Disregarding Entity Protections in Massachusetts

In prior Blog posts, our Lynnfield based Lawyers specialized in Massachusetts business law explained that the main benefit of a properly formed Massachusetts corporation is the limited liability afforded its officers and shareholders.  One exception to limited liability however is disregarding the corporate entity, otherwise known as “piercing the corporate veil.” The exception allows a claimant (such as a creditor) to hold either the officers or shareholders personally liable for claims against the corporation. 

In My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 619 (1968) the Massachusetts Supreme Judicial Court stated that the criteria for disregarding the corporate entity:

‘(a) when there is active and direct participation by the representatives of one corporation, apparently exercising some form of pervasive control, in the activities of another and there is some fraudulent or injurious consequence of the intercorporate relationship, or (b) when there is a confused intermingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the various corporations and their respective representatives are acting.’

The main reason usually cited for disregarding the corporate entity is, in rare situations, to prevent gross inequity by providing an injured party a remedy by permitting parties to disregard the corporate protections. A plain example of a situation where an entity is disregarded is when a small business owner runs a “shell corporation” (a corporation without any meaningful assets or capital) that comingles business with personal financial affairs, that doesn’t follow corporate reporting, formal procedures, nor officer duty requirements, and that is used to provide a direct source of funds and/or assets to a shareholder, or that is used to perpetuate fraud.

Massachusetts court use 12 factors to determine whether to disregard a corporation’s liability protections (e.g. pierce the veil):

1.      pervasive control;

2.      nonfunctioning of officers and directors;

3.      confused intermingling of business activity assets, or management;

4.      thin capitalization;

5.      use of the corporation in promoting fraud.

6.      nonobservance of corporate formalities;

7.      common ownership

8.      absence of corporate records;

9.      no payment of dividends;

10.  insolvency at the time of the litigated transaction;

11.  siphoning away of corporate assets by the dominant shareholders;

12.  use of the corporation for transactions of the dominant shareholders;

Evans v. Mulicon Construction Corp., 30 Mass. App. Ct. 728, 733 (1991).

If you as a Massachusetts business owner is interested in reviewing the validity of your organization, or are interested in learning more about the services we provide in business legal consulting, please contact us at 781-463-6063. 

Litigation or Mediation or Arbitration?

It is not uncommon for Massachusetts business and consumers to become ensnared in a dispute with family members, neighbors, business partners, vendors, customers, contractors, and other parties.  When that happens, it is best to contact an experienced Massachusetts litigation attorney as soon as possible and to avoid acting as your own lawyer . When a dispute arises, there is more than one way to resolve the dispute. The most common method of dispute resolution is litigation. In other words, you will "sue" or file a lawsuit in State or Federal Court, which will submit you to a binding and rigid process that will decide the outcome of any claims and requests for assistance. Litigation is costly, time consuming and represents a stressful experience. Many parties are not mentally or financially prepared to endure this process. 

Litigation is the formal process of resolving a grievance through the Federal or State Court systems. The process begins with the filing of a complaint, which places the opposite party on notice of your legal and equitable claims, as well as the factual allegations in support of those claims. A complaint can also be used to support preliminary relief, such as a Motion for Real Estate Attachment; Preliminary Injunction or Lis Pendens.  These early remedies are designed to prevent the transfer, concealment and liquidation of assets, and to help provide a security for judgment.  The parties will then enter the process of obtaining evidence to support or refute the claims, and then submit their respective cases to a jury or judge at trial. A trial can provide varying results that will leave litigants with potentially a complete victory, a total loss or a "push. A trial is risky for all litigants and can produce sometimes unpredictable results. 

As a way for avoiding the costs and risk associated with litigation, there are alternative dispute options available to parties.  

What is the Difference Between Mediation and Arbitration?

The difference between mediation and arbitration is commonly misidentified. Mediation is a formal process where a neutral third party (a mediator) attempts to negotiate and assist the parties in coming to settlement terms.  A mediator is often a retired judge, experienced and respected attorney, and does not "take sides" in any dispute.  Parties can always negotiate settlement terms on their own, however, those discussions can sometimes lead to deadlock or become stale. Therefore, a mediator can offer fresh perspectives for both parties; render opinions about the strengths and weaknesses on the claims and defenses; provide different settlement structures; and minimize the emotional responses, animosity and vitriol that has boiled over during a dispute. This process is voluntary and neither party is compelled to accept an agreement in mediation, however, the majority of qualified mediators are adept at getting the parties to find an agreement that they can live with. 

On the other hand, Arbitration is a formal process that allows parties to try their case privately and without court assistance. This process is typically expedited and the trial is before a arbitration and not a jury of peers. At the arbitration, each party will have the opportunity to provide witness testimony and enter documents into evidence. The arbitrator will then make a decision in the weeks or months that follow the arbitration. This written decision may be filed in Federal or State Court, and can have the same effect as a judgment against a party.  That is, unless, a party appeals the decision and is successful in overturning the decision on appeal. 

Some of the immediate advantages of mediation and arbitration are cost and time.  The legal fees and expenses are substantially lower if a case settles in mediation or tried before an arbitrator. The time that it takes for a grievance is also substantially reduced. 

If you have questions about the dispute resolution process, please contact one of our Massachusetts litigation attorneys at 781-463-6063. We can advise you as to the best method of dispute resolution, Our litigation attorneys serve clients in Boston, the Greater Boston area, and, of course, throughout the North Shore.  

What are my options if a Lis Pendens is Wrongfully Filed Against my Property?

A Lis Pendens, also known as , is a legal notice approved by a Massachusetts judge that is recorded at the Registry of Deeds to which the related property is situated. This legal notice provides record notice that there is a legal action pending against the real estate at issue and/or named in the lawsuit. A Lis Pendens may only be allowed if the applicant makes a claim of a right to title to real property or the use and occupation thereof.  The Lis Pendens differs from a real estate attachment in that the Lis Pendens relates to title or occupation of real property and an attachment is a remedy to secure assets to satisfy a potential judgment or prohibit transfer or concealment of property that could satisify a judgment. 

The effect of the Lis Pendens is to "cloud" that title to the property, or otherwise, create a defect in title that will discourage any potential purchasers or transferees from accepting title to the property.  It can also interfere with and prevent a property owned from obtaining a loan whereby the property is being used as collateral for the loan (mortgage). In almost all instances, no purchaser of real estate or lender will complete a transaction and accept title with a legally valid Lis Pendens recorded against the property.  In other words, the title will need to be cleared and the Lis Pendens released before a property owned can warrant clear title to any prospective purchaser or mortgagee (lender). 

The pertinent Massachusetts statute that governs the use and application of a lis pendens is Mass.Gen. Laws ch. 184 s. 15.  The Statute sets the procedure and requirements for obtaining a Notice of Lis Pendens. In order to obtain a Lis Pendens, an applicant must file a verified complaint; identify the real estate and property owners; and describe a claim that relates to title or occupation of the real property.  

What are your options if a Lis Pendens is Wrongfully Filed Against your personal or business property?

In the instance of a Notice of Lis Pendens that was inadvertently filed against a property, a qualified real estate attorney can help you clear title.  There are some cases where the property address or recording information was misidentified by the lis pendens application; an old title abstract was relied on; or there was some other type of clerical error either in drafting or recording the notice.  In these cases, the applicant will release the notice voluntarily.  

In other instances, an applicant who has deliberately an/or has in bad faith filed a notice of Lis Pendens against a property is subject to civil liability. A respondent to a Lis Pendens may file a special motion to dismiss on the basis that it is frivolous. "The special motion to dismiss shall be granted if the court finds that the action or claim is frivolous because (1) it is devoid of any reasonable factual support; or (2) it is devoid of any arguable basis in law; or (3) the action or claim is subject to dismissal based on a valid legal defense such as the statute of frauds." M.G.L. ch. 184, s. 15(c).  If the Court grants the special motion to dismiss, it will dissolve the Lis Pendens and may award legal fees and expenses (including recording fees) associated with the dissolution of the notice.  Legal fees may be awarded for any discovery (including document requests, interrogatories or depositions) related to the dissolution of the notice.  

If you have questions about a Lis Pendens or one was recorded against your property, contact one of our Lynnfield Real Estate and Litigation lawyers for a free consultation.   

Trust Accountings & Deadlines to Contest Transactions

Our Trust and Estate Litigation Lawyers located in Lynnfield, Greater Boston, Massachusetts are responding to the question as to how long a trust beneficiary has to contest or object to a trust accounting. First, a beneficiary of a trust should have a copy of the applicable trust instrument. If you do not have a copy of the trust, this may embody a transparency issue that begins with the trustee.  If you cannot obtain or the trustee will not provide you a copy of the trust, you should contact an experienced trust litigation attorney immediately.  Once you have obtained a copy of the trust, you should carefully review it for provisions concerning accounts (or accounting). This clause will typically set a deadline of thirty or sixty days for objections to the trust accounting. If you have discovered one of these deadlines and have been served with an accounting by the trustee, then the clock has begin to run on your time to object to the accounting. If you have allowed the clock to run out on filing an objection to the accounting with the trustee, there are limited circumstances to excuse the lack of objection and it is advisable that you consult counsel to determine your options. 

If a proceeding concerning the trust has been filed in a Massachusetts Probate Court, then the Massachusetts Uniform Probate Code and Court controls the deadlines for objections and typically will set a return day.  Any mention of a return day on an accounting is the deadline to file an objection with the Court.  

The Law Office of Stefan Cencarik, PLLC represents beneficiaries and trustees of Massachusetts trusts and estates, and serves clients in the greater Boston area and Eastern Massachusetts. 

Trustees Have a Duty to Account (No Matter What)

Our Trust and Estate Litigation Lawyers located in Lynnfield, Greater Boston, Massachusetts are responding to a question concerning whether trustees of irrevocable trusts, revocable trusts, realty trusts, special needs trusts, and charitable trusts trusts can be relieved from a duty to account to beneficiaries. The Law Office of Stefan Cencarik, PLLC represents beneficiaries and trustees of Massachusetts trusts and estates, and serves clients in the greater Boston area and Eastern Massachusetts. 

Trust instruments sometimes contain clauses that state that the Trustee of the trust is under no duty to account to any beneficiaries.  Other (limited) accounting clauses provide the trustee with complete discretion to determine whether he/she should account to beneficiaries. These clauses were presumably placed into the agreement by the trust settlor (person who set up the trust) so as to maintain the secrecy of the financial affairs of the trust, and to eliminate the administrative burdens on the trustee if required to account.   

Most modern trust instruments will contain an independent paragraph that obligates the trustee of the trust to account to the beneficiaries once per year.  This accounting will provide the beneficiaries with information on the types and amounts of property held by the trust, income earned, and expenses incurred by the trust.  This will help the beneficiaries determine whether the trust has been managed in their best interests. Most estate planning lawyers will recommend or automatically include an accounting provision in trust, absent some of the interests described above.  

In the instance that the trust relieves the trustee from any duty to account, beneficiaries are not left completely in the dark as to the financial affairs of the trust.  Massachusetts Courts have established the basic principal that trustees of a trust have a duty to account for trust property and can be compelled to do so upon request to Court that has proper jurisdiction.  Massachusetts Courts have held that any trust clauses that relieve trustees of accounting duties are against public policy.  Therefore, trust beneficiaries seeking to determine whether a trustee has properly and adequately performed their duties may retain a trust and estate lawyer to request that a Court compel the trustee to account.  Then, the beneficiaries and trust litigation attorney can determine whether the beneficiaries may pursue any other remedies against the trustee for mismanagement of the trust.  

If you are a beneficiary of a trust and a trustee has ignored, stalled, delayed and/or refused to account to you, please contact the Law Office of Stefan Cencarik, PLLC at 781-463-6063. We represent aggrieved trust beneficiaries throughout Eastern Massachusetts.  

What Can I Expect if a Trustee Breaches a Trust?

Our Trust Litigation Attorneys located in Lynnfield and serving all of Eastern Massachusetts are responding to the following question: What can I expect if a trustee breaches a trust? 

If a trustee of a trust has breached the trust, beneficiaries may seek various equitable remedies through the Massachusetts Superior Courts and Probate Courts.  "Remedies" provide beneficiaries with a means to be placed into the position that they would have been if the trustee had not breached the trust in the first place. Or remedies will provide the beneficiaries with an order compelling the trustee to take action, such as abiding by trust terms.  There are also other discretionary remedies such as removal of trustee. The following article describes some of the equitable remedies available against Massachusetts trustees who breach their duties to beneficiaries or charitable purposes: 

- If a Trustee causes a loss in income to the trust, then the beneficiaries may request that a court surcharge trustee (make the trustee responsible for repayment of the losses to the trust). In these cases, if a trustee fails to obtain income, capital gains, appreciation or foregoes lucrative opportunities, then the trust would be entitled to restitution from the trustee.  In the case that a Trustee personally benefited financially from any loss to the trust, the beneficiaries could also seek to disgorge the trustee of those gains.

- A trustee may be ordered to account to the beneficiaries for all income, losses, expenses, and other charges related to the trust.  In this case, the trustee must make full disclosure of the financial affairs of the trust. 

- If the Trustee fails to abide by or disobeys trust provisions, then a Court can order the trustee to comply with and follow the terms of the trust. 

- In cases of gross dereliction of duties, fraud, conversion, and self-dealing, a Court can remove a trustee from his / her office; appoint a receiver, temporary trustee, trustee or co-trustee. 

These are merely some of the equitable remedies available to trust beneficiaries in the event that a trustee breaches a trust. If you have questions about these remedies, contact the Law Office of Stefan Cencarik, PLLC, trust litigation and estate litigation attorneys located in the Greater Boston area at 781-463-6063.

Informal Partnerships Can Lead to Litigation

Partnerships are difficult endeavors for the majority of business owners and investors.  Informal (or handshake or gentlemans' / ladies' agreements) are sometimes ordinary practice when two or more individuals decide to enter into a joint business venture. When going into business with a relative, long time friend, or work colleague, it may appear to be a good idea to rely on these types of informal agreements, however, when problems arise for the business or the individuals partners individually, that close relationship may be relegated to irrelevance. 

Most, if not all, Massachusetts legal practitioners would recommend against informal partnerships, and instruct their client to form a Limited Liability Company (LLC). Unless a formal entity is registered in Massachusetts and unless the partners decide to conduct business under the LLC, both partners will be personally liable for the debts and liabilities of the partnership. In other words, if the partners incur debt or face the prospect of a legal claim, each partner will put at risk their own personal assets and income.  Also, what happens if one partner commits an unlawful act or injuries another party in commerce, and is subject to litigation? Without any form of limited liability, the other partners will also be liable for those actions. 

Additionally, what happens when the partners decide to part ways, and when there is a dispute over ownership, buyout, rights to intellectual property, or continuing use of customer lists, or other goodwill? What happens if the partners are unclear about the management and/or daily duties, time commitment, financial investment requirements, or transfer of ownership?

Without some type of legal entity structure or written partnerships agreement, informal business partnerships may expose partners to unnecessary (and costly) liabilities and litigation. If you are considering forming a new business partnership in the Boston and North Shore areas of Massachusetts, please contact the Law Office of Stefan Cencarik, PLLC at 617-669-9780 for a consultation.  

The Importance of Buy Sell Agreements for Business Partners

Buy Sell Agreements can be an effective tool for eliminating any confusion or dispute when it comes time for a partner to exit a business relationship.  A Buy Sell Agreement is a contract between two or more business owners that specifies the terms and conditions for a "buyout" and exit for one of the owners. These agreements are sometimes embedded in an Operating Agreement for an Limited Liability Company (LLC) or a Shareholder Agreement for a Corporation. 

It is a common occurrence, at the beginning stages of a business, that the partners are so focused on fundraising, marketing, and management of the business that those individuals ignore the importance of organizational matters. In other words, the partners put off meeting with a business attorney to set out an agreement that will become essential when it comes time to transfer ownership of the business.  A Buy Sell Agreement should be viewed as a indispensable agreement that can structure a partnership arrangement, and ensure that the business founders set conditions for long term control and ownership of the organization. 

These types of agreements can avoid numerous issues and potential litigation as a result of a disagreement on the transfer of a founder's interest to a third party; termination of the founder's involvement or employment in the business; buyback of interest by the organization or other founders; or death, disability, or insolvency of one of the founders. 

One of the principal and most common features of a Buy Sell Agreement is a provision that provides other corporate shareholders or LLC members the rights to purchase the shares or interest held by the other owner.  For example, if an owner materially changes their involvement in the management and day-to-day affairs of the organization through resignation, or termination, then the Buy Sell Agreement would provide the remaining owners the automatic right to purchase the interest or shares held by the departing owner. The agreement should specify the method for determining the buyout price, such as: a predetermined value; valuation of the business; or formula. The agreement would also set out the time frames; methods of payment; process for valuation of the business; and other conditions of the partner's departure from the business. 

The other types of situations that necessitate a Buy Sell Agreement are changes in the financial, health, and domestic status of one of the shareholders or members.  A business partner could face severe financial troubles that could cause a partner to become insolvent, or subject to numerous lawsuits involving personal creditors. Those creditors may seek to attach any dividends or equity disbursements of the partner, or the partner may be placed in receivership or bankruptcy.  In those instances, a receiver or bankruptcy trustee would be looking to claim all profit rights of the owners, or liquidate the business interest to a third party. This is an undesirable position for the other business partners particularly in the context of a private, closely held organization where the affairs of the business, in part, would be exposed to a public court proceeding. 

Additionally,  it may be that a business partner enters a divorce proceeding, and it becomes important to preclude shares from being held by a former spouse. Finally, there are the health and life consequences of death, disability, and/or incompetence.  A business partner may be permanently unable to participate in the affairs of the business, and  this will create problems at the management and ownership levels since owners are also typically key employees of the business.  In each of these circumstances, a well drafted Buy Sell Agreement can specify the buyout process, conditions, and price for transitioning ownership of the business to the remaining partners. 

A properly drafted Buy Sell Agreement can help business partners can help make all of the expectations and conditions clear out the outset when it comes time for a partner to move on. Attorney Stefan Cencarik, a Boston area business lawyer, works closely with business partners and entrepreneurs to help create Buy Sell Agreements, and is available for consultation at 617-669-9780. 

Small Business Owners and the Personal Guaranty - How Can You Avoid Liability?

The easiest method of avoiding personal liability for a debt as a small business owner is to never sign a personal guaranty. However, banks and other institutional and private lenders are mindful that most start up businesses, entrepreneurs, and young businesses have very few valuable assets, thin capital, and unpredictable revenues to obtain sufficient security when issuing a loan. In other words, it is nearly impossible for a small business to obtain a loan without providing the lender the security of a personal guaranty in addition to other commonly used types of security, such as a collateral assignment of leases and rents, security agreement and UCC- 1 Financing Statement ("UCC-1"), or a mortgage  on the commercial property, and, sometimes, the owner's personal residence. 

It is all too common an occurrence that when a business owner decides to exit the business, wind down operations, or sell the assets of the business to a third-party, the personal guaranty may become a significant issue.  For example, if a business debt is owed to a bank for a commercial loan, and the business owner or partners decide to terminate business operations while the debt remains unpaid, it is highly likely that the bank will demand payment from the guarantor under the terms of the personal guaranty.  As another example, a business owner may be personally liable on a loan or lease agreement, and the assets of that business are being sold to a third party.  Not only does this create an issue if the bank holds a UCC lien on those assets, the question arises, for the business owner, as to how the debt will be satisfied so that he/she may be released from the obligations of the personal guarantee.  No business owner should sell a business or its assets, and remain personally liable on any of the business debts, particularly if the debt is tied to those assets.  

How does a business resolve the liability associated with a personal guaranty? 

The easiest way to manage a personal guaranty is to make payment arrangements, or negotiate a payoff of the debt and release of the guaranty.  In this instance, the lender will look for cash and may be willing to accept some type of equity or other type of security as consideration.  It all depends on the circumstances, as well as the viability and nature of the acquiring business. 

The other method of dealing with a personal guaranty is litigation.  If you fail to pay a debt upon reasonable demand of the lender under the terms of the personal guaranty and promissory note, then it is likely that you will be dragged into a state court legal proceeding. Litigation is costly, time consuming and expensive for all participants.  If you are defending the enforcement of a personal guaranty, the best method of defense is equitable principals. In this instance, you are relying on the lender's acts and omissions during loan issuance and administration to provide you with an equitable defense to enforcement. For example, has the lender negligently handled the loan by failing to notify the guarantor of material changes in the loan, such as loan amounts, credit line increases, term, and the like? Did the lender take actions that indicate that it waived its rights to enforce the guaranty, or did it enter into another agreement that satisfies the debt, in full or part? Did the lender fail to adequately provide adverse information concerning the business financial affairs that somehow increased the guarantor's risk?  Did the lender allow the default and permit the debt to accumulate interest and principal? These are all questions that any Boston area business owners should ask when faced with a personal guaranty. 

There also may be issues with the personal guaranty document itself. The document may fail to properly identify the parties; capacities in which the parties have signed; failure of consideration; the guaranty could be a payment guaranty or a collection guaranty;  or some other type of technical issue with the personal guaranty. However, it is highly likely that lenders have learned from mistakes of their own, mistakes of others, and/or have hired skilled lawyers to draft the personal guaranty.  In this instance, the best hope for some type of technical issue is that the lender obtained the guaranty from an unqualified attorney or used downloadable form obtain from an Internet legal form retailer. 

Finally, there is reorganization and/or liquidation in a bankruptcy proceeding.  This is typically the final option for most business owners, and is not desirable for those wishing to keep their financial affairs out of public view, and out of the hands of a bankruptcy trustee. 

As outlined above, there are narrow circumstances that permit a Massachusetts business owner to avoid personal liability for a business debt and/or personal guaranty.  If you or any business owner or a group of business partners have questions about liability under a personal guaranty, Attorney Stefan Cencarik, a business lawyer serving the Boston area, is available for consultation at 617-669-9780.