BREAKING NEWS!

Posted on 04/28/2012 by Skjold Parrington Business Attorneys

Skjold Parrington is pleased to announce that our transactional and commercial litigation practices have been acquired by the national litigation and business powerhouse of Foley & Mansfield.

Effective next week, we’ll be teaming up with Foley & Mansfield’s approximately 130 attorneys from coast-to-coast to focus on business transactions, banking and securities, and estate and succession planning.

We are very excited about the enhanced depth and breadth of services and support we will be able to offer through this multi-jurisdictional practice. While we will still be based in Minneapolis, we now have exceptional resources on which to draw from, not only locally, but from any of the firm’s offices across the country. Be assured that our commitment to your service and our pricing structure will not be impacted — we’ll just have more to offer!

You can still reach us through our existing contact information; we will provide updates moving forward and of course, you can find us at www.foleymansfield.com.

We look forward to seeing you in the near future!

Posted in Banking and Financial News, Business & Transactional Law, Business Management, Commercial Litigation | Comments Off

REIT’s for Dummies: An Investors Guide to Real Estate Investment Trusts

Posted on 03/28/2012 by Skjold Parrington Business Attorneys

In the late 1990’s and early 2000’s, broker/dealers and registered representatives throughout the United States were recommending that every investor with a few extra dollars to spare invest the money in private placements. In recent years, many of those investments have proven worthless as evident by the fall of Provident Royalties and Medical Capital, and so many of the broker/dealers and registered representatives that recommended them to their clients.

While private placements have become less desirable investments in recent years, real estate investment trusts (“REITs”) have been the hot investment vehicles for the past 5-10 years. Much like private placements, however, many REITs have been the subject of FINRA arbitrations and FINRA and SEC enforcement actions. For this reason, it is essential that every investor who either has or is thinking about investing in REITs fully understand the ins and outs of this type of investing.

What is a REIT?

REITs are securities in which investors invest in associations, corporations or trusts that then use the investors’ money to invest in real estate. Typically, REITs pool investors’ money to purchase a portfolio of real estate that most individual investors could not acquire on their own. Some REITs own the property in which they invest, and generate revenue to pay their investors through either rental income or the sale of their properties. These REITs are often known as “equity REITs.” Other REITs loan money to property owners, secured by mortgages, or purchase existing mortgages or mortgage-backed securities. These REITs pay investors through interest charged on their loans to pay investors, and are often known as “mortgage REITs.” Finally, some REITs are a combination of equity REITs and mortgage REITs, and combine the investment strategies of both to generate revenue to pay back investors.

No matter what the type, the success of all REIT investments is contingent upon the real estate in which the REITs invest. If successful, however, REITs can be very profitable for their investors as they typically offer high yields and can receive special tax considerations.

Publicly-Traded vs. Non-Traded REITs

All REITs can be broken down into two (2) categories: publicly traded and non-traded. Publicly traded REITs are registered with the Securities and Exchange Commission and are publicly traded on the stock market. Much like other publicly-traded securities, publicly-traded REITS are listed on the stock exchange and the REITs are required to file reports with the SEC. As a result, publicly-traded REITs typically have a secondary market for investors to sell their shares as they choose. Publicly-traded REITS carry the same costs as publicly-traded stocks. Non- traded REITs are much more like private placements as opposed to common stocks. For example, shares of non-traded REITs are not traded on the national stock market, even though they are required to file reports with the SEC. Furthermore, non-traded REITs are usually not automatically liquid and share redemption programs can very greatly depending on the REIT. Often times, investors in non-traded REITs have to wait in order to receive a return on their investment until the REIT decides to liquidate its assets. Finally, the costs associated with investing in non-traded REITs are often much greater than the costs of investing in publicly-traded REITs; typically, non-traded REITs carry commissions of 8-10 percent to the registered representative that sold the investment, in addition to offering costs, land-acquisition and management fees. Although some investors will complain about investing in publicly-traded REITs, the majority of the REIT-related complaints and arbitrations pertain to non-traded REITs.

Specific Types of REITs

Not only are REITs categorized based upon whether or not they are traded on a public stock exchange, but publicly-traded and non-traded REITs are also categorized by the types of real estate in which they invest. These categories of REITs include apartment REITs, health care REITs, hotel REITs, industrial REITs, office REITs, retail REITs, storage REITs and specialty REITs. For example, health care REITS have typically be considered conservative investments as they have recently suffered minimal losses and managed to maintain their dividends during that period of time. Retail and office REITs likewise remained relatively steady in recent years. Apartment REITs, however, suffered from low rental demands from 2008-2010, but have bounced back recently as a result of declining real estate market and an increased demand for rental units.

The performance of specialty REITs depends on the specific focus of the REIT, with their focus ranging from convenience stores and gas stations to timberland and multi-family housing. Clearly, it is important that investors are fully educated on the specific type of REIT in which they are investing, in addition to the difference between publicly-traded and non-traded REITs.

Typical Risks of Investing in Non-Traded REITs

Although non-traded REITs are not exposed to market volatility, unlike publicly-traded REITs, their investors still fact significant risk when investing. For example, whether to pay distributions and the amount of those distributions are within the discretion of the directors of non-traded REITs – distributions to investors are not guaranteed and returns on investments are subject to the mercy of those operating the REITs. In addition, distributions from non-traded REITs are taxed as ordinary income, rather than qualified dividends. As such, when investments in non-traded REITs are sold or liquidated, the investors could suffer significant tax consequences. Furthermore, given that non-traded REITs are no publicly traded, it is often very difficult to determine a value of shares in non-traded REITs in the event of redemption or liquidation. Even worse, most non-traded REITs impose restrictions upon the ability for investors to redeem their shares prior to liquidation, and in the event early redemption is available, it is often only allowed at a significant cost to the investor. Finally, non-traded REITs are often very expensive, resulting in sales commissions up to ten percent, in addition to other issuer expenses such as offering and organizational costs. Investors in non-traded REITs need to make sure they weigh all the risks and potential rewards before deciding whether to invest their money.

If those risks were not fully disclosed to the investor prior to investing, then there is a likelihood that the REIT investment was not suitable for the investor or recommended under false pretenses, both of which could give rise to a securities fraud claim.

If you think you have been a victim of securities fraud as a REIT investor and wish to speak to lawyer about your rights, contact us directly or visit www.reitlawyers.com for a free, confidential case evaluation.

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The Two Ways that the Duty to Recommend Suitable Investments May Be Breached

Posted on 01/30/2012 by Skjold Parrington Business Attorneys

When recommending the purchase of a security, NASD Rule 2310 requires that a broker dealer (and its representative) must have reasonable grounds for believing that the recommendation is suitable for the customer on the basis of that investor’s financial situation and needs. Understanding the scope of this duty is critical in considering whether an investor may have a valid claim against a broker dealer based on an unsuitable investment recommendation.

Traditionally, the duty to make suitable recommendations has been thought of as requiring that the investment be a good fit for the investor based on the specific profile.  However, a number of FINRA Notices to Members and recent FINRA enforcement actions have made clear that this traditional conception of suitability analysis in fact is only the second step in the two-step process to determine if an investment is suitable.

The first step in determining whether a particular investment is suitable for investors is to determine whether the investment is suitable for any investor.  FINRA explained this in Notice to Members 03-71 in 2003 (relating to, among other investments, non-traded Real Estate Investment Trusts).

A reasonable-basis suitability determination is necessary to ensure that an investment is suitable for some investors (as opposed to a customer-specific suitability determination, discussed below, which is undertaken on a customer-by-customer basis). Thus, the reasonable-basis suitability analysis can only be undertaken when a member understands the investment products it sells. Accordingly, a member must perform appropriate due diligence to ensure that it understands the nature of the product, as well as the potential risks and rewards associated with the product. Moreover, the fact that a member intends to offer a [non-conventional investment] only to institutional investors does not relieve the member of its responsibility to conduct due diligence and a reasonable-basis suitability analysis.

While a firm may rely in good faith upon materials such as the prospectus or an offering memorandum, that analysis is not sufficient where the information contained therein is not sufficient to fully understand the risk of the product, or does not provide enough information to allow a broker dealer to train its representatives on selling the product.

So how might this work in practice?  This is best evidenced by the complaint filed by FINRA on May 31, 2011, against David Lerner & Associates (“DLA”) relating to their sale of the Apple Ten REIT.  FINRA argued that there were several red flags indicating that Apple Ten was not a suitable investment including the fact that previous Apple REITs had failed to adjust the valuation of their shares despite significant declines in actual performance.  Another red flag was the fact that dividends were being paid out that significantly exceed Funds from Operations, meaning that Apple REITs were paying dividends from new investors’ monies or by taking on additional debt.  Failing to detect these red flags, or to offer to sell shares of Apple Ten despite these red flags, was a violation of NASD Rule 2310, requiring that an investment be suitable for any investor while also requiring that adequate due diligence be conducted before recommending an investment.  What that means is this—when an investment goes wrong, especially one that is non-traditional like a non-traded REIT or a private placement, a broker dealer may be liable if there were earlier signs of this trouble that were not detected.

Once a broker dealer has determined that an investment is suitable for any investor, the second step is to determine whether the investment is suitable for the specific customer.  This involves a number of considerations such as the investor’s age, investment needs (such as retirement income), the investor’s time frame, tax bracket, risk tolerance, liquidity needs, and net worth.  The due diligence conducted at step one is intended to discern not only whether the investment is suitable for the public at large, but also what type of investor may be a good fit for the particular investment.

Thus a second type of breach may occur where the broker dealer, or its representative, makes investments that should not have been recommended given the particular investor’s situation.  For example, this might mean that a conservative investor with little tolerance for risk was put in a volatile investment.  It may mean that the investor who needed the money to be liquid was put into an illiquid investment with a long holding period.  Or it could simply mean that an investor who was retired or soon to be retired, and who was relying on the investment for retirement income, was put in an aggressive or speculative investment.

The bottom line is this.  An investment may be unsuitable for two reasons.  First, it may be that the investment itself was never suitable, and should not have been sold to any investors.  Or, the investment may not have been suitable for the particular investment.  A valid claim based on a breach of the duty to make suitable recommendations requires that only one of these violations occurred.  Learn more at www.reitlawyers.com.

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Behringer Harvard Opportunity REIT I’s Slow March to the Grave

Posted on 01/26/2012 by Skjold Parrington Business Attorneys

Investors in the Behringer Harvard Opportunity REIT I received some unpleasant news to start off the new year.  In early January 2012 investors were informed that the value of the REIT’s shares had declined to $4.12 per share, a 46% decline from the $7.66 per share valuation listed at the end of 2010.

This news is of course wholly unsurprising given how the REIT is set up.  Shares of Behringer Harvard Opportunity REIT were originally offered for $10.00 per share.  But for every $10 share purchased, $1.93 was taken right off the top to pay commissions to brokers, broker dealers, and the REIT itself.  So right off the bat, the net asset value of shares starts off 20% below the actual price at which they are purchased.

This of course isn’t the only problem REIT within the Behringer Harvard family.  The problems with the Behringer Harvard REIT I are well-documented.  Their newer offerings seem on a similar path as they continue to decline in net asset value while racking up additional debt. 

Despite this clear pattern, the company recently released a statement saying “[t]he fact that Behringer Harvard REIT I and Behringer Harvard Opportunity REIT I have a 2011 estimated share valuation in a similar $4 range is purely coincidental.”  Common sense would dictate otherwise.  The entire Behringer Harvard family of REITs should be avoided at all costs.

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Corporate Formalities and Annual Entity Updates

Posted on 01/25/2012 by Skjold Parrington Business Attorneys

Each year, we stress the importance of annual entity updates to allow your business to remain in good standing, preserve liability shields, avoid corporate veilpiercing claims, memorialize business activities, and to take some time to evaluate the businesses’ strategic position moving forward. Small corporations and LLCs – including those with a single owner – often ignore corporate formalities due to time and cost, yet these enterprises are often most vulnerable to claims by creditors, vendors, and customers. The IRS is also in the game, increasingly making use of various arguments to recapture income, estate and gift tax revenue, and evaluate whether independent contractors are really employees.

So, what does a small business need to address in terms of corporate formalities? This list will help you prevent potentially catastrophic mistakes that endanger your corporate standing and liability protections.

Maintain Corporate Records. Corporate minutes provide the paper evidence that establishes the separateness of the owners and the company. Yes, even a single owner must maintain these records. All key actions, activities and plans should be recorded in the corporate minutes. As a key part of the historical record of the corporation, accurate minutes can make or break the standing of future legal claims as well as the company’s valuation for sale proposes. All businesses and even single owners should have an “annual meeting” with the other owners and/or trusted advisors.

Maintain Corporate Financial Records. Failure to maintain separate finances is not only a key factor in veil piercing claims, it also makes good business sense. Companies must document all of their financial activities and maintain a current balance sheet separate from the owner’s personal finances. The company must also keep detailed records of all its financial transactions and to the extent possible, keep payroll and dividend payments consistent.

Separate Personal and Business Assets. While it’s not uncommon for a sole proprietor to grab some petty cash for expenses, it is never okay for owners or officers of a corporate entity to use company assets for personal use, or to pay a personal bill from a corporate account. All loans and distributions must be documented in the financial records of the company. If a business owner needs to use personal funds to cover payroll or other necessary business expenses, the owner should document the additional funds as either a loan from or an investment in the company. In addition, a clear record of separate finances may keep you from having to file personal bankruptcy in the event your business fails.

Ensure Adequate Capitalization. Without adequate funding, there really is no financial basis for the corporation to be a considered a separate entity. Although there is no minimum standard for a corporation’s capital requirements, it must be enough to provide the company with a reasonable chance of success. Deliberate undercapitalization is fraught with liability – such as when corporate debt is knowingly incurred when the company is already insolvent.

Keep the Corporation in Good Standing. A business owner appears in court to defend against veil piercing claims, realizing only then that their corporate standing been revoked by the state for failing to file an annual renewal, which is free if timely and only $35.00 if late. It’s a simple process to complete your annual renewal online at http://mblsportal.sos.state.mn.us/. But, this is only the first step in protecting your entity.

Properly Sign Corporate Documents. If documents are not signed correctly, what you thought was a corporate contract can in fact become a personal liability. Always properly identify the company and the signer’s role. In the example below, there is no doubt that the person signing is doing so as a corporate representative.

ABC Services, Inc.
By: ____________________
Its ____________________

In addition, make sure that all corporate representatives with signing authority look closely for language that may extend the contract to include a parent company or subsidiary. The company entering into the contract needs to be clearly defined in order to protect any related business entities from liability.

Identify the Business as a Corporation or LLC. It’s important that people know you are doing business as a corporation and not as an individual – especially if they are going to be extending credit. If you take out a loan for your business or purchase any products or services on credit, sign your name and write your corporate title next to your signature. This is proof that you aren’t purchasing as an individual but as an agent for a business. This keeps collection agents or others with an interest in your assets from saying that you misrepresented yourself as an individual.

Operate Related Entities Independently. If you have more than one corporation, it is essential to operate them separately. Meetings, records, bank accounts, etc. should all be maintained separately. Where closely related businesses operate from the same location and use the same employees, the lines can become even more blurred, leading to “horizontal piercing.” Don’t allow your corporation to procure labor, services or merchandise for another person or entity. For instance, claims against a solvent parent company, affiliates or even individual officers or stockholders are not uncommon when a creditor has a direct claim against a subsidiary that is facing insolvency. There is nothing inherently wrong with two subsidiaries conducting business, but it must be documented.

Maintain Arm’s Length in Relationships among Related Entities. Some business owners run multiple businesses from a single entity or multiple entities, which often leads to the commingling of assets, finances and employees. This can easily create a conflict of interest and prevents you from engaging in “arm’s length transactions” with related business entities. It is important to determine if an agreement was freely entered into to show that the price, requirements, and other conditions were fair and real. By forming separate entities for separate businesses, you prevent commingling and establish yet another level of liability protection.

Annual Entity Updates Decrease Risk, Increase the Value of Your Business. Complete and accurate adherence to corporate formalities is a sign of a healthy business. Not only are well run businesses more likely to be successful and survive lean times, an accurate, fully documented record showing the history and growth of a company will impress potential buyers and provide the leverage to negotiate the best purchase price possible.

We offer our Annual Entity Update service for an affordable annual flat fee of only $300.00.  Annual Entity Update Program information, forms and other resources are now available in our new online Forms Center.

Posted in Business & Transactional Law, Business Succession Planning, Buying/Selling a Business, Governance and Compliance | Tagged , , , , | Comments Off

Non-traded REITs: Broker-dealers should take steps now to avoid future regulatory problems

Posted on 01/05/2012 by Skjold Parrington Business Attorneys

Given the volatility of the market and the prevailing low interest rate environment, sales of non-traded Real Estate Investment Trusts are high.  For those who aren’t familiar, a REIT is a corporate entity that invests in real estate similar to how a mutual fund invests in stocks. 

The entity came into existence as a way to avoid having to pay corporate taxes on real estate investments.  In return, the REIT must distribute 90 percent of its income to investors.  READ BEN’S FULL ANALYSIS AT THOMSON REUTERS NEWS & INSIGHT

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Payroll Tax Amnesty: Reclassifying Independent Contractors

Posted on 12/09/2011 by Skjold Parrington Business Attorneys

At some time, most companies have faced the question of whether a person performing services for the company is an independent contractor or must be treated as an employee. For many years now, the trend by tax authorities has been toward the requirement of employment status.

Both federal and state governments have an interest in obtaining payroll taxes, unifying and accelerating the collection process. As a result, the requirements for independent contractor status have become more strict as the years have passed. In the third quarter of 2011, the Internal Revenue Service announced a program to increase compliance audits focusing on the correct classification of independent contractors/employees. 

Employment Status Determination

The determination of employment status is not always easy, and had led to many protracted and expensive contests between companies and the tax authorities, often leading to surprising and undesirable results. While the factors used to make this determination seem relatively straightforward, a slight difference in perspective can make all the difference in the result.

Companies often believe that the additional payroll tax and administrative costs of hiring an employee are unacceptable. The contractor/employee may believe that the payroll tax cost, seen periodically on the pay stub, is too expensive, often forgetting that all contractor net income is subject to self-employment tax. The contractor may also be concerned that employee treatment will lead to the loss of business deductions which will not be reimbursed by the company.

Assuming that the contracting party properly files their tax return and pays the appropriate self-employment tax, the hiring party has the greatest risk in this transaction. If the contracting party/employer is found to be hiring employees and not contractors, the penalties for failure to withhold, late payment and possibly failure to file payroll tax returns will accumulate quickly. A contracting party should avail themselves of Independent Contractor status for their workers only after a thorough study of the facts, documentation of the facts, and assurance that company policies, processes, and management practices conform to and support the argument of independent contractor status for its workers.

Many situations exist in which independent contractor status is a correct treatment. However, there are undoubtedly many other situations in which independent contractors should be treated as employees. In these situations the facts – sometimes unintentionally or unknown to management – do not support contractor status. Failure to correct these situations will ultimately result in great cost to the company, and can easily put the existence of the employing company at risk.

Voluntary Classification Settlement Program Introduced

The Internal Revenue Service very recently announced an amnesty program called the Voluntary Classification Settlement Program (VCSP). This Program allows a company to reclassify those employees formerly treated as contractors, pay ten (10%) per cent of the payroll taxes which would have been paid, and thereby avoid all penalties and interest. In order to qualify, a company must have filed Forms 1099 for the workers in question and must not be under a classification audit by any federal or state agency.

This program is a rare opportunity for a company to come into conformity with the law at a very advantageous cost. For many, the failure to take advantage of this opportunity will almost undoubtedly result in significantly greater costs in the future when a classification audit occurs.

We recommend that all independent contractor situations be reviewed, the facts documented, policies and procedures put into place that support the determination of status. If the contractor status can not be supported, the application for treatment under the VCSP should be undertaken promptly, with the assistance of a professional experienced in these matters.

Flat Fee Agreements

Skjold Parrington offers clients standard independent contractor and employment agreements for affordable flat fees. Visit our Forms Center for details.

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HAMP Loan Modification Still Not Working as Intended

Posted on 09/20/2011 by Skjold Parrington Business Attorneys

On September 1, 2011, the Star Tribune reported regarding demands from the Treasury Department that Bank of America and JPMorgan Chase & Co., have done a poor job in assisting homeowners in permanently lowering their mortgage payments through loan modifications as part of the government’s foreclosure-prevention program, Home Affordable Modification Program (“HAMP”).

As a result of poor practices, these banks (and many others such as Wells Fargo & Co. and Ocwen Loan Servicing) have erroneously rejected people who the government intended to be eligible for mortgage modifications under HAMP.  As such, the government has begun to withhold financial incentives for those banks who have agreed to participate in HAMP and provide loan modifications to its borrowers.

The HAMP program, launched in 2009, was intended to help those with financial hardships modify their existing mortgages to new monthly payment amounts that were more affordable. However, the program has struggled significant in converting homeowners to permanent loan modifications.

Typically, a homeowner is told they are “pre-approved” for a loan modification and asked to submit financial documentation to apply for a trial loan modification. Very few homeowners, however, ever get a trial loan modification due to errors within the bank’s internal procedures. If a homeowner does get a trial modification, it is common that after making the required trial payments, the homeowner is not approved for a permanent loan modification and instead subject to foreclosure proceedings despite fully complying with the HAMP program’s guidelines.

The most common reasons why homeowners are not offered a trial loan modification or are not approved for a permanent loan modification include missing documents (because the bank looses them), financially unqualified (because the bank’s calculations are incorrect), or failure to respond in time (because the bank does not send documents out in time). As the government has noticed, these reasons are invalid and were not intended when the HAMP program was launched in 2009.

The basics of the HAMP loan modification program are relatively simple. There are four (4) criteria that must be satisfied in order for a homeowner to be pre-approved for a HAMP loan modification: (1) the homeowner experienced a financial hardship; (2) the homeowner has some income; (3) the home is owner-occupied; and (4) there is no more than $729,500.00 due on the initial mortgage.

Some banks will tell homeowners that they must be in default on their initial mortgage payments, but this is false and is not a criteria to be preapproved for a HAMP loan modification. Once preapproved, a homeowner is next required to submit certain documentation for consideration of a HAMP loan modification. Specifically, the homeowner is required to submit an application; a Dodd-Frank Certificate regarding certain representations regarding the applicant’s lack of a criminal history; a 4506t form; and varying financial information demonstrating the applicant’s financial qualifications for a HAMP loan modification. After all that information is received, the homeowner’s application goes through a “waterfall” evaluation, in which the bank evaluates three (3) different ways to modify the mortgage. In order for a homeowner to qualify for a HAMP loan modification, the “waterfall” evaluation must result in the modified monthly mortgage payments being exactly 31% of the homeowners’ gross monthly income. The 3 parts of the “waterfall” evaluation include (1) reducing the principal due and owing by up to 18%; (2) extending the life of the mortgage out to a maximum of 40 years; and/or (3) reducing the interest rate of the mortgage to a minimum of 2%. If following this evaluation, the homeowners’ modified mortgage payment is exactly 31% of their gross monthly income, then they are qualified for a HAMP loan modification and placed in a trial payment plan, which typically required 3-6 monthly modification payments to demonstrate an ability to make the modified mortgage payments in a timely manner and in full.

Assuming the homeowner completes the trial payment plan as instructed, then the government intended the homeowner to receive a permanent modification with modified monthly mortgage payments in the amount of the trial payment plan. Unfortunately, however, this process and procedure is not often followed by the banks, which causes great frustration and disappointment with homeowners who hoped to get a loan modification under HAMP.

For additional information, or assistance, visit www.minnesotaforeclosuredefense.com

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Phantom Stock Plans: Real Incentives for Key Employees

Posted on 08/03/2011 by Skjold Parrington Business Attorneys

Despite the name, phantom stock plans are very real incentives used to attract, retain and reward key employees. These plans also have real benefits in terms of tax implications, ownership control, and, in comparison with qualified plans, the relative ease of planning and administration.

Essentially, a phantom stock plan is a form of deferred compensation, allowing employees to “share the wealth” without actually owing shares or otherwise having ownership rights in the company. These plans can have a positive impact in attracting and retaining employees by providing them with certain benefits of ownership and payment schedules that can effectively function as “golden handcuffs.”

Through a contractual arrangement, a company issues hypothetical shares – often called “units” – to the employee. Depending on the terms of the plan, the units can then be converted into cash (or other pre-determined value such as real stock) at the end of a specified period of time or a specified vesting period. Payout on phantom stock usually occurs at retirement, death, or termination of employment.

Many companies establish vesting schedules, preventing employees who leave before they are vested from receiving benefits; others make specified payments at predetermined intervals over time in order to keep key employees engaged.

Phantom stock plans are especially well suited for the family business that wants to maintain family control, yet provide a financial incentive to those non-family employees that are key to the businesses success – even more important if certain family members are not yet ready to assume a leadership or ownership role. They are also a valuable recruiting and retention tool for start-ups – traditionally short on cash yet high on both expectations and opportunities for growth.

Employer Flexibility, Control

In addition to serving as incentives, phantom plans also offer more flexibility and control than other more traditional employee benefits. As non-qualified stock plans under IRS rules, phantom stock plans are not subject to the same participation requirements under ERISA that apply to qualified plans, allowing companies greater latitude in determining exactly which employees to include. Some companies also use phantom stock as a supplement for standard benefit plans such as a 401k.

There is also more flexibility in terms of linking performance to end reward, whether based on individual, group or company-wide goals. A phantom plan also typically provides a less expensive alternative to qualified plans, as they are not subject to the same restrictions and administrative costs.

Caveats to Phantom Plans

While a phantom stock plan can be relatively straightforward to implement, it is essential that the plan is carefully drafted to avoid any conflict with IRS regulations, and state or federal laws governing employee benefits.

Business owners should always consult with their attorney and accountant to address the various contractual and financial issues involved. Equally important (since a phantom stock plan is usually un-funded) is for the company to properly plan for projected distributions.

Benefits

  • “Golden Handcuffs” – long-term incentive for key employees
  • No equity dilution or typical shareholder rights for participants
  • Flexibility – plan and participants based on company’s discretion
  • Not subject to same restrictions or administrative hassles as qualified plans
  • Tax deferral of employee compensation
  • No cash outlay or financial risk to employees
  • Payout can be treated as ordinary cash compensation for tax purposes

If you have any questions about phantom stock plans, ownership opr succession issues, contact the Minneapolis business law attorneys of Skjold Parrington at 612-746-2560 today.

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Defending Against Foreclosure: A Guide for Minnesota Homeowners

Posted on 06/06/2011 by Skjold Parrington Business Attorneys

In today’s economy it is virtually impossible to walk one block within any residential neighborhood in Minnesota without coming across a home that is either in default, in foreclosure, or was sold through a transaction designed to avoid foreclosure.  As foreclosures become increasingly common in this real estate market, the horror stories experienced by many of those homeowners are becoming just as common – especially among homeowners who have attempted to reinstate or modify their mortgages hoping to avoid the completion of foreclosure proceedings. 

However, there are certain things that homeowners can look out for and do to preserve their rights when faced with the prospect of foreclosure.

Common Signs of a Problematic Foreclosure
Although foreclosures are common in Minnesota, the paths leading to foreclosure often vary.  For example, some homeowners face foreclosure due to the failure to make mortgage payments as a result of losing a job.  Others face foreclosure due to unexpected medical bills, which hinder their ability to make mortgage payments. 

Regardless of the cause of a homeowner’s failure to make his or her mortgage payments, the experiences that occur after the initial default and prior to the bank’s initiation of foreclosure are often very similar.  Further, many of these experiences are indicative of problems related to the potential foreclosure.  Here are a few of the warning signs you should look for if you are concerned that your foreclosure is not following the normal course:

  • Lenders will often notify homeowners that the only way they can talk with them about modification programs or other internal remedies is if there is a default on mortgage payments. The lender will recommend that the homeowner therefore stop making mortgage payments, only later notifying the homeowner that they are not eligible for certain programs because they have not made recent mortgage payments.
  • Lenders will often notify homeowners that they may be eligible for modification programs or other internal remedies if certain documents are provided to the lender.  However, each time documents are sent, the lender claims they were not received and demands that they be resent.
  • Lenders will often notify homeowners that they need to make trial payments pursuant to a loan modification program.  However, the lender will refuse to accept tender of the trial payments from the borrower, thereafter claiming they are not eligible for the loan modification program for failure to make trial payments.
  • Lenders will bounce homeowners around between different departments when discussing a modification program or other internal remedy to avoid a foreclosure completion, without ever letting one department make a decision on the homeowner’s eligibility for a modification program or other internal remedy.
  • A homeowner often does not learn about a pending foreclosure until after the lender has purchased the property at a sheriff’s sale, at which time the lender represents to the homeowner that their only remedy is to redeem the property for the sheriff’s sale purchase price.

Legal Rights for Homeowners in Foreclosure
Under certain circumstances, homeowners in Minnesota have legal rights in defense of foreclosure proceedings.  For example, Minnesota law provides that a lender must strictly comply with the requirements for foreclosure proceedings.  Therefore, if there is a technical defect in the proceedings, the foreclosure must be deemed void.  Furthermore, if a homeowner does not receive proper notice of the foreclosure proceedings, the foreclosure must be deemed void.  Likewise, if a lender represents to a homeowner that he or she is eligible for a modification of their mortgage, but then fails to follow through on its representations, Minnesota law provides that the lender may have breached a contract for a modification with the homeowner, or at least, breached its duties of good faith and fair dealing as a mortgagee.  Minnesota law also provides that such conduct by a lender may amount to a deceptive trade practice, negligent misrepresentation or, under certain circumstances, fraud.  Depending on the circumstances of the case, there are various legal theories that may be advanced by a homeowner in defense of a pending foreclosure proceeding.

Possible Results of Problematic Foreclosures
Foreclosure proceedings contain many different stages.  As long as homeowner takes action in defense of foreclosure proceedings prior to the expiration of a redemption period, Minnesota law provides many options for legal and equitable results, all of which require the initiation of a lawsuit by the homeowner against the lender. 

In connection with a lawsuit of this type, the homeowner may ask the Court to issue a temporary restraining order or temporary injunction preventing the lender from completing its foreclosure until the homeowner’s lawsuit is resolved.  As long as the homeowner is willing and able to make appropriate monthly payments, the Courts in Minnesota are willing to issue a restraining order and stop a lender’s foreclosure proceedings while a lawsuit is pending, provided the Court is presented with a proper request identifying the appropriate legal theories.  Once a temporary restraining order or temporary injunction is issued, the homeowner and lender may choose from a wide array of options to resolve their claims, including:

  • Completing a loan modification or reinstatement that the homeowner was told they would receive prior to initiating a lawsuit;
  • Allowing the foreclosure to be completed and thereafter renting the home from the lender, with an option to purchase the home at the current market value;
  • Receiving payment from the lender in exchange for transferring title to the home to the lender without requiring the lender to complete its foreclosure proceedings; or
  • Seeking judicial rescission of the mortgage where appropriate under the facts of the case.

Skjold-Barthel has assisted numerous  homeowners in foreclosure. Call Chris Parrington at 612-746-2560 for assistance or information.

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