If the parties have a buy out agreement in place ( something we recommend to our clients when purchasing property in co-ownership), the buy out price and terms will be spelled out in the agreement. The price is usually based on the appraised value of the property upon the buy out date. But even then disagreements can arise. Further if one co-owner wants to sell his/her interest to a third party and the other co-owner wants to buy out that interest to preclude the sale to a 3rd party, there will still have to be an agreement as to the price. The parties may be hopelessly deadlocked. In such cases the remedy may be for either co-owner to petition the Superior court ( in California) for what is referred to as a “partition” action. In addition the party bringing the action may request an accounting.

What are the issues that will need to be decided by the Court?

1. The Court must first determine the respective interests of the parties. What % does each in fact own?

2.Once the interest are determined the Court will grant an order for partition. This means the property is subject to division.

3.The big question becomes the manner by which the property will be divided? Unless the property consists of separate parcels, it i usually is not subject to division. Therefore the property will invariably be ordered sold.

4. If the property is to be sold, a referee will be appointed to oversee the sale process and conduct an accounting. The accounting is particularly important where their are allegations that one or the other has been “skimming” money form the income of the property.

5. Once a sale is held and bids submitted, a final hearing is held where the Court will review the sales price and terms. A higher bid may even be submitted at the time of the hearing.

6. A final order is then entered by the court for the sale of the property and a division of the profits amongst the parties. The order can include  the right to offset one’s share of the profits by an amount to compensate the other for any misuse of funds found to exist. The party who initiated the partition action may also be entitled to reimbursement for costs incurred in bringing the action.

In sum a partition action is a good way to go where the parties are deadlocked and cannot agree on buying one another out. By having the Court take jurisdiction over the matter, it ensures an orderly process to reach a successful end point.

Stephen J. Gross is an attorney focused on  real estate and business law, wills and trusts, California company formation, asset protection, and co-ownership, partnership and shareholder dispute cases.  To learn more please see sjgassociates.com.

As it tuned out, the wife died before him. However the will did not address what would happen if his wife predeceased him. Upon his death, the two charities petitioned the Court to probate the will and distribute the property. Two of decedent’s nephews ( not named in the will) appeared in Court and argued that since the will did not provide for the wife predeceasing, the condition by which the charities were to take the property did not occur. Therefore nephews argued, they should be entitled to decedent’s estate by California statutory law.

The Court agreed. Since the will was clear and unambiguous, outside evidence of decedent’s intent was inadmissible. The clear result said the Court was that the will as written failed and was therefore void. The Court held the decedent’s estate should pass according to California intestate succession law. By California law, the two nephews being the decedent’s closest heirs were entitled to the property.

Stephen J. Gross is an attorney located in West Los Angeles practicing in the areas of business law, real estate law, wills & trusts, and asset protection.

Here are a few matters to consider:
1. When you sell your business outright to a family member or a 3rd party, you receive cash. If the sale is for the full market value (FMV) of the business interest, it may not be subject to estate tax as it is deemed a sale transaction. If the sale occurs before death it may however be subject to capital gains.
2. As attorneys, we are often called upon to draft buy-sale agreements for business owners. A but-sale agreement is essentially a contract that prearranges for the sale of your business interest with a willing buyer upon the happening of specified events and at a specified price and terms. It allows you to control your interest until the occurrence of a specified event such as retirement, disability, death, and even divorce. These are the so called “triggers” that put the agreement in motion. When one of these triggers occurs, the buyer is then obligated to purchase your interest at either the price specified in the agreement or FMV. One of the benefits is that because the price and terms are negotiated in advance, it eliminates the need for a “fire sale” should the business owner suddenly become ill or die.
3. Another variation of the above is for the buyer to give the owner a self cancelling installment note (SCIN) secured by the transferred business. Here the buyer makes a series of payments to the owner allowing for a lifetime income stream (much like an annuity). Upon the owners death, the remaining payments if any, are usually cancelled. If properly structured, estate tax may be avoided as it is deemed a sale transaction allowing owner to remove assets from his/her estate.
4. Family limited partnerships can assist one in transferring a business interest to a family member by allowing the business owner to gift partnership interests over time to family members. Usually the value of the interests are discounted for lack of marketability, so that one can transfer the business to heirs at significant tax savings.

The foregoing is not intended as legal nor tax advice. All matters discussed herein should be carefully reviewed with one’s tax advisor before deciding upon a course of action.

Stephen J. Gross & Associates is a law office located in West Los Angeles, California. Areas of practice include business & real estate law, contracts (including drafting of buy-sale agreements), California corporation and LLC formation, trusts, and asset protection. To learn more please visit sjgassociates.com.

Stephen J. Gross is an attorney located in West Los Angeles. His practice focuses on business, commercial, contracts,  and real estate law, estates and asset protection. For more info please visit sjgassociates.com.

 A family owned business defined as a business in which the parents own and maintain voting control of  51 % or more of the company and which employs less than 100 full time employees may qualify for an exclusion on the FAFSA under the small business exclusion.  Further, any assets owned by the business can also be excluded. The result is that you may be able to potentially remove from the FAFSA and college aid consideration, a multi million dollar net worth business asset as long as it employs less than the 100 full time employees and the parents are active participants and own 51% or more of the business. How can our office be of assistance to you? For both college aid planning purposes and (CREDITOR ASSET PROTECTION purposes), the family owned business should be held in either a California corporation or a limited liability company (LLC).  Our office is experienced in setting up business entities for college aid purposes and we knows how to prepare and document the paperwork so that it will meet the FAFSA guidelines.

The other area where we can be of  college aid assistance, would be if the parents own rental real estate which is leased and generating income. Rental property is another asset which may qualify for an EXCLUSION on the FAFSA.  Basically any type of rental property asset located anywhere in California including vacation cabins, 1-4 rental units, a small strip center, a  rented single family residence, etc. may qualify for exclusion if  the asset is POSITIONED CORRECTLY.  If an excluded asset, it is one less asset for college aid consideration purposes which means your student’s college aid award may potentially increase. Our office is experienced in working with parents of college applicants  in the placement of rental property assets in order to take advantage of the FAFSA exclusion.

My message to you is DON”T WAIT as far as preparing and getting your house in order to complete the FAFSA application process. The sooner you act the more time there is to prepare.  

Stephen J. Gross is a business and real estate attorney in West Los Angeles. To learn more about college aid planning and other areas of Stephen’s practice please go to sjgassociates.com.

Misik loaned $ 150,000 to whem he thought was a Mr. Ballardo in exchange for two interest bearing notes and trust deeds. Sayrahan, Inc. however was listed as payor on the notes at 12% interest. D’Arco signed the notes as CEO of Sayrahan. Misik testified that he never spoke to D’Arco before loaning the money and did not know the notes would be drafted with Sayrahan as the payor.

Thereafter Misik received several post dated checks representing interest payments. One check was drawn on D’Arco’s account and the others on the account of Sayrahan. Several of the checks were dishonored. Misik demanded his money money back from Ballardo and D’Arco but they refused. Misik sued Ballardo and Sayrahan for breach of contract and Ballardo  for fraud. The trial court found Ballardo had fraudulently induced Misik into loaning money to Sayrahan for Ballardo’s self gain. The court further held Ballardo and Sayrahan for breach of contract awarding damages to Misik.

Thereafter Misik conducted a judgment debtor’s examination of Sayrahan through D’Arco. (A judgment creditor has the right to take the examination of the judgment debtor and any relevant 3rd party to discover assets for purposes of enforcing the judgment). At the examination Misik discovered the following: 1) D’Arco owned 100% of Sayrahan 2) only D’Arco could legally bind Sayrahan to a contract 3) Sayrahan had no other officers or employees 4) there were no no annual meeting minutes kept by Sayrahan 5) Sayrahan had no separate business address… only D’Arco’s address 6) Sayrahan had no website nor even a separate phone number apart from D’Arco’s 7) at the time of the loans Sayrahan’s debts exceeded its assets.

With this information D’Arco then petitioned the court to allow him to add D’Arco as a judgment debtor (after the fact). Request  denied. Misik filed an appeal. Theissue was whether Sayrahan, Inc. was the alter ego of D’Arco? Alter ego is a theory in the law whereby if the owner(s) of a corporation or LLC fail to maintain the “separateness” of the business  entity from their own personal business activities, the court can set aside the business entity and hold the owner(s) personally liable. Here Misik was seeking to have the court set aside Sayrahan and substitute D’Arco as the judgment debtor.

The Appellate Court held that two (2) requirements must be satisfied in order to set aside the corporation: 1) unity of interest and ownership between the corporation and the individual(s) controlling it and 2) to treat the corporation as a separate entity would result in fraud and injustice.

 In this case the first requirement was met because D’Arco owned all the stock in Sayrahan; the corporation used the same home/business loaction as D’Arco; D’Arco commingled personal funds in the Sayrahan checking account ( this is usually the nail in the coffin); there were no written meeting minutes kept by Sayrahan; and the corporation was inadequately capitalized ( also a nail in the coffin).

Now the question turned on the second requiremment mentioned above. Would keeping the corporation’s separate identity result in fraud or promote an injustice? The trial court had held that since D’Arco was not named in the fraud cause of action it could find no fraud as to D’Arco. Therefore there was no injustice in treating D’Arco and Sayrahan as separate. The Appellate Court held to the contrary. It is NOT necessary to prove actual fraud for the alter ego theory to apply. The test is whether allowing separateness is an injustice because the individual is using the corporation for self gain. The Court held that D’Arco should be added as a judgment debtor even though actual fraud was not proven against him. The Court remanded the case back to the trial court with instructions to set aside the corporation and find D’Arco personally liable. 

So what is the lesson to be learned? Setting up a California corporation or LLC is only the first step toward protecting one’s personal assets. The owner(s) of the business entity MUST manage it as a separate entity. This means making sure the business is adequately capitalized; that the company keeps written minutes of any significant business event facing it, including contracts to be signed; a separate business account is a must and personal funds should NEVER be commingled with company money; a separate business address ia a good idea and if the business in run from the home a separate phone number and email address should be kept.

Note that a one person corporation or LLC is perfectly legal in California. But it is subject to a higher degree of scrutiny and all the more reason why maintaining one’s business entity as ”separate” is crucial to attaining asset protection.

Stephen J. Gross is an attorney in West Los Angeles practicing in the areas of business law, real estate law, contracts, company formation, and asset protection. To learn more please visit sjgassociates.com.

Our office practices in the areas of real estate, business entity formation, asset protection,  contracts and commercial law and living trusts. The best strategy for asset protection is to be proactive and take action BEFORE there is a lawsuit. Many professionals such as doctors, dentists, architects, entertainers, etc.  as well as  business owners, indeed are targets in a litigious society. By advance planning and proper asset placement techniques, we can make it more difficult and some cases impossible for a judgment creditor to discover and reach your personal assets. To learn more please visit sjgassociates.com.

Additionally under the new law the lender cannot require a party( usually the buyer) to pay “any additional compensation aside from the proceeds of sale in exchange for the written consent of the sale.” This may spell disaster for a borrower.  Most junior lienholders require the buyer to contribute cash in exchange for obtaining that lienholder’s consent to the short sale and to release a borrower from liability for any deficiency. But now SB 458 will prohibit such payment of a cash contribution. One possible net result  is that the 1st trust deed holder may find itself in the position of having to accept less from the sale proceeds in order to allow the junior lienholder to receive more (without extracting the cash contribution from the buyer) and thereby give it’s consent.  But if the 1st trust deed holder’s margin is thin to begin with, the 1st trust deed holder most likely will not want to take less. This catch 22 therefore could have a negative impact on borrowers seeking a short sale. If  ALL lenders involved in the transaction CANNOT AGREE, there will be less short sales. Less short sales spells more foreclosures which may be an unintended consequence of this new law.

Stephen J. Gross is a business, real estate, and asset protection attorney in West Los Angeles. To learn more please visit sjgassociates.com.

There is a key difference which weighs in favor of an S- Corporation. Draws from an LLC are subject to self employment tax. Draws from an S- Corp. are not subject to the self employment tax. They are subject to FICA.  But self employment tax can be considerably more.  

So why consider an LLC? It goes to the issue of judgment creditor protection. In California we have charging order protection. With a corporation ( S-Corp included), a judgment creditor can levy upon a shareholder’s share certificate. Once this occurs, the judgment creditor can potentially seek to dissolve the corporation and sell the real estate asset held by the corporation to satisfy the judgment. With a California LLC there is no certificate to levy upon. Ownership interests are documented in the operating agreement. But there is no tangible certificate evidencing ownership to grab. Charging order protection means that a judgment creditor’s remedy is limited to garnishing a money distributionfrom the LLC to a member/owner. But the creditor cannot reach the real estate held by the LLC.

 Therefore a California LLC  in this author’s opinion is far more protective than the S-Corporation. It may be worth it to pay the self employment tax on draws from the LLC  and enjoy maximum  protection from judgement creditors.

Stephen J. Gross is an attorney in West Los Angeles practicing in the areas of business and real estate law and asset protection. To learn more please visit sjgassociates.com.

As a result of the examination, the judgment creditor obtained a court order to turn over eleven antiques ( including an antique sewing machine, an antique surveying unit, and an antique fluting iron), which could be sold through auction so that the proceeds could be used to satisfy the judgment. The judgment debtors however asserted a claim of exemption relying on Calif  Code of Civil Procedure 704.060. Essentially this section exempts assets from execution if they are “tools” used in one’s ” trade or business.”  The question before the Court of Appeal was whether these items ( inventory) were tools of the business as contemplated by the California statute. While the opinion focuses on this statute (analysis to follow) I want to also address an asset protection issue to be learned from this case.  As to debtor’s claimed exemption,  the Court stated the general rule which is that all property of a judgment debtor is subject to enforcement to satisfy a money judgment. The California Constitution however authorizes the legislature  to protect a ” certain portion” of a debtor’s property. So the court next focused on whether the judgment debtors were entitled to claim an exemption for the antiques? The Appellate Court examined Section 704. 060. The statute provides … “tools, implements, instruments, materials, uniforms,furnishings,books,equipment, and commercial motor vehicles “… are exempt to the extent the aggregate equity value does not exceed $ 6,075.00 and is used by the debtor in the business to earn his/her livelihood. In other words a limited protection carved out by the legislature.

Did the antiques qualify? Did they constitute ” materials” or “personal property” as used in the statute providing for an exemption? The Court held that inventory is viewed differently from materials and personal property used in ones trade or business; that here the judgment debtors did not actually use the inventory in a way that a jeweler would use a safe or a travelling tire repairman uses his truck. In other words, the items of personal property must actually be used to conduct one’s livelihood in order to be  protected from a judgment creditor seeking to levy. Inventory is not used in the same way. The Court said ”materials” used in one’s trade or business are items which store, protect,and preserve ones inventory as opposed to the inventory itself.

 Now, lets assume the judgment debtor conducted his/her business through a California LLC. Lets further assume the judgment creditor obtained his judgment against the LLC itself as opposed to an individual doing business as a sole proprietorship or partnership. When the judgment creditor goes to collect he/she CANNOT conduct a judgment debtors examination as to the individual owner’s personal assets. The judgment having been entered against the LLC and not the individual owner(s) of the LLC, only the LLC’s assets would be subject to judgment creditor execution. But even these assets are protected. Why? Because in order to reach the assets of a California entity such as an LLC,  it must be shown that the LLC entity is a sham and not really being operated and maintained as a separate entity. ie: The judgment creditor would have to establish that the LLC did not keep separate books and records, did not maintain adequate operating capital, that the owner(s) of the LLC have commingled their own money with that of the the LLC, etc. In short, easier said than done.

Further, even if the judgment creditor obtained a judgment against the individual owner(s) of the LLC, the LLC’s assets are near impossible to reach because in California we have what is called charging order protection, a subject better left for a separate article.

The point is, the above reported case may have resulted in a different outcome had the debtor’s antique store been conducted through a California LLC. It cannot be emphasized enough how useful this asset protection tool is in California.

 Our law office practices in the areas of  business law, entity formation, and asset protection. To learn more please visit sjgassociates.com.