to maintain than corporate entities, but this translates, again, into an easier piercing of the corporate veil.

An “S” corporation entails more corporate formalities. The advantage is that if those formalities are maintained the corporate veil will not be pierced and there will be no personal liability. An “S” corporation features pass-through taxation – income is taxed only once. There are statutory restrictions on who can own an “S” corporation. One could avoid those restrictions through the use of a “C” corporation, but there are disadvantages: income is subject to double taxation; and any appreciated assets can be very difficult to get out of the corporation. “C” corporations are rarely, if ever, recommended as a vehicle for real estate investment.

A final option is the use of a land trust. This option does offer some limitation of personal liability, but it is not available in all states. Other trust options are available, but they do not offer protection in segregating liabilities, for reasons I will discuss in a future article. Choice of entity is a very fact-specific decision, to be made in consultation with one’s legal and financial advisors, after full consideration of your particular situation and the tax consequences of your choice.

Issue 310 - October 8, 2007
MULTIPLE OWNER ENTITY CHOICES
FOR REAL ESTATE INVESTMENTS
© Lisa Welch Stevens, Esq., August, 2004

There is a wider range of entity choices for multiple owners than for sole owners. Investors can own real estate through: (1) a tenancy in common; (2) a general partnership (GP); (3) a limited partnership (LP); (4) a limited liability partnership (LLP); (5) a limited liability limited partnership (LLLP); (6) a limited partnership association (LPA); (7) a limited liability company (LLC); (8) a subchapter “S” corporation; or (9) a subchapter “C” corporation.

With tenancy in common owners risk being treated as a GP. In a GP each partner has joint and several liability. In an LP at least one partner must be the general partner, with personal liability. An LLP is similar to a GP, with limited liability for the partners. An LLLP is similar to an LP, with limited liability for the general partner. LLCs limit liability for all members; “S” and “C” corporations limit liability for all shareholders.

“S” and “C” corporations have the most formalities, but the corporate veil is difficult to pierce. LLCs are the next most formal, followed by LLLPs, LLPs and LPs. GPs can arise purely by operation of law, and require no documentation or registration with the state.

LLLPs, LLPs and LLCs are good choices for multiple owners. Unlike “S” and “C” corporations, they do not require a pro rata relationship between percentage ownership and control and distributions. They also have tax advantages over corporations. LLPs are well suited for spouses investing together; liability is limited and few formalities are required. LLLPs are well suited for passive and/or multigenerational family investors. LLCs require more formalities than LLPs and LLLPs, but are also well-suited for passive and/or multigenerational family investors.

Not all states recognize LLLPs and LLPs; they are not a good choice if investment is possible outside Colorado. All states recognize LLCs; some limit it with respect to real estate.

The LPA is a more recent entity, found in few states. There are no judicial interpretations of it; it may be treated as a general partnership.

Choice of entity is fact-specific, and involves consideration of tax and accounting as well as liability issues. Consult your legal or financial advisor regarding your specific situation.

Issue 312 - October 22, 2007
WHEN IS AN EMPLOYEE NOT AN EMPLOYEE:
OR HOW NOT TO RUN AFOUL OF BIG GOVERNMENT
© September, 2004, by Lisa Welch Stevens, Esq.

During the early months of the first Clinton administration, Zoe Baird, a Clinton nominee, lost her shot at a prestigious position in the federal government due in part to her failure to pay any income withholding taxes for her domestic help. If that help had been independent contractors, and not employees, things might have turned out rather differently.

Whether you are a homeowner hiring a cleaning lady, a nanny or a yardman, or the owner of a flooring company looking to hire a tile installer, there are many reasons to ensure that the worker you hire is not your employee, but instead an independent contractor. First, as Ms. Baird discovered, to avoid responsibility for paying income and withholding taxes. Second, to avoid potential liability under various federal employment laws and requirements, such as: (1) FLSA (Fair Labor Standards Act, including overtime requirements); (2) ERISA (Employee Retirement Insurance Security Act); (3) OSHA regulations (Occupational Safety and Health Administration); (4) FMLA (Family and Medical Leave Act); (5) Title VII (civil rights discrimination); (6) ADA (Americans with Disabilities Act); (7) ADEA (Age Discrimination in Employment Act); (8) PDA (Pregnancy Discrimination Act amending Title VII); and others. Third, to avoid various state employment laws and requirements, such as unemployment compensation and workers compensation. And fourth, to avoid liability for any tortious acts or omissions by the worker.

The issue of whether a worker is your employee or an independent contractor is a highly fact specific decision determined by weighing various factors. These factors are too numerous to discuss here, but most deal with the degree of control either you or the worker has over his work, whether the worker is also performing similar work for others, whether workers doing his type of work are customarily employees or independent contractors, how the worker’s pay is determined and made, etc.. To be on the safe side, it is best if you and the worker execute an independent contractor agreement , setting forth the various factors indicating independent contractor status, and in which the worker specifically denies that he is your employee. For more information, please contact your legal advisor regarding your specific situation.

Issue 314 - November 5, 2007
LIMITING COMPETITION
BY FORMER EMPLOYEES
© October, 2004, Lisa Welch Stevens, Esq.

A concern of business owners is to insure that, having invested time, effort and resources in the training of employees, that investment is not lost should those employees decide to set up in competition. To limit this possibility, business owners may turn to confidentiality agreements, non-solicitation agreements, and covenants not to compete. These can be effective, but are not always enforceable; Colorado has a very strong public policy against anti-competitive agreements in general.

Confidentiality agreements bind employees or independent contractors not to disclose or use information acquired during their employment. To be protected, the information must be a “trade secret,” i.e. information related to the business that is both secret and of value. The business owner must have taken steps to keep the trade secret “secret,” and any confidentiality provisions must be both reasonable and necessary to protect that secrecy. Not all information deemed by a business owner to be confidential will be a trade secret; that is a fact-specific decision. Confidentiality agreements must be drafted as narrowly as possible, so as not to interfere with an individual’s right to support himself, or to restrict competition unduly.

Non-solicitation agreements and covenants not to compete seek to restrict the ability of an individual to operate in competition with a former employer. Non-solicitation agreements restrict an individual’s ability to solicit customers and/or employees of the former employer. Covenants not to compete restrict an individual’s ability to engage in specified activities for a certain period of time within a specific geographic area. Such agreements are generally NOT enforceable under Colorado law, except in certain circumstances. They are enforceable: (1) in connection with the sale or purchase of a business; (2) in connection with a contract for the protection of trade secrets; (3) in connection with contractual provisions providing for the recovery of the expenses of education and training of employees employed for fewer than two years; and (4) against executive and management personnel and officers and employees who are professional staff to executive management personnel. Such agreements must be limited in duration and geographic scope. Anti-competitive agreements are NEVER enforceable against individuals in certain professions.

Agreements seeking to restrict competitive activity by former employees can protect a business owner’s investment in his employees, if carefully drafted. Please consult your legal advisor for your specific situation.

MORE ARTICLES TO COME!

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