1. Limited liability of owners and managers for entity level acts;
2. Limited ability to “take” an ownership interest away to collect for an outside personal liability.

Most of us have believed that a single member LLC (just one owner) was at some risk if a collection effort against the owner sought to take the LLC membership interest away.  After all, no one else would be affected except the debtor owner.  Regrettably, the decision of the Florida Supreme Court in Olmstead v. Federal Trade Commission, SC08‑1009 (June 24, 2010)has reached beyond that to frame a solution for an unasked question.  This decision places the protections of multiple member LLCs in serious question.

O.K., so what?  Damage to the fragile business climate of Florida is the WHAT!  That is not an overstatement.   LLCs are the most popular form of business today due to their dual protection attributes.  Justice Lewis in his dissent points out the numerous problems and errors of the position taken by the majority.  His minority opinion would probably get a typical attorney disciplined, but he is an equal, a colleague of the Supreme Court, and can say those things without risk.  It is a bad day, and we are seeking the best form of replacement planning for our clients.  No doubt that some businesses will reestablish in other, more protective states.  Even if they continue their business activities for now in Florida, state fees are going elsewhere.  Further, many businesses are able to move to other warm climates more favorable than Florida – can you say Nevada?  Even Colorado s favorable if not wam (Florida in August?  Colorado sound good!).

LLCs have been a very capable tool in estate planning as well, allowing the grouping of assets, structuring buy-sell agreements, providing for active business continuity, and providing for post-death control by the best equipped person.  That may move outside of Florida as well – and many times the families will follow.  Nevada has no income tax . . . . .

I can’t help but think that the Federal Trade Commission as a litigant somehow impressed the Court in favor of the FTC position.  Whatever the reason behind the faulty reasoning, the Court has erred.  Allan Gassman, a lawyer well versed in the use of LLCs in estate planning observes:  Well respected bankruptcy and debtor-creditor lawyers have commented that the Supreme Court will be severely criticized for this “non-business law savvy” decision.

In the meantime, if your planning is critical, you may wish to rethink your single member LLC to at least have another member, or to call your counsel to reconsider your plan as a whole.

If your employer provides a typical 3 times compensation life insurance benefit, and you have privately owned life insurance in a responsible amount to benefit your family, that is all included for estate tax purposes.  You may be in trouble, and not be aware of it.

Whatever you do, and with whomever you consult, DO IT NOW.  Anticipate the worst, and prepare accordingly.

However, the rules are not as clear in respect to non-business expenses.

Second Rule: To be deductible, a non-business legal expense must be incurred under one of the following circumstances:

• The collection or production of taxable income.
• Managing, conserving or maintaining income-producing property.
• The determination, collection or refund of any tax.

Legal expenses of a purely personal nature are not tax deductible. Frequently legal services involve a mixture of personal and business matters which require the attorney to be aware of applicable tax law, and to perform a proper allocation within an opinion letter to the client for tax purposes.

Third Rule: If the fee incurred is associated with acquiring a capital asset, to the extent it is deductible, it is generally first capitalized into the asset acquisition cost, then depreciated or amortized.

TAX COURT CASE: Melat divorced his wife in 1989. In the division of marital property, Melat presented expert testimony on the value of his law partnership to the court. On his 1989 Federal Income Tax return, Melat deducted legal fees respecting his divorce of $28,000, which was 75% of his total fees.

Fees paid in connection with a divorce are usually nondeductible personal expenses. Melat claimed that the fees were deductible because they were incurred to conserve “the future stream of income” from his law practice. The Tax Court noted that the underlying action was personal in origin. Result: no deduction (Melat, TC Memo 1993-247).

Note: Only fees in connection with a rental property or other income producing property may be deducted from gross income. Other legal fees which fit into the “determination, collection or refund of taxes” category generally must be deducted as miscellaneous expenses. Miscellaneous expenses are deductible only to the extent in excess of 2% of your adjusted gross income.

The costs are not astronomical, but they are now somewhat more significant. The costs vary dependent on which court has jurisdiction, the type of suit, the number of parties to the suit, and other issues. A completely bizarre suit will likely be dismissed quickly, possibly with an award of attorneys fees. You must bring this by motion before the court, probably through legal counsel, at your expense. Even if the action is dismissed and you recover your fees, you have still been distressed by this, and used some of theat rare commodity, time.

So why discuss this if there isn’t any way to prevent suits? Answer – because there are ways to minimize the effect of suits. In the instance of recreational clubs, good and effective releases are important. Requiring use of all the proper safety equipment, with the agreement to do so in the same written release. Insure the organization – and for that matter HAVE an organization (probably under one to the sub-parts of the Internal Revenue Code at Section 501(c)). Insure the organization and its officers and directors for a reasonable sum. Recreational organizations can usually find special interest groups or associations which are sources for insurances. Insist upon minimum skills or training for joining in on activities. Provide training in the basics (or more) for beginners. Keep records of the training. Create a report form for incidents, and keep a signed copy in your records. These steps are to protect members from each other, as well as the organization and its leaders.

These concepts translate into a business environment as well. Have an entity that protects you; carry insurances; train, train, train to minimize injury; keep records and take good reports for every incident. These things may discourage suits, will reduce factual uncertainties, and help quantify any liability. While eliminating lawsuits is not realistic, minimizing their effect is.

Once again, simple but complex – the rule is that the “client” had a reasonable expectation that such a relationship would be or was established.  Before trying to understand that, we should consider the benefit which the “client” is expecting from the relationship.  Buried in these imaginings are additional myths. While there may be other “benefits”, these capture the most important:

1. Confidentiality
2. Exclusivity (as to that matter) – that is, counsel is legally unable to represent the adverse party
3. Accountability for advice given
4. The right to future services

Confidentiality.  If you have an appointment with an attorney who knows, based upon you setting the appointment, that you want defense against a suit by X for some alleged obligation, then you can expect confidentiality – ususally.  If you tell the attorney that you are going to do a particular thing because you are angry with X, and the attorney is aware that this is a criminal act you are proposing, then forget confidentiality  If you obtain advice from the attorney, and without his or her knowledge, use the advice to commit a fraud, forget the confidentiality.  Those are not reasonable expectationsof confidentiality even in an attorney-client relationship. A recent fraud involving counterfeit Cashiers Checks sent to attorneys, with a legal fee to be withdrawn, and the balance sent to the client DOES NOT give an attorney-client realtionship or privilege.

Exclusivity.  You speak to an attorney you barely know at a function you both attend, and in a conversation blurt out facts about a problem that you have with Y, and are thinking of filing suit; does he do that kind of work?  Unfortunately, the attorney represents Y regularly – what now?  This is difficult.  The setting is not one in which you could reasonably expect confidentiality; however, if you and Y went to court, this attorney may have to first ask the court to determine if he is disqualified from representing Y.  That is likely to upset Y, and the time to ask the court for a ruling will likely be at the attorneys expense.  He could also lose Y as a client.  Do you understand now why attorneys are reluctant to be “open” to such discussions?

What if you were an attorney, and in your early morning e-mail you received a solicitation from someone you don’t know, telling you all their dirty secrets, and asking you to consider their case.  Assume that the story draws you in before you realize what is being asked.  Are you bound to NOT represent the adverse party in this person’s matter?  No.  Until a few months ago, here in Florida the answer would have been “maybe”.  States are now dealing with this more than ten year old question, and for most, the decision has been that such blanket solicitations have no reasonable expectation that an attorney-client is established.  These solicitations come by e-mail, USPS. telephone calls, any of the other delivery services, and soon, I am sure, texting, Twitter and other means.  This is ususally someone trying to conflict potential opposing counsel out of representation – unsuccessfully now that the issue is settled here.  Be aware that the rules do vary in other states.

Accountability.  The coffee clatch advice is dangerous.  In any area of law, there are details which can turn an issue on its head, and lead to a different conclusion and result.  A conversation is a poor way to record what advice was given, if any.  Each of tries to record the discussion at a later time, but it is impossibel to fully do so.  If you were to ask me if the sun is shining, I might first ask if you were asking the lawyer in me for that answer.  Do not laugh!  Alright, so you could not help yourself!  The lawyer in me would answer, “Define shining.”  Believe me, every conversation, even those in this information, is flavored with, “Seek professional advice” because digging  out all the relevant facts is difficult.  Equivocal answers are given in an uncertain world, and ours is all of that.  Yes, we are accountable for our advice; yes, despite evidence to the contrary, we are human – we feel for our clients and really want to solve their problems.  We must avoid an indiscreet bit of advice, for it can, has and will bite us.

Future Services.  With rare exception, the access to counsel is based upon employment accepted by counsel and proper compensation.  Usually we have an agreement that says cooperation, timeliness, etc, although the case law shows this to be implied.  We DO NOT have to work for someone who doesn’t pay per agreement, fails to cooperate and assist, or acts belligerently and abusively.  We cannot drop our client in the mud, for example in the middle of a trial, but we can withdraw except where such would prejudice the client.  At a certain point in some Federal matters, judges will not allow withdrawal.  That is why counsel who starts a Federal case usually requires a sizable retainer, unless the matter is contingent.

The rules are, as in most tax-related areas, both simple and complex.  The simple: an indepedent contractor has to be truly independent.  The complex is in what that really means.  Roughly stated, determing the status is not easy – and once again we say “Don’t try this at home – hire a professional!” – an independent contractor should have a license for their business; business cards and other documents bearing their name or that of their company; insurance; set their own hours and work methods (within safe parameters); price their services or goods; make profits or sustain losses as any other business does; provide their own tools of the trade; generally must work in areas other than that which your business conducts; etc.  For example, as a law firm, if we hire a painter to touch up our office space, that is not our customary business activity.  The more business formalities that are observed, the more likely that person is an “independent contractor.” 

The consequences of improper classification can be severe, including paying the employer’s share of Social Security and Medicare contribution, and the possibility of paying all the income tax which was due from the “employee” for their employment earnings with you – all this plus penalties and interest.  Worse yet is an injury “on the job,” where workers’ compensation should have been provided and wasn’t.  Suddenly you may find yourself determined to be that person’s “employer”, and your potential liability is unlimited.  With workers’ compensation, you are relieved from liability for anything except egregious gross negligence, which is rare. 

Unless you have determined with prudent research by competent specialists that you may employ persons as independent contractors, DO NOT TAKE THIS RISK.  It is just too dangerous.  For a current example of the breadth of this, go to:  http://www.boston.com/news/local/massachusetts/articles/2009/08/11/chelsea_strippers_each_entitled_to_thousands_in_class_action_suit_judge_rules/

Our law is based upon the English system of “Common Law”, but that is another story for later.  The courts system has taken the language English law and adopted it to our law and courts.  We depart from England in many ways, but in one respect we maintain a parallel – you must be admitted to the Bar to practice law.

Judges appointed by the King would travel to towns around England on a “circuit.”  There were no fine courthouses, no great buildings dedicated to justice.  The towns were in a primitive land.  The towns all had a central square, sometimes called the market or town square.  This pattern is present throughout the old towns and villages of Europe, not just England.  We have cycled England and other European countries, and can tell you that the farming villages are a short distance from one another – five to 7 miles, no more.  The market towns are in the center of a hub of such villages, all for the commerce in food, animals and other agricultural products.

Some of the “roadies” for the judge would ride ahead to the next town as the final cases were being heard in the last one.  They would announce that the judge would soon arrival so that litigants could be summoned (think of “Summonses” today), and would prepare the town square for the next court session.  We take our notion of circuit riding judges from this process.

In each town square were vertical posts buried in the ground at numerous points, and projecting above ground to about waist high.  These were used for market day, for fairs and for court.  A “bar” was horizontally secured on the vertical post to enclose an area for the court.  The party asking the court to hear a problem and the person accused of being responsible were not allowed inside.  Only persons whom the judge had recognized as having sufficient knowledge of the law were “admitted to the bar” – allowed inside the area set aside for the court – to make arguments for their clients.  Witnesses were allowed in to testify, and a prosecutor for the Crown in criminal cases.  From this elementary beginning our legal system of advanced education and testing for, even today, admission to the Bar, has emerged.

In Florida as in most states, age eighteen is the age of majority.  Your progeny can contract, marry, vote, join the military, cannot drink until 21, but do have privacy rights.  Yes, even from you.  Their University, School or College cannot provide any privacy protected information to you, including health, grades, class attendance or anything else.  A call in the night to inform you that your child has been injured (you were on the Emergency Notification), followed by the statement that they cannot disclose anything more, is seriously distressing.  It is even more distressing if that educational institution is a long distance away.  So what can you do?

 Now, before the migration back to higher learning takes place, consider that if your child executes a Durable Power of Attorney, Health Care Designation (called a Health Care Power of Attorney, Authority or Surrogacy – all mean the same), and Living Will, these concerns are generally resolved, because you will have the authority to be informed, and to act on your child’s behalf.  You could add a Will to the list, although that is more of an education in responsibility than a necessity.  Most states provide that the parents are default beneficiaries, and few college age children have much in the way of assets.

 Your family or estate planning attorney can quickly prepare these documents; the young generally have simple issues.  Call, but be prepared to provide the responses as to who will be named with authority under each document.  Probably that will be you as parents, and possibly an older brother or sister, or another relative as a backup in case you aren’t available.  Remember that it is your child’s choice, not yours.  Of course, they may prefer going to college than being out on the street, so you do have some influence.  Once executed, the documents are usually scanned to PDF files, and can be sent to the institution when needed.  The cost to prepare these documents is much less than a plane ticket or lost workday, traveling with the fear that your child needs you.

You may wish to consider our posting at http://www.strattonlaw.com/archives/214 for further thoughts.

It is true that under Florida and the laws in many states that the failure to pay for certain kinds of materials or services allows the filing of a lien.  Usually this involves services or materials to improve real property, including construction, repairs, some design and landscaping, and architect and engineering services.  These are specifically protected under statutes, and a provider of materials or services of this type may file a protective lien for the payment of their services even before a failure to pay occurs.  This is the single most common type of lien other than a “judgment” lien.  This lien for improvement of real property has limitation and special notice requirements, and is only applicable to the real property to which the services relate.

Judgment liens are based upon having properly recorded a judgment received after successfully completing a suit against a defendant.  There are technical requirements as to what the judgment must contain to be recorded and thus become a valid lien.  The judgment lien is against all real property of the defendant in the county where recorded.  A creditor holding a judgment may also record the judgment with the State of Florida.  This then acts as a lien against all personal property anywhere in Florida.

Now back to the question – why not just file the lien?  Unless you are one of those permitted to obtain a lien by merely recording it in the correct form, you may be placing yourself at risk of a suit for falsely claiming a lien.  Imagine the you have a debt due to you for $10,000, and you file a lien even though you have no right to do so.  How bad can that be?  After all, maybe the miscreant who hasn’t paid you will sue to get rid of the lien, and you will sue for the debt you’re owed, so you are O.K., right?  Well, not necessarily.  Imagine that your lien disrupted a several million dollar sale of real estate by the debtor to you, who intended to pay you after the sale.  Having lost the sale because of your “slander of title” – the filing of an improper lien – you become the defendant in a multi-million dollar suit.  Oh, yes, that has happened!

This is not for amateurs.  Collect your debt the right way.  Do not try this at home – ask a professional!