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Thursday, May 28, 2009

Legal News Sources

Not sure how to keep up to date on legal matters pertinent to you or your company? Gross & Romanick has a number of publications available to help you keep abreast of the ever changing legal arena in Virginia: sign up for our Legal Fax, a compilation of short articles; request a seminar on a legal topic hosted at your company; subscribe to our Legal Newsletter, which covers Virginia Business Law; or subscribe to our Medical Legal Newsletter, which covers issues pertinent to processing personal injury cases or medical office collections. Find out how to sign up for any one of these publications—or to request a seminar—by filling out Gross & Romanick’s online information request form. And, of course you can always call us at 703-273-1400.

Tuesday, May 26, 2009

Prebankruptcy Provisions Should you include them in your contracts?

Creditors and lending institutions have recently been including various provisions in their contracts and credit agreements, which contemplate what will happen in the event of a bankruptcy. The provisions can be divided into three basic categories: (1) Waivers; (2) Covenants; and, (3) Representations/Admissions.

Waivers limit a borrower's right to either file a bankruptcy petition or to oppose the creditor's lifting of the automatic stay. Covenants provide for immediate relief from the automatic stay or consent not to contest a lift stay motion. Representations/Admissions include provisions in the agreement which admit the elements necessary for the creditor to lift the automatic stay, admit that any future bankruptcy filing will be made in bad faith to hinder or delay the creditor and admissions that security interests are properly perfected.

The prebankruptcy waivers provide a comfort level to lenders and creditors in the hope that they will not be delayed or damaged in the event of bankruptcy and they also are put in agreements to provide assurances that they are avoiding deals with debtors heading toward bankruptcy.

The courts are split on the enforcement of the prebankruptcy provisions. Some courts have expressed concern as to whether or not the provisions violate public policy. In almost all cases however, the courts have found the agreements are not necessarily self-executing. Therefore, a creditor should be weary of taking any action, which may result in a violation of the automatic stay without first obtaining bankruptcy court approval.

On the positive side, prebankruptcy provisions have proven to speed up the process and assist creditors in obtaining quick relief from the automatic stay of bankruptcy. In addition, some courts have upheld the various admissions and representations as conclusive evidence of the elements needed to lift the stay. This has led to a decrease in litigation cost for some creditors.

It would be dangerous and unadvisable to take any action which may be determined to be a violation of the automatic stay in reliance on the prebankruptcy provisions, but including the provisions may save you litigation fees in the long run. Therefore, while prebankruptcy provisions are not guaranteed to work, you may want to include them in your agreements.

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The above is not meant to replace legal counsel. To speak to an attorney, please contact Gross & Romanick directly by calling 703-273-1400 or e-mailing law@gross.com.

Thursday, May 21, 2009

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Monday, May 11, 2009

Abandoned Property

ISSUE: A Landlord must often deal with property seemingly abandoned by a former tenant. While the Landlord would like to dispose of or sell this abandoned property, the Landlord may not know who owns the property or if there is a recorded security interest. In some instances, the Landlord may want to sell the property to satisfy unpaid rent or transfer it to the next tenant. Before any decision can be made, the Landlord must determine whether the property is truly abandoned and whether other parties may have a legal claim to the property.

THE LAW OF FINDS: "Abandonment" according to the Law of Finds, means that the owner of the goods has voluntarily relinquished "possession with the intention of terminating his ownership and with no intention of vesting title in another."

ACTION ADVISE: If the Landlord wishes to transfer or sell the property, it should: (1) Do a complete inventory of the property by 2 witnesses; (2) Examine the property for evidence of ownership; and (3) Conduct a UCC search for recorded liens or leases.

NOTICE: The Virginia Residential Landlord and Tenant Act requires a letter to be sent to the former tenant giving a 10 day notice that unless the property is retrieved it will be considered abandoned. Normally Residential Landlords are held to a higher standard than Commercial Landlords when dealing with their tenants. Therefore, it would be appropriate to provide a 10 day notice to any person who you believe has an interest in the property, including parties with UCC claims, tenants, or names which are found on the property.

DISPOSITION: If none of these parties make a claim, the property is probably abandoned. This determination will have to be made in each situation on a case by case basis in conjunction with a lawyer. Non-legal factors may impact on your determination of how to dispose of the property, i.e. the value of the equipment or if it can be transferred to a new tenant in the same space. A carefully worded sale agreement of the equipment may provide some protection for the Landlord from a subsequent claimant.

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The above article is not meant to replace legal counsel. To speak with one of Gross & Romanick's attorneys, please contact the firm itself by calling (703) 273-1400.

Wednesday, May 6, 2009

Piercing the Corporation: The Veil Becomes a Wall

As a result of a recent decision by the 4th U.S Circuit Court of Appeals, the "veil" of immunity protecting the officers of a corporation from individual liability has become a "wall."

Proving Fraudulent Intent

In Perpetual Real Estate v. Michaelson Properties, the Court held that, in order to hold the officers or directors of a corporation personally liable for acts of that corporation, a plaintiff will have to prove actual legal wrong on the part of the officers or directors. This standard provides tremendous protection to officers and directors of corporations by dramatically increasing the burden of proof placed on the plaintiff.

By requiring evidence of actual legal wrong, the Court has placed an imposing barrier in front of every unpaid creditor. "Fraudulent intent" has always been something extraordinarily difficult to prove, since it requires a psychological probe into the mind of the defendant. In corporate fraud cases the actual wrong standard is particularly burdensome, since the only evidence of any such intent is likely to be in the form of letters and similar correspondence, all of which will be tucked away in the files of the defendant corporation-if the evidence exists at all.

Traditional Standards

Despite the seemingly far-reaching implications of the Court's ruling, the traditional evidence required to "pierce a corporation" will still figure prominently in any suit seeking to hold corporate officers or directors personally liable for corporate acts. In addition to evidence of actual intent, the plaintiff will generally need to prove that the corporation was really just an alter ego of the directors, and had no independent financial existence apart from the directors. In this vein, successful cases prove that:

1. The directors and officers have co-mingled corporate funds/assets with their own personal assets, or diverted the corporation's assets for purely personal use or

2. The corporation was so undercapitalized that it was clearly incapable of operating as a successful business and was, thus, merely a "nominal" corporation, consisting only of business cards and stationery.


Perhaps the most successful means of piercing a corporation is based upon the corporation's failure to maintain the "formalities" required by law. Most importantly, that it failed to file various documents with the State Corporation Commission. At the very least, its Articles of Incorporation must have been accepted by the State and a charter number issued.

Now more than ever, creditors should investigate corporations to whom they extend credit and insist on personal guarantees or collateral security. Corporate borrowers should maintain their corporate formalities, not commingle funds, and avoid even the appearance of fraud.

The above article is not meant to replace legal counsel. To speak to an attorney, contact the offices of Gross & Romanick today.