TLD's General Counsel Blog

The Impact of Proposition 8's Passage on Gay Married Couples In California

In the aftermath of Proposition 8's passage, many gay and lesbian couples who took their vows after the California Supreme Court's July 16, 2008 ruling, are now left on a legal "island," without knowing how this constitutional amendment's enactment may impact their marital status.

The Amendment's language is simple: "Only marriage between a man and a woman is valid or recognized in California."

The amendment says nothing about whether it is retroactive to the date the Supreme Court issues its ruling. Generally, there is a, constitutional limitation against retroactive impairment of a vested right without due process of law. The enactment is now under legal challenge, as there is a writ pending with the appellate courts to address these issues.

Practically speaking, the best course of action is for gay couples married between July 16th and November 4th to assume that their marriage is no longer valid or recognized in California. The answers vary on their legal standing; a couple registered as domestic partners may suffer no consequence. Others are left with no clear idea of what to do as we have no answers whether the marriages are nullified or merely dissolved. The verbiage is important in ascertaining whether community property rules which exist in heterosexual marriages and domestic partnerships are in effect; or whether such rights were voided, such that they never existed.

Definitive answers to these perplexing questions may have to wait until the constitutional challenges are addressed. In the meantime, most counties (San Francisco being a notable and predictable exception) have stopped issuing marriage licenses to gay and lesbian couples.

Couples married between July 16th and November 4th who wish to preserve their property rights should each contact independent counsel and negotiate cohabitation, property, or pre-partnership agreements that expressly define those rights. While it may seem like a short stretch of time to be concerned with, there is no harm in memorializing the appropriate terms, and certainly more harm could result by not putting these agreements into writing.

Article Submitted by: Attorney Daniel Gold

Keep Your LLC Current!!

Are you the manager or the managing member of a California limited liability company? If so, you should be aware of a new program to be implemented beginning in early 2009.

The Franchise Tax Board, working with the California Secretary of State, is currently implementing a suspension/forfeiture process for Limited Liability Companies (LLC's). The FTB will begin to suspend/forfeit the rights, powers, and privileges of LLC's for nonpayment of taxes, penalties, or interest, and/or failure to file a return.

The effect of this program is to quickly alert the Secretary of State to LLC's that are not paying their taxes, penalties and interest to the Franchise Tax Board. These LLC's will more quickly be placed into "Suspended" or "Forfeited" status by the Secretary of State.

The consequence of having an LLC in suspended or forfeited status is costly. Any other party contracting with an LLC in suspended status can have that contract declared VOID and unenforceable! See California Revenue & Taxation Code 17654, 23301.5, 23304.1 and 23305.5.

To check the status of your LLC, go the California Secretary of State's website and type in the name of your LLC here:

http://kepler.sos.ca.gov/list.html

If your LLC is in suspended status, we can help you get it active and avoiding possible legal exposure.

Article Submitted by: Attorney Brooke Pollard

Domestic Partnership Is Not Marriage...Or is it??

Unless there is an agreement otherwise, California law provides that spousal support terminates upon the "remarriage" of the supported spouse. In a recent unpublished case, In re Marriage of Garber, (___Cal.App.__, 4th Dist., October 09, 2008 (No. G039050), the 4th District Court of Appeals in California upheld a trial court's decision not to set aside a Judgment ordering spousal support for a supported ex-spouse who had entered into a domestic partnership with her lesbian lover prior to the Judgment being entered. The trial court indicated that a domestic partnership was not a marriage; and given that marriage was the only listed terminating condition in the Judgment, there was no basis for a set aside.

When the case was appealed, however, the Court never got to the juicy political issue because the Court of Appeals did not find evidence that the partnership was actually registered.

Article Submitted by: Attorney Daniel Gold

Personal Guarantees

Lately I have seen a significant amount of frustration by businesses and individuals in the business industry concerning collection on accounts. Of special concern are loans and lines of credit being extended to other business that either have questionable ability to pay, or are on the brink of bankruptcy. In such a situation, it can be desirable to have the individual owners of the debtor business sign a personal guaranty wherein the person guarantees to pay the debt of the corporation. There are several types of guarantees, e.g. continuing guarantees and limited guarantees. Although the idea is simple, there are several legal requirements and subsequent actions that must be considered and handled with care.

To begin with, a guaranty is unenforceable unless it is in writing and supported by valid consideration. Also, the creditor must be careful after the guaranty is signed because certain creditor actions may cause the guarantor to be exonerated (released) from liability—e.g., where the creditor alters the underlying obligation without the guarantor's consent, or, in the case of a continuing guaranty, the guaranty may be revoked.

The language of the guaranty is very important as well. A well drafted guaranty will protect the creditor by providing that defenses be waived. If you are concerned about extending credit or lending money to a business or individual, we can help draft a guaranty that will help secure repayment.

Article Submitted By: Attorney Min Thai

Business Divorces

There was recently an article in the Daily Journal about "Business Divorces." The main argument in the article was that when a business partnership turns sour, it is as difficult as a divorce to get out. TLD frequently prepares clients for these situations.

A buy-sell agreement is a way for two partners beginning a business to decide when, how and at what price their "business divorce" will play out. We recently drafted a buy-sell agreement for a group of individuals beginning a cellular accessories distribution business. The three individuals were equal shareholders, all were on the Board of Directors, and all three were employees of the corporation.

One of the shareholders decided he could get a better business opportunity by taking business leads from the company and diverting them to himself for his own personal gain. The other partners found out about what was going on and wanted this partner out of the corporation. Without a buy-sell agreement in place, this partner could be fired as an employee, but the re-purchase of that individual's shares is generally not possible. The law does not provide for a requirement of non-employee shareholders to sell their shares either to the corporation or to the other partners.

With the Buy-Sell Agreement in place, these shareholders were able to compel the repurchase of the shares, give a price for the re-purchased shares, and gave them a significant bargaining power.

The best time to draft and sign a buy-sell agreement is when the business is started. However, any time before there is a dispute amongst the shareholders a buy-sell agreement should be drafted and signed by all shareholders. Please contact TLD if you would like a buy-sell agreement drafted to protect yourself and your business.

Article Submitted By: Attorney Brooke Pollard

The “joint client” exception

The original article was written by:

Alexander Y. “Sandy” Thomas and Matthew R. Sheldon,
of The Law Firm of ReedSmith
September 9 2008

Courts are increasingly faced with claims that the “joint client” exception bars application of the attorney-client privilege. The joint client exception may come into play when an individual litigant, who was an officer or director of the business to which he is adverse in litigation, demands production of privileged material that he reviewed or had access to while affiliated with the company. The exception is based on the theory that a corporation is, in fact, one collective client that includes the corporation and each individual member of the board of directors and each officer of the company. As evidenced by the three decisions described below, courts are surprisingly receptive to application of the joint client exception. The practical implication of greater acceptance of the exception is the need for businesses and in-house lawyers to be particularly careful to limit access to privileged information only to those with a true need to know the information.

a. Montgomery v. eTreppid Technologies, LLC, 2008 U.S. Dist. LEXIS 35561

In this action, the individual plaintiff was a member and former manager of the defendant LLC, eTreppid. The plaintiff demanded production of relevant, but privileged, communications created during the time he was a manager and member of the LLC. The LLC argued that the client for purposes of determining who had authority to claim or waive the privilege was solely the LLC. The plaintiff countered that he, too, was the client, having been a member and a manager of the LLC, and claimed that eTreppid could therefore not assert the privilege against him.

The district court first determined that the LLC should be treated as a corporation, as opposed to a partnership, for purposes of the privilege. It then noted the split of authority regarding acceptance of the joint client exception and determined that the more persuasive view was that directors and officers are not joint clients with the corporation such that the plaintiff could discover privileged information merely on the basis that it was accessible to him when he was affiliated with the defendant LLC. The court observed: “It makes sense that the corporation is the sole client. While the corporation can only communicate with its attorneys through human representatives, those representatives are communicating on behalf of the corporation, not on behalf of themselves as corporate managers or directors.” Because the plaintiff brought suit to benefit himself individually, he was not entitled to discover the LLC’s privileged information. His prior access to such information took place as a consequence of his capacity as a member in the entity, not in an individual capacity.

eTreppid squarely adopts the “sole client,” as opposed to the joint client, approach to control over the attorney-client privilege.

b. Barr v. Harrah’s Entertainment, Inc., 2008 U.S. Dist. LEXIS 26018

Similar to eTreppid, the New Jersey district court in Barr faced a demand for access to privileged information by a plaintiff who previously served as CEO and board member of the defendant’s predecessor. The plaintiff, serving as the named representative in this class action suit, sought application of the joint client exception and discovery of communications between the defendant and its in-house and outside counsel during the time the plaintiff served as CEO.

The defendant argued that application of the joint client exception was inappropriate in the class action context. It maintained that disclosure of the privileged information to the plaintiff/class representative would inevitably result in disclosure of the privileged documents to the remaining class members, the majority of whom had never been officers or directors of the defendant and could not be said to be in a joint client relationship with the defendant.

Applying Delaware law and the substantial authority supporting application of the joint client exception, the court keyed its holding to the contemplated use of the privileged materials sought by the former director seeking application of the joint client exception. Unlike the Delaware cases that allow individual former officers and directors access to privileged information, the Barr court reasoned that the plaintiff/class representative actually asserted a right to discover the defendant’s privileged communications on behalf of a class of individuals who would not otherwise have access to the privileged information under Delaware law. Indeed, the plaintiff/class representative owed a fiduciary duty to the class he represented. Thus, the court acknowledged the vitality of the joint client exception, but simply declined to apply it in the class action setting.

c. Rush v. Sunrise Senior Living, 2008 Va. Cir. LEXIS 12

Again, in Rush, a court was confronted with the claim by a former officer of the defendant that he should have access in discovery to privileged information to which he was privy while employed by the defendant. The plaintiff claimed that his termination as CFO of defendant was retaliatory because of his disclosure of certain of defendant’s alleged accounting practices to the SEC. The defendant claimed the former CFO was terminated because of violation of company policies. The plaintiff sought disclosure of privileged information based on the joint client exception.

Rather than directly evaluating the merits of the joint client exception, the Virginia court applied a rigorous and narrow standard to the defendant’s threshold burden in claiming privilege over the disputed communications. The court determined that “the public policy of furthering [defendant’s] ‘full and frank communication’” with its counsel was outweighed by the plaintiff’s right of access to the privileged documents to which he was privy while employed with the defendant. The court simply declined to apply the attorney-client privilege to the withheld communications between client and counsel, and did so on the basis that the disputed communications had not been “kept confidential in relation to [the plaintiff].”

The Rush court’s ruling amounts to a pragmatic acceptance of the joint client exception. The court ordered production of privileged material to which the plaintiff had access while in the defendant’s employ, based on the fact that such materials had not been kept confidential from the plaintiff. The court did not address the question of the capacity (individual, corporate, or both) in which the plaintiff had, or was given, access to the privileged materials at the time of disclosure. Thus, under Rush, the attorney-client privilege may in some circumstances simply not be applicable when privileged communications are made to an officer or director in that person’s capacity as such, and are later sought in discovery when the individual and corporation are adversaries.

Real Property and Divorce In A Declining Real Estate Market

Compounding marital dissolutions are the effects of a troubled real estate market. Bloomberg recently reported that foreclosures and mortgage delinquencies have now hit 29 year highs. Couples going through a marital breakup must deal with the whammies of lower incomes, higher payments on adjustable rate mortgages, and tightening credit; all of which serve to make selling and refinancing marital property extremely difficult. These difficulties result in lowering values.

These external factors serve to create problems in valuing and dividing real property. Take the family residence. One spouse may want to keep the house for emotional or practical reasons (e.g. kids in school). In a boom market, that spouse may be forced to "overpay" for the right to keep that house because they are charged with the equity in the marital balance sheet. In a down market, however, it is the "out" spouse who is disadvantaged, watching a property worth nothing when they divorce, increasing in value many years after moving on to new relationships and jobs.

  One way spouses can address these concerns is to pick a date of sale or valuation in the future so that extreme market variances can be minimized. The parties can remain on title together until that time.

Article Submitted By: Attorney Daniel Gold

What Are the Tax Consequences of a Settlement to the Recipient of a Non-Personal Injury Action?

In litigation, any settlements should take into consideration the tax consequences to the client recipient of settlement proceeds. As a litigator, this is something very important to consider for the benefit of the client because the settlement can put the client in a tax bracket over and above what he/she is at, thereby increasing the percentage of tax the client has to pay. Here are the nuts and bolts of the taxability of non-personal injury settlements: all damages/settlements received are taxable as gross income with the exception of damages for emotional distress that are used specifically to pay medical expenses. This article does not address the taxability of personal injury settlements which is treated differently under the Internal Revenue Code ("IRC").

Lost Earnings and Lost Wages

Compensatory Damages received in non-personal injury lawsuits whether pursuant to judgment or settlement are taxable as ordinary income if they compensate the recipient for lost earnings. Estate of Carter v. Commissioner (8^th Cir.1962) 298 F.2d 192. Recoveries in employment contract disputes are generally characterized as ordinary income, just as the compensation would have been characterized under the contract. Stocks v. Commissioner (1992) 98 T.C. 1; Byrne v. Commissioner (1988) 90 T.C. 1000; Glynn v. Commissioner (1981) 76 T.C. 116. Since back pay is a quintessentially contractual measure of damages, any recovery of back wages is taxable, even if paid along with tort-like injuries. Commissioner v. Schleier (1995) 515 U.S.323; United States v. Burke (1992) 504 U.S. 299.

Reimbursement of Legal Fees and Deduction of Legal Fees

Judgment or settlement amounts intended to reimburse a taxpayer for legal fees in non-personal injury cases are generally considered income to the taxpayer. Baylin v.United States (Fed. Cir. 1995) 43 F.3d 1451; Bagley v. Commissioner (1995) 105 T.C. 396; Estate of Gadlow v. Commissioner (1968) 50 T.C. 975; Rev. Rul. 60-14, 1960-1 C.B. 16. Where an attorney is paid under a contingent fee arrangement, the client must include in gross income as a contingent fee. Commissioner v. Bank (S.Ct. Jan. 24, 2005) NO. 03-892 . Under the anticipatory assignment of income doctrine, a taxpayer may not avoid taxation by assigning income to another party. Id.

Legal fees may be deducted as ordinary and necessary business expenses. Whether litigation expenses are deductible business expenses depends on the origin and character of the claim for which the expense incurred and whether the claim bears a sufficient nexus to the taxpayer’s business. US v. Gilmore (1963) 372 US 39. Ordinary and necessary litigation costs generally are deductible when the matter giving rise to the costs is proximately related to a business activity. Woodward v. Commissioner (1970) 397U.S. 572. If indeed the legal fees are qualified as business expense, the effectiveness of the deduction may be substantially limited by the 2 percent floor on miscellaneous itemized deductions under IRC §67 and the alternative minimum tax, under which miscellaneous itemized deductions are completely disallowed.

Emotional Distress Damages in Employment Discrimination/Wrongful Termination Case

Only damages that result from personal injury actions are excluded from gross income. IRC Section 104(a)(2). The exclusion from gross income does not apply to damages received through employment discrimination or defamation actions accompanied by a claim for emotional distress. However, taxpayers can exclude damages received for medical expenses associated with emotional illness (this does not include amounts compensating for emotional distress beyond the medical expenses). IRC § 104(a); Treas. Reg. 1.213-1(g).

Punitive Damages

IRC §104(a)(2) expressly provides that punitive damages are not excluded from income, even though such damages may accompany the award of other damages that are excluded from income.

Article Submitted By: Attorney Pamela Tahim

Employers Required to Provide Same Sex Spouses Same Benefits It Offers Opposite Sex Couples

In a landmark decision, the California Supreme Court recently granted same-sex couples the right to marry, In re Marriage Cases, No. S147999 ( Cal. May 5, 2008). In addition to the right to marry, the Court’s decision grants equal treatment under the law to married same-sex couples and married opposite-sex couples.

 

The most immediate impact on employers is that same-sex couples must have access to many employment benefits that have traditionally been given to married heterosexual couples. The decision went into effect on June 14, 2008.

The California Supreme Court in In re Marriage Cases did not invalidate the domestic partner law, but instead extended the rights and responsibilities granted to married heterosexual couples under California law to married gay and lesbian couples.

Therefore, an employer must now provide same-sex spouses with any benefits that the employer provides to opposite-sex spouses under state law or employer policy.

Examples of state law employment policies that must now extend to same-sex spouses are leaves to care for a spouse and any coverage provided by an insurance policy an employer purchases in California. Examples of possible employer policies that must now extend to same-sex spouses are leaves of absence offered beyond those provided under state law and paying for travel for spouses of employees. An employer who fails to provide spousal benefits to same-sex spouses may be exposed to claims of sexual orientation discrimination under California’s Fair Employment and Housing Act.

Although the In re Marriage Cases decision permits same-sex marriage in California, and grants state law rights to same-sex couples, tension remains between that ruling and applicable federal law. Under the Defense of Marriage Act (DOMA), enacted in 1996, a California same-sex spouse does not qualify as a spouse under federal law. Therefore, benefits covered by federal law, such as ERISA retirement plans subject to the Internal Revenue Code, will not automatically apply to a same-sex spouse. However, the DOMA does not prevent an employer from voluntarily extending coverage to same-sex spouses.

Employers should take active steps to ensure that their policies are in compliance with state law regarding same-sex marriage:

1. First survey all employment policies and benefits provided under state law or employer policy to determine if they provide rights or benefits to an employee’s spouse. If so, the employer should ensure that those benefits are also provided to same-sex spouses or domestic partners.

2. You should also carefully review federally-regulated benefits, such as ERISA benefit plans, in order to determine to what extent the employer should extend those benefits to same-sex spouses or domestic partners.

Reproduced with the permission of the Author, HR Network www.hrnetworkinc.com

Tredway, Lumsdaine & Doyle, LLP., has a team of attorneys ready to help you with your employment matters. For more information on how we can be of service to your company, or about our General Counsel Plan, contact Shannon M. Jenkins or Annie B. Markarian at 562-901-3050.

Article Submitted By: Annie Markarian

Beware of the Contractual Arbitration Clause

Many contracts include mandatory or optional arbitration clauses which either bind the parties of the contract to an arbitration process or give the parties the option of attending an arbitration in the event of a dispute. However, not all arbitration clauses are created equally and all should be carefully reviewed and screened. Easily overlooked provisions such as whether the arbitration is binding or non-binding, a required venue or location in which the arbitration is to take place, the number of arbitrators, and what rules will govern the arbitration proceeding, will all dramatically effect the cost of an arbitration. For instance, a requirement that the arbitration take place at or under the rules of the American Arbitration Association or at some other professional arbitration company may subject the participants to the management and facility fees of the companies. In addition, even though the California Code of Civil Procedure provides for its own rules of procedure in an arbitration proceeding, such rules will be preempted by any rules agreed to in the arbitration clause. Arbitration clauses must also be carefully reviewed to determine what penalties there may be if you fail to abide by the terms of the arbitration clause. So whether you are in the process of drafting a contract, negotiating a contract, or are involved in a contractual dispute which contains an arbitration clause, the details of the arbitration clause should be carefully reviewed by an attorney to fully protect your present and future interests.

Article Submitted By: Attorney Jennifer Lumsdaine