Posted on March 23, 2009 by Angelo Tartaro

Friends Going Into Business Together

A group of friends and I are considering going into business together. What kind of partnership agreements/incorporations would be best? What exactly is a “closely held business?”

We are often contacted by friends intending to go into business together. The first thing we tell them is that they are now negotiating among themselves so their interests are in conflict. They may each want to consult their own attorneys until the agreements that they need to form the business are put in place. They can waive the conflicts and consult an attorney together but should do so only if they fully understand the conflicts they are setting aside.

 

The term “closely held business” is generally used to distinguish the business from a publicly traded business. So, it is a business owned by a relatively small number of people. Obviously, there can be wide variations: from one owner to hundreds. And, in specific tax contexts, the definition can be more precise and technical. 

 

Entire books have been written on selection of a form of ownership: sole proprietorship, “S” corporation, “C” corporation, limited liability company (LLC), partnership, limited liability partnership and so on. One of the first considerations should be to effectively limit the liability of the owners. Then, there are many tax and business considerations. The selection has to be based on considerations specific to each business and its principals but here is a general point to remember: after the selection of form of ownership is made, it is important to observe the formalities so that you do not lose any of its benefits.

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Posted on October 17, 2008 by Angelo Tartaro

Reminder From NY Appellate Court: In Real Estate, Rely Only on the Written Contract

A New York Appellate Court, in a recent decision, reminds us that in a real estate transaction, the parties should rely only on the written contract. The case is Friedman v. Kagan, 2008 Slip Op. 07624 (2d Dep’t).

The plaintiffs commenced the lawsuit because, having purchased a single family residence, they claimed the defendant/sellers dissuaded them from having the basement professionally inspected for mold. The house was contaminated with “toxic” mold. But, the written contract included a disclaimer that the purchasers were not relying on oral representations and the house was being sold “as is.”

 

The trial court granted summary judgment to the defendants and the appellate court affirmed. For our non-lawyer readers, that means decision for the defendants without a trial because there are no facts at issue. The facts not at issue are that the written contract disclaimed any reliance of oral representations.

 

The plaintiffs tried an alternative theory that the mold was fraudulently concealed but that went no where either.

 

We shouldn’t need the reminders but, being human, repetition is helpful: a real estate contract has to be in writing. A disclaimer, similar to that found in this case, tends to be the norm. Thus, the parties should not rely on oral representation, they should “get it in writing.”

 

Image: Slime Mold from Wikipedia Commons

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Posted on September 15, 2008 by Angelo Tartaro

Learning From the Borat Case: Waivers and Merger Clauses in Contracts

The Wall Street Journal Law Blog reports that the federal judge who rendered the Borat decision has been nominated for an appointment to the U.S. Second Circuit Court of Appeals. I doubt there was an actual connection. So, we congratulate the judge and move on to more thought-provoking aspects of the story and case. The post is “In Wake of Borat Ruling, Judge Preska Nominated to 2d Cir High Five.” The decision ishere.

The case was also reported in ABAJournal in a post by Martha Neil (“’Borat’ Filmmakers Win Legal Battle”).

 

I have not seen the movie. But, I’m not going to discuss the movie. I am going to discuss waivers, merger clauses and the importance of understanding and resolving the ambiguities in contracts before they are signed.   

 

In the Borat case, the claims against the producers for fraudulent inducement to participate in the movie were dismissed because the plaintiffs signed a contract that included a waiver of all claims. The court found that the waiver, for participation in a documentary-style film, was not ambiguous.

 

The determination that there was no ambiguity turned on the meaning of the term “documentary-style,” which described the movie. The Court emphasized that the operative word is “style.” Thus, the movie did not need to be an actual documentary. The plaintiffs’ argument that “documentary-style” is ambiguous was unavailing. The term “documentary-style,” according the Court, is a film “displaying the characteristics of a film that provides a factual record or report.”

 

The claim that the plaintiff-participants were fraudulently induced to enter into the film was defeated because each contract included a “merger clause.” The participants waived their reliance on promises or statements, other than any stated in the contract, by anyone involved with the film.

Although our small business clients may never be invited to participate in a “documentary-style” movie, they are invited to sign all kinds of contracts, all of the time. Thus, the Borat story has an element of universality: the parties to a contract will be presumed to have understood the contract terms. 

 

And, the Borat litigation story also reminds us to be acutely aware of the merger clause in a contract. The Borat contract waiver, as is commonly the case, explicitly stated that the plaintiffs relied on no representations other than those stated in the contract. Thus, when ambiguous terms are defined, clarified or explained, it is important that the definitions, clarifications and explanations be in writing so as to become an integral part of the contract.

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