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Tuesday, December 31, 2013

Year End Reminder: New LLC Law Takes Effect on January 1, 2014

Arlen Gunner
As a reminder to our clients, colleagues and friends, effective January 1, 2014, the existing Beverly-Killea Limited Liability Company Act (the "Old Law") will be repealed in its entirety.  It will be replaced on that date by a new statute known as the California Revised Uniform Limited Liability Company Act (the "New Law") which can be found in new Title 2.6 of the Corporations Code beginning with Section 17701.01.

If you have an interest in limited liability company that will remain in effect as of the end of 2013, it would be prudent for each member and/or manager (depending on how the limited liability company is managed) to review the terms of the existing operating agreements and to compare them with similar provisions in the New Law to ascertain whether or not an appropriate amendment is needed to the existing operating agreement.  The purpose of the amendment would be either to conform the operating agreement to the New Law without going through the necessity of having a default provision of the New Law apply to your operating agreement, or to redraft the operating agreement in specific terms so that you preserve the intended effect of the business deal that was originally negotiated under the Old Law.

It is possible that when comparing the New Law to the Old Law, the Old Law can easily be superseded by the limited liability company's operating agreement.  But a problem may arise since the new default rules were not in effect or applicable at the time the existing operating agreements were drafted.  Therefore, it would be prudent for a review of the existing operating agreements that clients have in place so that the appropriate default provisions of the New Law can be avoided if they would significantly alter the business deal that was originally agreed to and evidenced by the written operating agreement.  Obviously, if there is only an oral agreement in place or an implied agreement, those particular exposures would have to be addressed on an item by item basis.

One provision which should be reviewed relates to the powers of a manager in a manager managed limited liability company.  There are new default rules that can limit the ability of the manager to act if the default rules govern in light of the conflict with the original operating agreement.  Additionally, members can lose their voting rights or other membership rights (except their economic interests) upon the occurrence of certain events specified in the New Law.

As a result, there are more than enough reasons to compare your existing limited liability company operating agreements with the New Law to make sure that you do not cause a default to the new statute which materially alters your intended relationship among the members.

It is impossible in this message to give a complete analysis of all of the different changes in the New Law versus the Old Law.  As a result, we recommend that you contact your counsel if you have any concerns that the New Law will substantially modify the terms and conditions of your existing business arrangement under the Old Law.

Valensi Rose, PLC has a great deal of experience dealing with the operations of limited liability companies and we remain available for you to contact our office if you have any questions concerning any of your existing companies and their status under the New Law.
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Arlen Gunner is the managing partner of Valensi Rose, PLC and has been practicing for more than 40 years. His practice focuses on business, commercial and corporate law; mergers, acquisitions, and reorganizations; acquisitions and sales of assets and real and personal property; real estate development and finance; leases and leasehold financings of all types; and nonprofit law and board governance. He has acted and is available to act as an expert witness in matters involving non-profit entities and secured transactions.

Contact Arlen Gunner

Friday, December 13, 2013

Year-End Tax Planning Tips from Valensi Rose, PLC


 Year-end tax planning could be especially productive this year because timely action could nail down a host of tax breaks that won't be around next year unless Congress acts to extend them, which, at the present time, looks doubtful. These include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; and tax-free distributions by those age 70- 1/2 or older from IRAs for charitable purposes. For businesses, tax breaks that are available through the end of this year but won't be around next year unless Congress acts include: 50% bonus first-year depreciation for most new machinery, equipment and software; an extraordinarily high $500,000 expensing limitation; the research tax credit; and the 15-year writeoff for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements.
High-income-earners have other factors to keep in mind when mapping out year-end plans. For the first time, they have to take into account the 3.8% tax surtax on unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).
We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We are happy to narrow down the specific actions that you can take to tailor a particular plan for yourself or your business. 
Year-End Tax Planning Moves for Individuals
  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
  • You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2014, and (2) held for more than five years. In addition, such sales won't cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.
  • If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for 
Businesses & Business Owners
  • Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2013, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax years beginning in 2014, the dollar limit will drop to $25,000, the beginning-of-phaseout amount will drop to $200,000, and expensing won't be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
  • If you are self-employed and haven't done so yet, set up a self-employed retirement plan.
  • Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2014, and disposing of a passive activity to allow you to deduct suspended losses.
  • If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.  Please contact a member of the Tax & Wealth Planning Group for more information.  

Monday, December 9, 2013

When is a Marriage Over?

The bright line necessary to be considered legally separated in the State of California, once again, has become less bright.  Dating back to 1931, to be considered legally separated, California law required spouses to be living physically separate and apart, having no present intention of resuming marital relations or taking up life together again under the same roof. In 1977, 46 years later, the appellate court held that the parties' conduct must evidence a complete and final break in the marital relationship.  17 years after that, in 1994, the California Court blended these holdings and required a court to examine these two components together to decide the legal date of separation.  Now, in October of this year, the California Court has held that a married couple can be considered legally separated, even when they continue to live with their children in the family home, as long as substantial evidence shows that, in every meaningful way, at least one spouse has abandoned the marital relationship. In Re Marriage of Davis (Cal. Ct. App. - Oct. 25, 2013)

In Davis, the couple married in 1993 and had two children.  Thereafter, sexual relations ceased and sometime after that, the wife moved  into a separate bedroom.  The husband assaulted the wife in 2005 and, when the school year ended in June 2006, the wife announced to her husband that the marriage was over.  She then disentangled their finances, prepared a spreadsheet of household and child expenses and instructed the husband to pay 50% of the total into a joint account.  Each spouse contributed the amount needed for community expenses, but retained any remaining income separately and was solely responsible for her/his personal expenses.  All the while, they continued to live under the same roof, though wife made every effort to keep their interactions to a minimum.  In her mind, they were roommates who continued to participate in family events together, traveled to Hawaii on a prepaid trip in 2006 together, and slept in the same hotel room (but not the same bed), all for the sake of their children.  After 2006, there were no more family vacations together, but birthdays and other special occasions were celebrated as a family.  Throughout this time, they maintained the appearance of an intact family.  The wife then filed for divorce in 2008, claiming a June 1, 2006 separation date.

According to the husband, nothing changed in their relationship until the wife physically moved out of the family home in 2011.  When she announced in 2006 that she wanted a divorce, he did not take her seriously because she had threatened divorce before.  While he conceded that she implemented her new ledger system in June 2006, he agreed to it merely as a way to enable bills to get paid.  According to him, the parties had an abnormal and dysfunctional marriage for most of their marriage, so, in his mind, neither had abandoned the marital relationship in every meaningful way, until she moved out of the house.  Despite his sentiments, the wife prevailed with a June 2006 separation date.

So which of the following factors in a marriage would be meaningful enough to satisfy a legal  separation?  Ceasing sexual relations and moving to separate bedrooms?   No longer going on family vacations together, but celebrating special days and exchanging holiday gifts?  Separating finances and paying for personal expenses separately?  Quite often, people share a life together under the same roof, without intimacy, in separate bedrooms with separate financial accounts, yet believe and would indeed claim to be meaningfully married.  And what if these same two people remained sleeping in the same bed, in the same house, sharing joint accounts, pooling their incomes and expenses with no expressed intent by either to part ways, but one spouse truly believed there was no marriage because there was no intimacy, no family vacation enjoyed in several years, and no meaningful connection between the spouses?

The courts will now have to consider all factors. But, the bright line necessary to determine date of separation – dependent upon a substantial showing, in every meaningful way,  of abandonment by at least one spouse of the marital relationship – is less clear now.

Contact Sharon Jill Sandler


Update:

In February, 2014 the California Supreme Court voted to grant review in this case. The Supremes have limited the issue to be reviewed to the following: May a couple who reside in the same residence qualify as living separate and apart for purposes of satisfying the statutory requirements of being legally separated and determining the couple's respective property rights, separate or community. In an now-vacated opinion, the Appellate Court held that a trial court had not erred by determining that divorcing parties' date of separation was approximately five years before wife moved out of the family home. 

Wednesday, October 23, 2013

What's in a Michael Jackson Name? Plenty Says the IRS!

Michael R Morris
With all of the media focus on the recently decided wrongful-death action in which a jury found AEG not liable in Michael Jackson's death, there is another court battle generating less press, but which could cost hundreds of millions of dollars.  This case pits the Estate of Michael Jackson against the Internal Revenue Service ("IRS") and centers on the $7 million taxable value of the estate's assets reported to the IRS.  Undoubtedly eyebrow raising to the IRS was the valuation of Michael Jackson's name and likeness rights at only $2,105, to which the IRS has countered at greater than $434 million.  In all, the IRS has valued Michael Jackson's estate at more than $1.1 billion, and issued a notice of deficiency in estate taxes of more than $505 million.  And because the IRS contends the executors significantly undervalued the estate's property, it tacked on additions to tax of $196 million for good measure!

In response to the IRS notice of deficiency on July 26, 2013, the estate filed a petition with the U.S. Tax Court, contending the valuations of the assets on the estate tax return "were accurate and based upon qualified appraisals by qualified appraisers who had extensive experience valuing entertainment industry assets."  And on August 20, 2013, the IRS filed its answer, which detailed all of the proposed IRS valuations of Michael Jackson's assets, including his name and likeness. This sets the stage for a contentious valuation battle.

No doubt, the IRS is aware that the exploitation of dead celebrity names and likeness is big business.  In 2009, CNN's story "A Living for the Dead" profiled Mark Roesler and his company, CMG Worldwide, which represents the estates of such icons as James Dean, Buddy Holly and Marilyn Monroe, to name but a few.  What makes the Estate of Michael Jackson's battle with the IRS of extreme interest is while the valuation of an estate's assets for federal estate tax purposes is usually made when a person dies (there is an election of value estate assets as of six months after the date of death), any subsequent dispute with the IRS over the worth of celebrity "name and likeness" rights rarely become public.

The rights of a deceased celebrity's estate to name and likeness rights are governed by state not federal law.  So unless a deceased celebrity died a resident of a state affording posthumous protection for rights of publicity, such rights literally go to the grave along with that celebrity.  This happened in the hotly litigated cases involving Marilyn Monroe, where the ultimate determination of her status as a New York and not a California resident meant Monroe's rights of publicity failed to survive her (since New York has no law protecting posthumous rights of publicity).

Conversely, California has for many years statutorily protected the rights of both living and dead celebrities in their names, voices, signatures, photographs and likenesses.  Cal. Civ. Code §§3344 and 3344.1.   In fact, these rights extend for 70 years after death, and, like most property rights, are licensable, transferable and descendible.
  
The holder of the decedent celebrity's right of publicity must, however, register the claim with the California Secretary of State (a simple procedure), and until that is done, damages cannot be recovered for any use prior to such registration. Cal. Civ. Code §3344.1(f)(1).

To come within this statutory protection, California law requires that a decedent's right of publicity must have had "commercial value at the time of his or her death, or because his or death." Cal. Civ. Code §3344.1(b).  Indisputably, Michael Jackson's right of publicity (name, likeness, etc.) had commercial value when he died. But how much such rights were worth when he died is the pivotal question facing the U.S. Tax  Court.

Determining the value of intellectual property based on projected future earnings and discounted to a present value is not an exact science.  In the case of the King of Pop, his estate has generated hundreds of millions of licensing post-mortem dollars, which the IRS no doubt factored  into its valuation.  So now, the IRS and the Estate of Michael Jackson are locked in a hotly contested battle over just how valuable is the future earnings power of Michael Jackson's posthumous celebrity rights.  While the Jackson case may settle prior to the Tax Court's adjudicating what these rights are worth, the litigation between the IRS and the Estate of Michael Jackson could well signal similar IRS scrutiny of valuations placed on other high profile  deceased celebrities' name and likeness rights.  Accordingly, the administrators of such estates need to be aware of the necessity to engage both qualified appraisers to value such rights and experienced tax professionals to defend against the inevitable IRS audit.

Contact: Michael Morris

Valensi Rose Lawyers Administer the Estate of Famous “Soul Train” Founder

Stephen F. Moeller
Don Cornelius was the legendary founder and host of the long-running “Soul Train” television series. He is now considered to be one of the most important pioneers in African-American entertainment. Mr. Cornelius was a longtime client of the Valensi Rose law firm, whose lawyers handled essentially all of “Soul Train’s” entertainment, intellectual property and litigation work for many years.

Mr. Cornelius died in February, 2012, and his Estate and Trust are now being administered in Los Angeles County. Once again, Valensi Rose lawyers, primarily Stephen Moeller and Bruce D. Sires, are heavily involved in this legal representation. They continue to represent the former “Soul Train” production company, Don Cornelius Productions, and also represent the Cornelius Trust and Cornelius Estate in various legal matters including federal estate tax issues, liquidation of real estate, and the litigation and resolution of any pending claims or disputes which involve the Cornelius Estate.

Contact: Stephen Moeller

Recent Rulings of Interest

We regularly compile a few recent rulings that may be of interest to our clients and friends.  Feel free to contact any of the firm's litigation attorneys should you have questions about these cases.

[1. Civil Procedure]

ARBITRATOR'S FAILURE TO DISCLOSE THAT HE WORKED FOR SAME ADR FIRM PROVIDED GROUNDS TO VACATE ARBITRATION AWARD

While continuing to represent the respondent in arbitration proceedings before ADR Services Inc. (ADR), the respondent's attorney also joined ADR as an arbitrator, a fact the arbitrator failed to disclose.  The arbitrator issued an award for the respondent, which the petitioner then sought vacate based on the nondisclosure.  The Court of Appeal reversed the trial court's denial of the petition to vacate.  The court held that the California Arbitration Act and the California Ethics Standards for Neutral Arbitrators in Contractual Arbitrations require an arbitrator to disclose any grounds for disqualification, which include the status of a party's attorney as a member of the arbitrator's dispute resolution firm.  The court further held that California Code of Civil Procedure section 1286.2(a)(6) requires a court to vacate an award if the arbitrator fails to comply with disclosure requirements.  According to the court, disclosure requirements are mandatory and nonwaiveable under the plain language of the statute and the Ethics Standards.  Therefore, it did not matter whether there in fact existed a significant relationship between the arbitrator and the respondent's attorney, or whether the petitioner knew or should have known of the attorney's membership in ADR.

   
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[2. Real Property]

COURT COULD NOT DENY ARBITRATION FOR EFFICIENCY'S SAKE TO PREVENT PARALLEL LITIGATION/ARBITRATION PROCEEDINGS, WHERE THERE WAS INSUFFICIENT RISK OF CONFLICTING RULINGS

There is a strong policy under California law favoring arbitration.  Consistent with that policy, a court must enforce a written arbitration agreement unless it finds one of the limited number of exceptions set forth in California Code of Civil Procedure Section 1281.2, which include the existence of pending litigation with a third party that creates the possibility of conflicting rulings on common factual or legal issues.  The trial court found that exception to apply in a case involving The Colton Real Estate Group (Colton), a group of related companies that bought and managed commercial real property, which generally used separate funds to solicit investors and take title to each portfolio of properties it managed.  Hundreds of investors sued Colton, alleging a wide variety of fraudulent conduct in connection with multiple different funds.  Some of the funds' governing documents had arbitration provisions and some did not.  Reasoning that having parallel arbitration and court proceedings would be inefficient and could lead to conflicting rulings, the trial court denied all of Colton's motions to compel arbitration.  The Court of Appeal reversed, holding that the primary purpose of Section 1281.2(c) is to avoid conflicting rulings, not to further judicial economy, and that the specific facts of the case did not indicate a sufficient likelihood of conflicting rulings.


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[3. Contracts]

LOW LEVEL OF PROCEDURAL UNCONSCIONABILITY IS INSUFFICIENT FOR COURT TO REFUSE TO ENFORCE ARBITRATION AGREEMENT 

Once a party seeking to compel arbitration has proved that an arbitration agreement exists, the opposing party bears the burden of proving one of the defenses to enforceabilty, which include unconscionability of the agreement.  One relying on that defense must prove both procedural unconscionability (which focuses on oppression and surprise due to unequal bargaining power) and substantive unconscionability (which focuses on overly harsh or one-sided results).  Under that standard, where a used car purchaser's principal argument for unconscionability was that the sales documents were presented to him on a take-it-or-leave-it basis and he was not given an opportunity to negotiate any of the terms, the Court of Appeal held that it was error for the trial court to deny the petition to compel arbitration.  The court reasoned that any procedural unconscionability arising from the use of a pre-printed contract was minimal where the arbitration clause was conspicuous and the lengthy form of contract was commonly used by auto dealers to comply with various statutes.  Likewise, substantive unconscionability, if any, was also minimal.  Requiring the consumer to pay his own arbitration costs did not violate any statute and was not unconscionable absent evidence that the arbitration would be prohibitively expensive.


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[4. Real Property]

ATTORNEYS' FEES PROVISION IN HOA STATUTE COVERS PRE-LITIGATION ALTERNATIVE DISPUTE RESOLUTION

A dispute arose between homeowners and their homeowners' association when the homeowners built a cabana and fireplace in their backyard without obtaining the association's prior approval.  Before proceeding to litigate the dispute, the parties unsuccessfully attempted to settle it through the alternative dispute resolution (ADR) process of mediation.  After the homeowners prevailed in litigation, they obtained from the trial court a judgment for their attorneys' fees, including fees incurred in connection with the pre-litigation mediation.  The Court of Appeal affirmed, relying on provisions of the Davis-Sterling Common Interest Development Act (the Act) providing for attorneys' fees to the prevailing party in disputes between an association and a member of a common interest development.  The court held the Act's attorneys' fees provisions are mandatory, as is the requirement under the Act that, before an association or a member may file an enforcement action, the parties must first submit the dispute to ADR.  Since the pre-litigation ADR requirement is mandatory, the court reasoned, there is no basis to exclude mediation fees incurred from the Act's attorneys' fees provisions.


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[5. Real Property]

ACT GOVERNING HOA REQUIRES STRICT COMPLIANCE WITH PRE-LIEN, PRE-FORECLOSURE NOTICE REQUIREMENTS

After a townhouse owner failed to pay a special assessment, the homeowners association recorded an assessment lien on the property and then filed for judicial foreclosure.  The property owner sought summary judgment on the ground that it was undisputed that the association had failed to strictly comply with the pre-lien and pre-foreclosure notice requirements set forth in the Davis-Stirling Common Interest Development Act (the Act) under California Civil Code Sections 1367.1 and 1367.4.  Finding that the association had substantially complied with the notice requirements, the trial court denied the summary judgment motion.  The Court of Appeal reversed, holding that substantial compliance was insufficient since the Act's legislative history showed that the Legislature intended the notice requirements to be strictly construed.

Diamond v. Superior Court (2013) 217 Cal. App. 4th 1172 (Opinion not available)

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[6. Employment Law]

EMPLOYER LIABLE FOR RETALIATION FOR TURNING EMPLOYEE'S COWORKERS AGAINST HER BY LEAKING DETAILS OF PRIOR CONFIDENTIAL DISCRIMINATION SETTLEMENT

As part of a confidential settlement of an employment discrimination lawsuit, an employer agreed to provide its employee with training for a position that would give her a pay increase.  However, when the employee's training began, she was given a "less desirable" workspace that increased her isolation from the rest of the staff, was denied certain training materials and was not told about a class regarding hazardous materials.  The employee then brought a second suit, alleging claims including unlawful retaliation under the California Fair Employment and Housing Act.  Following a jury verdict favoring the employee, the trial court granted a motion for judgment notwithstanding the verdict.  The Court of Appeal reversed with respect to the retaliation claim, reasoning that there was sufficient evidence for a reasonable jury to find that management revealed to the plaintiff's coworkers the details of the prior confidential settlement with the intent to turn her coworkers against her, thus making her training period intolerable.




Wednesday, August 7, 2013

Los Angeles Lawyer Magazine Features “Bankruptcy Shelters” by John C. Keith

John Keith
Attorney John C. Keith, who recently joined the Editorial Board of Los Angeles Lawyer Magazine, the Los Angeles County Bar Association’s official publication, authored “Bankruptcy Shelters: Public policy continues to weigh against the absolute effectiveness of bankruptcy remote entities,” which was featured in the magazine's July/August 2013 edition.

Mr. Keith’s article examines the effectiveness of “bankruptcy remote” special purpose entity borrowers, a tool used by lenders in recent years to protect them against bankruptcy filings.  Typically, lenders will insert themselves or their designees into the borrower’s management as nominally “independent” directors or managers, with the expectation of wielding veto power over the borrower’s ability to file bankruptcy. 

Read Bankruptcy Shelters

Contact John Keith

Tuesday, July 30, 2013

Lender Cannot Pursue Borrower For Deficiency Judgment After Short Sale

Laurie Murphy
In a case decided on July 23, 2013, the court of appeal held that a lender cannot pursue a borrower for a deficiency judgment after a short sale.
When a borrower defaulted on her payment obligations under a purchase money note secured by a deed of trust on her residential property, the lender served a notice of default.  The borrower was able to negotiate a short sale with a third party prior to the foreclosure sale but the agreed to price was less than the amount outstanding on the loan.  The lender consented to the short sale with an agreement that they were only releasing the security, not any deficiency.  The borrower then sued the lender after it attempted to collect on the amount of the deficiency it claimed she still owed. 
The trial court sided with the lender.  On appeal by the borrower the court of appeal held that any lender who either forecloses or agrees to a short sale of residential property secured by a deed of trust cannot pursue the borrower for any deficiency after either a foreclosure sale or a short sale.  Coker v. JP Morgan Chase.
Contact Laurie Murphy


Monday, July 1, 2013

New Requirement in Commercial Leases Effective July 1

Laurie Murphy
As of July 1,2013, all commercial leases must include a provision indicating whether the leased premises have been inspected by a certified accessibility specialist and if so whether the premises meet all the federal and state accessibility requirements. 

The provision is Civil Code section 1938. This statute compliments a larger statutory scheme enacted in 2012 (Civil Code sections 55.51-.55.57) designed to curb predatory lawsuits by Plaintiffs claiming damages for failing to maintain premises compliant with state and federal accessibility laws.  I had one such case of a client recently where the plaintiff had brought over 50 such lawsuits.
 
Because the landlord is strictly liable for statutory damages so long as a non-compliant conditions exist, landlords nearly always pay the statutory amount which makes them easy targets for lawyers who file these cases most of whom have a stable of professional plaintiffs who are disabled and who troll the area looking for establishments to sue.  The inspection by such a specialist can limit damages sought and/or provide the basis for a stay in litigation.  Commercial landlords are well advised to familiarize themselves with these new laws. 
Contact Laurie Murphy

Friday, June 14, 2013

California Franchise Tax Board Hot Audit Issues Part III

Recently, the California Franchise Tax Board announced the most common tax audit issues affecting Individuals, Pass-Through Entities and Corporations.  In the previous couple weeks we highlighted the first two taxpayer groups.

In this last installment, we will discuss the top issues for Corporate Taxpayers.

1. Sales Factor and Gross Receipts - Items included in the sales factor denominator that do not meet the definition of "gross receipts" or result in distortion.  (The sales factor denominator is the total sales everywhere during the taxable year.  Only sales derived from business activities are considered in the sales factor -- nonbusiness sales are excluded.)

2. Abusive Tax Shelters - Abusive tax shelters involving the creation of entities or deductions without economic substance or a business purpose that attempt to avoid state or federal tax.

3. Credits - Credits such as the Enterprise Zone and the Research and Development Credit not properly reported.

4. Cost of Performance and Sourcing of Intangible Sales - Utilization of market rules for assigning sales from intangibles and services when electing a single sales factor for apportioning business income to California.

Please contact our Tax and Wealth Planning attorneys for consultation or assistance in the identification, clarification or resolution of these issues. 
Contact Mayer Nazarian
Contact Geoffrey Weg

Friday, June 7, 2013

California Franchise Tax Board Hot Audit Issues Part II

As discussed in our previous post, the California Franchise Tax Board recently announced the most common tax audit issues affecting Individuals, Pass-Through Entities and Corporations.  Last week we highlighted personal income taxpayers.
 
This week, we will review the top issues for Pass-Through Entity Taxpayers.
 
1. Disposition of Real Estate - IRC Section 1031 and 1033 issues: specifically with respect to deferred gain, incorrect treatment of cancellation of debt (COD) income within short sales or deeds in lieu, and failure to report California-source income by nonresident taxpayers . 
 
2. Final Year of Limited Liability Companies (LLC) or Partnerships - In the final year of an LLC or Partnerships, verification of proper gains or losses, reconciliation of negative capital accounts, distributions of installment notes, and COD income.
 
3. Apportioning Trust Income - When trust income is from sources within and without California, the apportionment of income to California and the residency status of the trustee must be appropriate. (A trust will be subject to taxation in California if the fiduciary or a noncontingent beneficiary is a resident of California.)
 
4. Other State Tax Credits - Verification of taxes paid to the other states is another audit priority.
 
5. Shareholders Basis - Review of shareholder's basis to determine correct flow through income, losses, deductions, credits, as well as taxability of distributions, debt repayments, and dispositions.
 
6. Built-in Gains - The recognition period and the basis of the disposed asset must be properly reported.  (If an S corporation that was formerly a C corporation sells an appreciated asset (such as real estate) and the appreciation occurred during the time the corporation was a C corporation, the S corporation will probably pay C corporation taxes on the appreciation--even though the corporation is now an S corporation. This Built In Gain (BIG) tax rate is 35% on the appreciated property, but is only realized if the BIG asset is sold within 5 years (starting from the first day of the first tax year of conversion to S-Corp status.))

Please contact our Tax and Wealth Planning attorneys for consultation or assistance in the identification, clarification or resolution of these issues. 
 
Contact Geoffrey Weg 

Thursday, June 6, 2013

Another Case on Unconscionability

Laurie Murphy
In previous blogs we've reported on what makes a boilerplate agreement unenforceable.  Recently another appellate court weighed in in another automobile purchase case.  Two buyers of a new car were presented with a long, two sided contract containing an arbitration clause on the back of one the pages at the very bottom of the page.
The arbitration clause itself was harsh and one sided favoring the dealer of course.  The buyers were not given the opportunity to review the contract and did not even know it was two sided.  The trial court did not find the contract was unconscionable.  The appellate court reversed finding both procedural and substantive unconscionability. 
The procedural unconscionability stemmed from the placing of the arbitration clause on the back of the two sided page at the bottom.  The substantive unconscionability stemmed from several clauses in the arbitration paragraph, one permitting an appeal in an award of injunctive relief, one permitting an appeal to an arbitration panel of three arbitrators if the award exceeds $100,000, another requiring the appealing party to pay the filing fee in advance and lastly a clause exempting repossession from arbitration though permitting injunctive relief.  Vargas v. SAI Monrovia  2013 DJDAR 7148. 
Contact Laurie Murphy

Wednesday, June 5, 2013

When Are Boilerplate Unfair And One-Sided Provisions In Consumer Agreements Unenforceable?

This question was answered in a recent case decided by the court of appeals.  When clauses are so one sided or unfair, the courts can decline to enforce them if they are found to be both procedurally and substantively unconscionable. 
Procedural unconscionability is found when there is unequal bargaining power and the contracts are foisted on the unsuspecting with no explanation and/or when their terms conflict with oral representations, are buried in the fine print and/or required as a "take it or leave it" proposition. 
Substantive unconscionability is where the complained of provision is overly harsh and one-sided.  In Vasquez v. Greene Motors Inc. 2013 DJDAR 4087 the appellate court overturned a trial court's finding that an arbitration clause in a used car sales contract was unconscionable. 
The appellate court found that though the sales contract was procedurally unconscionable because it was offered on a take it or leave it basis, there was not a high degree of procedural unconscionability.  And, the court further found that the complained of clause requiring the parties to arbitrate their dispute was not necessarily substantively unconscionable because there was no evidence that the cost to arbitrate would have been so significant to the plaintiff so as to prevent him from arbitrating and/or that arbitration necessarily favors the defendant dealership. 
Because there was not a high degree of procedural unconscionability and essentially no evidence of substantive unconscionability the court reversed the trial court effectively ordering the parties to arbitrate their dispute.

Monday, June 3, 2013

June 2013 the U.S. Supreme Court Expected to Decide a Federal Estate Tax Case and The Most Hotly Debated Civil Rights Case of the 21st Century: LGBT Rights v. Defense of Marriage Act

Bruce D. Sires
This month, the U.S. Supreme Court is expected to rule on two cases argued last March which are at the forefront of the fight for civil rights for the LGBT community.  One challenges California’s Proposition 8, which overturned the marriage equality which had existed only briefly in that State.  The other challenges the 1996 Defense of Marriage Act, which deprives lesbian and gay couples who are legally married or in a civil union from obtaining any federally mandated benefit otherwise afforded to married couples, such as the federal estate tax marital deduction.
 
The case of United States v. Windsor arose in the State of New York.  Edith Windsor and Thea Spyer were married in Canada in 2007, and thereafter resided in New York when in 2009, Thea Spyer died, leaving her entire estate to her surviving spouse, Edith.  Edith filed a federal estate tax return, claiming the unlimited marital deduction.  The IRS denied the deduction based upon the Defense of Marriage Act which defines the terms “marriage” and “spouse” for all purposes under federal law.  Section 3 of the Act defines “marriage” as a legal union between one man and one woman as husband and wife, and defines a “spouse” as either a husband or a wife under the foregoing definition.  Edith paid the federal estate tax and filed a claim for refund.  The IRS denied the claim and Edith filed suit.  The U.S. District Court for the Southern District of N.Y. and the Second Circuit Court of Appeals both rejected the IRS’s position and ordered the refund.  The U.S. Supreme Court granted certiorari last December, and argument was heard at the end of March.
 
It does appear that time could well be ripe for the Supreme Court to overturn the Defense of Marriage Act, thereby providing marriage equality as to federal benefits, such as the marital deduction.  However, it would be irresponsible to speculate on whether the Court will hold that marriage equality is a constitutionally protected right, thereby overturning the law in the majority of states.

Planning for lesbian and gay clients, whether married, in a registered domestic partnership, in a committed relationship or single, requires care and sensitivity from the professionals called upon to advise them.  If you or your partner want to protect each other, or you're solo and want to protect your assets, seek sound, competent and sensitive financial and legal advice.  The Tax and Wealth Planning attorneys at Valensi Rose, PLC would be pleased to assist you.
 
Contact: Bruce Sires


Thursday, May 30, 2013

Recent Rulings of Interest

We regularly compile a few recent rulings that may be of interest to our clients and friends.  Feel free to contact any of the firm's litigation attorneys should you have questions about these cases.

[1. Insurance]

"FIRE SALE" TRIGGERS COVERAGE FOR TRADE LIBEL 


An insured threatened to sell high-end products at close-out prices and the manufacturer sued, contending this would result in a diminution of its brand and trademark. The insurer (whose policy covered claims for disparagement of goods) refused to defend the claim contending that there was no potential for coverage because price reduction itself was not product disparagement and thus not covered under the policy. The trial court granted summary judgment in favor of the insurer, which was reversed on appeal. The appellate court found that the underlying complaint did not need to allege all of the elements of a cause of action for trade libel to trigger coverage for product disparagement. Instead, coverage could be triggered for trade libel because it was a reasonable interpretation that the insured's "fire sale" of products disparaged claimant's high-end product.




[2. Real Estate]

"BAD FAITH WASTE" OF SECURITY CAN BE ALLEGED BY FORECLOSING LENDER 


After buyers bought a parcel of property with a deed of trust to secure approximately 90% of the purchase price, they demolished the structure with the intent to build a new building. After they failed to complete the new building and defaulted on their payment obligations, the holders of the security interest foreclosed and then brought suit for bad faith waste. The trial court found no bad faith existed because the borrowers had a good faith intent to build the new building. The court of appeal reversed, holding instead that bad faith waste may exist, regardless of whether the owners acted intentionally or recklessly. The court found that the destruction of the building constituted bad faith waste because there was no showing that its destruction was somehow caused by economic pressures of a depressed market.




[3. Contract Law]

EXPERT TESTIMONY ON CUSTOM AND PRACTICE SHOULD HAVE BEEN CONSIDERED BY TRIAL COURT 


When a personal manager who had an oral agreement with an actress for a percentage of her income was terminated, he contended that he should be able to receive a percentage of income from engagements entered into and services rendered while he served as her manager. In response to a summary judgment by the actress, the manager submitted the declaration of a long time talent agent and personal manager as to the custom and practice in the entertainment business for compensation after a manager is terminated. The trial court refused to consider the declaration and judgment was entered for the actress. On appeal, the court found that the trial court erred in refusing to consider the declaration of the expert whose credentials qualified him to testify as to the custom and practice in the industry.




[4. Trade Secrets]

PLAINTIFF WHO SUBMITTED NO EVIDENCE OF TRADE SECRET THEFT LIABLE FOR DEFENDANT'S ATTORNEY'S FEES, EVEN THOUGH DISCOVERY WAS NOT COMPLETE 


A company sued its competitor for misappropriation of trade secrets after several of its employees went to work for the competitor, claiming on information and belief that the former employees stole certain trade secret software. Plaintiff failed to oppose a motion for summary judgment, which was granted. Thereafter, the defendant filed a motion for attorney's fees under the Uniform Trade Secrets Act, which provides for the recovery of attorney's fees if the action is brought in bad faith. Plaintiff opposed the motion, contending that discovery was not complete. The trial court awarded attorney's fees to the defendant and plaintiff appealed. The court of appeal held that the trial court was correct because there was no evidence in the record that there was any theft of trade secrets. This absence alone was sufficient in order to award attorney's fees to the defendant.




[5. Arbitration]

ARBITRATION ORDERED EVEN THOUGH CC&R'S WERE CREATED BEFORE ANY CONDOS WERE SOLD

 

A developer created a homeowner's association when it developed a condominium project and included in the covenants, conditions and restrictions ("CC&R's") a provision that construction claims against the developer were required to be arbitrated. The HOA later sued the developer for construction defects and the developer contended that under the CC&R's the claims must be arbitrated. The trial court invalidated the arbitration clause in the CC&R's, finding that the HOA could not have consented to arbitration since it did not even exist when the CC&R's were recorded. The court of appeals agreed with the trial court, but the Supreme Court reversed finding, among other things, that it is not unreasonable based upon statutory and decisional law pertaining to common interest developments for a developer to bind future condominium owners via CC&R's to arbitrate their disputes.

   


[6. Arbitration]

CLASS ACTION WAIVER DOES NOT DEFEAT AN ARBITRATION CLAUSE UNDER THE FEDERAL ARBITRATION ACT 


When a buyer purchased a used car from a Mercedes dealership and experienced mechanical problems, she brought a class action lawsuit. The sales agreement contained an arbitration clause under the Federal Arbitration Act (FAA) and included a class action waiver. The dealership petitioned for arbitration, which the trial court denied on the grounds that the Consumers Legal Remedies Act (CLRA) prohibited class action waivers. The court of appeals reversed the trial court and ordered the case to arbitration, citing to recent US Supreme Court cases and holding that the FAA's main purpose was to have streamlined results in arbitrations and the CLRA's class action waiver was an impediment to the FAA's policy objectives.


Wednesday, May 29, 2013

California Franchise Tax Board Hot Audit Issues Part I

Mayer Nazarian
Geoffrey A. Weg
Recently, the California Franchise Tax Board announced the most common tax audit issues affecting Individuals, Pass-Through Entities and Corporations. 

Over the next few weeks we will briefly highlight these areas.
 
This week, we will discuss the top issues for Personal Income Taxpayers.
 

1. Like-Kind-Exchange Transactions - Sale of Property Through an IRC 1031 Exchange with incorrect treatment of boot, identification of property, and/or "drop and swap transactions.”
 
2. Securities Transactions - Overstated stock basis, unreported option premium income, and regulated futures contracts. 
 
3. Rental Real Estate Losses - The treatment of the real estate activity as passive or nonpassive may vary for Federal versus State tax purposes, therefore, the classification selected by the taxpayer must be appropriate. (Generally, losses from passive activities, including rental real estate, may be deducted only up to the amount of income from passive activities. Any excess loss is carried forward to the following year or years until the interest in the activity is disposed in a fully taxable transaction. In some cases, a taxpayer may classify rental activities as nonpassive for federal purposes. However, for California purposes rental activities are generally considered passive, with a few exceptions.) 
 
4. Residency - Residency status for state tax purposes is based upon the taxpayer's specific situation which includes consideration of where the taxpayer has the closest connections and whether or not he/she receives substantial benefits and protection from the state. 
Please contact our Tax and Wealth Planning attorneys for consultation or assistance in the identification, clarification or resolution of these issues. 

Part two will be published next week.

Contact Mayer Nazarian
Contact Geoffrey A. Weg

Monday, May 20, 2013

Another Bad Employee Compensation Idea: Paying Exempt Employees By The Hour, With No Minimum Guarantees

David Krol
Is it a good idea to compensate an employee based solely on the number of hours worked, with no guaranteed minimum, if that employee would otherwise be exempt from overtime?  The answer is no.  Negri v. Koning & Associates (May 16, 2013, H037804), ___ Cal.App.4th ___.  That's because, to be exempt from overtime, employees must perform specified job functions in a particular manner and must also receive a "salary," not an indeterminate sum based solely on the amount of hours they work. 
 
Negri was an insurance claims adjuster at Koning & Associates who was paid $29 an hour with no minimum guarantee.  He worked for Koning for 66 weeks, and estimated that he worked approximately 20 hours a week as overtime.  When Negri sued Koning for overtime pay, Koning argued that Negri was exempt from overtime under a 2011 Supreme Court decision which held that, based on the job functions performed by an insurance claims adjuster, the adjuster was an exempt employee.  Applying that decision, the trial court found that Negri was exempt and therefore not entitled to overtime.  The Court of Appeal reversed. 
 
Under California Labor Code Section 515, to be exempt from overtime, an employee must perform specified duties in a particular manner and be paid “a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.”  Even though Negri's job duties would have rendered him exempt, the Court of Appeal had little difficulty in concluding that Negri wasn’t exempt because he didn’t earn a "salary":  he wasn’t paid a predetermined amount based on the number of hours worked.  His employer therefore owed him overtime – a result which could have been avoided if Koning had paid Negri a guaranteed salary.
 
If you’re considering creative ways to pay your employees, you should consult with counsel beforehand.
 
Contact David Krol

Monday, April 22, 2013

Another Case Just Came Down Involving The Issues Of When A Contract Is Unconscionable



Laurie Murphy
An employee sued her employer for sexual harassment and other claims.  The employer sought to compel arbitration pursuant to the provisions of its employment handbook.  The employee contended (and the trial court agreed) that because the handbook permitted the employer to change its provisions at the employer's sole discretion, the arbitration policy was illusory and therefore unconscionable.   

The court of appeals found the fact that the provisions of a contract can be modified does not alone render a contract unconscionable because the authority to change the provisions of a contract is limited by the covenant of good faith and fair dealing.  Moreover, the court found that unconscionability requires a finding that a contract is both procedurally and substantively unconscionable.  Here, even if the employment handbook was substantively unconscionable, there were no facts justifying a finding that it was also procedurally unconscionable (i.e. no surprise or oppression).  Serpa v. California Surety Investigations Inc. 2013 DJDAR 5124.