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5 Major Mistakes Business Owners Make That Expose Them to Legal Risks

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Presentation about the major mistakes business owners can make with critical business and legal management functions such as: Protecting their business entity status, shielding personal assets, and planning for growth and business transition Negotiating purchase agreements, customer contracts, leases, and other business agreements Observing immigration employment eligibility verification requirements Handling employer responsibilities and shielding against employee competition and loss of trade secrets Managing legal exposure and defending against lawsuits
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  • 1. Legal Risk Management Seminar Cowles & Thompson, PC October 28, 2015 5 Major Mistakes Business Owners Make that Expose Their Businesses to Huge Legal Risk, Severe Financial Loss and Bad Publicity
  • 2. Failing to Meet Requirements for Company Records, Reporting, and Governance 1
  • 3. Failure to Negotiate and Use Contracts to Protect Company Interests 2
  • 4. Virtually Ubiquitous
  • 5. Eligibility to File for Chapter 7 or Chapter 11 Relief .  No insolvency requirements  No debt ceiling limitations  No income requirements
  • 6. Chapter 7  Appoints an interim Chapter 7  Right to elect a different trustee  Trustee is authorized to hire counsel and other professionals  Operate the Debtor’s Business
  • 7. Chapter 11  Fiduciary of the bankruptcy estate  Remains in possession and control of its assets  The debtor will operate its business and conduct its affairs in the ordinary course
  • 8. Unsecured Creditors’ Committee Represents the interests of the unsecured creditors as a whole
  • 9. Property of the Bankruptcy Estate All legal and equitable interests of the debtor in property of any kind at the time the case is commenced, the proceeds of that property, and interests in property that the estate acquires after the commencement of the case.
  • 10. The Automatic Stay Operates as a stay of “the commencement or continuation… of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case.”
  • 11. The Automatic Stay Operates as a stay applicable to all entities, of any act to obtain possession of property from the estate or to exercise control over property of the estate.
  • 12. The Automatic Stay • The automatic stay contains exceptions • Does not prevent the commencement or continuation of criminal proceedings against a debtor nor actions by the government in exercising its police and regulatory powers.
  • 13. Automatic Stay The automatic stay protects only the debtor and usually does not extend to separate legal entities. However, despite the general rule, courts have held that the automatic stay can reach beyond a debtor to stay actions against non- debtor third parties, such as officers, directors and others. Actions brought by the debtor are not stayed.
  • 14. Executory Contracts and Unexpired Leases
  • 15. Executory Contracts Debtors are permitted to assume executory contracts and unexpired leases and assign those contracts or leases to third parties regardless of any prohibition on assignment in the contract or lease and over the objection of the non-debtor party
  • 16. Executory Contracts Contracts and leases cannot be assumed or assigned if applicable non-bankruptcy law would excuse the non-debtor party from accepting performance from or rendering performance to any party other than the debtor
  • 17. Executory Contracts As a condition to the assumption or assignment of a contract or lease, the debtor must: (i) cure or provide adequate assurance of a prompt cure of any monetary defaults; (ii) compensate the non-debtor party for actual pecuniary loss resulting from the debtor's default; and (iii) provide adequate assurance of the debtor’s (or assignee’s) further performance under the contract or lease
  • 18. Executory Contracts Upon rejection, the contract is deemed breached, as if such breach occurred immediately prior to the filing of the bankruptcy petition. Rejection results in the non-debtor party having a general unsecured claim for damages arising from the rejection.
  • 19. Setoff and Recoupment The Code preserves any setoff rights a claimant may have under applicable non-bankruptcy law
  • 20. Setoff In order to establish a valid right of setoff, the parties obligations must arise prior to the commencement of the bankruptcy case and must be mutual obligations
  • 21. Recoupment • Right of recoupment is similar to that of setoff • Recoupment must arise from the same transaction or occurrence
  • 22. Reclamation Reclamation allows a creditor to reclaim goods previously shipped to the debtor under the applicable provisions of the Uniform Commercial Code
  • 23. Sale of Assets Debtor in possession is permitted to operate the debtor’s business and as such may use, sell or lease estate assets in the ordinary course of that business Debtor in possession is permitted to use, sell or lease assets outside the ordinary course of business either through a confirmed plan or by motion under section 363
  • 24. Appointment of a Chapter 11 Trustee The standard for appointment a trustee is “cause” which is defined to include fraud, dishonesty, incompetence or gross mismanagement
  • 25. Dismissal and Conversion The court may convert the chapter 11 case to one under chapter 7 or dismiss the case – whatever is in the best interest of creditors – for “cause”
  • 26. Avoidance Actions Preferences and Fraudulent Transfers
  • 27. Fraudulent Transfers (i) Made with the actual intent to hinder, delay or defraud a creditor; or (ii) made in exchange for less than reasonably equivalent value, (a) while the debtor was insolvent or which rendered the debtor insolvent, or (b) which left the debtor with inadequate capital to continue in business, or (c) which rendered the debtor unable to pay its debts as they became due.
  • 28. Preferences The analysis focuses on whether the creditor’s position was improved by the transfer during the preference period
  • 29. Definition of a Preference 1. There must be a transfer of property to or the benefit of the creditor; 2. The transfer must be on account of an antecedent debt owed by the debtor before the transfer was made; 3. The transfer must have been made with the debtor was insolvent;
  • 30. Definition of a Preference 4. The transfer must have been made on or within 90 days prior to the filing date of the bankruptcy petition (or within one year if the transferee was an insider of the debtor); and 5. The transfer must have enabled the creditor to receive more than it would have received in chapter 7
  • 31. Definition of Transfer of Property Almost any conceivable mode of disposing of property is included.
  • 32. Defenses to Preference Claim New Value Contemporaneous Exchange Ordinary Course
  • 33. New Value The creditor must have given the debtor money or money’s worth, new credit or a release of property previously transferred that is not secured by an otherwise unavoidable security interest and on account of which the debtor did not make an otherwise unavoidable transfer
  • 34. Contemporaneous Exchange • If the transfer was intended by the debtor and the transferee to be a contemporaneous exchange; • The exchange was for new value; and • The exchange was contemporaneous or substantially contemporaneous
  • 35. Ordinary Course • Transfer must have been incurred in the ordinary course of business or financial affairs of both the debtor and the creditor; and • The transfer was made in the ordinary course of the debtor and the creditor; or • The transfer was made according to ordinary business terms
  • 36. Ordinary Course If the timing of the payments made by the debtor to you during the 90 days pre-petition are not consistent with the debtor’s pre-preferential period payments, the preference period payments may be preferential
  • 37. Ordinary Course Courts will review the manner, the amount and the timing of the payments made to see whether the preference period transactions fall within the typical range for either the parties’ or the industry’s payment terms
  • 38. Preventative Measures to Avoid a Preference Maintain routine payment schedules Require cash in advance or on delivery Obtain collateral Always accept payment
  • 39. Fraudulent Transfers • Transfers made by a debtor with the actual intent to hinder, delay or defraud • Transfers made for less than reasonably equivalent value • Transfers by a partnership to a general partner while the partnership is insolvent or by which it became insolvent • Transfers to self-settled trusts in which the debtor is a beneficiary
  • 40. Badges of Fraud • Transfer made to an insider • Debtor retain possession or control • Transfer was concealed • Debtor was in litigation • Transfer involved all the debtor’s assets • Debtor was insolvent or was rendered insolvent • Unreasonable consideration for the transfer • Transfer was outside the ordinary course • Transfer involved shell entities
  • 41. Constructive Fraud • Transfer for less than reasonably equivalent consideration • Transfer leaves the debtor with unreasonably small capital • Transfer caused the debtor to incur debts beyond its ability to pay
  • 42. Defenses to Fraudulent Transfer Good Faith Savings clause for an initial transferee that gives reasonably equivalent value to the debtor for the transfer and the transferee exhibits good faith Burden of proof is on the transferee
  • 43. Failure to Proactively Deal With Workplace Issues 3
  • 44. EMPLOYEE HANDBOOKS Employers should have them(!) o Without a handbook, it’s more difficult to defend EEOC charges of discrimination, unemployment, etc. o Also, handbook is basic source of information for employees on rules at their place of employment.
  • 45. EMPLOYEE HANDBOOKS But employers want to avoid curtailing “at-will” employment with handbooks, and in Texas, they generally can.
  • 46. EMPLOYEE HANDBOOKS Handbooks are not generally treated as binding contracts: "There is a 'generalized rejection [by Texas courts] of the claim that employment manuals issued unilaterally by an employer can per se constitute written employment contracts and create specific limitations which take the cases out of the at-will doctrine.“ Hays v. HCA Holdings, Inc., 2015 U.S. Dist. LEXIS 131960 (W.D. Tex. 2015)
  • 47. EMPLOYEE HANDBOOKS Avoid promises of lifetime employment, termination only for good cause, etc. BUT—even these seldom create enforceable contracts nullifying employment at will.
  • 48. EMPLOYEE HANDBOOKS General statements …simply do not justify the conclusion that the speaker intends by them to make a binding contract of employment. For such a contract to exist, the employer must unequivocally indicate a definite intent to be bound not to terminate the employee except under clearly specified circumstances.
  • 49. EMPLOYEE HANDBOOKS General comments that an employee will not be discharged as long as his work is satisfactory do not in themselves manifest such an intent. Neither do statements that an employee will be discharged only for "good reason" or "good cause" when there is no agreement on what those terms encompass.
  • 50. EMPLOYEE HANDBOOKS Without such agreement the employee cannot reasonably expect to limit the employer's right to terminate him. An employee who has no formal agreement with his employer cannot construct one out of indefinite comments, encouragements, or assurances. Montgomery County Hosp. Dist. v. Brown, 965 S.W.2d 501, (Tex. 1998)
  • 51. EMPLOYEE HANDBOOKS Handbooks are generally not binding on the employer. They are nothing more than a guideline. If the employer included a phrase providing they are not contractual, then they will not be binding. e.g., progressive discipline provisions can be ignored if offense is serious.
  • 52. EMPLOYEE HANDBOOKS NLRB, however, frowns on too-broad at will disclaimers. e.g.: “I further agree that the at-will employment relationship cannot be amended, modified or altered in any way.” NLRB thought that this language would cause employees to conclude that the at-will language means that their at-will status cannot be changed through collective bargaining.
  • 53. EMPLOYEE HANDBOOKS Here are some examples of issues that should be in a handbook: Acknowledgment of Receipt of Employee Handbook Attendance Policy At-Will Employment; Handbook not a contract Company-Issued Credit Cards Confidentiality of Information Conflict of Interest Driver Policy Drug-Free Workplace Policy
  • 54. EMPLOYEE HANDBOOKS Discrimination, Harassment and Disrespect Toward Others (including sexual harassment) FMLA Policy Fringe Benefits Exempt/Nonexempt employees Internet, E-Mail, and Computer Usage Policy Limits on Leave Benefits Medical Absence Warnings Medical Information Confidentiality Policy Neutral Absence Control Policy
  • 55. EMPLOYEE HANDBOOKS  Overtime  Relationships Within The Workplace  Request for Change in Employment Status  Searches  Smoking Policy  Social Media Use Policy  Vacation and Sick Leave  Video Surveillance / Search Consent  Wage Deduction Authorization Agreement  Wage Overpayment/Underpayment Policy  Work Schedules and Recording of Work Time
  • 56. INDEPENDENT CONTRACTORS So-called “misclassification” of workers as independent contractors when they are really employees is a top priority for the federal government. There are joint working agreements between IRS, DOL/WH, TWC to exchange info on employers who have a lot of misclassified employees.
  • 57. INDEPENDENT CONTRACTORS Traditional common law test centered on “control” over the details of the way the work is performed, and Texas courts addressing state law issues still focus a lot on control.
  • 58. INDEPENDENT CONTRACTORS USDOL and other federal agencies, and the federal courts, look beyond control to include other factors.
  • 59. DOL FACTORS The extent to which the work performed is an integral part of the employer’s business. Whether the worker’s managerial skills affect his or her opportunity for profit and loss. The relative investments in facilities and equipment by the worker and the employer.
  • 60. INDEPENDENT CONTRACTORS 4) The worker’s skill and initiative. 5) The permanency of the worker’s relationship with the employer. 6) The nature and degree of control by the employer.
  • 61. EMPLOYEE PRIVACY ISSUES
  • 62. Non-consensual use of employees’ name or likeness Publication of Private Information Intrusion into Seclusion, i.e. searches of person, property, medical exams, tests TRADITIONAL PRIVACY ISSUES
  • 63. EMPLOYEE PRIVACY ISSUES Searches Key is to obtain employee consent at time of hire, and to remove any reasonable expectation of privacy employee might have
  • 64. Developing Privacy Issues Medical Records • ADA requires that medical information be kept in separate files • HIPPA does apply to health insurance plans, etc.; HOWEVER
  • 65. EMPLOYEE PRIVACY ISSUES Information received as an employer record is not protected by health privacy rule. e.g.; FMLA health care provider certification info. But if employer is plan administrator, Health Privacy Rule applies.
  • 66. Employer Monitoring of Electronic Resources • Give employees notice, get consent, get acknowledgement • Electronic Communications Privacy Act has both civil and criminal sanctions for secret monitoring, eavesdropping
  • 67. Video Monitoring If no audio, not subject to ECPA but can still be invasion of privacy, so give employees notice, get consent, get acknowledgement
  • 68. EMPLOYEE PRIVACY ISSUES Examples of video monitoring which got employers into trouble: • Employer put video cameras in women’s restroom based on rumors of drug sales, but kept them there two years • Hooter’s franchise took secret videos of applicants changing into proposed Hooter’s uniforms
  • 69. Lack of Comprehensive Immigration Compliance Plan to Avoid Violations and Claims 4
  • 70. Investigates employers for compliance with employment employer verification rules and removes undocumented aliens from the United States. http://www.ice.gov
  • 71. Investigates and prosecutes charges of immigration- related unfair employment practices www.usdoj.gov/crt/osc U.S. Department of Justice Office of Special Counsel (OSC)
  • 72. PM Packing ordered to pay $27,200 (reduced from $53,762) for paperwork violations, including failure to prepare I-9 for 22 employees.
  • 73. Golf International ordered to pay $57,650 (reduced from $136,697) for paperwork violations, including failure to sign section 2 for 110 employees.
  • 74. Demand of Specific I-9 Documents Prohibited RECENT CASES Miami Dade County Public Schools paid $90,000 penalty and $125,000 for back pay Yellow Cab Companies of Nevada paid $445,000 in civil penalties Abercrombie paid approximately $156,000 in back pay
  • 75. Immigration Compliance Plan
  • 76. Recommended Policies and Procedures I-9 procedures for hiring and re-verification Anti-discrimination policies Retention of I-9 forms E-Verify procedures Investigation of violations
  • 77. Group training Individual training Sample training Ongoing and periodic Training and Supervision
  • 78. Secure Recordkeeping Separation Centralized Retention
  • 79. Retention Calculation Date of Hire__________+ 3 years =____________ Date of Separation ________+ 1 year = _________ Take the later date and enter it here: _____________________________________ Retention Date
  • 80. Consistency – do not treat workers differently because of immigration status No “citizen only” policy Do not demand specific documents, e.g. “green card” Do not re-verify “green card” when the card expires Do not demand more documents than needed to complete I-9 Anti-Discrimination Procedures
  • 81. Violationsreportingandinvestigations Consistency Credible reporting Enforce, enforce, enforce!
  • 82. Prepare for government audit Identify errors Identify training issues Demonstrates good faith compliance I-9 Self Audits
  • 83. Conduct training Ensure corrections are made Review audit report and implement procedural changes Maintain ongoing project attitude Post-Audit Implementation
  • 84. ICE Enforcement Action
  • 85. Responding to ICE Enforcement Actions  Choose a point person  Ask to see documents authorizing the search of premises or employees (warrant)  Make copy of the warrant, notice of inspection (NOI), subpoena, etc.
  • 86. Responding to ICE Enforcement Actions  Ask about purpose and scope of inspection  Accompany agents on the search  Comply with the warrant but do not volunteer information not covered by warrant
  • 87. Responding to ICE I-9 Inspection  If I-9 inspection, don’t waive right to 3-day notice (ask for extension)  Separate I-9 forms from personnel files  Offsite review – make copies of all documents submitted  Onsite review – conference room or somewhere separate from work areas
  • 88. Call an experienced attorney immediately upon receipt of the NOI or initiation of enforcement action and do not allow agents to talk with employees before calling an attorney.
  • 89. NO Annual Legal Review to Uncover Hidden Risks and Reduce Potential Losses 5
  • 90. Legal Check-Up • Diagnosis • Treatment • Prevention
  • 91. Thank You 901 Main Street Suite 3900 Dallas, Texas 75202 4965 Preston Park Blvd East Suite 320 Plano, Texas 75093 214-672-2000 www.cowlesthompson.com info@cowlesthompson.com
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