Protecting Business Partnerships from Unanticipated Emergencies

Ian Gilbert

The maxim that an ounce of prevention is worth a pound of cure holds up just as well in the business world as it does in the practice of medicine. Consider the following situation: partners Allen, Bob, and Charlie have a successful small business together. Through years of grit, industry, and teamwork, they have taken a business idea from the theoretical into the practical and found a niche for themselves in a new market. In the course of success, they formed an limited liability company (LLC), developed relationships with marketers, suppliers, accountants and lawyers, and did their due diligence to ensure their growth and viability for the future.

                But then disaster strikes. Maybe Allen is getting a divorce. Maybe Bob is faced with personal bankruptcy and criminal charges of fraud or tax evasion. Maybe Charlie has been in an accident and is looking at long-term care and permanent intellectual disability. The question of whether the business can survive (and at what cost) may rest on the partners having planned in advance for these contingencies.

                In any of the situations described above, the lack of a formal recognized agreement between the partners could very well end the business. A divorcing spouse may be entitled to a share of the business assets, forcing a sell-off or dissolution. In the case of personal bankruptcy, accounts and assets of the business could be subject to judgments and liens. If a member of the business is afflicted with some type of disorder that prevents them from actively participating, the business could find itself hamstrung until a guardianship can be put in place if unanimous consent is required for some decision-making.

                The most practical way for a business with multiple partners to guard against unanticipated disaster is to adopt a well-crafted buy-sell agreement. A buy-sell agreement is, in the simplest terms, a contract between all of the owners of a business and the business itself that governs how the interests in the business can be transferred. New York has adopted certain rules that restrict what an enforceable buy-sell agreement can include. For example, prohibiting a member of an LLC from ever selling his or her interest in the business to somebody else would likely be deemed an “unreasonable restraint on alienation” and unenforceable. On the other hand, New York courts will generally uphold a provision that gives the business or the other members a first right to “buy back” the selling member’s interest on the stated terms, or pursuant to a stated figure in the agreement within a certain time period.

                The buy-sell agreement or operating agreement can be expanded to include rules that require certain outcomes based on triggering events such as death, divorce, incapacity, personal bankruptcy, imprisonment, etc.

                There are other practical steps a business should consider taking with respect to its members. A business can take out life insurance policies on the members naming the business as the payee. Upon the member’s death, the business can then use the life insurance policy proceeds to pay a sum to the surviving family members, rather than trying to scrap together enough money through new loans and liquidating assets, to satisfy the amount owed for the decedent member’s share of the business. Another option is for the members to grant each other limited durable powers of attorney. A power of attorney is an agreement granting another person the authority to make certain decisions on his or her behalf. This is a useful tool for situations where consent must be unanimous (such as making large capital purchases or entering settlements and confessions of judgment). Powers of attorney can also be “springing” which generally means that they come into effect only if the principal becomes incapacitated. Again, the idea here is about saving time and money down the road by taking simple preventative measures.

                Many of these steps also apply to business owners who operate as sole proprietors or who are in charge of single-member entities but wish to see their businesses continue on after their own involvement. To that end, lawyers can help to reconcile business goals with broader estate planning objectives.

                All of these strategies and more should be considered by business owners, and can often be implemented expeditiously and without great cost, through an attorney or team of advisors familiar with the business’s operations and the owners’ goals. Failing to take proper precautions may cause, as Churchill said, “history to cast its verdict with those terrible, chilling words, ‘too late’”.

                The information in this article is for informational purposes only and should not be construed as legal advice with respect to any specific subject matter or circumstances. Contact a reputable attorney for advice regarding your particular situation or issue.

Breaking Biases

AMANDA COLTON

It can often be difficult for individuals with criminal convictions to find employment or housing, even years after serving their sentence. Even with protections in place, some employers and landlords can’t fight an unconscious bias towards these individuals. Local attorney Matthew Porter has begun using a new law passed in October of last year to protect his clients from such bias.

    New York State does not have any laws in place to erase, or expunge, criminal records. Instead, New York offers a processes for sealing certain criminal records. For an individual experiencing additional hardship due to an old conviction, applying to have their records sealed may be an attractive option.

     “When a person’s record is sealed it is not erased, but any related fingerprints, booking photos, and DNA samples may be returned to the individual or destroyed, and records of their crime will no longer be available to the public,” explained Mr. Porter.

    Under New York’s Executive Law Section 296(16), employers are prohibited from inquiring about or taking any discriminatory action based on an individual’s sealed record. This means that if a record is sealed it cannot be considered in an application for employment.

    “However,” said Mr. Porter, “this law does not apply to law enforcement agencies, nor to those charged with federal licensing for firearms or other deadly weapons.”

    The two processes for having criminal records sealed are outlined in New York’s Criminal Procedure Law Sections 160.58 and 160.59. Section 160.59, effective October 2017, has created a new opportunity for individuals who have not been convicted of a crime in the past ten years to apply to have their criminal convictions sealed.

    Due to the individual nature of applying this new law, Mr. Porter is unable to state that any conviction will be automatically sealed. However, he was able to provide certain requirements a person must meet in order to apply to have a conviction sealed under the new law, primarily including but not limited to:

  • The individual may have up to two convictions, including only one felony conviction;
  • To be considered an “eligible offense” the conviction(s) must not have been for any of the following:

    ◦ sex offenses,

    ◦ other crimes requiring sex offender registration,

    ◦ Class A felonies (including but not limited to the following non-violent felonies: aggravated enterprise corruption, criminal possession or sale of a controlled substance in the first or second degree, operating as a major trafficker or conspiracy in the first degree)

    ◦ violent felonies, and

    ◦ attempts to commit any ineligible offenses under the categories listed above;

  • It must have been at least ten years since either

    ◦ the date the sentence was imposed, or

    ◦ the date of release from the individual’s last period of incarceration; and

  • The individual must not have been convicted of any new crimes during the ten-year waiting period.

    Once the application is filed, the local district attorney’s office has forty-five (45) days to notify the court whether they will oppose sealing the record. Then a judge must consider a number of factors in determining whether to grant a sealing application, including:

  • the amount of time since the individual’s last conviction,
  • the circumstances of the offense the individual seeks to have sealed,
  • any other convictions,
  • the individual’s character,
  • statements by any victims of the offense,
  • the impact sealing will have on the individual’s reintegration into society, and
  • the impact sealing will have on the public.

    Any experienced criminal attorney can help individuals determine whether they are eligible for sealing and to guide them through the sealing application process. The attorneys at Conboy, McKay, Bachman & Kendall, LLP, with offices in Jefferson County and St. Lawrence County, understand this new law and have begun aiding clients in having their criminal records sealed.

AMANDA COLTON is from Ogdensburg. In 2016, Amanda received her J.D. from Hofstra University and she is currently pending admission to the bar. Once admitted, Amanda will be practicing in the areas of domestic relations and criminal law.

Legal Duties and Responsibilities of Directors & Officers

Megan Kendall

An individual must fully understand the duties and responsibilities that accompany being a director and/or an officer of a nonprofit organization. Directors and officers have fiduciary responsibilities to steer the organization towards a sustainable future, to adopt policies that are sound, ethical and legal, and to ensure the organization complies with the required laws and regulations. The directors and officers are responsible to ensure that the nonprofit has adequate resources to advance its mission.

    Directors and officers are held to the standard that they will act in good faith, and will use the degree of diligence, care and skill which a prudent person would use in their similar position and under similar circumstances. Directors and officers are expected to comply with the three fundamental areas of legal and fiduciary responsibilities, including the duty of care, duty of loyalty and the duty of obedience. 

Duty of Care

    The directors and officers are required to participate in the governance and oversight of the organization’s activities.  Directors and officers are required to specifically uphold the following duty of care requirements: 

1.) To attend board and committee meetings regularly;

2.) To review and understand the financial documents and reports;

3.) To help develop a strategic plan that identifies and helps to manage risk;

4.) To take all necessary steps to advance the organization’s mission goals;

5.) To take reasonable steps to ensure the organization is compliant with all of the applicable laws and regulations;

6.) To read the minutes and reports from prior meetings, including meetings that were missed;

7.) To approve the process for fundraising, professional fees, compensation and construction contracts;

8.) To ensure the board minutes reflect any dissenting votes or actions that are taken;

9.) To read all of the literature on the organization’s programs;

10.) To make sure that monthly financial statements are available, that they are clear, and communicate the proper information;

11.) To ensure that all policies are written, safeguarded and are used to protect the organization’s assets. The polices must be updated regularly;

12.) To ensure background checks are done on employees;

13.) To determine the amount and level of director and officer liability coverage;

14.) To encourage diversity within the board members; and

15.) To be involved in the selection and review of the chief executive officer and any other key employees involved in the day-to-day operations of the organization.

Duty of Loyalty

    The Duty of Loyalty requires officers and directors to act in the best interest of the organization at all times. Directors and officers need to ensure that all potential conflicts of interest are identified and disclosed prior to joining the board. New York State specifically requires that all nonprofits have a written conflict of interest policy. The policy must be re-signed each and every year by the directors and officers. Specifically, directors and officers must:

1.) Be able to identify circumstances that render conflicts of interest;

2.) Be involved in setting forth procedures to disclose conflicts of interest;

3.) Prohibit other individuals from being present during or participating in deliberation, voting on the issue, or influencing the vote on the issues that directly involves the conflict of interest; and

4.) Ensure the organization documents and resolves each conflict;

Duty of Obedience

    The Duty of Obedience requires that directors and officers work to ensure that the organization complies with all applicable laws and regulation, ensure that the organization complies with its own policies and ensure that the organization is carrying out its mission.  Directors and officers have a duty to ensure that the organization is complying with the requirements to maintain their tax-exempt status by filing the appropriate forms with the IRS and the attorney general.  

    Before joining the board, make sure you complete your due diligence. You should research the expectations of board members, governance responsibilities, the time commitment, the regularity of board and committee meetings, fundraising obligations, the current board of directors, the leadership style of the board, the number of employees, and the organization’s policies. In addition, you should verify that there are no pending regulatory investigations or any other pending investigations. You must review the organization’s by-laws and verify that the organization has directors’ and officers’ liability insurance coverage.

Joining a nonprofit board can be an extremely rewarding experience.  Now that you have the knowledge to make an informed decision, go join a nonprofit board!

 

Megan Kendall is an associate attorney at Conboy, McKay, Bachman & Kendall LLP, and practices in areas of estate planning, real estate, and business law. She is a member of Clayton Lions Club, Clayton Improvement Association, Herring College Trust, T.I. Community Foundation, Association of the Blind and Clayton Opera House. Contact her at 315-788-5100