Category Archives: Business Operations

Prepayment Fees on Commercial Loans

By Louis Pashman, Esq.
lpashman@pashmanstein.com

It is pretty widely known at this point that New Jersey does not permit prepayment penalties on mortgage loans.  N.J.S.A. 46:10B-2.

What if, however, you enter into a commercial loan?  That loan is often guaranteed by a principal of the borrower.  Additionally, the lender frequently requires a mortgage on the guarantor’s personal residence.  Is that sufficient to bring into play the prohibition on prepayment penalties?

That was the question in Lopresti v. Wells Fargo Bank, 435 N.J. Super 311 (App. Div. 2014).

The borrower was a commercial enterprise.  Lender required a personal guaranty from the President of the company.  Borrower also required a mortgage on the guarantor’s personal residence.  Some years later, when interest rates had fallen, borrower asked Wells Fargo to renegotiate the loan.  The bank refused.  Borrower then went to another bank to refinance.  That bank paid off Wells Fargo, including a prepayment fee of $48,306.41.  Borrower challenged that, claiming that because the bank held a mortgage on his personal residence it was a mortgage loan and therefore no prepayment penalty was permitted.

The court first decided that the guarantor had standing to bring the action.  Although his interest was “inchoate and conditional,” he had a “real and genuine financial interest in the transaction….”

The court then noted, however, that all proceeds of the loan and the refinance were deposited directly into the account of the business.  No portion of the money was used for personal or residential purposes.  The mortgage secured the personal guaranty, not the business obligation.  Therefore, the mortgage on the personal residence was not a “mortgage loan” within the statute’s definition and the lender was not “the holder of a mortgage loan.”

The upshot is that prepayment fees, long considered acceptable in commercial transactions, do not lose their character as commercial loans if guaranteed by an individual and that guarantee is secured by a mortgage on the guarantor’s personal residence.

What NYC Employers Should Know about Paid Sick Time Requirements

By CJ Griffin, Esq.
cgriffin@pashmanstein.com

Recently, the New York City Earned Sick Time Act went into effect and employers who have NYC locations or employees who perform work in NYC must now provide paid sick leave to their employees.

The Act requires that employers with five or more employees who perform work in New York City at least 80 hours during a calendar year must provide those employees with 40 hours of paid sick leave each calendar year.  Employers with fewer than five employees must offer at least 40 hours of unpaid sick leave each calendar year.  The Act allows the employer to define its calendar year, so long as employees are given the allotted sick time within a 12-month period.

The Act allows employees to carryover up to 40 hours of sick time to the next year, but employers are only required to allow the employee to use 40 hours of sick time per a year.  Employers can choose to compensate employees at their regular rate for unused sick time, but are not required to do so.  If employers do compensate the employee, then the employee is no longer entitled to carry that unused sick time over to the next year.

Finally, the Act prohibits an employer from making any threat, discipline, discharge, demotion, suspension, or reduction in an employee’s hours, or any other adverse employment action against an employee who exercises or attempts to exercise his or her right to sick time under the Act.

Employers must be aware that they are required to give written notice to their employees of their right to sick leave, including accrual and use of sick leave, the right to file a complaint, and the right to be free from retaliation. The written notice must be given to each employee on his or her first day of employment and must also be posted in the workplace.  The notice must state the employer’s calendar year, including start date and end date, and be given to employees in their primary language.  Employers can find sample notices available at http://www.nyc.gov/PaidSickLeave.

An Eye to a Company’s Future – Sale, Acquisition and Succession Planning

Bruce J. Ackerman, Esq.
backerman@pashmanstein.com

As a business ages and grows, its owners face the ultimate decision:  Do we sell the business?  Do we acquire a synergistic company?  Or do we establish a succession plan to insure the company’s longevity and also provide for their financial security?  This decision involves planning.

Sale

Achieving success in the sale, acquisition, and succession planning of a business involves the same elements that make the business successful in the first instance – proper planning and implementation.  There are many choices, including selling to insiders, to employees through an employee stock ownership plan, to other owners, to a competitor or a third party.  The best planning starts long before the company goes to market and involves “putting its house in order.”

A team of professionals should be involved from the start to assist in this process.  The team should include an accountant, an attorney, a marketing professional and, perhaps, a valuation professional.  Typically, the company will choose either the accountant or the attorney to lead the team.  That choice is a personal one to the owner.  These professionals may or may not be the same professionals who provide day-to-day advice in those areas, since the sale process requires another knowledge base and experience in navigating that process successfully.

First, the company needs to work with its financial advisors to maximize its ability to present its financial picture in the best possible light.  This is a time to address cleaning up items on the company’s books that could cause doubt or even a claim or credit by an interested suitor.  For the sale of a business, this planning should begin several financial reporting cycles, if not years, prior to marketing the company for sale.  The accountant will also provide tax advice to the company as to transaction structure and for the owners.

Similarly, the company needs to work with its legal advisors to prepare for orderly due diligence of all its legal issues, such as all contracts, licenses, permits, employment issues, any environmental issues, and litigation.  Due diligence will involve a thorough review of all documentation of the company and will likely involve significant employee time.  If planned properly, the company can shore up its legal documentation, such as company manuals and policies, employment agreements, restrictive and non-circumvention covenants.  The attorney will also provide legal advice on the structure of the proposed transaction, negotiate and draft the sale/acquisition documents, and provide legal counsel during the transaction process.

The inclusion of a valuation professional can assist the selling company to validate the asking price and the acquiring entity to validate that price.  This type of support can be forceful for negotiations, both to help a selling company form its negotiating posture, but also to respond to contrary assertions on value.

Acquisition

Similar considerations apply when the company decides to target a strategic acquisition, rather than to sell.  The same team of professionals should be engaged to maximize success in that process.  Remember that the target company has also thought through and engaged in the above planning process prior to sale.  Therefore, careful review of its history is crucial.  Due diligence is essential and should involve company professionals and key personnel to validate the assumptions supporting the acquisition.

Succession Planning

For any closely held company that has decided on continuity, decisions on succession planning should be made.  This requires an initial plan and regular review and reconsideration.  Many companies have the option of perpetuating a business by transitioning leadership and ownership to family members and/or other insiders.  Similar to sale or acquisition, owners need to address family, tax, and estate planning issues.  Depending on the plan, different legal documentation applies, such as a standard Buy-Sell Agreement, a Cross-Purchase Agreement with Life Insurance, or a written succession plan to address continued management and control.  Greater detail is beyond the scope of this article.  However, it is most important to note that this is an interactive process that requires re-evaluation over time, rather than an event that occurs at a specific time and remains in place without change.

All businesses need to chart their future course, and planning is the key element.  Be prepared so that you can recognize the time to sell, the time to make a target acquisition, or to plan for the next generation to assume leadership and ownership.

Guidelines for Employers Dealing with Weather-Related Absences

By Eleanor Lipsky, Esq.
elipsky@pashmanstein.com

With the region experiencing a seemingly unusual number of winter storms and polar vortexes this season, employers should review their policies on paying employees for weather-related absences, while considering potential liability for injuries when determining closures.

Employers might be required to pay employees who miss work because of bad weather under the federal Fair Labor Standards Act (“FLSA”).   In particular, the FLSA requires employers to pay exempt employees (generally, those exempt from overtime pay) their regular salaries for any business closure lasting less than one week.   An exempt employee’s pay cannot be deducted based on the quantity or quality of work during such closures.

For exempt employees, this means that if the employee is sent home because of inclement weather, the employer is still required to pay for the entire day.  On the other hand, if the business remains open but some exempt employees cannot commute to work, the employer can deduct an exempt employee’s salary for a full day’s absence without jeopardizing the employee’s exempt status.  However, employers cannot deduct salary for less than a full day’s absence without jeopardizing the exempt status.   This means that if exempt employees arrive late because of commuting issues or leave early because of an imminent storm, regardless of the employer’s opinion on the weather, they must still be paid for a full day’s pay.

A private employer has the option to deduct the period of absence from an exempt employee’s paid time off, as long as the employee still receives his or her full salary for the time the business is closed.  However, if the exempt employee does not have enough paid leave to cover the absence, the employer may not deduct the difference from the exempt employee’s salary.   This can become an issue at the end of the year in particular.  Businesses can create policies for their handbooks, such as requiring exempt employees to deduct future leave to cover missed hours or perhaps choosing to advance the employee leave and not deduct the hours from their paid leave bank.  Employers should be careful to consider any negative effects a certain policy might have on worker morale.

For non-exempt, or hourly, employees, the FLSA generally does not require employers to pay for any time that actual work is not performed.  This means that payment is not required if the employee did not come to work or the business is closed because of weather, even if the employee was scheduled to work a full day and was sent home early.  It is important to note that this rule applies to non-exempt employees, unless they are paid on a fluctuating workweek basis.  Employees paid on such a basis must still be paid their full weekly salary for any week during which any work is performed, regardless of work missed because of weather.

In contrast to the above regarding FLSA rules for non-exempt employees, some states, including New Jersey and New York, have their own reporting pay requirements.   Such statutes require employers to pay a minimum amount to employees who show up for work, even if they did not perform any work.  New Jersey’s law, outlined in N.J.A.C.  12:56-5.5, requires that any “employee who by request of the employer reports for duty on any day shall be paid for at least one hour at the applicable wage rate,” unless the employer “has made available to the employee the minimum number of hours of work agreed upon … prior to the commencement of work on the day involved.”   Employers with offices in multiple states should ensure they are familiar with each state’s laws regarding reporting pay.

Further, employers should also keep in mind that collective bargaining agreements may also require employers to pay employees for a minimum number of work hours, regardless of the number of hours actually worked.

Finally, employers who choose to keep their business open in inclement weather should consider their potential liability.  Normally, employees who are injured on the job in the scope of their employment are limited to workers’ compensation claims as their exclusive remedy under N.J.S.A. 34:15-8.  However, there is an exception to this provision in instances of “intentional wrong” by the employer.  This means that an employee may be able to sue if the employer’s intentional conduct causes the employee’s injury.  While “intentional wrong” has been narrowly construed by New Jersey Courts, employers should nevertheless keep this in mind, particularly, if their business requires employees to work outside in poor weather conditions.

Application of the Oppressed Shareholder Provisions of the Business Corporations Act to Minority Oppression in other Business Organizations

By David White, Esq.
dwhite@pashmanstein.com

A developing trend toward applying minority shareholder oppression remedies under the Business Corporations Act (“BCA”), to owners of other business entities was curtailed by the Appellate Division.  Tutunikov v. Markov, A-1827-10T3 (August 1, 2013).

N.J.S.A. 14A:12-7, contained in the BCA,  provides a range of remedies to oppressed minority shareholders. “Oppression” is said to occur where the conduct of the majority owners frustrate the minority shareholder’s reasonable expectations in the venture. Where oppression is demonstrated, courts are authorized to order a forced buyout of the oppressed shareholder’s interests and fix the price at “fair value.”  “Fair value” is a judicial construct designed to avoid diminishing the value of an oppressed shareholder’s stock by valuation discounts, such as those for minority or non-marketable interests, which would inure to the benefit of the buyer.

The current Limited Liability Act (the “LLC Act”) does not contain a compulsory buyout remedy.  Instead N.J.S.A. 42: 2B-39 provides that an LLC member may resign and receive fair value for his shares “less all applicable valuation discounts.” Because of similarities in the predicaments of oppressed owners in the corporate and LLC settings, and in the absence of a specific, statutory remedy, Courts had begun to “import” oppression remedies from the BCA to minority members.

In Tutunikov, the Appellate Division flatly held that the BCA is not applicable to LLCs. Thus its oppression remedies were not portable. Nevertheless, the opinion did uphold a buyout at fair value, a concept generally seen in the setting of shareholder oppression.

New Jersey has adopted the Revised Uniform LLC Act (“RULLCA”), which includes an oppression remedy similar to that under the BCA. N.J.S.A. 42:2C-48.  The RULLCA will become effective for all New Jersey LLCs on March 1, 2014. In the short interval before RULLCA becomes effective, the application of the BCA to LLCs is unlikely to receive additional judicial attention.  However, the Tutunikov decision does not necessarily foreclose crafting oppressed owner remedies in the partnership setting by analogy to the BCA. Like the LLC Act, the Partnership Act, N.J.S.A. 42:1A-1, et seq. is silent on remedies for oppression. In precluding BCA remedies for LLC members, the Tutunikov Court relied in part on the fact that an oppression remedy under the RULLCA was imminent.   No such revision in the partnership statutes is pending, and accordingly, the Tutunikov decision does not completely preclude arguments along those lines.

New Act Will Apply to All Limited Liability Companies – Part Three

By Bruce Ackerman, Esq.
backerman@pashmanstein.com

New Jersey’s new law affecting every limited liability company (“LLC”) is the Revised Uniform Limited Liability Company Act (“RULLCA”), which took effect September 19, 2012.  RULLCA controls all LLC’s formed on or after March 18, 2013, and all LLC’s regardless of when formed as of March 19, 2014.  This final part of three parts explaining elements of RULLCA will address the following areas which have changed in the new Act — distributions, resignation and withdrawal, and the rights of members to information.

As to distributions, the old LLC law provides that, unless the operating agreement provides otherwise, distributions are to be made based on “the agreed value … of the contributions made by each member.”  Again highlighting the importance of the operating agreement, RULLCA provides that distributions prior to dissolution or winding up are to be “in equal shares among members and dissociated members.”  That is contrary to the ordinary agreement by members, which would provide for distributions by their percentage of ownership.  The parties must have their operating agreement set forth the terms of their agreement as to distributions.

As to resignation of a member and the right to any payment or “distribution” upon such withdrawal, the old LLC law provides for six months’ notice to withdraw and the payment of any distribution provided under the operating agreement or, if not provided, then payment of fair value for the interest held, less all applicable discounts.  In contrast, under RULLCA, a member may withdraw at any time, and there is no entitlement to any distribution upon withdrawal.  Of course, the members themselves may agree otherwise and set forth that entitlement within their operating agreement.

Finally, under the old LLC law in New Jersey, each member is entitled to receive information on the business and financial condition of the company, tax returns, member addresses, the operating agreement itself, and the value of cash and other assets held by the LLC.  The manager may maintain the information in confidence for such time as reasonably believed necessary to maintain trade secrets or other information the disclosure of which is believed not in the best interests of the LLC or required by a third party to keep confidential.

In contrast, RULLCA sets forth a procedure and time in which to secure LLC documents.  In general, RULLCA provides that the LLC shall furnish to each member any information concerning the company‘s activities, financial and other wise, that is material to the member pursuant to its operating agreement and, on demand, any other information.  Each member has that duty to provide information as well.  However, in a manager managed LLC, this information shall be provided by the manager if sought by the member for a “a purpose material to the member’s interest as a member,” and the member must make a written demand “describing with reasonable particularity the information sought and the purpose for seeking the information.”  The law provides a ten day period for the LLC to respond and inform the member when and where the LLC will provide the information and, if declined, the reasons why the information will not be provided.

As shown, a careful review of your current operating agreement should be made and appropriate changes and supplements to address those areas under RULLCA that leave to the members in their operating agreement to clarify and change what RULLCA provides.  With the March deadline looming for the RULLCA to apply to all LLC’s in New Jersey, it is important to make that review and update soon.

Negotiating Commission Agreements for Commercial Leases

By Scott Lippert, Esq.
slippert@pashmanstein.com

Recent experience negotiating commission agreements with commercial brokers served as a reminder to set forth fundamental principles in clear and concise fashion.  Typically, the broker will propose its form agreement, which may not deal with all the issues and, of course, will be broker-friendly.  While this is not intended to be an exhaustive list, the following issues should always be considered:

1. Calculation of Commission: Make sure the commissionable rent is defined precisely.  Items such as rent concessions and tenant electric, for example, should generally be excluded.

2. Term: At some point, the right to receive commissions should terminate.

3. Payment: Try to provide for a pay out over a reasonable amount of time.  The landlord would hate to be in a position of having paid a full commission on a long term deal where the tenant ends up defaulting early on in the term.  Also, the right to payment should accrue only upon the execution of a lease.

4. Marketing: The broker’s efforts to market should be clearly described.

5. Exclusions: Be sure to list any prior contacts that will not be subject to a commission.

6. Co-Brokerage: Set forth the circumstances under which the landlord’s obligation to pay co-brokerage fees will arise.

Most experienced commercial brokers will be receptive to reasonable modification of their standard agreement.  If you are getting an unusual amount of pushback, the landlord may want to consider doing business elsewhere.