How to be prepared for the accelerated union process

In December 2014, the National Labor Relations Board (NLRB) announced final rule governing union representation and election procedures. The rule, which took effect April 14, 2015, allows unions to move much faster in their organization campaigns while shortening employer timelines for providing employees information about unions and the election process.

“Because the time period between the filing of the representation petition and the election has been compressed, employers are severely handicapped in organizing opposition to a union’s organizational campaign,” says Frank P. Spada Jr., an attorney at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Spada about the expedited election process and how employers can be prepared.

How does the petition filing process work?

If there are least 30 percent of people in a particular bargaining unit — a group of employees who share a community of interest in a variety of factors  — who sign authorization cards, the union can go to the NLRB and request a petition for an election. It’s a secret ballot election and if the union gets 50 percent plus one of the people who voted in that select bargaining unit, the union will be authorized as the collective bargaining representative for those employees and will negotiate with the employer to set the terms and conditions of employment.

Let’s say that there are 100 employees in a bargaining unit and only 60 vote in the election. If the union has 31 people vote for the union then it would be recognized as the collective bargaining representative. The 40 employees who didn’t vote would still be part of the union and pay dues.

What type of information lists are now required?

In the past, only names and classifications of employees were required. The new rule requires employers to disclose full name, address, home and cell phone numbers, personal email addresses and job classification. This allows unions to contact employees directly so they can have a much more focused campaign. This information should be gathered and updated consistently prior to a union organizing effort so there is little delay in developing a strategy to combat unionization and, if necessary, to allow counsel to prepare a statement of position and proceed to a pre-election hearing on the appropriateness of the unit identified by the union.

How can businesses improve relations with their employees?

The management team should be trained on how positive employee relations can help avoid labor issues. If management listens to issues and problems before they fester, it stands to reason that the employees won’t need to go to an outside source to resolve their differences. One of the major reasons that employees seek representation is that supervisors fail to communicate effectively, or discipline employees unfairly or inconsistently.

How should potential bargaining units be identified?

Employers should take steps in advance to strengthen arguments in favor of preferred units should an organizing threat emerge. For example, a union may try to include employees on the manufacturing floor as well as the shipping department within a single bargaining unit. The employer might want to restructure operations or take other steps to enable it to argue to the NLRB that it would be improper for a union to try and organize both the shipping and manufacturing employees in one unit, or that certain parts of the manufacturing operations should be excluded from a petitioned for unit.

What type of plan should businesses have for dealing with organizing threats?

Preparation should begin, prior to any union organizing efforts, to identify individuals in management, human resources or in-house legal, if applicable, that are knowledgeable or can be trained regarding what an employer is legally permitted to do in opposing a union organizing campaign. What is communicated, as well as who communicates it, is very important. A trusted management team member or supervisor who is well liked by the employees should communicate information provided by a legal expert. With the accelerated organizing process, advance preparation by an employer is critical.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How to take advantage of the accelerating M&A market

As the M&A market for small businesses continues to recover after the recession, now is the time for potential sellers to begin planning. After all, business owners who sell their business without a well-defined exit plan typically sell for too little.

“To maximize value, minimize cost and make for an efficient sale, the business owner must seriously review legal, financial and business operations before going to market,” says Peter J. Smith, a member at Semanoff Ormsby Greenberg & Torchia, LLC. “Your lawyer, accountant and/or a good business consultant can help with this evaluation.”

Smart Business spoke with Smith about the M&A market and how to create an effective exit plan strategy.

What are some indicators that the M&A market is heating up?

BizBuySell.com reports that sales of small businesses have for the first time reached pre-recession levels. We’ve seen this in our own practice as well with increased deal flow and increased multiples.

What is driving the increase?

A variety of factors: improving small business performance, increased capital availability, more add-on acquisitions for venture capital portfolio companies, more sellers who waited out the post-recession recovery in order to regain lost value, and more buyers willing to take on debt and risk to grow.

Currently, there are many potential sellers in the market with viable businesses. Many restructured during the recession, so expenses were reduced and their EBITDA and profits have now increased. At the same time, banks have relaxed underwriting criteria and are more willing to finance buyers who are interested in making strategic acquisitions. Finally, there is a lot of pent-up demand, both among small businesses that see acquisition as a way to grow, and venture capital firms that are looking to expand their holdings through add-on acquisitions that provide synergy with their existing portfolio.

According to a BizBuySell.com survey of brokers, the strong M&A market is expected to continue throughout 2014 and we see nothing on the horizon that should cause a decline in deal activity.

What should potential sellers be thinking about in this market?

They should be thinking about exit planning — How can I position my business for maximum value and a clean, quick sale? They should be reviewing their entire company from the perspective of a buyer. This is not how most business people usually view their companies.

What are some examples of things to consider when exit planning?

Among other things, the business owner should ask:

  • Are financial systems and controls in place and adequate? Are financial statements presentable and in accordance with standard accounting principles? The business owner should consider having the financial statements reviewed or audited, if they are not already.
  • Can the business owner identify the best ways to increase EBIDTA? This is the biggest driver of value in your business.
  • Are employment agreements in place for key employees? Do all sales employees have non-competes?
  • Do key customers and vendors have contracts? Is there any guarantee of recurring revenue?
  • Does the business have title to all of its assets? Can it prove this in writing?
  • Does the company have title to all of its intellectual property? Without contracts, this is unclear.
  • Are all key contracts assignable? The business owner should know who can hold up their deal.
  • Is the business qualified in all states in which it does business? Has it filed tax returns in all of the appropriate states?

How far in advance of an anticipated sale should exit planning occur?

The longer the lead time the better. Planning should occur at least a year in advance of going to market. Ideally, it would be two to three years before a sale as it’s important to have the financial statements and tax returns in place as part of due diligence.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How to prepare for laws that give criminal offenders another chance

Ban the Box, a movement designed to provide additional opportunities to job candidates who have an arrest or conviction, is gaining steam. According to the National Employment Law Project, one in four Americans have either an arrest or conviction on their record, in most cases for nonviolent offenses. Ban the Box offers the vast majority of these individuals a second chance at an opportunity for employment.

The law does not require an employer to hire any candidate with a criminal background nor does it forbid employers from conducting background checks. Ban the Box simply requires employers to wait until later in the hiring process to ask the applicant about his or her criminal record.

“After the first interview, a potential employer may inquire about any criminal convictions the applicant may have,” says Michael B. Dubin, a member at Semanoff Ormsby Greenberg & Torchia, LLC. “The interview does not need to be a formal in person interview; it can be a telephone interview.”

Smart Business spoke with Dubin about Ban the Box legislation, how it affects employers and what penalties could arise from not following the law.

What is Ban the Box?

Ban the Box is a law that has been adopted in various states and municipalities that prohibits employers from inquiring about criminal convictions or arrests during the application process and the first interview. The law also prohibits employers from making personnel decisions based on arrests or criminal accusations that do not result in a conviction. Ban the Box was enacted by the City of Philadelphia in 2011, and with certain limited exceptions, applies to all city and private employers with 10 or more employees in the city. It was also recently signed into law in New Jersey and will take effect throughout the State of New Jersey on March 1, 2015 for all employers that have 15 or more employees and do business, employ persons, or take applications for employment in New Jersey.

How does Ban the Box affect employers?

Prior to the conclusion of the first interview, including on the employment application, employers are prohibited from inquiring about: (1) any arrest or criminal charge that did not result in a conviction and is not still open in court; and (2) criminal convictions.

After the first interview, employers are prohibited from inquiring about and/or making any adverse employment decisions based on any arrest or criminal charge that did not result in a conviction and is not still open in court. If an employer does not conduct interviews, then it is not permitted to conduct any criminal background inquiry.

There are several exceptions, for example, when an employer is mandated by state or federal law to consider criminal histories of applicants, such as when hiring law enforcement.

What are the penalties for violating Ban the Box laws?

Penalties differ by location. In Philadelphia, violators are subject to a fine of up to $2,000 per violation. In New Jersey, violators will be subject to a civil penalty not to exceed $1,000 for the first violation and $10,000 for each subsequent violation.

What must employers do to ensure they comply with Ban the Box laws?

Employers should review their form job applications and job posting advertisements to ensure they do not ask about criminal arrests or convictions. Any such inquiry should be removed.

Employers should also review the law in each state and municipality in which they either do business or have employees to ensure compliance. Human Resource personnel and hiring managers should be properly trained regarding Ban the Box laws and instructed as to what can and cannot be asked of job candidates and when criminal background inquiries may be made.

As the trend is moving toward more states and municipalities enacting Ban the Box legislation, multi-state and nationwide employers should be extra vigilant in ensuring compliance. The consequences of failing to do so could be extremely expensive for employers.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How to manage the benefits and risks of social media in the workplace

As the number of people and businesses using social media continues to proliferate, workplace social media policies are getting more attention.

“It’s important to craft a written social media policy that protects a business without infringing on employee’s rights,” says Stephen Goldblum, a member at Semanoff Ormsby Greenberg & Torchia, LLC. He advises having a legal expert help establish a clearly defined social media policy.

“An employment lawyer who drafts personnel polices can help create a social media policy suitable to your business’s needs,” he says.

Smart Business spoke with Goldblum about the benefits and risks of social media, as well as the importance of a written social media policy.

What are some of the most popular uses and types of social media in the workplace?

There has been an explosion in the growth of social media and it has changed the way people communicate, both at home and in the workplace. Some of the most popular examples of social media include Facebook, LinkedIn, Twitter, YouTube and Pinterest.

Companies can benefit greatly from the use of social media, but there are also significant risks, which is why it’s so important to have a well-articulated social media policy. Even if a business doesn’t have a social media presence it can still be affected by what people, including its own employees, post about the business.

What benefit does social media offer?

All businesses can capitalize on the use of social media. One example is the recruitment of employees. Over the past several years, outlets such as LinkedIn and Facebook have become an important part of the recruiting process for many companies. Also, social media allows a business to communicate with current employees as well as the public to drive existing or prospective customers to its website or physical location.

What are the risks associated with social media?

One of the biggest risks is that people misuse social media while at work. For example, employees may inadvertently or intentionally disclose confidential or proprietary information about their employer through social media, or publish negative or false information. Employees may also waste time on Facebook or YouTube rather than concentrating on their assigned responsibilities.

The social media phenomenon can be a liability for businesses. For example, social media can be a source of discovery in employment discrimination cases. In fact, the Equal Employment Opportunity Commission recently ruled that a claim of racial harassment made through a co-worker’s Facebook postings could go forward.

It’s also important to note that personal information that companies glean from social media cannot be used to make employment decisions. Although most businesses know that questions about a person’s background are generally not permissible in a job interview, significant information about a person’s race, gender, religion, national origin and age can be gleaned from a person’s use of social media, which creates a risk for discrimination lawsuits if this information is used in the hiring process.

Why are written social media policies important?

It is incumbent upon businesses that they have a well-drafted social media policy that is distributed to employees so they know in advance what is expected of them. The policy must clearly state whether social media usage is allowed at work, and if so, under what circumstances. The organization should articulate its social media goals, including what it uses social media for and what it expects to get out of its use of social media.

Employees must understand that they are responsible for the things that they post on social media and must clearly understand the legal impact that their actions can have on the company. Employees must understand the need to exercise good judgment and to protect the company from the disclosure of its confidential and proprietary information.

Finally, it’s important to outline the consequences for failing to abide by the policy, which might range from a warning for a minor infraction to termination for a more significant violation of the policy.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How to avoid some common pitfalls when doing business online

Christina D. Frangiosa, attorney, Semanoff Ormsby Greenberg & Torchia, LLC

Christina D. Frangiosa, attorney, Semanoff Ormsby Greenberg & Torchia, LLC

Anything published online lasts forever, so it is important to set the right tone for your company’s online communications and to mean what you say from the outset. You might try to retract or amend these public statements, but it is relatively easy to find prior versions, thus causing embarrassing or false statements to not truly disappear, says Christina D. Frangiosa, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC.

“It’s safer to wait to publish materials to the Web until you have confirmed they are accurate, not misleading and not based on someone else’s intellectual property rights,” she says. “False statements about either your company’s products or about a competitor or its products could lead to lawsuits claiming false advertising, unfair competition or commercial disparagement. Misuse of the company’s or a competitor’s intellectual property can result in a loss of rights, or even, perhaps, an injunction or damages.”

Smart Business spoke with Frangiosa about avoiding legal mistakes on the Internet.

How should you handle statements about your competitors and their products?

Avoid knowingly making false statements about a competitor or the quality of its products. Publishing statements about them without appropriate due diligence could result in negative publicity for your company, corrective advertising costs or monetary damages.

How does cutting and pasting content from other websites create copyright concerns?

Many users have a common misconception: If they can find ‘free’ content on the Internet, then they must be able to use that content for any purpose. Just because content may be freely accessible does not mean that you have a right to use it. Copyright holders have exclusive rights, including the ability to choose to publish or not to publish their works; posting something on a public website constitutes publication. Copying and pasting someone else’s images, text or video into your company’s website without permission could expose the company to copyright or trademark infringement suits, among other claims.

How might misuse in social media undermine company trademarks?

Companies today use their websites and social media to communicate about their products or services. Specific employees may be assigned to prepare and/or post content. These employees should be informed about how to use the company’s trademarks to further develop the brand and maintain existing rights. If employees misuse these trademarks on the company’s sites, they may unknowingly undermine the value of the brand, and perhaps cause problems for trademark renewals or other filings.

Some employees may also use the company’s marks on personal social media. For example, an executive might use a company logo rather than a headshot on his or her Facebook page. Any statement made on these pages about company business could be seen as a formal company representation, and perhaps cause problems for the company with the Securities and Exchange Commission or other governing bodies.

What can you do to protect against these pitfalls?

  • Create your own content, rather than relying on design elements you see on other sites. This may have a higher upfront cost but could reduce your litigation exposure in the long run.
  • Seek a license to use any content in which you are interested, and pay the appropriate royalty fee for its use. There are organizations that accept those royalty payments on behalf of content owners.
  • Obtain images, videos or other content from a valid image collection service, authorized by the copyright owner.
  • Ensure employees understand the source of the content they plan to use before they upload it to the company’s site. They should be trained to avoid the impulse to right-click, ‘save as’ and then upload.
  • Avoid using a competitor’s trademarks to advertise your own goods or services.
  • Ensure employees understand the appropriate use of trademarks.
  • Establish a social media policy that includes explanations of limits on use of the company’s trademarks.

 

Christina D. Frangiosa is an attorney at Semanoff Ormsby Greenberg & Torchia, LLC. Reach her at (215) 887-0200 or [email protected]

Find about more about privacy and intellectual property law on Christina’s blog.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How employers should comply with the Family and Medical Leave Act

Michael B. Dubin, member, Semanoff Ormsby Greenberg & Torchia, LLC


Michael B. Dubin, member, Semanoff Ormsby Greenberg & Torchia, LLC

The Family and Medical Leave Act (FMLA) entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons. However, should an employer fail to comply with the FMLA requirements, the employer could be subjecting itself to litigation and possibly fines from the Department of Labor.

“There are a lot of obligations on the employer. To the extent that you’re not aware of these, you should contact an attorney to make sure you’re following the strict requirements of the FMLA,” says Michael B. Dubin, a member at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Dubin about employer compliance with the FMLA.

What does the FMLA allow employees to do?

Eligible employees are entitled to 12 workweeks of unpaid leave in a 12-month period for:

  • The birth of a child and to care for the newborn child.
  • The placement with the employee of a child for adoption or foster care and to care for the newly placed child.
  • To care for the employee’s spouse, child or parent who has a serious health condition.
  • A serious health condition that makes the employee unable to perform the essential functions of his or her job.
  • Any qualifying exigency arising out of the fact that the employee’s spouse, son, daughter or parent is a covered military member on ‘covered active duty;’ or 26 workweeks of leave during a single 12-month period to care for a servicemember with a serious injury or illness if the eligible employee is the servicemember’s spouse, child, parent or next of kin (military caregiver leave).

What employers are covered by FMLA?

The FMLA only applies to employers that meet certain criteria. A covered employer includes a private-sector employer with 50 or more employees in 20 or more workweeks in the current or preceding calendar year; and public agencies and public or private elementary or secondary schools, regardless of the number of employees.

What employees are eligible for FMLA leave?

Employees are eligible if they: have been employed by a covered employer for at least 12 months, which need not be consecutive; had at least 1,250 hours of service during the 12-month period immediately preceding the leave; and are employed at a worksite where the employer employs at least 50 employees within 75 miles.

Can an employee take intermittent leave?

Under certain circumstances, an employee may take FMLA leave on an intermittent or reduced schedule basis. That means an employee may take leave in separate blocks of time or by reducing the time worked each day or week for a single qualifying reason. When leave is needed for planned medical treatment, the employee must make a reasonable effort to schedule treatment so as to not unduly disrupt the employer’s operations. Employers must be careful to accurately track intermittent leave.

Can an employee be terminated at the conclusion of the 12-week leave?

Upon return from FMLA leave, an employee must be restored to his or her original job or to an equivalent job with equivalent pay, benefits, and other terms and conditions of employment. However, there is a limited exception for ‘key employees’ where reinstatement will cause ‘substantial and grievous economic injury.’

Many employer FMLA policies provide that if an employee fails to return to work at the conclusion of the 12-week leave, the employee will be deemed to have abandoned his or her job and/or will be automatically terminated. Employers are discouraged from maintaining this type of policy as it may be deemed a violation of an employee’s rights under the Americans with Disabilities Act (ADA). At the conclusion of an employee’s FMLA leave, employers should consider whether the employee will be able to perform the essential functions of the job with or without a reasonable accommodation (pursuant to the ADA), which may include additional time off following FMLA leave.

If confronted with an issue under FMLA, employers are cautioned to contact an attorney to ensure they are acting in conformity with the FMLA and avoiding the numerous pitfalls inherent in complying with the FMLA.

Michael B. Dubin is a member at Semanoff Ormsby Greenberg & Torchia, LLC
. Reach him at (215) 887-2658 or [email protected]

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How to decide whether or not to own your factory or warehouse

Howard N. Greenberg, managing member, Semanoff Ormsby Greenberg & Torchia, LLC

Howard N. Greenberg, managing member, Semanoff Ormsby Greenberg & Torchia, LLC

You’ve been in business for several years and it is profitable. You have a decision to make: Do you want to invest in the business and buy a facility, or will you continue to lease?

With the help of your accountant, you should carefully examine the anticipated capital requirements of your business.  Evaluate your ability to obtain capital or loans. Don’t box yourself into being cash poor and unable to meet business obligations or take advantage of opportunities.

“The prevailing reason that businesses fail is insufficient capital. Draining capital to pay for a real estate project could be a cause,” says Howard N. Greenberg, managing member at Semanoff Ormsby Greenberg & Torchia, LLC.

“My colleague, Jeffrey Rosenfarb, a principal in Hart Corporation, a national industrial real estate firm, advises that small manufacturing firms overwhelmingly desire to own versus rent, whereas larger corporations generally prefer leasing.”

Smart Business spoke with Greenberg about some pros and cons of leasing or purchasing industrial real estate.

What issues should be examined when considering purchasing a facility?

First, what’s the nature of your business?   Manufacturing that utilizes heavy, difficult-to-move equipment is where purchasing may be desirable, to avoid being at a landlord’s mercy when your lease expires. Or is it light manufacturing or distribution, that moves easily?

Second, can you obtain a facility that will remain adequate for your needs? Plan for potential future expansion. Have your counsel review the local zoning code to determine what can be built, either now or in the future.

Do you contemplate children in the business? Real estate can provide a source of income and inheritance. Counsel will need to prepare an agreement that deals with numerous issues including governance, death, disability, termination of employment and sale of the business.

Where do you want to invest your limited capital? Be sure that you will not need capital to expand your business versus acquiring a building. Lending rates are at historic lows, encouraging acquisition. Consult counsel concerning special types of financing such as tax free industrial development or state-provided financing, as well as tax abatements.

What issues should you consider if you determine to lease?

Check locally to ensure there are adequate reserves of industrial rentals available. With any lease, secure options to: extend the term; terminate early; purchase the building; for a right of first refusal; and for the ability to assign the lease or sublet in connection with your business sale.

If I decide to purchase, what entity should purchase the property, and how should the lease be structured?

Keep the building owner entity distinct from the entity that occupies it. The building owner entity should be a limited partnership, limited liability company or S corporation to enable you to utilize tax advantages like depreciation and amortization, and to permit gifting. Also, you may want to divvy up interests differently in the operating company versus ownership in the real estate company. You could decide to bring a partner into your business, but not into the building ownership.
You will need a lease between the two entities, especially if you’re going to sell the business and not the real estate. As a landlord, limit the tenant’s options and set a reasonable term.

Does new construction make sense versus purchasing and rehabbing an existing building?

With new construction or significant rehab, you must have a reliable contractor and architect. Assume that it’s going to cost at least 15 percent more and take 15 or 20 percent longer than initially estimated. Weigh the aggravation of new construction versus having your building the way you want. However, over the past 15 to 20 years, sale or leasing of existing facilities has far exceeded new construction, per Rosenfarb.

Buying and holding an industrial property usually works out well for the owner. For heavy manufacturing, building ownership, or a long-term lease with renewal options, is the way to go.

Howard N. Greenberg is a managing member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 and [email protected]

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How borrowers can understand and limit legal risks for all loan types

Catherine A. Marriott, member, Semanoff Ormsby Greenberg & Torchia, LLC

Catherine A. Marriott, member, Semanoff Ormsby Greenberg & Torchia, LLC

Virtually every business and individual borrows money at some point. Although there are many different loan types available, some universal concerns apply to every loan. Borrowers need to understand these issues and know that they may be able to limit their risk through negotiating their loan documents.

“Borrowers don’t always fully appreciate the risks they are taking when borrowing,” says Catherine A. Marriott, a member at Semanoff Ormsby Greenberg & Torchia, LLC. “Often, a default which could have been avoided can result in acceleration of a loan, putting personal and business assets at risk.”

Smart Business spoke with Marriott about what provisions counsel should review, whether or not he or she participates in the negotiations.

What are issues borrowers should consider?

Often, borrowers extend lines of credit via a simple modification document, without reviewing the documents signed when the loan was first obtained. In doing so, they run the risk of violating representations and warranties that were true when the loan was first made, but are not necessarily true when the loan is modified. Further, borrowers may not be aware of operating and financial covenants that apply to their business, and often think that because they have not had any issues in the past, there is no need for concern now. While that may be true, reviewing the initial documents is critical in avoiding defaults going forward, as circumstances and goals may have changed.

For new and existing loans, borrowers must be sure that they understand:

  • All business terms, such as the monthly payment obligation, interest rate, amortization term, prepayment penalty, and operating and financial covenants.
  • What collateral is pledged for the loan, including security interests in equipment, inventory and accounts receivable, and, most importantly, personal guarantees.
  • The remedies that the lender has upon a default, including confession of judgment for money or possession of real property, and what effect enforcement of these remedies could have on business and personal assets.

What should be considered regarding personal guarantees?

Many borrowers form entities to keep business and personal assets and liabilities separate. Notwithstanding this goal, principals of small and midsize businesses are almost always required to personally guarantee business loans, resulting in risk to personal assets. Although these individuals are aware of their personal liability, the extent of their exposure may not truly be appreciated.

How does confession of judgment work to increase borrower risk?

Confession of judgment is a powerful remedy available to commercial lenders in Pennsylvania. It allows a lender to immediately obtain a judgment against a borrower or guarantor (or both) for money or possession of mortgaged property. The money judgment will include the accelerated amount of the balance of the loan, plus interest, late fees, attorney’s fees and costs of collection. A borrower or guarantor will have the opportunity to open the judgment only after it is entered, rather than defend the matter before it becomes a judgment. An attorney can advise of the risks and consequences of confession of judgment.

When should counsel be reviewing the loan documents?

Certain loan provisions are legal in nature, so borrowers should consult with an attorney to understand the legal risks. By doing so at the outset, counsel can advise not only on whether borrowers are receiving market terms, but also can assist with modifying or eliminating provisions that are negotiable. Counsel can make sure that borrowers understand their obligations, and that the loan terms adequately address the borrowers’ needs and business goals. The later counsel gets involved, the more difficult it becomes to improve the loan terms.

Even if a borrower has never had problems with its loans or lender, things can happen. Considering what is at stake, all borrowers should strive to minimize their risk. Spending a little time and money now to protect business and personal assets in the future is invaluable.

Catherine A. Marriott is a member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach her at (215) 887-0200 or [email protected]

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How you might have to return a payment to a company that files for bankruptcy

Stephen C. Goldblum, member, Semanoff Ormsby Greenberg & Torchia, LLC

Stephen C. Goldblum, member, Semanoff Ormsby Greenberg & Torchia, LLC

A “preference action” is a lawsuit by or on behalf of a debtor seeking to recover certain payments made by the debtor prior to filing for bankruptcy. Preference actions are unfamiliar to many business owners and often seem illogical and unfair.

“Clients often receive a letter demanding the return of a payment that the debtor made to them before filing for bankruptcy. They call and say, ‘What does this mean? Do I have to return this money? We sold them products and they paid us, are they entitled to get their money back?’” says Stephen C. Goldblum, member at Semanoff Ormsby Greenberg & Torchia, LLC. “The answer is yes, you may have to return the money — unless the payment falls within one of the statutory defenses.”

Smart Business spoke with Goldblum about how preferences work.

What should you know about preferences?

Typically, a preference action is often preceded by a ‘demand letter’ from the debtor demanding the return of payments made in the 90 days prior to the debtor filing for bankruptcy. This seems patently unfair to the recipient of the payment. The business provided products or services and was paid for them, and it seems unjust to have to return the money, often many months after the payment was received. The policy behind the bankruptcy code, however, takes a broader view. The policy is to prevent debtors from treating creditors unequally and paying preferred creditors before filing bankruptcy, and to prevent aggressive collection activities that could actually force a debtor into bankruptcy. Such policies have been determined to be of greater importance than the rights of an individual creditor.

There are four elements needed to prove a preferential payment; if the payment was:

  • For an antecedent (previously incurred) debt.
  • Made while the debtor was insolvent.
  • Made to a non-insider creditor in the 90 days prior to the bankruptcy filing.
  • Allows the creditor to receive more than it would have if the payment had not been made and the claim paid through the bankruptcy proceeding.

Where do many businesses make mistakes regarding preferences?

A business’ biggest mistake is to ignore a demand letter received by or on behalf of a debtor. Often the debtor is willing to settle the preference claim for a significantly reduced amount before a lawsuit is filed. A business that ignores a demand letter or fails to timely retain counsel familiar with bankruptcy law often misses its best opportunity for a favorable resolution.

Do you receive the repayment back?

Usually not. The preferential payments recovered by the debtor are added to the bankruptcy estate. To the extent there are funds available, secured, priority and certain other creditors are paid first. To the extent there are funds remaining, they are distributed to the unsecured creditors, which often results in little or no payment.

What are the defenses when a payment is alleged to be preferential?

The three primary defenses to an alleged preferential payment are the following:

  • New value defense, which provides an offset against the preferential payment if the creditor subsequently gives new value to the debtor after the alleged preferential transfer.
  • Ordinary course of business defense, which protects transfers consistent with the debtor and creditor’s prior business history.
  • Contemporaneous exchange defense, which includes certain concurrent transactions such as a cash-on-delivery.

How are insider creditors treated differently?

With insiders — corporate officers or directors, relatives and related entities — a debtor may recover payments for up to 12 months prior to the bankruptcy.

How can you protect your company? 

It’s difficult for a company to pre-emptively protect itself from a payment later being deemed preferential. When you receive a letter demanding return of an alleged preferential payment, contact an attorney experienced with creditors’ rights. He or she will analyze the potential defenses and prepare a response to the letter. Often, a timely, well-reasoned response to a demand for the return of a preferential payment leads to a prompt and cost-effective resolution.

Stephen C. Goldblum is a member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-5961 or [email protected]

 

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How executives and managers are vulnerable to individual liability

Michael J. Torchia, Esq., Managing Member, Semanoff Ormsby Greenberg & Torchia, LLC

Michael J. Torchia, Esq., Managing Member, Semanoff Ormsby Greenberg & Torchia, LLC

Michael J. Torchia, a managing member at Semanoff Ormsby Greenberg & Torchia, LLC, gave a seminar to executive clients on individual liability several months ago. “Even if some supervisors knew they had liability under a statute or two,” he says, “seeing their actual exposure to 12 or 14 statutes shocked them.”

“I don’t think business owners have any clue how vulnerable they are to being sued under various employment statutes,” Torchia says.

This exposure is prevalent in areas like discrimination cases, and wage and hour claims which include unpaid overtime, exempt and non-exempt employees, and independent contractor status.

Smart Business spoke with Torchia about individual liability and strategies for protection and avoidance.

How are executives vulnerable to individual liability? 

Many state and federal statutes explicitly state an employee has a right to relief against the employer and an individual.  Some simply define ‘employer’ to include certain individuals. Examples include the Pennsylvania Wage Payment and Collection Law; Fair Labor Standards Act; Family and Medical Leave Act; Pennsylvania Human Relations Act; Pennsylvania Whistleblower Act; Immigration Reform and Control Act; and COBRA. There are also common law court cases allowing an individual to be sued under a variety of claims such as intentional infliction of emotional distress and defamation. Although incorporation helps shield individual assets — as opposed to, for example, a sole proprietor — the corporate veil does not protect individuals here because the statutes specifically allow action against them.

How far into management is the risk?

Generally, if an executive, manager or supervisor is considered a decision maker when it comes to employee issues, especially with regard to compensation, benefits or termination, there could be individual liability. In some organizations, that could be those at the ‘C’ level, president or vice president, but in others a secondary or middle manager could be individually liable.

What about executives who say, ‘I was following orders’ or ‘It was unintentional’? 

‘Just following orders’ or ‘company policy’ may help, but is not an absolute defense. And whether the improper act was or wasn’t intentional is only relevant if the statute requires proving intent, bad faith or a knowing violation.

So, how can executives protect themselves?

At a minimum, managers, supervisors and executives should make certain they have adequate insurance. There are a variety of policies for individual exposure, such as employment practices liability, directors and officers, fiduciary liability, and errors and omissions. There are also lesser known policies that cover, for example, inadvertent disclosure of private information.

Another factor is asset protection. In Pennsylvania, assuming the executive is not already named in a lawsuit or under imminent threat of a claim, which could result in a fraudulent transfer claim, assets can be protected by putting a house, cars and bank accounts in joint names with a spouse.  If not married, executives may consider increasing contributions to retirement accounts, which are not usually subject to collection.

How can executives and their companies avoid problems in the first place?

Training and education for managers, supervisors and executives — especially your decision makers — is key. They need to know how to handle all aspects of their supervisory duties, such as hiring, discipline, firings and employee complaints.

The company’s written policies should be consistent with the manager training and what is actually done day to day. Policy review and training should occur at least every three years, and sooner if there is turnover or changes in the law. Seminars and in-person training for middle managers is routinely overlooked or disregarded as unnecessary, but that it is one of the most important steps a company can take.

Most often decision-making executives, managers and supervisors are not trying to violate the law. However, with authority to bind the company, they can unknowingly cause liability to themselves or the business.

Michael J. Torchia, Esq. is a managing member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 or [email protected]

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