The Legal Play Blog

Podcast: Play in new window | Download | Embed

Subscribe Apple Podcasts | RSS | Subscribe:

The birth of a business is characterized by a sense of positivity. Often little thought is given to setting the parameters for a potential battle for control of the company if disagreements between owners begin to cause an impasse. Having a vague business agreement can lead to substantial legal problems, not only for the owners, but for the business itself.

Fortunately, by working with a qualified attorney when forming the company, new business owners can flesh out a comprehensive business agreement that includes the protocol for the unthinkable. If certain events should occur, a well-planned business agreement will protect all involved.

The “Bright Side” of Partnerships

The majority of people who engage in business partnerships do so with the understanding that they are able to work well together. Initially, they are confident enough in each other to share a fifty-fifty ownership of the company without requiring anything more than a standard template.

We often hear budding entrepreneurs claim that a comprehensive business agreement is not needed. The most common reasons are:

• “We wholeheartedly believe we will do very well.”
• “We are going to make lots of money with our company.”
• “We are of like mind and always agree with one another.”
• “We have total belief in the business’ mission.”
• “Even if there turns out to be something that causes us to dissolve the company, we will just split everything fifty-fifty.”

The bright side of partnerships can be beautiful, but it seldom stays that way when problems arise.

 

Acknowledging Both Success and Failure Can Cause Problems

Most business owners mistakenly believe that only failure will bring problems to a company and its ownership, but the reality is that success can be equally responsible for demise in a partnership.

When there is some sort of failure within the company, these are some of the forms it can take:

• If one party doesn’t have any money, they may want the other one to put up the money instead.
• It may be viewed as unfair if one partner puts in money, but the other one does not want to.
• If one party brings in a contact base of family and friends and the other party does not, it can be seen as lopsided effort.
• If there are liabilities, one partner may want to force the other one to pay.
• If a pay cut is required, one partner could demand the other take it while they themselves do not.

Success of the business can also create problems in the partnership, and this typically takes forms in three primary ways:

1. One partner wants to sell out due to their current success, but the other does not.
2. One party may embrace success and want to take it easy, while the other prefers to keep their workload the same or even increase it.
3. With funds from new success, the partners may disagree on whether they take on more debt or pay off the debt they have.

In addition to failures and successes, life in general can bring up issues for the partners. For example, one partner may become older or not healthy and want out. Death of one of the partners can also bring about issues with the deceased’s estate and the partnership.

In the end, whether it is due to failure, success, or life, various circumstances can cause partners to be on different pages with how to run the business. Theoretically, most partners think they can just split up the business if they decide to go their separate ways, but it is far more complicated than this, and it often leads to a battle for control of the company.

 

What the Battle for Control of the Company Can Look Like

When two partners are at odds, the battle for control can look quite different depending on the specific details, or lack thereof, in the initial business agreement.

In general, when there are two partners who are not working well together anymore but their partnership agreement is silent as to what should happen in this event, one of three things takes place:

1. Both partners simply live with it and just continue on.
2. The partners decide to go their separate ways and sit down to negotiate a settlement regarding that decision.
3. They are forced to hire lawyers, file lawsuits, and have receivers appointed.

Before the partners decide which of the three pathways they want to choose going forward, the best thing to do is keep the lines of communication open to discuss what each of them wants to do and where they want to get in the process.

 

Potential Stumbling Blocks to Ending a Partnership

In the battle for control of the company, there are a few stumbling blocks that can play a large role in which of the above three ways they choose to move forward.

• Customer-base. The partners may fight over who gets the business’ customers once the partnership is dissolved.
• Manner of division. Some partners choose to split the business into parts and award some to each partner. However, this can be tricky because they could have an emotional or monetary attachment to the business they have helped build. This then necessitates a buyout agreement.
• Most businesses are financed by some sort of loan, and banks will require guarantees. Problems can arise if the exiting partner wants to be released from the personal liability with the loan since they are not there actively running the business and are not involved in the company and its line of credit.
• If things have grown so bad that the partnership has become adversarial and the partners cannot work it out themselves, professional lawyers, accountants, and appraisers will need to be brought in to value items and see what a buyout would require. Some businesses have just a desk, phone, and services. Other businesses might have a warehouse, inventory, storage yards, office buildings, and many other assets. The more assets and debts there are, the more complicated the situation becomes.
• Non-competes. This can be the biggest point of contention in buyouts as one partner typically does not want the other to be competing against them after they exit the partnership.
• Complete deadlock. This is when the partners absolutely cannot agree, and the business cannot operate without an agreement. A court may then be empowered to appoint a receiver who will take over the business. This is not efficient nor cost-friendly for the business or partners, so receivership is usually recommended only when the other sole option is to shut down the company completely.

 

Do I Need an Attorney to End My Business Partnership?

In the simplest of situations that have no external factors such as bank lending and liens, a lawyer’s help may not be required when ending a business partnership. Yet, if a complication exists like one partner buying another out or noncompete issues, these types of situations do require the experience of a knowledgeable attorney.

It is a mistake to wait until a problem develops to enlist the help of an attorney. Before going into the partnership, a lawyer can help owners proactively consider and determine factors such as determining buyout agreements for potential disputes, the division of the company if needed, who gets bought out, how much is paid in the buyout, what process will guide a buyout, the time period of the buyout, and non-competes.

 

When it comes to the battle for control of the company, the main takeaway should be to do as much as possible up front by having a lawyer present in the beginning to walk both partners through things they may not dream will happening and plan well for them. . . just in case.

Podcast: Play in new window | Download | Embed

Subscribe Apple Podcasts | RSS | Subscribe:

Trusts and wills are one way for a grantor to hand over their estate to a recipient of their choice. But many of us don’t have much to leave once we pass. Sometimes all the large property a grantor may have are a house and a car. The car title can be handled easily via a simple process through the local department of motor vehicles (DMV). While living, the grantor can complete a Beneficiary Designation Form. If this form has not been completed, a living heir of the decedent can submit an Affidavit of Heirship form to the local DMV.

For real property, such as a house, one of the best and easiest ways to leave your house to someone upon your death is what is called a “Lady Bird Deed.” The legal term for this type of deed is an Enhanced Life Estate Warranty Deed. It earned the name of Lady Bird Deed after Claudia “Lady Bird” Johnson, the wife of Former United States President Lyndon B. Johnson. Lady Bird used one of these deeds to transfer some of her real property to her daughter. The process was easy, effective, and legally recognized as a testamentary transfer. The name “Lady Bird Deed” was apparently catchy and much easier to say, thus the nickname stuck.

What exactly is a Lady Bird Deed? According to the associates at the Hap May firm, it is pure genius is what it is. Read on to know exactly how a Lady Bird Deed works, as well as knowing your rights under it (both as grantor and grantee).

Lady Bird Deed vs. Regular Warranty Deed

The long and short of it is that a Lady Bird Deed reserves the right for the grantor to revoke the transfer during the life of the grantor, whereas transfers under Warranty Deeds cannot be revoked once signed and recorded. Lady Bird Deeds are similar to wills — the grantor can change their mind anytime up to their death. Whoever is named as grantee under a Lady Bird Deed is automatically granted title to the house once the grantor passes. But grantee beware: the grantor is well within their right to execute a subsequent contradictory Lady Bird Deed for the same property to someone else. In that case, the first deed is revoked, and the original grantee has no more rights to the house at that point.

Take the following scenario of a client who came to an attorney. The client’s grandmother had passed away. The granddaughter had a deed in which her grandmother had conveyed to the granddaughter the grandmother’s house before the grandmother passed away. As if losing her grandmother wasn’t enough, she was being hailed to court pursuant to an eviction suit, from someone claiming to have ownership rights to the house – her mother (grandmother’s daughter).

Before the grandmother passed, and previous to the execution of granddaughter’s deed, the grandmother had executed a Lady Bird deed to her daughter, giving her daughter full ownership rights to the house upon grandmother’s death. Days after the deed was signed and recorded, the daughter left the state and her dying mother behind. In the daughter’s absence, the granddaughter chose to stay and live with her sick grandmother and take care of her grandmother who was battling cancer.

With her daughter gone, the grandmother began to rethink deeding her home to the daughter. Since the granddaughter had devoted herself to caring for the grandmother, and because the granddaughter was using the house as a primary residence, the grandmother decided to execute another Lady Bird deed on behalf of her granddaughter.

When the grandmother passed away a few months later, the granddaughter used the Lady Bird deed to execute an affidavit of ownership and filed both in the property records. The house now belonged to the granddaughter.

However, when the daughter heard of her mother’s passing, she argued the house was hers because she was deeded the property first and had recorded it in the property records well before the granddaughter’s deed. This left the daughter and granddaughter contesting ownership of the property.

Ultimately, who does the house belong to?

The answer is in the type of deed that the grandmother executed, a Lady Bird Deed. This is because there is a substantial difference between it and a regular warranty deed, one is revokable, and the other is not.

If the grandmother had executed a regular warranty deed when she deeded the house to her daughter, then the mother would be correct. Generally, the rule is “first in time, first in right” – meaning that if you receive a deed first, and record it in the property records, the grantor has nothing left to deed to anyone else. If the grandmother had granted a warranty deed to her daughter, the second deed to the granddaughter would have been essentially worthless. However, a Lady Bird deed includes a special provision that basically says a grantor maintains all rights to the property during their lifetime, to live in it, make changes to it, and to transfer or even sell it. And the grantor has the right to change their minds and revoke the deed at any time, without the permission of the grantee, at any time during the grantor’s lifetime. Revocation is as simple as executing another Lady Bird Deed on behalf of another grantee. Since the grandmother had granted a simple Lady Bird Deed to her daughter, executing another deed to the granddaughter legally revoked the deed to her daughter.

Therefore, the house legally belongs to the granddaughter.

The Genius of a Lady Bird Deed

The ability for a grantor to revoke a previously executed deed is a remarkable feature. The grantor can do so without the initial grantee having any say in the matter. The grantor needs no permission, and the person who was originally deeded the property does not even have to be aware of the change.

Revocation can happen in one of two ways:

1. File a revocation in real property records that basically says, “I hereby revoke this deed.”
2. Convey another Lady Bird Deed to someone else.

There is no Texas statute that supports the existence and validity of Lady Bird Deeds. The Lady Bird Deed is just a type of deed that is revokable. Yet courts have upheld their legality as a binding contract and testamentary instrument. Their primary purpose is to avoid the probate process for people that do not have much to their name beyond a house.

If a person passes away without having deeded their house to someone else, then the property must be passed on via probate – either through a will (if the decedent has one) or through intestate succession (divided among the decedent’s legal heirs). If a person dies without a will, a court must appoint a dependent administrator to be responsible for paying the decedent’s debts and going through the court every time they need to do something, such as list and sell a house. This can be expensive and cumbersome.

In Texas, if all a person has in their name is their house, executing a Lady Bird Deed is a smart way to avoid the hassle of probate.  The grantee can deed the house to the beneficiary of their choice, but continue to live in it and have the power to do what they want with the house in their lifetime. A Lady Bird Deed also gives the grantor the freedom to change their mind until they pass, because the deed does not become effective until the grantor’s death.

After the grantor passes, the grantee simply has to take a death certificate and an affidavit and file the deed in the real property records.

Stipulations of the Lady Bird Deed

There are a few stipulations of the Lady Bird Deed, such as:

• While many states, like Texas, recognize this type of deed, not all of them do. If you don’t live in Texas, check that your state recognizes Enhanced Life Estate Warranty Deeds before you decide to use one to transfer property.
• It is subject to abuse. For instance, someone on their deathbed could be made to sign a deed under undue influence or trickery. In this case, the deed to a grantee could be set aside if it can be shown there was undue influence or fraud exercised on the grantor. An example of this can be if one child locks mom away and will not let other children see her just to ensure she gets mom to sign the deed to her.
• To be recognized, the deed must be properly notarized and filed in the county’s real property records.

Whether you are considering deeding your home to someone via a Lady Bird Deed, or if you think deed ownership should be contested, enlist the help of a reputable real estate attorney to determine your options.