Acts Of God

Flood, fire, and famine may be the traditional hallmarks of divine intervention, but the law has a very specific definition of what count as actions by the Almighty. Legally, "Acts of God" are "misfortunes and accidents arising from inevitable necessity which human prudence could not foresee or prevent" - in other words "bad luck." The earliest recorded use of the term "Act of God" was by Sir Edward Coke in 1581; he used the term to refer to death, and later extended it to include a sudden tempest that broke down sea walls. In 1899 the Virginia Supreme Court had the opportunity to address the Act of God question when it excused a reluctant groom from his promise to marry because the unfortunate fellow had contracted a urinary disease that was aggravated by sexual intercourse. As the blushing Court states: "I desire to speak with all reserve: but to possess the lawful means of gratifying a powerful passion, with the alternative of abstaining or periling life, is, indeed, to incur a risk of intense misery, instead of mutual comfort."

Similarly, in 1931 the Virginia Supreme Court came to a widow's aid, when it made her deceased husband's life insurance company pay. The insurance company tried to avoid the insurance contract by a provision that required prompt notice of incapacity even from a person who was too incapacitated to give any notice. The court quotes: "The primary purpose of all insurance is to insure or to provide for indemnity, and it should be remembered that, if the letter killeth, the spirit giveth life."

Most Act of God defenses involve extraordinarily violent storms, sudden tempests, severe frosts, great droughts, lightening, earthquakes, sudden death and illness. Or, a remarkable "freshet"? A railroad company successfully argued that the sweeping away of a privy with one of their employees inside was excused because a freshet with this volume of water pouring through the creek could not have been anticipated.

To successfully employ the Act of God defense, one must have been victim of a natural cause without human intervention that could not have been prevented by exercise of reasonable care and foresight. So, ironically, a devout worshiper who testified that he was trotting through his church under the Spirit of the Lord when he injured a fellow congregant was not permitted to use "Act of God" as a defense.

Should an atheist be allowed to make the Act of God argument? Maybe an agnostic judge should decide the issue.

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To learn more about Acts of God or to speak to one of the lawyers at Gross & Romanick, call 703-273-1400 or fill out our online Information Request form here.

Security Deposits & Bankruptcy

What happens to a tenant's security deposit after the tenant files bankruptcy? If rent is owned, can the landlord apply the deposit to unpaid rent?

An informal poll of area Bankruptcy Lawyers reveals a belief that a security deposit can be used as a set- off against both pre-petition damages and lease termination damages under Section 553 of the Bankruptcy Code. The set off is subject to mitigation by the landlord, including releting the premises. The safest process is to have a court grant relief from stay before applying the security deposit; but this procedure may cause a debtor to file an objection. Right or wrong, most Landlords simply keep the deposit.

Some attorneys also argued that Landlord can assert a "secured claim" up to the amount of the security deposit.

For more information about landlord/tenancy law and bankruptcy contact the lawyers at Gross & Romanick by calling 703-273-1400 or by filling out our online Information Request form here.

Construction Law At Gross & Romanick

Gross & Romanick, P.C., located in Northern Virginia represents contractors, owners and suppliers in Virginia, Maryland and Washington, DC. Our goal is to find solutions for our clients through understanding and respect for their business concerns. We strive to keep our clients out of court with proper advice, timely action and effective contracts. When necessary, our lawyers draw upon their very significant experience in construction litigation in state and federal courts, as well as arbitration.

Some of the areas of law in which we can help are:

Business Formation
Avoid exposure of your personal assets by conducting business as a Corporation or Limited Liability Company. We have organized simple and complex business structures. After formation, we can assist with matters from annual Board of Directors meetings to complex corporate reorganizations.

Mechanic Lien's
Our firm has represented claimants in very large mechanic lien cases. In addition, we understand surety law and Miller Act Claims.

Contracts
We can prepare, review and advice on a broad range of contracts from Construction Contracts to Joint Check Agreements. Because we understand the construction industry, our clients use us to negotiate terms and draft their agreements.

Credit Extension/Collections
From credit application through bank garnishment, we can help at every step to lessen your company's risk. We provide credit investigations, seminars and collections. Furthermore, our bankruptcy experience allows us to effectively pursue many debtors even after bankruptcy is filed.

Litigation
Our lawyers have represented companies in the construction industry in hundreds of cases in state and federal courts. These cases range from simple collections to complex breach of contract disputes.

Registered Agent
Edward Gross acts as registered agent for many corporations and limited liability entities. Included in the annual fee is assistance in preparing annual reports, as well as acceptance of legal service of process.

To speak to one of the lawyers at Gross & Romanick, call us today at 703-273-1400 or by filling out our online information request form.

Lease Survives Bankruptcy

An individual who owned a business filed a personal Chapter 7 Bankruptcy. The business remained at the premises and continued to pay the rent, but the bankruptcy trustee failed to accept the Lease. Under bankruptcy rules such failure is an automatic rejection of the Lease. The Landlord filed a Motion to Lift Stay to eject the business from the space based upon the rejection of the Lease.

The Court ruled that the rejection of the Lease on behalf of the bankruptcy estate was not a termination of the Lease. So long as the debtor did not default on the Lease, the Landlord could not evict the business. Federal Realty Investment Trust v. Park, U.S. Bankruptcy Court for the Eastern District of Virginia (2002)

For more information about commercial landlord law or to speak to one of our attorneys, contact Gross & Romanick today by calling 703-273-1400 or by filling out our online information request form.

Corporation vs. LLC

Perhaps the most common question we receive from individuals looking to start a new business is: “What is the difference between a corporation and an LLC?” This is a very important question because understanding the differences between these two entities is essential to making the right choice for your new business. Or, in some cases, making a decision regarding whether to convert your existing company to a corporation or an LLC.

The first chart below addresses some of the important differences between Corporations and LLCs. The second chart below, which naturally flows from the first, lists some of the pros and cons of forming either entity.

These charts are not intended as a substitute for the advice of an attorney and a CPA. Many of the issues, especially the tax issues, are presented in a simplified form; therefore, in some situations the issue may be more complex with a different result than described below. You should speak with an attorney and a CPA about which entity is best for you based upon your needs and circumstances. Furthermore, these charts are based on the laws of the Commonwealth of Virginia. State law varies in the treatment of Corporations and LLCs
[SEE CHARTS BELOW]

	Corporation	LLC
Formation	Corporations are formed by filing Articles of Incorporation with the State Corporation Commission (the “SCC”).	LLCs are formed by filing Articles of Organization with the State Corporation Commission (the “SCC”).
Ownership	Corporations are owned by “Shareholders”. Shareholders can be either individuals or business entities. Upon formation, each Corporation is authorized by the Commonwealth to issue a particular number of shares of stock. The Corporation then issues physical stock certificates to its Shareholders. The Corporation may elect to issue different classes of stock (i.e. common stock and preferred stock) which afford different rights to the Shareholders, such as voting rights and profit distribution rights. If the corporation elects to be taxed under Subchapter “S” of the Internal Revenue Code (see below), it can issue only one class of stock. In addition, it can have a maximum of 100 shareholders, all of which must be individuals (with some exceptions) residing in the United States.	LLCs are owned by “Members”. A Member can be an individual or a business entity. A Member’s ownership interest in an LLC is usually referred to as a “Membership Interest”. Most LLCs do not require membership certificates; instead the percentage of an individual’s Membership Interest is documented as an attachment to the LLC’s Operating Agreement. The Operating Agreement can afford different rights to different Members, such as voting rights and profit distribution rights.
Management	Corporations are typically managed by the Officers and the Board of Directors (“BOD”), who are elected by the Shareholders. The Officers (i.e. President, Secretary and Treasurer) run the day-to-day affairs of the Corporation and report to the BOD. Typically, the BOD votes on the major decisions of the Corporation.	LLCs can be “Member Managed” or “Manager-Managed”. That is to say, the LLC can elect to have its day to day affairs controlled by a Manager or a Board of Managers, or can elect to have its day to day affairs controlled by all or some of the Members. Typically, Members vote on the major decisions of the LLC. LLCs can give the Managers common titles, such as President, CEO, etc., but is not required to do so.
Governance	Corporations are governed by state law and the agreements of the Shareholders. State law governing corporations is well-developed, and typically addresses all aspects of corporate governance. Bylaws and Shareholder Agreements can also govern the Corporation if adopted by the Shareholders. With some exceptions, Bylaws and Shareholder Agreements will trump state law when inconsistent. If the Bylaws and Shareholder Agreement fail to address a particular issue, state law will control.	LLCs are governed by state law and the LLC’s Operating Agreement. State law governing LLCs mirrors state law governing Corporations in many respects, but is not as well-developed or tested in Court. In almost all circumstances, an LLC’s Operating Agreement is what controls and governs the LLC. However, if the Operating Agreement fails to address a particular issue, state law will control.
Protection from Personal Liability	A Corporation is an entity separate from its Shareholders. Shareholders cannot be personally liable for corporate debts unless a creditor is able to “pierce the corporate veil”. This is rare, but may occur when the Corporation was established to perpetrate a fraud, fails to follow the corporate formalities required by the Commonwealth or is merely an “alter ego” for the Shareholders (i.e. the Corporation does not actually operate as a separate entity). Shareholders must be careful to keep corporate affairs separate from personal affairs, and must be sure to sign “on behalf of” the Corporation whenever engaging in corporate transactions.	An LLC is an entity separate from its Members. Members cannot be personally liable for corporate debts unless a creditor is able to “pierce the corporate veil”. This is rare, but may occur when the LLC fails to follow the legal formalities required by the Commonwealth or is merely an “alter ego” for the Members (i.e. the Corporation does not actually operate as a separate entity). Members must be careful to keep LLC affairs separate from personal affairs, and must be sure to sign “on behalf of” the LLC whenever engaging in LLC transactions.
Taxation	Corporations are taxed under Subchapter “C” of the Internal Revenue Code, unless the Corporation elects to be taxed under Subchapter “S” of the Internal Revenue Code. If taxed under Subchapter “C”, the Corporation itself must pay a corporate tax on its net income. Shareholders must then pay personal income taxes on the distributions they receive from the Corporation. If taxed under Subchapter “S”, the income and losses of the Corporation “pass through” to the shareholders, based upon each shareholder’s percentage ownership in the corporation. No corporate tax is required for a Corporation taxed under Subchapter “S”.	LLCs are taxed under Subchapter “K” of the Internal Revenue Code. The income and losses of the LLC “pass through” to the owners of the LLC based upon each Member’s percentage ownership in the LLC. No income tax is paid by the LLCs. Unless otherwise elected by the LLC, the LLC is taxed like a partnership and each member receives a “K-1” form each year from the LLC.
Ongoing Formalities	Corporations must: (a) file annual reports with the SCC and pay an annual fee, (b) hold annual meetings, (c) must keep the SCC advised of the officers and directors of the Corporation, (d) comply with formalities found in the Virginia Code, and (e) comply with its By-laws.	An LLC need only pay an annual fee to the SCC. The LLC’s Operating Agreement determines what formalities, if any, will be required by the LLC.
Case Law	Corporations have been recognized as separate business entities for many years. Accordingly, there is well developed case-law which Courts will follow in the event of a corporate dispute or attempt to pierce the corporation.	The LLC is a relatively new business form, and as a result, the Courts have not addressed all issues regarding LLCs. Nevertheless, it appears that the Courts will be following corporate case law precedent, where applicable.

	Corporation	LLC
Pros	• Shareholders protected from personal liability. • Well suited for large businesses due to the fact that it is easy to raise capital and take on investors by simply issuing additional stock certificates. • Easy transfer of shares in case of sales. • Well developed (and litigated) statutory and case law provides guidance to Shareholders and reduces risk of doing business. • Uniformity between states with respect to laws governing Corporations.	• Members protected from personal liability. • No corporate tax required. Income of LLC passes through to its owners. • LLC is principally governed by an Operating Agreement. The Members can draft this document however they choose. This results in LLCs being very flexible with respect to management and distributions of profits/losses. • LLCs typically require fewer formalities. • CPA’s find tax advantages.
Cons	• Shareholders must follow many corporate formalities. • Not very flexible with respect to distributing profits/losses to Shareholders. • Not flexible with respect to management. • Must pay corporate tax unless a Subchapter “S” election is made. Requires significant planning to avoid double taxation.	• Less developed statutory and case law to guide Members. • Lack of uniformity between states with respect to laws governing LLCs. • Not well suited for large businesses with many investors or businesses with regular changes of ownership.