Avoiding dissolution pitfalls and protecting against post-dissolution liability for company debts and claims

Steven H. Bergman
April 2019

Based on information contained in the Department of Commerce’s most recent annual report, there are currently more than 300,000 businesses operating in Utah, with approximately 60,000 new business filings each year. For the past decade, the most common form of new entity in Utah has been the limited liability company. The next most common is a DBA registration of a fictitious business name, followed by the corporation. Each of these new entities brings the promise of a new business venture, new ideas, new jobs, and potential success.

Although the overall number of businesses in Utah has been growing, the Department’s annual report suggests that on an annual basis, more 40,000 businesses either fail to file an annual report or dissolve. For the principals of these 40,000-plus businesses, the failure to file an annual report or the dissolution of the business triggers potential issues that if not managed properly can have adverse effects on the shareholders, members, directors, officers, and managers of these businesses.

Failing to file an annual report can eventually lead to administrative dissolution of a corporation or limited liability company. Once a corporation or limited liability company is administratively dissolved, any action taken by the directors, officers, or managers that is not related to the winding up of the entity can result in the personal liability of the acting director, officer, or manager.

Similarly, in those instances where the shareholders or members of a corporation or limited liability company elect to dissolve, or a court orders the dissolution of the entity, properly dissolving and winding up the entity can make the difference between the principals still enjoying some or all of the available liability protection after the entity is wound up and those same principals being exposed to personal liability for the debts of and claims against the entity. This is not a theoretical risk, as Utah Courts have found directors, officers, and managers of dissolved entities personally liable for actions taken after dissolution. In these instances, the director, officer, or manager who was found liable could have avoided that liability by complying with the annual reporting requirements under the Utah Revised Business Corporations Act or the Utah Revised Uniform Limited Liability Company Act or by following the dissolution and winding up procedures under those acts.

For example, when the dissolution and winding up process is in accordance with the provisions of the Utah Revised Business Corporations Act, officers are generally protected from post-dissolution liability, and shareholders can only be held liable for company debts and claims up to the amount they received in monetary distributions from the winding up process. Conversely, not following the procedures (for example, by distributing corporate property other than money), can expose the receiving shareholder to liability in excess of the limits set forth in the Utah Revised Business Corporations Act. Similar rules apply to limited liability companies wound up under the Utah Revised Uniform Limited Liability Company Act.

Another important part of the winding up process is the management of claims against the entity. Following the procedures under either act can lead to the early and final resolution of claims against the entity. Not following those procedures can result in claims against the entity. Furthermore, the former shareholders or members may also be exposed to liability for extended periods–up to seven years in the case of corporations and six years in the case of limited liability companies.

The attorneys in RBMN’s Business Transactions and Corporate Governance and Business and Commercial Litigation practice groups know and understand the statutes, rules, and regulations that apply to corporations and limited liability companies. If you have a corporate or company governance issue, or are in the process of or soon will be dissolving and winding up a corporation or limited liability company, contact one of the attorneys in RBMN’s Business Transactions and Corporate Governance or Business and Commercial Litigation practice groups.

Business Transactions & Corporate Governance

BUSINESS TRANSACTIONS & CORPORATE GOVERNANCE


PRACTICE AREA / UTAH BUSINESS LAW ATTORNEYS

At Richards Brandt, we work with established businesses, start-ups, small businesses, and publicly traded companies on a variety of business-related issues. Our business law attorneys have experience in document and contract creation, organizational structure and planning, mergers and acquisitions, and corporate governance in Salt Lake City and across the U.S.

BUSINESS LAW AND CORPORATE ATTORNEYS IN UTAH



Courage, responsibility, and nerves of steel. That’s what it takes to own or operate a business these days. We understand that all businesses have to walk the fine line between having expert legal counsel and keeping costs in line. That’s why we take a pragmatic approach when it comes to legal strategy. Our philosophy is that the simplest solution is often the best solution. Our attorneys focus on what matters to our clients — a practical strategy that will safeguard the business and help protect the bottom line.



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BUSINESS LAW REPRESENTATION YOU CAN DEPEND ON



Richard Brandt's Adam Affleck in Meeting


Every business has a life cycle. Some last longer and become stronger than others. Analysis of the unique challenges and opportunities of any particular business is not a simple matter. Every business needs customized legal counsel.

Examples of issues that Richards Brandt business attorneys help clients with include:



  • Administrative Guidance and Compliance
  • Asset Protection
  • Business Entity Formation and Dissolution
  • Business Succession Plans
  • Capital Acquisition & Financing
  • Commercial Transactions, including Uniform Commercial Code (UCC) Transactions and Compliance
  • Contracts
  • Corporate Governance, including Articles of Incorporation or Organization, By-Laws, Shareholder Agreements, LLC Operating Agreements, Partnership Agreements, Resolutions, Consents, Proxies, and Meetings
  • Distribution Agreements
  • Employment and Labor Law
  • Non-Profits & Exempt Organizations
  • Immigration Audits and Counseling
  • Mergers & Acquisitions
  • Real Property Purchase and Sale Transactions
  • Religious Organizations
  • Secured Transactions
  • Shareholder Agreements and Limited
  • Limited Liability Company Operating Agreements
  • Small Business Consulting and Advice
  • Start-Ups & New Business Consulting and Investing
  • Trade Secret Protection
  • Trademark & Copyright Registration, Licensing, and Transactions

SEE FAQS REQUEST A CONSULTATION




RECENT BUSINESS LAW UPDATES



Avoiding dissolution pitfalls and protecting against post-dissolution liability for company debts and claims



BUSINESS LAW ATTORNEYS AT RICHARDS BRANDT IN SALT LAKE CITY, UTAH



Lincoln Harris

Shareholder and Family Law and Construction Law Practice Chair

GOOD PLANNING IS THE BEST WAY TO MITIGATE FUTURE PROBLEMS

Jon Parry


At Richards Brandt, we believe the best way to handle business legal challenges and problems is to avoid them altogether through good planning. Solid planning will also enable you to take advantage of opportunities when they come along – taking on new clients or new lines of business, or even selling the business if the right opportunity arises. We’ll put our decades of experience to work for you to identify potential problems to prevent lawsuits and avoid expensive litigation down the road.

Every business may experience legal challenges at one time or another, so if something unexpected does arise, we’re here to help with a proactive approach to defend your business’s best interests.

FREQUENTLY ASKED QUESTIONS (FAQS)



BUSINESS TRANSACTIONS & CORPORATE GOVERNANCE / FEATURED FAQS



Answered by:

Barry G. Scholl

Barry Scholl

Shareholder, Cybersecurity Section Chair and Business Practice Chair

A: To decide which entity is right for you, we look at: liability, taxation, and maintenance. Both corporations and LLC’s have limited personal liability—this means that owners are usually not responsible for business debts. However, corporations and LLC’s are taxed very differently—corporations are classified as a separate taxable entity, whereas LLC’s are typically taxed as a pass-through entity (unless you choose otherwise). And corporations and LLC’s have different levels of maintenance—LLC’s have fewer reporting requirements and can operate solely with members acting as the managers. Conversely, corporations are required to hold certain annual meetings, keep certain records, and appoint boards and officers to manage the company for the stockholders. Every situation is unique so we recommend that you consult with an attorney in making your decision. Contact our firm, Richards Brandt, if we can help you decide which entity is right for you.

Answered by:

Jonathon D. Parry

Jonathon Parry

Of Counsel

A: A business lawyer helps business owners at every stage of business ownership, from start-up, through long-term growth, and when the founders transition business ownership. Any business owner who is serious about growing their business and depends on the business to provide for themselves, their family, and their employees should have a strong relationship with a good business lawyer. What value does a business lawyer bring? In short, an effective business lawyer helps to grow and protect the client’s business. Besides drafting business contracts and representing the business in court if litigation arises, good business lawyers provide their clients much more – they provide legal counsel in helping clients plan for and navigate through challenges and disputes that may arise regarding customers or employees, collaborate with other critical business advisors such as accountants, and advocate in support of the business. Good business lawyers are also proactive in helping their clients plan for growth and make use of new business opportunities.

Answered by:

Matthew C. (Matt) Barneck

Matthew C. (Matt) Barneck

Shareholder

A: One of the most common problems I see when a small business finds itself in litigation is the lack of proper documentation. It might be that you haven’t formed the business properly, or you haven’t documented an agreement among the owners about who owns what percentage or how the business is going to be run. Or it might be that there isn’t written documentation to reflect a key transaction such as a purchase or sale. You’d be surprised at how common that is, even in the 21st Century. And if you find yourself in that situation, it can be difficult to defend or pursue litigation.

If that’s what you’re facing, my suggestion is try and get the documents in place now. If you formed an LLC, for example, but you don’t have an operating agreement, contact a business lawyer and get one put together. Or if there is a purchase or a sale or an option that you’ve agreed upon with a handshake, put it in writing. That kind of documentation will sometimes help avoid litigation, or at least make your case stronger if you do end up in litigation. And the cost savings is well worth it. Litigation is very expensive. The cost is usually measured in the 10s of the thousands of dollars, not in the thousands. And once you are in litigation, you will quickly spend multiples of the cost it would take to make sure you have proper documentation of your business entity and your transactions. So I recommend that you contact a good business lawyer in Utah and get some advice about it.

A: Just as all people are unique and have special attributes critical for their success, every business is different and has different opportunites and challenges. It takes time for a lawyer to learn the important details of a business client and its founder or owners. The lawyer should also have a basic understanding of the business’s industry. So when a new business challenge or opportunity arises, it is critical that the business already has a lawyer who can effectivlely counsel to take advantage of the opportunity or minimize the impact of a problem.

A: There are several steps to starting an LLC. First, you must determine what type of LLC is right for you. Second, you should counsel with a tax advisor to decide on the best tax treatment for your LLC. Third, you should consult with an attorney to decide on and draft your formation documents (like your Organizational Consent, Certificate of Organization, and Operating Agreement). Fourth, you’ll need to register your LLC with the appropriate tax authorities, like the IRS and the state tax commission. Fifth, you’ll need to consider whether you need payroll services, employment agreements, employee withholding accounts, an employee handbook, independent contractor agreements, etc. Sixth, you’ll need to apply in your city and county for the relevant licensing, such as your business license and relevant permits. And there may be other additional steps unique to your line of work. While some steps can be completed on your own, we recommend that you consult with an attorney in planning for your new LLC. Contact our firm, Richards Brandt, if we can help you with this exciting new step.

A: When you first establish your LLC, you get to choose how it will be taxed. For a pass-through tax entity, you will pay federal and state income tax by attaching a K-1 to each member’s personal tax return. In addition to federal and state income tax, LLC’s must sometimes also pay sales & use tax and other taxes like social security, employee witholding, etc. Whether or not your LLC must pay those taxes depends on whether you have employees and what goods or services your company provides. Every situation is unique so we recommend that you consult with a tax advisor in determining your requirements. Contact our firm, Richards Brandt, if we can help you navigate your tax filing requirements.

A: People often wonder whether their limited liability company (also known as an “LLC”) needs an Operating Agreement. Your Operating Agreement is the document that states how your LLC will be governed. It covers all kinds of things, from adding new members to tax treatment and everything in between. Whether you need an Operating Agreement or not depends both on your local law and how many owners (known as “members”) hold interests in the LLC. Some states require an LLC to have an Operating Agreement, even if there is only one member. Other states allow LLC’s with only one member to do business without an Operating Agreement. However, even then, you may want an Operating Agreement in order to bypass some of the state laws that apply to LLC’s by default. If your LLC has more than one member, you are usually required to have an Operating Agreement. In that case, having an Operating Agreement is even more important because it dictates how the co-members will buy in, sell their interests, make distributions, decide upon managers, cast votes, and resolve disputes with one another. [You can sometimes find Operating Agreements offered on the internet, but we caution you to avoid those—they often lack the most important parts of an Operating Agreement or they contain extremely rudimentary terms that will not protect you and your company fully. Internet vendors are not liable for mistakes in your Operating Agreement, but you might be. Your company is important, so please get your Operating Agreement from a licensed attorney.] If you do not have an Operating Agreement, or if you need to update your Operating Agreement, please contact our firm, Richards Brandt Miller Nelson, and we can help you determine whether an Operating Agreement is right for you.

A: The biggest challenge is inertia – just starting the planning process. Another challenge is not having an experienced professional to coordinate, guide, and complete the planning process with the different professionals (CPA, financial planner, attorney, etc.) involved. The third challenge, which is related to the first, is a lack of time to plan. Too often, business owners wait to begin planning, and a health scare occurs, or a potential buyer suddenly offers to buy the business. If some succession planning has not already been done when those circumstances aries, the business may suffer or the sale opportunity may be lost because the owner is unprepared.

A: A buy-sell agreement is written contract among the business’s owners/partners that details the terms and conditions for changes in business ownership. A buy-sell agreement answers fundamental questions like the following: When and under what circumstances can a partner sell his/her interest? To whom may a partner sell or transfer his/her interst? If the remaining partners buy out another partner, how will the price and other sale conditions be determined? In short, a buy-sell agreement provides a critical written “roadmap” that governs the critical details concerning the sale or transfer of business interests. It is critical for every multi-owner business. Business owners who don’t have a written buy-sell agreement may be destined for chaos and conflict.

A: For any LLC business with multiple owners, it is important to have an experienced lawyer draft a customized operating agreement. This is a subject where “DIY” planning can really backfire and cause harm. This is because the law pertaining to LLCs varies depending upon the unique attributes of members and the business, and there are often operating agreement terms that should be included or should be avoided that only experienced lawyers will be familiar with.



BUSINESS TRANSACTIONS & CORPORATE GOVERNANCE – CASE STUDIES



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REVIEWS

[/av_textblock] [av_hr class='invisible' icon_select='yes' icon='ue808' font='entypo-fontello' position='center' shadow='no-shadow' height='60' custom_border='av-border-thin' custom_width='50px' custom_margin_top='30px' custom_margin_bottom='30px' custom_border_color='' custom_icon_color='' av-small-hide='aviaTBav-small-hide' av-mini-hide='aviaTBav-mini-hide' id='' custom_class='' template_class='' av_uid='av-ktnzynxb' sc_version='1.0' admin_preview_bg=''] [av_hr class='invisible' icon_select='yes' icon='ue808' font='entypo-fontello' position='center' shadow='no-shadow' height='40' custom_border='av-border-thin' custom_width='50px' custom_margin_top='30px' custom_margin_bottom='30px' custom_border_color='' custom_icon_color='' av-desktop-hide='aviaTBav-desktop-hide' av-medium-hide='aviaTBav-medium-hide' id='' custom_class='' template_class='' av_uid='av-kto01099' sc_version='1.0' admin_preview_bg=''] [av_testimonials style='slider_large' columns='1' grid_style='av-minimal-grid-style' font_color='' custom_title='' custom_sub='' custom_content='' interval='15' alb_description='' id='' custom_class=' ' template_class='' av_uid='av-8iepgt' sc_version='1.0' admin_preview_bg=''] [av_testimonial_single src='10025' name='Mary Jane Fine' subtitle='Chief Operating Officer Utah Non Profit Housing Corporation' link='http://' linktext='' av_uid='av-kum5azb7' sc_version='1.0'] "Barry Scholl has been an invaluable asset to our development and property management teams over the years. He has quickly learned our mission and philosophy in the affordable housing space. He displays both legal prowess and compassion in the legal field. He lifts the load with his legal experience in most any endeavor. " [/av_testimonial_single] [av_testimonial_single src='10031' name='Brylan Schultz' subtitle='President/Founder Natural Ventures' link='http://' linktext='' av_uid='av-kum5vbs5' sc_version='1.0'] "As our business operations have grown and evolved Barry has been with us every step of the way.  He has been able to accomplish things that many others in his field told us were not possible.  One of the greatest things about Barry is his wealth of resources within RBMN that enables him to advise us in many different areas of legal practice.  Barry has always been available to field phone calls and emails as needed and has operated with a personal touch that we really appreciate.  His patience and willingness to properly explain issues, and attention for getting things done correctly are among his best qualities." [/av_testimonial_single] [av_testimonial_single src='8715' name='Sheridan Mordue' subtitle='Owner/President Hip and Humble Inc.' link='http://' linktext='' av_uid='av-70xrml' sc_version='1.0'] "Barry Scholl has been counsel for my high-end fashion and gift shop for a number of years. He has helped us with leases and other contracts, company trademarks and other issues. Barry works hard to understand his clients’ needs and is always happy to answer our questions or to deal with time-sensitive matters. We recommend him highly to fellow business owners." [/av_testimonial_single] [av_testimonial_single src='8677' name='J.T. VonLunen' subtitle='President and Founder RMUS - Rocky Mountain Unmanned Systems' link='http://' linktext='' av_uid='av-5u5cdp' sc_version='1.0'] “I wasn't given enough space to write out my full endorsement for Barry Scholl. He's an integral part of the RMUS team. As a rapidly growing leader in the unmanned systems industry, we need to make decision quickly, yet cautiously... and Barry helps make that happen. Not only does Barry have a Wikipedia size knowledge of Law, he also understands our business strategy. Thanks Barry for being part of our team!” [/av_testimonial_single] [/av_testimonials] [av_hr class='invisible' icon_select='yes' icon='ue808' font='entypo-fontello' position='center' shadow='no-shadow' height='70' custom_border='av-border-thin' custom_width='50px' custom_margin_top='30px' custom_margin_bottom='30px' custom_border_color='' custom_icon_color='' id='' custom_class='' template_class='' av_uid='av-459rrx' sc_version='1.0' admin_preview_bg=''] [av_button label='TALK WITH US' icon_select='yes' icon='ue800' font='entypo-fontello' link='page,11' link_target='' size='large' position='center' label_display='' title_attr='' color_options='' color='theme-color' custom_bg='#444444' custom_font='#ffffff' btn_color_bg='theme-color' btn_custom_grad_direction='vertical' btn_custom_grad_1='#000000' btn_custom_grad_2='#ffffff' btn_custom_grad_3='' btn_custom_grad_opacity='0.7' btn_custom_bg='#444444' btn_color_bg_hover='theme-color-highlight' btn_custom_bg_hover='#444444' btn_color_font='theme-color' btn_custom_font='#ffffff' btn_color_font_hover='white' btn_custom_font_hover='#ffffff' border='' border_width='' border_width_sync='true' border_color='' border_radius='' border_radius_sync='true' box_shadow='' box_shadow_style='0px,0px,0px,0px' box_shadow_color='' hover_opacity='' sonar_effect_effect='' sonar_effect_color='' sonar_effect_duration='1' sonar_effect_scale='' sonar_effect_opac='0.5' id='' custom_class='btn-chat-icon' template_class='' av_uid='av-3a88al' sc_version='1.0' admin_preview_bg=''] [/av_three_fifth][/av_section]

RICHARDS BRANDT REPRESENTS BUSINESSES OF ALL SIZES



Whether you have a small business or large enterprise, our attorneys are prepared to help you assess their options and protect your interests. Businesses and corporations in Utah and throughout the intermountain west look to Richards Brandt for customized, reliable legal services related to business organization and corporate governance.

THE BUSINESS FORMATION EXPERTS — FROM LLCS TO S CORPS AND BEYOND



Business formation issues such as which type of entity to form may seem simple on the surface. However, with dozens of options, and dramatically different implications for each, it’s simply too important to make the decision without legal counsel. You’ll want the advice of an experienced Utah-based business attorney. That’s where we come in. At Richards Brandt, we have decades of business law experience and can help you avoid the legal mistakes that many businesses make. The business law attorneys of Richards Brandt understand the legal complexities and pitfalls of business operations, and we know how to assess your unique objectives and help you structure your enterprise to best suit your needs. Our corporate lawyers’ business litigation experience means we can advise new and growing businesses about strategies to prevent lawsuits down the road.

In addition to business formation or dissolution actions, we help our clients with a variety of legal tasks such as:

  • LLC formation
  • Partnership dispute resolution
  • Buy-sell agreements
  • Corporate compliance
  • Employment issues
  • Document preparation
  • Employee handbook drafting
  • Contract disputes
  • Incentive bonus compensation plans
  • Non-qualified deferred compensation plans
  • Phantom stock/equity plans
  • Employee contracts
  • Wage and hour disputes
  • Workers’ compensation matters
  • Employment discrimination
  • Wrongful termination claims or litigation
  • Contract negotiations
  • Licensing issues
  • Non-compete clauses
  • Trademark infringement
  • Commercial real estate transactions
  • Payment disputes
  • Articles of incorporation
  • Breach of contract
  • Uniform Commercial Code claims
  • General business and commercial dispute resolution
  • Business dissolution issues
  • Business fraud or embezzlement
  • Insurance law
  • Partner and shareholder disputes
  • Employment disputes
  • Theft of trade secrets
  • Unfair competition
  • Wrongful interference with business relations
  • Pursuing collection of debts owed to your business
  • Litigation involving officers and directors
  • Shareholder rights Business-to-business defamation
  • Appeals
  • Intellectual property protection

WE LOVE TO COLLABORATE!



Our lawyers often collaborate with other lawyers and professionals such as CPAs, financial planners, and tax advisors, at the client’s request. We work to provide the best possible strategies to resolve issues and mitigate risks. This includes helping you navigate complex state and federal laws.




UCC Article 9: What You Need to Know, Part 5

Clint M. Hanni
April 2018

UCC Financing Statements

Once the loan documents have been signed, it is imperative from the lender’s point of view that a UCC financing statement be filed in the proper location to “perfect” its interest in the collateral. This is a routine task that is easy to overlook in the rush to close a loan. Multi-million dollar loans have been completely uncollectible because someone forgot to file the financing statement. The takeaway is simple: don’t forget to file!

Beyond simply filing the UCC financing statement, there are three fundamental issues that the lender must get right.

First, file in the right place. UCC Article 9 has a simple rule for finding the right place to file the UCC financing statement—file in the state where the debtor is located. For debtors that are business entities, such as corporations or limited liability companies, regardless of where they may have their corporate headquarters, they are deemed located in the state where they filed their organizing documents, such as articles of incorporation or certificate of organization.

Second, get the name of the debtor right. The general rule is that a UCC financing statement is effective only if a searcher could find it by searching the state’s database with the debtor’s correct name. What this means in practice is that you must list the exact legal name of the debtor on the UCC financing statement. This includes commas, periods, spaces, hyphens and all other incidental characters. For corporate entities, the best way to get the name right is to request that the debtor provide you with a good standing certificate from its state of organization, which will list the debtor’s exact legal name. DBA’s are not good enough. There are endless horror stories of misspelled debtor names that spelled disaster for lenders.

Third, get the collateral description right. All UCC financing statements must include an indication of the collateral. If the collateral is all the debtor’s assets, then you can simply list “all assets” in the collateral box (but remember that this approach does not work in the security agreement itself). If the collateral is a subset of the debtor’s assets, consult the signed security agreement and use its collateral description for the financing statement.

When it comes to UCC Article 9, small errors can be catastrophic. It will be well worth your time and money to consult an attorney with UCC expertise.

Clint M. Hanni is Of Counsel to Richards Brandt Miller Nelson. He is a member of the Business Transactions & Corporate Governance, Banking and Finance Law, Business Bankruptcy and Creditor Rights, and Real Estate Transactions & Litigation practice groups.

UCC Article 9: What You Need to Know, Part 4

Clint M. Hanni
April 2018

Security Agreements – For Debtors

Let’s say that you have approached a bank about getting a loan for working capital purposes. You have inventory and accounts receivable to offer as collateral to secure the loan. After agreeing to basic terms, the bank sends you a loan agreement, a promissory note and a security agreement. The bank has assured you that these are all “standard documents” and encourages you to quickly sign and return them so the loan can be funded and you can get your money. Before you sign the security agreement, however, it’s important to understand that there’s really no such thing as a “standard document” when it comes to security agreements. There are only short-form minimalist documents that cover the basic elements necessary for the creation and attachment of a security interest and long-form documents that describe the lender’s remedies in exhausting detail.

The debtor should take care to review the obligations that are secured by the collateral. Generally, the obligations to be secured should be limited to obligations arising under the loan agreement itself. Lenders often will extend the obligations to include any and all obligations owing from the debtor to the lender at any time in the past or future. As a debtor, make sure you are comfortable with this approach or push back to place limits on the secured obligations.

Every security agreement will have a collateral description, and the debtor should review it carefully to confirm the collateral is as agreed. This is less important where the debtor has agreed that all its assets will constitute collateral. It is more important where the debtor has multiple lenders each with different collateral. Lenders often include over-inclusive collateral descriptions and depend on the debtor to trim them back. It is worth being careful on this point. An over-inclusive collateral description can throw the debtor into default under prior loan agreements and result in the waste of time and money to fix.

A security agreement gives the lender the right to seize the debtor’s collateral upon the occurrence of certain listed “events of default.” A debtor should review these events of default carefully to confirm they will not be triggered unexpectedly. For example, it is customary for the debtor’s failure to make a payment to the lender to be deemed an event of default, but only after all cure periods have been exhausted.

A smart debtor will insist that any loan documents it receives be reviewed quickly and efficiently by experienced counsel, even if the lender claims they are “standard documents.”

Clint M. Hanni is Of Counsel to Richards Brandt Miller Nelson. He is a member of the Business Transactions & Corporate Governance, Banking and Finance Law, Business Bankruptcy and Creditor Rights, and Real Estate Transactions & Litigation practice groups.

UCC Article 9: What You Need to Know, Part 3

Clint M. Hanni
March 2018

Security Agreements – For Lenders

Security agreements lie at the heart of loan transactions. If you are a lender, the security agreement is the document that insures you will be repaid. Security agreements are most often stand-alone documents, but they don’t have to be. Language creating a security interest can be embedded in any other agreement, such as a loan agreement, a purchase order, a promissory note or a deed of trust. The key to creating a security interest is including language whereby the debtor “grants a security interest” to the lender in named collateral. Beyond that, there are two elements of utmost importance in a security agreement that, surprisingly, are often overlooked.

First, the security agreement must indicate what the collateral is. There doesn’t have to be an exhaustive description of each separate item of personal property of the debtor that constitutes collateral. It is enough to identify the category or type of collateral, such as equipment, inventory, accounts receivable, deposit accounts and the like. UCC Article 9 identifies the generally recognized types of personal property collateral in which a security interest can be taken. You should always consult a qualified lawyer to review any collateral description in a security agreement to confirm it is adequate (for the lender) and not overreaching (for the debtor).

A common pitfall is to identify the collateral by simply referencing “all assets” of the debtor or “all personal property” of the debtor. Many lenders have tried this, thinking that it will get them the most collateral, only to find out that UCC Article 9 specifically disqualifies this approach. Such lenders end up with no security interest, no collateral and a difficult path to repayment if the debtor becomes insolvent. To create an effective security interest, the collateral must be identified by specific type or category.

The second element of utmost importance is that the security agreement must be signed by the debtor. This is a simple matter, but often overlooked. An unsigned purchase order with embedded language about the creation of a security interest is not sufficient. The mere filing of a UCC financing statement (which, as a rule, is not a signed document) is not sufficient. Without the debtor’s signature on a written (or electronic) security agreement, no security interest will be created.

As you can see, the requirements of a security agreement are complicated. Before providing a security agreement to a debtor, it’s wise to have it reviewed by a competent attorney with UCC expertise.

Clint M. Hanni is Of Counsel to Richards Brandt Miller Nelson. He is a member of the Business Transactions & Corporate Governance, Banking and Finance Law, Business Bankruptcy and Creditor Rights, and Real Estate Transactions & Litigation practice groups.

 

UCC Article 9: What You Need to Know, Part 2

March 2018

What is a security interest?
At the heart of UCC Article 9 is the concept of a “security interest.” The UCC itself defines a security interest as “an interest in personal property or fixtures which secures payment or performance of an obligation.” The definition goes on for another eight lines, but the gist of it is that a lender receives security for its loan by getting an interest in the debtor’s collateral. In other words, a security interest is a type of lien that allows a lender to take collateral from a debtor that defaults on an obligation. Under UCC Article 9, a security interest only attaches to personal property collateral. Personal property essentially includes everything but land and buildings (the latter are called real property).

When it comes to security interests, two important concepts come into play. First, in order to be of any effect, a security interest must be created and attach to personal property. Second, in order to be enforceable against a debtor, a security interest must be properly perfected.

In order for a security interest to be created and attach to collateral, there are three basic requirements. The debtor (the one owing the obligation) must sign a security agreement, which will be discussed in more detail in future blog segments. The secured party (the one receiving the obligation) must give value to the debtor, for example, in the form of a loan. Lastly, the debtor must have rights in the collateral, which generally means that the debtor owns or is leasing the collateral.

Even though a security interest has attached to collateral, it is of little value until it has been perfected, or in other words, can be legally enforced, a matter of great importance for lenders. The way to perfect a security interest depends on the type of collateral. For most types of collateral, perfection of a security interest is generally done by filing a UCC financing statement with the central filing authority in the state, which is often the secretary of state. In Utah, the place to file is the Division of Corporations and Commercial Code. For certain types of collateral, the only way to perfect a security interest is for the lender to take control or take possession. In other cases, the lender can perfect its security interest in any one of several ways, but with possibly differing priorities. It is possible, for example, for two lenders to perfect a security interest in the same collateral, but with different resulting priorities. If you are a lender wanting to perfect a first priority security interest in collateral, it is essential to consult a lawyer with expertise in UCC Article 9 so that you perfect the security interest in the proper manner and comply with other legal requirements for a legally enforceable interest.

Clint M. Hanni is Of Counsel to Richards Brandt Miller Nelson. He is a member of the Business Transactions & Corporate Governance, Banking and Finance Law, Business Bankruptcy and Creditor Rights, and Real Estate Transactions & Litigation practice groups.

UCC Article 9: What You Need to Know, Part 1

Clint M. Hanni
March 2018

Introduction

If you’re a business owner, you’ve been using the Uniform Commercial Code (UCC) even if you’ve never heard of it. The UCC is a model body of law adopted by all 50 states and US territories in a generally uniform manner that governs commercial business transactions, although there are slight differences between the states. The UCC is divided up into eleven separate sections or “Articles” that each govern a different set of transactions.

What kind of transactions are governed by the UCC? Here’s a short list: selling goods, leasing equipment, issuing promissory notes, sending purchase orders, writing checks, opening bank accounts, shipping goods, and finance transactions where a loan is secured by collateral. This blog series will deal with finance transactions, which are covered by UCC Article 9.

As a business owner, why should you care about UCC Article 9? The answer is simple: whenever you enter into a financing arrangement, equipment lease or any transaction where an obligation is secured by collateral, UCC Article 9 is there in the background to protect you as long as the documents and agreements comply with its provisions. If you are entering into a transaction where you will provide financing, you’ll need to have a basic understanding of how UCC Article 9 helps protect your interest in the collateral. As you might expect, UCC Article 9 is a complicated statute, and you’ll need the help of a professional to navigate it. If you’re a lender, you’ll want to make sure the documents you are using have been vetted by an attorney so they comply with the UCC in your state. If you’re a borrower, you’ll want to hire a lawyer to confirm the documents aren’t overreaching and include the protections offered by the UCC.

Because UCC Article 9 touches so many different kinds of transactions, a general understanding of how it works and what to look for will benefit you regardless of whether you’re a lender, borrower, buyer or seller.

Clint M. Hanni is Of Counsel to Richards Brandt Miller Nelson. He is a member of the Business Transactions & Corporate Governance, Banking and Finance Law, Business Bankruptcy and Creditor Rights, and Real Estate Transactions & Litigation practice groups.

 

 

Contracting 101 – Choice of Law and Borrowing Statutes

Steven Bergman
November 2017

This is another in a series of posts about negotiating, executing, performing, and enforcing contracts, whether commercial or individual. This installment focuses on choice of law issues and how choice of law can affect your right to pursue a remedy on a contract default or the defenses available to you or your business in the event of a default.

Many contracts today contain provisions establishing where a lawsuit can be filed (or arbitration can be heard if there is a mandatory arbitration provision) and what law applies. For contracts that are silent on choice of law and forum selection, statutes or court rules govern the appropriate forum, and the controlling law is determined based on a complex body of law known as conflicts of law. Which law applies can have a significant effect on the outcome of the case. One area where these provisions or the choice of law analysis can be critical concerns the statute of limitations. A statute of limitations is a law that establishes the maximum amount of time a party can wait before it pursues a potential claim. Depending on the type of claim, there are different statutes of limitation. To illustrate this point, a few examples follow.

In Utah, the statute of limitations for written contracts is typically six years. For oral, or unwritten, contracts, the statute of limitations is four years. By contrast, in other states, the statute of limitations varies from three to fifteen years on written contracts and from two years and up on oral contracts. These differences can come into play, even on a contract with a Utah forum and choice of law clause or even where a Court determines under choice of law principles that Utah law applies. This is because Utah, like most states, has a borrowing statute for the application of the statute of limitations where another state’s law may be implicated. Put another way, a Utah court will adopt the other state’s law as Utah law for purposes of the dispute in certain circumstances, such as when performance under the contract occurred in that other state. This can result in a shortening of the statute of limitations, which if you are a defendant is a potential defense, and if you are a plaintiff, a potential bar to recovery.

Utah’s borrowing statute is codified at Utah Code Ann. Section 78B-2-103 and states: “A cause of action which arises in another jurisdiction, and which is not actionable in the other jurisdiction by reason of the lapse of time, may not be pursued in this state, unless the cause of action is held by a citizen of this state who has held the cause of action from the time it accrued.” The first part of this statute means that if the statute of limitations on a claim has expired in another state, that claim generally cannot be pursued in Utah, even if the statute of limitations in Utah has not expired. For example, if a Utah company enters into a contract with a company from California, and the contract provides for payments to be made in California, California’s shorter statute of limitations periods may apply, even if the contract calls for litigation in a Utah court and application of Utah law. For Utah defendants in contract actions, this is a potentially dispositive defense, meaning it will terminate the action. The exception is if the plaintiff is a Utah citizen and has held the claim from the time of inception, then the borrowing statute does not apply.

Read Contracting 101 – Introduction

Contracting 101 – Introduction

Steven Bergman
October 2017

Business and individuals enter into contracts on a regular basis. When entering into a contract, it is important to make sure you know and understand every term in the contract, not just the major provisions, such as the parties, the price, the terms and conditions of performance, and the time and place for performance.

In addition to the major provisions, virtually every written contract contains what most people refer to as “boilerplate,” which are the standardized terms that are included in most agreements. These might include assignment clauses, severability clauses, notice clauses, choice-of-law clauses, and arbitration clauses, among many others. The so-called “boilerplate” is found in commercial leases, license agreements, purchase orders, loans, real estate purchase contracts, employment contracts, and guaranties. And it is true of consumer agreements, such as credit card agreements, residential leases, cell phone contracts, and more. The reality is that most people gloss over the “boilerplate” without even attempting to understand what it is they are agreeing to in the contract. Whether a commercial or consumer contract, not knowing and understanding every term and provision, including “boilerplate” provisions, can have far-reaching consequences. As the Utah Supreme Court recently stated, “it is not the judiciary’s role to draft better agreements for parties than those they draft for themselves.” PC Riverview, LLC v. Cao, 2017 UT 52, ¶ 23, n.2.

Additionally, for those contracts that do not contain sufficient terms of conditions, the law will often impose those terms and conditions based on the course of performance of the parties and/or the terms and conditions that are standard for that industry or transaction. Other terms and conditions, if not stated in the contract or agreement, are based on the Utah Uniform Commercial Code in many instances.

Over the next few months, we will be posting about some of the important provisions of a contract or agreement that many business and individuals overlook – often to their detriment. The time to get a contract right is before it is signed – not after an actual or threatened dispute exists. Examples of these provisions, and the effect they can have on a contract dispute, include the right to receive or requirement to give notice in the event of a default, the manner of that notice, what remedies are available to the parties in the event of a dispute or failure to perform, whether a lawsuit can be filed, where a lawsuit can be filed, and what law applies in a lawsuit or arbitration.

The attorneys at Richards Brandt Miller Nelson have decades of experience preparing, negotiating, litigating, and defending contracts. If you or your business are preparing or negotiating a contract, or you or your business are now facing an actual or threatened contract dispute, please contact us with your contract questions to ensure that you or your company have the most protection and strongest contract rights possible under the circumstances.

Read Contracting 101 – Choice of Law and Borrowing Statutes

Website Hack? What are the legal issues?

Someone is trying to hack your site. In fact, if your site is built on WordPress, which more than 75 million websites are, there are bots constantly trying to gain access to your site – perhaps even as you read this post. This isn’t because WordPress has security flaws. It is because most sites are built on WordPress, so that is the Content Management System on which most hackers focus. Thus, after you have taken reasonable steps to secure your site, you should have a plan in place in case a hack is successful despite your security measures. Here is a short list of steps to take in the event your site is hacked. A word of warning: this will sound pretty simple, but it could get messy.

  1. Fix the problem – The first thing you must do is stop the bleeding by identifying the problem and repairing the breach. The longer the site is up and running after it is hacked, the more data you are going to lose. Have someone who knows what they are doing identify the breach and fix it. Your in-house tech support may be able to take care of this, but it is still a good idea to get an outside IT expert to take a look before you call it good.
  2. Get the facts straight – While you are repairing the security issue and restoring the site, you should be keeping detailed notes on exactly what took place. You may be explaining what happened to customers, security breach victims, attorneys, board members, law enforcement, or even the press. Having a clear, concise knowledge of the facts will make this easier and ensure your story is not altered. At the same time you are determining what to say, you should be deciding on who will be saying it. It is important that the person who is giving the explanation has a firm understanding of what happened so that they are prepared for follow-up questions.
  3. Call your attorneys – Your attorneys will be able to identify your legal obligations at this point. Most importantly, they will be able to advise you who you need to contact. This includes third parties whose information may have been stolen. It may even include banks if credit card information was stolen. Your attorneys can help mitigate the problem by outlining what legal steps need to be taken to avoid or minimize lawsuits. Data-breach legislation differs from state to state, so your attorneys can identify which states’ laws affect your situation and what those laws are.
  4. Develop a hack strategy for the future. You battled through this one – good for you. Now is not the time to sit back and wait for it to happen again—now is the time to put a plan in place that will A) prevent future attacks and B) alert you as soon as a breach is taking place (before any real damage is done).
  5. Communicate. It is critical that the first news of the breach come from you or your company—the last thing you want is for it to appear that you were trying to hide what happened. You may be legally obligated to alert certain people, such as shareholders, board members, clients, customers, etc. so that they can mitigate the damage at their end. Include the steps you have taken to fix the problem and what your plan for security in the future.

There is no such thing as a hack-proof website. As security technology improves, hackers are constantly thinking of new ways to circumvent it. Many computer security experts suggest the most effective thing you can do to keep your site secure, as simple as it seems, is to use complex usernames and passwords. Login pages are typically the easiest way for a hacker to get into your site, and they usually use bots that simply guess usernames and passwords. It is also important to back up your data every night and keep an eye on unusual activity on the site.

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