Monday, November 14, 2011

TPMR Lawyers Win Victory in U.S. Court of Appeals to Protect Local Business


On November 10, 2011, the United States Sixth Circuit Court of Appeals announced its decision in the case of Daniel Pilgrim, et al. v. Universal Health Card, LLC, et al., upholding dismissal of a multi-million dollar class action suit against a Stark County business, Universal Health Card, LLC. TPMR attorneys Gary Corroto, Lee Plakas, Edmond Mack and Maria Klutinoty secured this victory by utilizing an aggressive and innovative legal strategy to protect Universal from the potentially crippling effects of this litigation. Mr. Corroto argued the case before a three judge panel of the Sixth Circuit Court of Appeals in Cincinnati on October 6, 2011. The case represents a significant victory for a local business and protects local jobs.

By taking an aggressive and innovate approach to the case, TPMR was able to secure a dismissal of the case at the earliest possible stage of the litigation saving Universal hundreds of thousands of dollars in legal fees and expenses to the benefit of Universal and its Stark County employees.

The case was brought in the Federal District Court in Akron, Ohio under the Class Action Fairness Act of 2005, which grants federal court jurisdiction in cases where the amount at issue exceeds $5 million, by a New York City area class action law firm on behalf of two class representatives from Pennsylvania and Mississippi seeking to bring claims against Stark County based Universal on behalf of tens of thousands of individuals located in more that twenty-five states. The TPMR legal team employed an innovative strategy in approaching these claims - claims that, if successful, would have driven Universal out of business causing the loss of a significant number of local jobs. Recognizing the potential cost of the litigation, and the crippling effect that it would have on its client, rather than taking the traditional approach of conducting expensive class action discovery and waiting to address the issue of class certification until after the completion of time consuming and costly discovery, TPMR lawyers analyzed the case at its earliest stages recognizing critical flaws in the Plaintiffs’ case and devising a legal strategy to attack those flaws at the earliest possible time. TPMR employed seldom utilized provisions of Federal Civil Rules 12 and 23 to file a motion to strike the class allegations in the Plaintiffs’ complaint requesting the Court dismiss the case before class discovery could even begin. The District Court agreed with TPMR’s position that the Plaintiffs’ claims were fatally flawed and that dismissal of those claims was appropriate before discovery. The Federal Sixth Circuit Court agreed and upheld the dismissal. The Courts adopted TPMR’s arguments that Plaintiffs could not maintain a class action against Universal because the class, as asserted, would include thousands of satisfied Universal customers who had no claim and would require the Court to apply the laws of each state where each individual claimant resided. As a result, Plaintiffs could not satisfy their burden to demonstrate that common issues of law and fact predominated the class such that class action treatment of the claims was warranted. Once the Court reached this conclusion, dismissal of the case was proper.

Thursday, August 18, 2011

Is There a Deadline for the State of Ohio to Request Medicaid Estate Recovery?

The answer to this question of course is yes. However, thanks to a recent Ohio Supreme Court decision, that deadline may not be for years and years if no one notifies Ohio's Medicaid Estate Recovery Administrator of the death of a Medicaid recipient.

What is Medicaid Estate Recovery?

The Ohio Department of Job & Family Services is the Ohio administrative agency responsible for administering Medicaid (not to be confused with Medicare) benefits to Ohio residents. Because Medicaid eligibility is many times dependent upon a person's financial resources, there are numerous rules and regulations associated with a person's ability to receive Medicaid benefits as well as certain rules and regulations that allow the State of Ohio to recover Medicaid payments made to a beneficiary after that beneficiary dies.

Specifically, the administrator of the Medicaid Estate Recovery Program in Ohio may make a claim against a Medicaid recipient's estate after that recipient dies. If the Medicaid recipient dies having assets, those assets are subject to the claims of the estate recovery administrator to the extent of any Medicaid benefits paid for the benefit of that recipient during his or her lifetime.

What is the deadline?

Ohio Revised Code Section 2117.061(E) provides that the administrator must present a claim for estate recovery to the person responsible for the estate of the decedent recipient not later than ninety (90) days after the date on which the administrator receives the Medicaid Estate Recovery Reporting Form or one year after the decedent's death, whichever is later.

In the recent case of In Re Estate of Centorbi (2011), 129 Ohio St.3d 78, 2011-Ohio-2267, the Ohio Supreme Court determined that the "whichever is later" language actually extended the deadline beyond one year after the decedent's death where no Medicaid Estate Recovery Reporting Form is sent to the administrator. In other words, the administrator never has a deadline to make a claim against a decedent's estate unless and until the Medicaid Estate Recovery Reporting Form is sent to the administrator.

This outcome obviously can create an enormous amount of uncertainty and lack of finality when administering the estate of a deceased Medicaid recipient. Therefore, it is absolutely critical that any person responsible for the estate of a decedent that received Medicaid benefits, or even may have received Medicaid benefits (if you are unsure, the reporting form gives you safe harbor) send the Medicaid Estate Recovery Reporting Form to the administrator as soon as possible after the death of the recipient. By doing so, the administrator must present a claim to that responsible person (or other designated personal representative) within one year of the recipient's death. If the notice form is received by the administrator after that one year period, then the administrator of the program has an additional ninety (90) days to present the claim.

Questions about Medicaid claims or other estate questions? Contact our attorneys.

Tuesday, February 22, 2011

December 2010 Tax Legislation Update

Congress Brings Back Federal Estate Tax, Raises Exclusion to $5 Million, Lowers Rate to 35%

In December 2010, Congress reenacted the Federal Estate Tax (aka "Death Tax") as part of the tax legislation compromise between Congress and President Obama. This legislation is effective for only two years, set to expire on December 31, 2012.

The new law provides for an individual exclusion amount of $5 million and a tax rate of 37%. Many expected the Estate Tax to return in 2011 with a much lower exclusion level and possibly higher tax rates.

Had Congress not taken any action in December, the old Estate Tax laws would have come back into effect. The exclusion amount per person would have been just $1 million with a tax rate as high as 55%.

While many hoped that Congress would simply extend, or make permanent, the 2010 Estate Tax repeal, the provisions of the legislation provide for many planning opportunities for individuals and families.

Proper planning and consideration is now more important than ever before.

Individual Gift Tax Lifetime Exemption Raised to $5 million, Gift Tax Rate fixed at 35%

While Congress reenacted the Federal Estate Tax, it also provided for a large increase of the Federal Gift Tax Lifetime Exemption. The new lifetime exemption is $5 million.

Until now, the Federal Gift Tax was assessed against an individual (or that person's estate) if there were lifetime gifts in excess of $1 million. Gifts less than the annual gift exclusion amount were exempt.

Like the Estate Tax provisions, this increase is set to expire on December 31, 2012 unless Congress takes action by that time. If Congress fails to take action by the end of 2012, then the lifetime exemption will decrease to $1 million. The Gift Tax rate would also increase.

Families wishing to preserve significant wealth should consider taking advantage of this potential opportunity to shelter assets from Estate and Gift taxation while this lifetime exemption remains at an all time high.

New Tax Law Allows Portability of Unused Estate Tax Exclusion Among Spouses

While Congress disappointed many by not permanently repealing the Federal Estate Tax, Congress did add a new portability feature to the Estate Tax that will benefit married couples.

The new legislation provides each individual with a $5 million individual exclusion. Under prior law, if the individual did not use his or her entire exclusion amount, that unused exclusion amount was lost. Previously, the surviving spouse and the children were unable to later use that unused exclusion to shelter assets upon their later deaths.

Pursuant to the new legislation, a surviving spouse may use his or her deceased spouse's unused exclusion amount in addition to the surviving spouse's exclusion. To qualify however, certain tax elections and filings must be made upon the first spouse's death. Otherwise, this benefit is lost.

For example, if Husband and Wife's combined estate is valued at $10 million and Husband leaves everything to his wife upon Husband's death in 2011, no Federal Estate Tax is paid at the time of his death because there is an unlimited marital deduction allowing him to leave his entire estate to his wife (and vice versa) upon the first death.

Upon Wife's death, assuming Husband's estate timely filed the appropriate election, Wife's estate would pay no Federal Estate Tax estate tax on $10 million (Husband's unused $5 million exclusion + Wife's $5 million exclusion = $10 million). Without portability, Wife's estate would have to pay Estate Tax on $5 million.

This portability option is only available to married couples. It also requires proper planning and tax filings in order to maximize the tax savings.

Favorable Capital Gains Treatment Returns to Inherited Property

The December 2010 tax compromise legislation also saw the return of more favorable capital gains tax rules. Persons inheriting property from someone (as opposed to receiving it as a lifetime gift) will once again receive a "stepped-up" basis in the capital asset for purposes of capital gains tax.

This rule becomes particularly advantageous for families that may not necessarily exceed the Federal Estate Tax Exclusion amount ($5 million) but have one or more highly appreciated capital assets.

This rule applies to any capital asset: real estate, equipment, marketable securities, closely held business interests, collectibles, art, and any other capital asset.

A gift during the donor's lifetime of a capital asset will continue to be taxed at the original owner's tax basis. Therefore, very careful consideration must be given when deciding upon how to transfer a highly appreciated capital asset.

For example: Father purchased a parcel of real estate in 1975 for $25,000 and it is now worth $500,000. He desires to give it to his two children. If he gives the property to them during his lifetime, they will assume his tax cost basis in the property ($25,000). Assuming they sold the property at its current value immediately upon receiving the gift, the two children would be taxed on the capital gain of $475,000 ($500,000 less the cost basis of $25,000).

If Father instead named the two children as transfer on death beneficiaries of the real estate, and he died in 2011, the two children would receive an adjusted tax basis in the property equal to the value on the date of Father's death. Assuming the current value was $500,000 and the children immediately sold the property after Father's death for that amount, the children would not be taxed on any capital gains because their basis was adjusted at the time of Father's death.

This favorable capital gains treatment is available to all individuals. Therefore regardless of whether or not a person's estate will face any Federal Estate Tax liability, an estate plan should take advantage of the stepped up basis rules.


· Estate, Gift, and Generation Skipping Transfer taxes are all unified with a $5 million lifetime exclusion and rate of 35%

· Unused exclusion amounts are portable among spouses

· Return of favorable stepped-up basis for capital gains

· 2011 Gift Tax Annual Exclusion $13,000 per individual

· Direct payments of beneficiary's tuition and medical expenses still exempt from Federal Gift Tax

Wednesday, January 5, 2011

Contract Negotiation Strategies for Buyers and Sellers

We are pleased to share Robert Konstand's seminar presentation regarding business negotiation strategies for buyers and sellers.

Making and Evaluating Offers: Business Decisions v. Legal Decisions.

It is prudent for the client to get his attorney involved in the discussions for the sale or purchase of a business very early in the process. Buyers and sellers tend to hear only what they want to hear in negotiations and are usually afraid to approach the difficult deal points that they perceive as a weakness. Effective legal counsel can take the lead role in negotiations to ensure that the client is protected. However, the attorney must be fully apprised of the legal and business issues in the negotiation. In the initial phase of negotiations, the discussions will be centered on business matters.

The attorney should meet with the client prior to any meeting with any potential seller or seller, and understand exactly what the client is looking for in the transaction. Attorneys sometimes shy away from discussing business matters. With adequate preparation, the attorney can effectively present what the client is seeking. It is beneficial at times for the client to step back and listen to his or her attorney state what the proposed deal is during the negotiations.

Rendering business advice to a client can be problematic. The attorney can offer advice on business matters if the attorney is well-versed and understands the situation and the client understands that it is merely a business opinion and not a legal conclusion. Business opinions may be helpful for the attorney to get the client 'down to earth' in matters where the client's goal may be extreme or unrealistic or could end up damaging the client.

Caution is necessary in offering business advice to the client. Often, we see as attorneys, clients making obvious mistakes in the operation of their business. It is the role of the attorney to point out issues that may have beneficial or detrimental effects on the business side of things, where the attorney has that knowledge. If the attorney does not understand or has no knowledge of the business issues at hand, then the attorney should not be making any opinions or statements regarding the business. A good example of sound business opinion would be where a party seeks to buy a business that would require a large sum of cash to operate the business initially and the client does not have the cash or the access to the cash to operate the business. It is obvious that the business will fail without the cash in place, and therefore the attorney if comfortable, should advise the client of that. It is incumbent upon counsel to assist clients in making the right decisions.

It is more important to make sure that the initial negotiations include all of the major business points of the proposed transaction. The finer points can be left up to the written agreement; however, issues can arise with regard to lesser points that become major deal-breakers that perhaps would have been better to have been dealt with in the initial discussions.

Evaluating Your Client's Strengths and Weaknesses in the Transaction.

Every client is different. If you know your client well, you can find out about its strengths and weaknesses prior to the negotiations. A common weakness would be insufficient cash to purchase the business. An example of a strength would be that the client is a good business person and could make money but lacks the financial resources. It is important for the attorney to know this so that any agreement can be negotiated to avoid or minimize any client weaknesses and take advantage of any client strengths.

Another important issue is how much time your client can devote to the business. Will the business require full time involvement or not and will the client devote the necessary time and attention to the business.

If the client has insufficient cash for conventional bank financing and cannot meet the requirements for an SBA type loan, then obviously owner financing or outside partners would be in order. Depending on the various weaknesses or strengths, it may be beneficial for the client to be present and discuss the strength or weakness at the initial meetings of the buyer and seller and counsel. It helps to set limitations and demands on the negotiations and shows the other side that your client is truthful. Every client has weaknesses and strengths in their particular transactions and it is up to their counsel to utilize these strengths and weaknesses to the client's best advantage. Also, it is wise to have the client present at all negotiations to see where the issues are and the intensity of the issues. It is easy for a client to make unreasonable demands if they are not in the heat of the negotiations.

Another example of weaknesses would be the client's lack of knowledge with regard to financial statements and accounting. It is surprising today that this is prevalent. If either the seller or a potential bank sees this as a weakness, the deal may not go forward. The client then needs to enlist the help of a professional who can be there to answer questions and to give the other side assurance that the appropriate professional advice will be available to the client and be part of the team. I find it helpful at times to get the client's accountant involved in negotiations at a very early stage. This is particularly beneficial where the accountant knows the client well and understands the financial matters of the client.

The same goes for a client that has strong financial capabilities but lacks specific knowledge of running the particular business. Once again, the client should obtain help and present this to the other side, particularly where there will be owner financing and/or bank financing in the matter. Maybe a representative of the seller can stay on for a period of time after closing, to assist in the transition.

Discussions should be memorialized during the initial negotiations to make sure that every party is on the same page. Initial negotiations can be discussed through a term sheet prepared by the buyer. The term sheet is an outline of the deal points which can serve as a basis for discussion. Once there is an initial meeting of the minds and verbal agreement on the major points, then a letter of intent should be prepared. Clients question letters of intent because they are usually nonbinding. Recently however, I have seen binding provisions with regard to confidentiality and similar terms while the business points are not binding. It cannot be overemphasized that once business points and terms have been agreed upon in the letter of intent, it is usually difficult to negotiate away from those understandings. Some clients like to agree to certain points in the letter of intent knowing that they will not be able to agree to the same points in the final agreement. I strongly advise against this practice. If a client is unsure as to a specific deal point, he or she is better off to omit the deal point from the letter of intent and then deal with it as a new subject in the agreement.

Meeting Conditions of Sale.

Once the deal has been made and the agreement is signed, then each party must perform according to the terms and provisions of the agreement. Both the buyer and seller will make certain representations and will have certain obligations with regard to closing the transaction and thereafter.

It may be helpful to keep a punch list of your client's obligations as well as the obligations of the other side to ensure that all items are met in the closing. One cannot depend on an Escrow Agent in a real estate closing to make sure that all conditions are met and performed. It is up to us, as counsel for our clients, to make sure that everyone performs as agreed. Once again, it must be stressed that if your client is unable to perform according to the agreement, then this should be brought to the attention of the other party as soon as possible, in most cases. It may be possible to work around any issues. In the drafting of the agreement, the attorney for each party must carefully consider what the default provisions are, if the agreement does not close. As attorneys, we need to make sure that we protect our client's potential weaknesses in the agreement in case there is a default. In today's difficult economic times, it may be difficult for sellers to provide proper title to the assets sold, watch out for the undisclosed 'short sale' of assets.

Discussing the Finer Points of the Acquisition Agreement.

The question always comes up as to whether the seller or buyer should draft the agreement. This should not be a major issue unless the party drafting the agreement is not competent to draft it. I personally have no issue with making changes and doing red lines on agreements to make sure that all of the points I need are included to protect my client. As the transaction is negotiated on the term sheet and letter of intent, I keep notes of deal points and legal matters that I want to make sure are included in the agreement. Check lists are helpful, as well. However there will be times when the first version of the agreement is not even close in reflecting the transaction. Then is it is wise to start over with your own agreement.

Drafts of the agreement should be reviewed and discussed with your client before meeting with the other side. Some clients may understand most of the agreement, some clients may not. However, it is up to us as counsel to fully disclose and explain the agreement to the satisfaction of our clients. Clients, at times, tend to want to close things quickly and not pay attention to detail; it is incumbent upon us as counsel to ensure that our client understands the fine points and the nuances that are beneficial or potentially detrimental to the transaction. The last thing we want is for the client to say that they did not understand what they were signing or that it was not fully explained to them.

Discussions with the client help to vest them in the process. It assists the client in making sure that he or she can fully perform as expected of them not only in the closing of the agreement but in running the business thereafter.

Dealing with Liabilities.

Liabilities are always an important factor in the sale of a business. The buyer may have to assume certain liabilities. Liabilities must be detailed; representations by the seller must be made to detail the extent of those liabilities. If any liabilities are to be assumed or if the seller makes a representation that there are no liabilities, then the seller should back up the statement by a personal guarantee or other agreement.

If your client assumes liabilities, then the client needs to make sure that the liabilities can be paid and will not detrimentally affect the operation of the business. Liabilities need to be closely documented with the creditor to ensure that everything is as represented. Assuming liabilities can be helpful in financing a business, but care must be taken to ensure exactly what the liabilities are and the terms and conditions of the repayment of the liabilities.

Counsel should also look for any possible unknown potential liabilities in the transaction. Are there potential employee claims that have not been brought? Are retirement plans properly documented? Is there any litigation threatened or pending? Are there agreements that have disclosed but are in default? What if there are agreements that have not been disclosed? It is important for counsel to examine all of these matters.

In owner financed transactions, the agreement should contains a provision for a dollar for dollar set-off against any sums due the seller, where there is a breach of any representations, covenants, or other obligations of the Seller.

If you are unsure of any potential liability, it is wise to hold an agreed upon sum in escrow after the closing to investigate the liability and have the money available to resolve it. If the other side is unwilling to do so and it is a reasonable request, then this is a red flag, and if your client desires to proceed then it must be done with extreme caution. Sellers like to generally get out of their business quickly and in a clean manner. However, when there are issues of uncertainty, the buyer must insist on being protected. If there are potential issues, a reputable seller should be willing to provide for reasonable requests.

Environmental Issues.

Today, environmental issues are very important in any transaction. If the sale of a business includes real estate, then a Phase One environmental survey and perhaps a Phase Two will be necessary to ensure that the property is environmentally clean, even if there is a lease. Once again, representations by a seller may be worthless if the seller is not collectible and the buyer inherits the seller's environmental issues.

This can be more troublesome in a transaction where the sale of real estate is not involved. Environmental issues can be present in the real property that is leased and equipment can be contaminated.

A business operating out of leased premises has the potential for environmental liability and should be evaluated. Landlords are becoming aggressive in demanding clean-up of their real estate by tenants.

Successor Liability: Taxation, Tort and Contractual.

Successor liability is an issue in taxation with regard to Trust Fund taxes including Federal, state, and local as well as sales taxes. One common issue overlooked, is the status of the workers' compensation premiums paid, as well as the rate, as a result of the history of claims by the seller. Another issue is whether or not the new business entity of the buyer will be considered a successor employer or not.

If the business entity is purchased, then an examination of all filed tax returns must be made as well as the payments thereon. Investigate and confirm any potential IRS or state audit issues.

Tort liability can be an unknown. If potential tort liability is insured and the seller had insurance on an "occurrence" basis, then coverage should be available post-closing. If insurance was made on a "claims made" basis, then it may be incumbent upon the buyer to continue insurance. More important is the potential for uninsured future tort liability where the seller must represent that there is none and that the representation would be backed by sufficient assets for indemnification purposes.

Contractual liability is generally not insurable and thus representations have to be made by the seller and that sufficient assets will be in place for the benefit of the seller for indemnification purposes, post-closing.

Unpaid Taxes, Sales Tax, Payroll Tax and Income Taxes.

As previously discussed, these can be successor liability issues for the buyer. Provisions in the purchase agreement must be made for indemnification. As part of the buyer's due diligence, sales tax returns for the selling entity as well as payroll tax and income tax returns must be reviewed, as well as verification of the payments for the tax due. Obviously, if the internal statements of the seller reflect different numbers than contained in the tax returns then there are potential issues not only for liability purposes but for the real value of the seller and whether or not the tax returns may be erroneous.

Accounts Payable.

Once again, accounts payable must be verified and if assumed, then indemnification should be provided by the seller for any accounts payable other than as represented. During the due diligence process, the buyer should examine the accounts payable not only as to the amount but the timing of the payment. Arrangements should be made to ensure that the accounts payable can be paid on a timely basis. Most accounts payable today provide for interest to be charged on delinquent balances at fairly high rates and this should be avoided for cash flow purposes for the buyer. Make sure that vendors will continue to do business with the new entity at the same pricing and terms as before the sale.

Insurance for Environmental Issues.

Insurance is available, but it is very expensive and often contains exclusions and requires personal indemnification. Insurance is usually required for large real estate sales and where non-recourse financing is provided. The mortgagee will want as much environmental protection as possible and may seek redress from the seller for environmental liability issues. Environmental insurance is worth investigating but may be cost-prohibitive.

Non-Competition Agreements and Seller Participation, Post-Closing.

Non-competition agreements are crucial in the sale of a business where the principal of the seller could continue to compete or interfere with the buyer's enterprise. The courts look at non-compete agreements on a case-by-case basis. Most artfully drafted agreements provide that the seller and its principal cannot compete with the buyer for any set duration of time and within a certain distance or geographical area. The Courts look more favorably upon stricter provisions where the non-compete agreement is with the principal of the seller, rather than just as an employee of a company without a sale pending. Make sure that the agreement provides for appropriate injunctive relief that may be sought in enforcing a non-compete agreement.

Breach of Contractual Representations and Survival of the Agreement.

If a party defaults before the agreement is closed, the agreement usually provides for a default process which may or may not include litigation. Post-closing defaults are more troublesome. Indemnification provisions should be used extensively by counsel for the buyer to protect the buyer against defaults or breaches of representations made by the seller. Care must be given in the drafting of the purchase agreement to ensure that important representations and covenants survive the closing of the agreement.

Once again, there needs to be recourse upon a collectable entity.

Using ADR Effectively.

Most agreements for the sale of business provide for some type of alternative dispute resolution. Some agreements call for binding arbitration or a similar arbitration process; other agreements may have a mediation requirement and then litigation. It may be effective to provide at least an informal hearing of some type, either by mediation or arbitration, before litigation ensues. It allows both sides a forum to air the grievances and get a taste of litigation. Litigation is the least preferable way to resolve conflicts in the sale of a business because of both cost and time factors.

Closing the Deal.

Once again, checklists are crucial for the closing of a transaction. The buyer's attorney will need to assist not only with the obligations, including due diligence, contained in the sale agreement, but also provide services and assist with any third party financing. The funds must be obtained and financing qualifications must be met. Counsel should be vigilant to make sure that all terms and conditions of the agreement are met and that the client is prepared to operate the newly purchased business. This may necessitate forming a new entity, obtaining insurance, obtaining tax and accounting (including payroll) advice, as well as operational advice.

There will be times when the seller will insist on an opinion of counsel. These should not be given lightly as there is tremendous exposure to the lawyer. It is best to negotiate what will be contained in the opinion, while negotiating the agreement. Obviously, the goal is to limit what matters are opined. Also make sure that all necessary qualifications are contained in the opinion, like choice of law, bankruptcy and insolvency, and default.

Post-Sale Duties and Obligations.

Again, it is incumbent upon the attorneys to make sure that all post-sale obligations are met. The use of checklists again is useful in this process. The goal of the attorney representing the buyer would be to continue to represent the buyer because he or she is knowledgeable of the transaction and is in the best position to continue the representation. Careful consideration of post-sale duties and obligations will ensure that counsel continues to be retained in the future.

Saturday, October 23, 2010

Foreclosure FAQ’s & Strategies

We have all heard about the real estate foreclosure crisis affecting individuals across the nation, but the crisis has affected Ohio particularly hard. If you are facing foreclosure, or are in the process of a foreclosure proceeding, then you likely have many questions about what to do. Seeking legal advice is the best thing you can do so that you understand your rights and your options. This article will try to provide you with some basic information that will allow you to better understand the process and how you and your attorney can work towards potential resolutions with the bank / lender / creditor seeking to foreclosure upon your property.

Some Foreclosure Vocabulary

You may have seen or heard a variety of terms used in the media or elsewhere and wonder what they mean. Here are some basic terms and definitions:

Chapter 7 / 11 / 13: These are different types of bankruptcy filings an individual may file depending upon their circumstances. Bankruptcy typically is an option of last resort. When all else fails, bankruptcy may be necessary. Your attorney's advice is critical in evaluating whether or not bankruptcy is an appropriate decision for you and your family.

Credit Score: This "score" is essentially a rating that credit rating companies apply to you based upon how well you have managed debt and whether you have kept current with your various payment obligations. It does not necessarily matter how much or how little debt you have had over time. In fact some people that have avoided incurring any debt, and have been current with all of their other payments, sometimes are surprised and frustrated to learn that they may have a credit score far less than others that have incurred large amounts of debt, but have paid it off timely. Chances are, if you are currently facing foreclosure, or you are in default on your loan payments, your credit score has been negatively impacted. A bankruptcy also negatively impacts your credit score. However, people sometimes fail to understand that you can rebuild your credit score over time. When you are trying to evaluate options to save your home or stay current on other obligations, your credit score may not necessarily be your first priority, and it's probably too late to save your score.

Deed in lieu: This is a bit like a "short sale" except there is no buyer. A "deed in lieu of foreclosure" is a transaction merely between the homeowner and the bank. The homeowner agrees to simply sign a deed for the property to the bank in lieu of the bank having to file a foreclosure action. Like a short sale, the homeowner and bank should come to an agreement in writing as to whether or not the bank will forgive part or all of any deficiency. The bank then becomes the new owner of the property and may choose to auction it, list it for sale, or leave it off of the active market for a period of time believing that there may be a better opportunity to sell the property in the future. In a very creative deed in lieu, the homeowner might even be able to remain in the home and pay rent to the bank in order to continue living in the home while the homeowner searches for new living arrangements.

Deficiency: Also referred to as a "deficiency judgment," this is the difference between the amount that the bank receives when the property is sold and the amount it is owed (if the bank's remaining balance was not entirely paid off). This is the likely result when a home is "underwater" or when there is a "short sale." Depending upon the loan agreement documents, the bank likely will have the right to continue to try to collect from you this deficiency balance even after the foreclosure proceeding is completed and the house is sold. However, depending again on the situation, banks may be limited as to how long they can continue pursuing you for the deficiency, if there is one.

Loan Modification: In certain situations, the bank may agree to modify an outstanding loan. The bank has several options when considering a loan modification (also called a "loan mod"). The bank can adjust and reduce the amount of principal balance. The bank can forgive unpaid, accrued interest. The bank can extend the loan without reducing the balance owed, but by extending it over an additional period of time, it may be able to reduce the monthly payment obligation. The bank can also reduce the interest rate without reducing the principal balance. This can also effectively reduce the monthly payment obligation.

Short Sale: This term refers to the sale of a property where the homeowner and the bank agree to sell the property to a buyer that is paying a total sale price that is less than the outstanding balance owed to the bank on its loan. Banks many times may be willing to agree to a short sale knowing that the amount of the loan far exceeds the current fair market value of the home. This type of sale typically occurs when the home is "underwater." The issue that must be understood and addressed by the homeowner and the bank before the sale is whether or not the bank will release the homeowner from any obligation to pay the "deficiency." If the homeowner is not released, the bank may still try to collect the deficiency from the homeowner even after the short sale is completed. However, some banks may agree to release the homeowner from this obligation in order to avoid the costs and delays it will face if it needs to file a foreclosure.

Underwater: This term simply means that the current fair market value of the property is less than the current outstanding loan balance owed to the bank. Assuming that the homeowner continues making the required monthly payments to the bank and is current on all other obligations, a property can be underwater without the risk of a foreclosure, and without the risk of negatively impacting a credit score.

What is a Foreclosure and who can file it?

A foreclosure is a legal proceeding whereby a person or entity that has a lien (pronounced "leen") upon property can ask a court to sell the property in order to collect money owed. Currently, the vast majority of foreclosures are associated with mortgage loans made in the last 15 years. Banks gave large loans to people in exchange for a mortgage on their homes. Once those people could no longer afford to keep paying their monthly payments, the banks declared the loans to be in default and file foreclosures in order to sell the property and collect the outstanding loan balance still owed.

Many people may not realize that banks are not the only entities that can file foreclosures. Any person or entity that is owed money, sued to collect that money, and obtained a court judgment, can file a judgment lien. This is like a mortgage in that it allows the judgment lien holder to initiate a foreclosure action to sell property owned by the person that owes the money.

Government agencies also can file a foreclosure. If the homeowner has failed to pay income taxes, property taxes, or has some other obligation to pay the government (state, local, or federal), the government will place a lien upon the property and may then file a foreclosure to collect what is owed.

Now that a foreclosure is filed, is it too late to resolve this?

Absolutely not. In fact, once the foreclosure is filed, there are several opportunities to resolve it, and the bank may be even more willing to negotiate with you.

It is commonly known that banks will not negotiate with you when you are keeping your payment current. If the bank is getting paid, why would they agree to reduce your obligation? Banks are out to make money. Negotiating with you to reduce the amount of money they will get is against every bank's instinct.

Should you strategically stop paying the bank? If you do, your credit score will plummet. You may also risk the bank taking very swift action to grab any bank accounts you have at that bank, initiate legal proceedings, or take other action against you. Therefore, you have to very carefully consider this decision, and you should only do so after seeking professional advice.

Should you decide to stop your payments to the bank, you will definitely have their attention. Once the bank is not getting paid, they will send you threatening letters and collection agents will call you at home to try to get you to start paying them. If you continue not paying the bank, they will file a foreclosure action.

The worst thing you can do if you are trying to negotiate with the bank is to ignore the foreclosure action. In Ohio, if a foreclosure is filed in court, you have only 28 days from the day you are served with the foreclosure complaint to file an "Answer" to the complaint. Get a lawyer! An "Answer" is a legal document that requires certain allegations and defenses to be made or you risk waiving those defenses. Unless you are a lawyer, you probably have no idea how to draft and file an answer with the court in such a way as to preserve all of your defenses.

If you do not file an answer, the bank will obtain its foreclosure almost immediately because the court will issue a default judgment against you and quickly order the property sold at auction. Therefore, to hold off the foreclosure process, and to engage in meaningful negotiations with the bank, an answer must be filed.

Once an "answer" is filed, most counties in Ohio have a foreclosure mediation program that homeowners can request. This mediation typically involves a court-appointed, neutral person (the mediator) that will try to assist both the homeowner and the bank to reach an agreed resolution. This might result in a short sale, a deed in lieu, a loan modification, or some other settlement that both the homeowner and the bank agree to in writing. A successful mediation results in the bank's dismissal of the foreclosure.

I tried mediation, but the bank won't agree to settle. Can I do anything?

Absolutely. Due to some very sloppy loan processing practices in the last 15 years, there has been increasing press attention to courts refusing to allow some foreclosures to proceed. Homeowners and their lawyers can effectively halt foreclosure proceedings if there is a problem with the bank's paperwork. Examples of this are:

  • Is the bank that initiates the foreclosure the current holder of the loan and the mortgage? If not, the bank may not actually have legal standing to bring the action, resulting in its dismissal.
  • Is the bank using "robo-signers" in its foreclosure documents? If so, then the documents may be invalid because they were not properly executed or reviewed prior to filing.
  • Are the amounts set forth in the foreclosure case accurate? If not, or if the bank cannot verify their accuracy or properly demonstrate the application of your payments to principal and interest, then a court may dismiss the foreclosure.

There can be many other types of technical defenses that grind a foreclosure to a halt. An attorney with experience in foreclosures can identify those potential issues and work with you to try to reach a proper resolution of the dispute. The key is to involve a professional advisor at the earliest stages to navigate the process and protect your rights.

Tuesday, September 28, 2010

What is “probate” and why am I trying to avoid it?

What is "probate" and why am I trying to avoid it?

Is "probate" an 8-legged monster that will suck the life out of your lifetime hard work and savings upon your death? Or, did probate just get a bad reputation somewhere along the way? The answer actually is not as simple as some may believe. This post will explain the probate administration process, try to dispel some of the myths, and provide you with some basic information that you can consider when talking with your estate and financial planning professionals.


"Probate" is the name of the court in Ohio that governs the administration of the financial affairs of deceased persons. There are several other subjects over which the Ohio probate courts have jurisdiction. However, those topics are beyond the scope of this article.

Why do we need probate courts? One primary reason we need probate courts is to assist with a lawful, supervised procedure for transferring the assets and property of a deceased person to his or her surviving heirs. This procedure is intended to avoid conflict and provide certainty.

In some situations, the plan of distribution of a deceased person's estate might be obvious. For example, if a man is survived by only his wife, and he has no children, everyone might simply assume that his intent was to leave all of his assets to his wife.

What if the family picture was more complex? What if there is a surviving wife and children? Should the wife still receive all of the property or should the children receive some portion? What if the husband had children from a prior marriage that survive him, he is survived by a second wife, step-children, and children from his second wife? Who gets what?

What if the husband sent a letter to his church telling his pastor that upon his death, he wanted the church to receive an inheritance from his estate? What if that letter wasn't signed by the husband, but was typed on his stationery? Is that valid?

All of these questions demonstrate exactly why we need probate courts in Ohio, and why we need uniform rules and regulations about how to execute a document that will be legally recognized. However, as society has become much more efficient with respect to the registration of assets and property, the laws have recognized and even sanctioned procedures that allow for the faster and more efficient transfers of assets that permit those assets to bypass probate court oversight.

Probate court processes are seen by many as lengthy, drawn out, and expensive. That can be true at times. There are some very valid reasons to try to avoid probate court, and there are sometimes situations where a probate court's oversight might be beneficial.

Some common myths about probate court

Myth #1: If I avoid probate, I avoid estate taxes.

This is one of the most common misconceptions about probate court. People believe that if you can avoid probate court, no estate taxes will be owed. This is incorrect.

A prior blog post discussed in greater detail the estate tax, how it is levied, and how it can be avoided or minimized. The estate tax applies to all assets owned by a decedent at the time of his or her death regardless of whether the asset requires probate administration or if the asset bypasses probate administration by way of a payable on death beneficiary designation, simple trust, or survivorship account.

Myth #2: Probate court will take a percentage of my assets upon my death.

This myth is sometimes a spinoff of Myth #1 (avoid probate and you avoid estate taxes). Others believe that the probate court will assess some type of levy or assessment against the assets separate from the estate tax. This is incorrect.

The probate courts do charge court costs for an estate administration, but these costs typically are less than $300 for a full estate administration.

Myth #3: If I avoid probate, no one can contest my will (or my estate plan).

A part of this myth actually isn't myth. If a person dies and has an estate plan that does completely avoid probate administration altogether, then the person's will has little or no consequence. This is because all of the assets bypass probate administration. A person's will controls the administration of a person's probate estate. Without probate assets, the will has almost no effect.

However, this does not mean that the person's estate plan is not immune from attack by a disgruntled family member that wishes to contest that plan. A trust, payable on death beneficiary designation, survivorship account classification, or even a gift made before the person's death are all subject to inquiry and attack by a disgruntled heir / family member.

Myth #4: I can avoid probate using a POD designation or survivorship account designation, but the beneficiary is legally bound to follow the provisions in my will.

This is the granddaddy of all myths. Parents many times make the foolish mistake of naming only one child as the beneficiary of assets, or naming only one child as a joint and survivor owner of assets, or the single beneficiary of life insurance to take advantage of probate avoidance benefits. However, they mistakenly believe that the provisions of the will are legally binding on those non-probate assets. They mistakenly believe that the single beneficiary is required to distribute the assets that he or she receives pursuant to the will. This is incorrect.

This can create extensive problems and potentials for family disputes merely because the parents did not plan properly. Problems such as these can easily be avoided if careful planning is done by an estate planning professional.

How do you avoid probate?

As you can see by some of the above myths, extreme caution must be taken when planning your estate with the goal of avoiding probate. Planning should be done only with the assistance of an estate planning professional such as an attorney. There can be significant tax consequences, inequitable distribution consequences, family infighting, and unnecessary legal expenses merely because there was no careful plan developed.

Ohio law provides individuals with a variety of tools to avoid probate. Individuals can establish trusts to hold property and pass it to others upon the death of the owner. They can identify one or more payable-on-death or transfer-on-death beneficiaries for bank accounts, securities, and even real estate. Beneficiaries can be named on retirement accounts, life insurance policies, and annuities. One or more persons can be named as survivorship beneficiaries to a jointly owned asset such as a bank account, security, or real estate.

Again, designating persons as beneficiaries under any of these mechanisms should be done only after considering all of the potential consequences. The prior blog article regarding joint and survivorship accounts is a perfect example of the terrible consequences that can occur when such planning is done without the assistance of a professional.

Why do I want to avoid probate?

Two major reasons that people identify as reasons to avoid probate.

  • My assets remain confidential and are not open to inspection by the public. Probate estates are open to public inspection because they are maintained in court files. If you wish your family's net worth to be absolutely confidential, you may want to plan to avoid probate.
  • Probate can be expensive and involve delays. Because assets in an estate require judicial orders and paperwork to access and transfer, family members sometimes must hire professional advisors to assist them with the probate administration process, satisfy court filing requirements, and file documents accounting for even simple and undisputed expenditures and distributions. This takes time and money.

Is probate ever beneficial?

In some situations, a person may actually want court-oversight and supervision of his or her assets upon her death. The probate court has particular expertise in this oversight and also has the power of the Ohio judicial system to protect a decedent's assets from theft, mismanagement, negligence, fraud, or other misconduct. Many times, the probate court can prevent the problem before it happens depending upon the nature of the estate.

Get advice

Estate planning requires careful thought, a review of your assets, and professional guidance. Reaching your goals, protecting your family, and minimizing taxes and expense can be accomplished, but shoddy planning can create headaches, litigation, and needless expense and delay. Talk with your attorney about these issues and get your questions answered.

Monday, August 30, 2010

Understanding Your Employment / Reemployment Rights as a Uniformed Service Person:

USERRA—Uniformed Services Employment and Reemployment Rights Act.  39 USC §§ 4301 – 4335.

USERRA is the federal law that protects the employment of persons in the "uniformed services." Persons on Military Leave from their private sector jobs are granted certain rights and protections under USERRA. However, USERRA provides additional rights and protection to those that serve our nation.

Who is protected by USERRA?

USERRA protects persons who perform duty, voluntarily or involuntarily, in the "uniformed services." These include the Army, Navy, Marine Corps, Air Force, Coast Guard, and Public Health Service commissioned corps. It also includes the reserve components of each of these services.  Federal training or service in the Army National Guard and Air National Guard also gives rise to rights under USERRA, and certain disaster response work is also covered.

Uniformed service includes active duty, active duty for training, inactive duty training (e.g., drills), initial active duty training, and funeral honors duty performed by National Guard and reserve members. It also includes the period for which a person is absent from a position of employment for the purpose of an examination to determine fitness to perform any such duty.

USERRA applies to virtually all United States employers, regardless of the size of the employer.

What conduct is prohibited?

USERRA prohibits employment discrimination against a person on the basis of past military service, current military obligations, or intent to serve.  An employer must not deny initial employment, reemployment, retention in employment, promotion, or any benefit of employment to a person on the basis of past, present, or future service obligations.  Additionally, an employer must not retaliate against a person because of an action taken to enforce or exercise any USERRA right or for assisting in an USERRA investigation.

What are employers required to do?

A pre-service employer must reemploy service members returning from a period of service in the uniformed services if those members meet the following five criteria:

  1. The person must have been absent from a civilian job on account of service in the uniformed services;
  2. The person must have given advance notice to the employer that he or she was leaving the job for service in the uniformed, unless such notice was precluded by military necessity or otherwise impossible or unreasonable;
  3. The cumulative period of military service with that employer must not have exceeded five years;
  4. The person must not have been released from service under dishonorable or other punitive conditions; and
  5. The person must have reported back to the civilian job in a timely manner or have submitted a timely application for reemployment, unless timely reporting back or application was impossible or unreasonable.


Employers are required to provide persons (that are eligible for protection under USERRA) a notice of the rights, benefits, and obligations of such persons and such employers under USERRA.

What happens when a service member returns to his or her civilian job?

Returning service members are to be reemployed in the job that they would have attained had they not been absent for military service. This is referred to as the "escalator" principle. The employer is required to return the employee to the same seniority, status, and pay, as well as other benefits determined by seniority.  USERRA also requires that reasonable efforts, such as training or retraining, be made to enable returning service members to qualify for reemployment.  If the service member cannot qualify for the "escalator" position, he or she must be reemployed, if qualified, in any other position that is the nearest approximation to the escalator position and then to the pre-service position.

What about health insurance or other employment benefits?

Health and pension plan coverage for service members is also covered by USERRA.  Individuals performing duty of more than 30 days may elect to continue employer sponsored healthcare for up to 24 months. However, if they do so, they may be required to pay the full premium.  For military service of less than 31 days, healthcare coverage is provided as if the service member had remained employed.

USERRA's pension protections apply to defined benefit plans and defined contribution plans. It also applies to plans provided under federal or state laws governing pension benefits for government employees.  For these plans, they must be treated as if the service member had continuous service with the employer.

Where can a service member file a complaint if there is a violation?

Service members that wish to file a complaint alleging a violation have two alternatives. First, they can file a complaint with the U.S. Department of Labor, Veterans Employment and Training Service.  If the DOL determines that a violation has occurred, it will try to negotiate a resolution.  However, it has no enforcement authority.  Thus, it will turn the matter over to the Office of Special Counsel in the case of the federal government, or the United State Attorney General.  These officials may pursue the matter, or they may inform the service member that he or she may take action against the employer.

The other alternative is for the service member to file a lawsuit in state or federal court. Employees of the federal government must file an appeal with the Merit Systems Protection Board.

What is the remedy for a violation of USERRA?

USERRA provides for compensatory damages, reinstatement, back pay, lost benefits, corrected personnel files, lost promotional opportunities, retroactive seniority, pension adjustments, and restored vacation. If a violation is determined to be willful, the court may double any amount due as liquidated damages.  USERRA does not allow for an award punitive damages.  However, the court may, in its discretion, award attorney fees and legal expenses.