When purchasing a business in Ohio, it is possible for the purchasing company to inherit the worker’s compensation ratings and liabilities of the seller. This “successor in interest” rule often catches buyers off guard, especially due to the Bureau of Workers’ Compensation’s (BWC) broad interpretation of successorship.

The Ohio Administrative Code provides that where one employer succeeds another in a business, in whole or in part, the successor shall assume the predecessor’s obligations under the workers’ compensation laws. This broad provision generally results in the BWC finding that the purchaser inherits the seller’s workers’ compensation experience rating and is liable to the BWC for all of the seller’s unpaid workers’ compensation premiums and further could potentially cause the purchaser’s premiums to significantly escalate in the future.

Usually, when a new owner succeeds to the business as a whole and inherits employees of the previous owner, the BWC transfers the entire employer’s ratings and obligations to the purchaser as the successor in interest. If the new owner purchases a portion of the business, only a part of the former employer’s ratings and obligations will be transferred. Even if the asset purchase agreement expressly states that the purchaser assumes none of the liabilities of the seller or if the parties enter into some alternative agreement or arrangement which demonstrate that the entities are not undergoing an acquisition or merger, but the purchaser still takes on former employees of the seller, the BWC frequently determines that the purchaser is a successor to the predecessor and will automatically transfer any claims history and experience rating to the purchaser.

A recent case illustrated the BWC’s aggressive stance toward finding that a purchasing company is a successor in interest. In overturning the BWC’s finding of successorship, the Ohio Supreme Court unanimously held that the BWC abused its discretion when it transferred part of a predecessor company’s experience rating to another company who was not a successor in interest for the purposes of worker’s compensation.

The K&D Group Case

In 2004, K&D Enterprises contracted with Fame-Midamco Company through K&D Enterprises’s manager, Mid-America, to purchase an apartment complex. Prior to the closing, K&D Enterprises created a new company, Euclid-Richmond Gardens, and assigned its rights under the purchase agreement to that new company.

Euclid-Richmond Gardens hired K&D Group, a property-management company, to manage the apartments, which were renamed Parkside Garden Apartments. K&D Group hired some former employees of Mid-America and assumed the day-to-day operations of the complex.

The BWC conducted an audit of K&D Group in 2009 and determined that it was the successor in interest to the business operations of Mid-America. This determination was made despite the undisputed fact that K&D had nothing to do with the purchase of the building and did not acquire any assets of Mid-America. The sole connection between Mid-America and K&D was that K&D independently hired about half of Mid-America’s former employees to work at the rebranded property.

This determination authorized the bureau to base K&D Group’s experience rating in part on Mid-America’s past experience, which included a large workers’ compensation claim. K&D Group filed a protest in response, arguing that it was not a successor in interest to Mid-America, because it had not been involved in the purchase of the apartment complex and it did not acquire anything in the transaction. However, the Bureau’s adjudicating committee denied the protest concluding that the K&D Group was the successor in interest because: “The day to day operations of the apartment complex remained the same after the purchase. The K&D Group assumed the prior leases, retained some of the former employees and operated under the same manual numbers.”

K&D Group filed a lawsuit challenging the BWC’s successorship finding, which ultimately made its way to the Supreme Court. The Supreme Court concluded that for the BWC to transfer an experience rating from a predecessor employer to a successor employer, there “must be a transfer of business in whole or in part and the successor employer must be the successor in interest.”

The Court found that there was absolutely no evidence that Mid-America transferred the business of managing the apartment complex to K&D Group because the contract was between two other entities, K&D Enterprises and Fame-Midamco. Both the governing statute and rule focus on the transfer of business operations or labor, not the transfer of assets. The Court specifically stated that the fact that K&D Group hired some of the former employees of Mid-America, assumed management of the apartment leases, and coded its employees under the same job classification code as Mid-America was not sufficient to demonstrate that Mid-America transferred its business operation to K&D Group.

In sum, the Court found that K&D’s mere agreement to assume management of the existing apartment complex did not create a successor relationship for the purposes of worker’s compensation law.

Takeaway

This case adds to a growing line of cases demonstrating the potential breadth of the successor in interest rule and the BWC’s determination to find employer successorship (see here and here). Although the Supreme Court overruled the BWC’s finding, this case illustrates the possible workers’ compensation implications from purchasing a business or any of its assets. This decision should limit the BWC’s ability to transfer experience ratings to all purchasing companies; however, when purchasing a business, it is important for the employer to consider the risks of inheriting a negative or penalty-rated experience from the seller.

Any company involved in the acquisition of an ongoing business should be sure to evaluate a predecessor business’ workers’ compensation rates as part of the due diligence in undertaking a purchase of another business in whole or in part. Purchasing companies should remember to be cautious when taking over a company with penalty-experience rating and liabilities. The rating and liability should be considered when calculating the purchase price, or some mechanism to recover payments made for inherited workers’ compensation claims. It may end up being preferable to forgo acquiring some of the assets, rather than inheriting extra workers’ compensation liabilities. With the assistance of counsel, purchasers can structure the deal in order to avoid unexpected liabilities once the transaction has closed and it is time to obtain workers’ compensation coverage for the new entity.

We previously reported on two cases in Michigan, the more famous being Wells Fargo v. Cherryland Mall Limited Partnership (Mich. Ct. App. Dec. 27, 2011, 2011 WL 6785393) where lenders of nonrecourse CMBS loans were able obtain monetary judgments through a so called “lack of solvency” provision against the limited guarantors of the loans, thus destroying the nonrecourse status and entire intent of the loan. The Michigan Court basically ruled that “insolvency” of the Borrower was a “nonrecourse carve-out” causing the loan to become recourse to the guarantors. It was a severely misguided decision that defied common sense.

Recently however, Michigan and Ohio passed nearly identical pieces of legislation that should curtail the Cherryland decision from being implemented or followed elsewhere. Section 5 of the Legacy Trust Act provides that:

“it is inherent in a non-recourse loan that the lender takes the risk of a borrower’s insolvency, inability to pay, or lack of adequate capital after the loan is made and that the parties do not intend that the borrower is personally liable for payment of a nonrecourse loan if the borrower is insolvent, unable to pay, or lacks adequate capital after the loan is made … [T]he use of a postclosing solvency covenant as a nonrecourse carveout, or an interpretation of any provision in a loan document that results in a determination that a postclosing solvency covenant is a nonrecourse carveout, is inconsistent with this act and the nature of a nonrecourse loan, is an unfair and deceptive business practice and against public policy, and should not be enforced.”

It is nice to say that the legislators in Ohio and Michigan got it right this time by passing this important legislation. The Ohio Legacy Trust Act went into effect in late March of 2013.

For more in this new development, go here.

Contests and sweepstakes can be a great way for companies to get consumers to interact with their brands. However, brand owners that plan to implement such promotions should be aware that they are subject to a variety of legal restrictions and that such promotions need to be properly structured in order to comply with requirements.

Depending on the type of promotion you are running, you may need to comply with state lottery and gambling laws; sweepstakes and contest laws; advertising laws; and, federal consumer-generated content laws. Promotions are also subject to industry, channel, and audience requirements. Plus, promotions which use social media platforms have their own rules and mobile market marketing campaigns are subject to Mobile Marketing Association (MMA) requirements.

Lottery and Gambling Laws

The first pitfalls you want to avoid are lottery and gambling laws. If not properly structured, a promotion risks being categorized as gambling or as a lottery, making it illegal. Generally, state lottery and gambling laws prohibit a promotion from combining the following three elements:

1) Prizes. Anything of value.
2) Chance. Where winning depends on factors outside a person’s control.
3) Consideration. Requirement of payment or purchase in order to enter a contest.

A promotion carefully structured without one of these three elements usually qualifies as a contest or sweepstakes. However, if a promotion incorporates all three elements, it risks being categorized as an illegal lottery or gambling.

Sweepstakes

Next, it is important to distinguish between types of promotions. Although often used interchangeably, “sweepstakes” and “contests” are different types of promotions subject to differing legal requirements. Sweepstakes are promotions in which prizes are awarded based on chance, while contests are promotions in which prizes are awarded based on skill.

Sweepstakes are based on chance, such as a promotion where winners are selected in a random drawing. In order to properly structure a sweepstakes, the promotion cannot involve consideration and the entry into the sweepstakes must be free. Consumers can be allowed to enter through methods that involve consideration, like purchasing the product; however, an alternate free form of entry must be included, such as a mailed or online entry form. Additionally, the contest cannot give any advantage for persons who enter by purchase and companies must provide an adequate disclosure regarding the free method of entry.

Recently, in New York, the government has challenged several companies for failing to adequately disclose how consumers can enter sweepstakes for free. In order to avoid this challenge, sweepstakes advertisements should include clear and conspicuous disclosures about the free method of entry. Further, sweepstakes rules should generally disclose eligibility, timing, entry instructions, prize descriptions and odds.

Contests

A contest is a promotional mechanism that awards a prize based on skill. Consideration is allowed, but the contest must not involve any element of chance. Skill must be the dominant factor in determining the outcome and states have different thresholds for what constitutes a dominant factor. Generally, to ensure that a contest is skill based, companies should:

• establish objective judging criteria
• communicate the criteria to the entrants before they enter
• use judges that are qualified to employ the criteria and ensure that they evaluate all entries using the criteria
• break any ties between contestants on the basis of skill
• disclose these entry instructions and judging criteria in the contest rules

In order to further protect themselves, companies may want to include additional provisions based on the contest offered. Additional recommended protective provisions include: the right to cancel or modify the promotions, a release against any claim, a limitation on liability for technical errors and other things that prevent the promotion from running as planned, a right to substitute the prize in case the prize advertised becomes unavailable, and a forum selection stating that the official rules are governed by the laws of a specific jurisdiction.

Because properly structured contests do not involve the element of chance, some can permissibly require a purchase. However, some states restrict or prohibit this requirement in certain circumstances. Contests requiring a purchase should be evaluated on a case-by-case basis and companies are advised to seek legal advice before including a purchase in a contest.

Consumer-Generated Content

Promotions often involve contests where consumers are asked to create their own content and submit it for entry. Depending on the nature of the contest, submissions may contain content that could violate a third parties’ intellectual property or publicity rights. To avoid liability from third party claims, companies should include disclosures in the contest rules and advertisements. Disclosures should clearly state that entrants may not submit content that contains any elements that violate a third parties’ copyrights or trademark rights and that content should not depict any individuals that have not granted permission to be featured.

Companies are further advised to obtain signed releases from entrants stating that they have complied with the rules and that their content does not infringe any third party rights or violate any laws. Additionally, companies should usually include a provision which licenses them rights to use the submissions.

Notes on Social Media Platforms and Gamification

Social media platforms can be an effective tool for promotional sweepstakes and contests. Companies should be aware, however, that social media platforms often have their own specific terms of use that apply to structuring promotions. Facebook, for example, requires its users to follow its Promotions Guidelines and other applicable laws when publicizing or offering any “contest, giveaway, or sweepstakes” on Facebook.

“Gamification” is the increasingly popular technique of incorporating game elements and mechanics into non-gaming websites and software in order to engage audiences. Brand owners who engage in gamification should evaluate their marketing to make sure that they are not creating a contest or sweepstakes. Examples of gamification include systems for awarding, redeeming, trading, gifting, and otherwise exchanging points for employee training programs, enhancing loyalty programs and social networking. Brand owners employing gamification in their marketing should consider if what they have created could be construed as contest or a sweepstakes of any kind and if so, should make sure to follow the applicable laws.

Notes on Contests and Sweepstakes Laws in Quebec

Contests and sweepstakes in North America are often open to residents of Canada. However, companies should note that the province of Quebec contains special promotions laws that require registration with the Quebec government and a fee based on what is given away. The way to get around this is explicitly state that the promotion is not available in Quebec as many promotions do.

Conclusion

Structuring promotions properly is important in order to keep them from being characterized as either as illegal gambling or a lottery. In order to promote brands legally and effectively, companies should remember to keep in mind these legal requirements and seek legal advice when structuring a sweepstakes or contest.

Ohio, as do all states, sets time limitations on how long you can wait to file legal action against a person or entity. Many legal claims have this ticking clock known as the “statute of limitations.” Failure to file a claim within the specified limitation period may have the effect of barring or nullifying the action. The Ohio Revised Code provides a series of statutes for this purpose in Chapter 13 and 23. Some statutes set forth dates by which you must file and action, while other dates are dates of expiration and these limitations differ based on the cause of action or type of agreement.

Last June, the Ohio legislature passed a new law which shortened the statute of limitations for contract from 15 years to 8 years. The new law became effective in September and applies retroactively to causes of action that accrued prior to September 28, 2012. Specifically, the law provides that “an action upon a specialty or an agreement, contract, or promise in writing shall be brought within eight years after the cause of action accrued.”

This change, however, did not impact other of limitations for bringing other actions arising under contract. The 6-year statute of limitations still applies to contracts not in writing, or oral contracts, and also upon liability created by statute. This limitation is also applicable to claims raised under collective bargaining agreements. Also left unchanged was the 4-year statute of limitations applicable to contracts for the sale of goods. However, in the original agreement for contracts for the sale of goods, the parties may reduce the period of limitation to not less than one year (but may not extend it).

In addition to contract actions, various other agreements, liens and judgments are subject to time limitations for enforcement including:

• Collection on Accounts – If you keep running accounts, you have 6 years to file an action. Note that this is the same as your time limit for an oral contract. Therefore, it is important to obtain a written contract setting balance limits, guarantees or other issues relating to the sales of goods and/or services.
• Promissory Notes – An action to enforce the obligation of a party to pay a note payable at a definite time needs to be brought within 6 years after the due date or dates stated in the note. If, however, a due date is accelerated, then it must be brought within six years after the accelerated due date.
• Dishonored Checks and Drafts – There is a 3-year limitation. However, this does not apply to the bank where you presented the check or the bank upon which the check was drawn. The bank’s liability is set forth by separate statute that outlines limitations on their liability.
• Mortgages - A mortgage that has been recorded on a property and note release, but then left alone without some action to contest it or have it removed automatically expire after 21 years.
• Mechanic’s Lien – This type of lien is valid for 6-years. The lien is not renewable. Therefore, you must take action to foreclose within 6 years or lose your rights related to that realty. A mechanic’s lien has a limited life. Six years after filing the lien, the lien expires unless the lien claimant has initiated a lawsuit to foreclose the lien.
• Judgment Liens – A judgment lien must be renewed every five years. This lien will only be enforceable as long as the judgment is in force. Note, although a judgment is valid for 21 years, a lien recorded pursuant to that judgment must be renewed every 5 years.
• Ohio State Liens – This type of lien is valid for 15 years and is renewable if the renewal is filed within 6 months of the expiration of the lien.
• Federal Judgment Lien – This lien is effective for 20 years and is renewable.
• UCC Financing Statements – These are generally valid for 5 years after the date of filing. However, if filed in connection with a public-finance transaction or manufactured-home transaction is effective for a period of 30 years after the date of filing if it indicates that it is filed in connection with a public-finance transaction or manufactured-home transaction.

With all claims and causes of action it is important to know the statute of limitations time limit that will apply and be certain to exercise your rights within that time.

The deadline to file a Complaint against the Valuation of Real Property (“Tax Complaint”) with the Franklin County, Ohio Auditor is April 1, 2013. In Ohio, real estate taxes are assessed in arrears, meaning that property owners will pay the real estate taxes assessed in 2012 during the year 2013. In Franklin County, property owners have until April 1, 2013 to file a Tax Complaint against the real estate taxes assessed in 2012. Property owners who fail to file a Tax Complaint by the deadline lose the ability to challenge the real estate taxes paid for the 2012 tax year. (Every county in Ohio has its own rules regarding postmarking, so make sure you check the local county auditor’s website to confirm the due date).

Filing a Tax Complaint can result in saving thousands of dollars in annual real estate taxes if the value of real property has been significantly affected due to a change in circumstances including:

• recently purchased/sold real property
• property values in your neighborhood decreased due to foreclosures or other factors
• if you own commercial property that has experienced increased vacancies, or other concessions that significantly lowered your property’s income stream

If any of these apply to you, filing a Tax Complaint with your county’s Auditor may be appropriate.

The current assessed value of real property is publicly available on the Auditor’s website in each county. The property taxes assessed to real property each year are based on the Auditor’s determination of the fair market value of that property. Generally speaking, the “fair market value” in this context means the most probable purchase price an interest in real property is likely to bring in a competitive market.  In many instances, the Auditor’s periodic estimation  is higher than the true fair market value of a parcel of real property that has been affected by a change in circumstances such as those mentioned above.  Filing a Tax Complaint provides property owners a mechanism to challenge the Auditor’s estimation of the value of real property, and potentially lower their annual real estate taxes.

The best indication of the fair market value of real property is the recent purchase price paid.   In many cases, (once a Tax Complaint is properly filed) the Auditor will accept the purchase price paid as the fair market value, and revise the assessed value of the property accordingly. This assumes that the purchase price was based on an “arm’s length transaction” between unaffiliated parties of similar bargaining power.  If you believe that the value of your property is not accurately reflected by the Auditor based on a reason other than a recent sale, then you will most likely need to hire a certified real estate appraiser to determine the value of your property.

Appraisers primarily use three methods to determine the value of real property: the Sales Comparison Approach; the Cost Approach; and the Income Capitalization Approach. Under the Sales Comparison Approach, a parcel is compared against recent sales of similarly improved parcels in the same geographic area. An appraiser compares your property to the selling prices of properties of comparable size, location, and with similar improvements. If the properties are dissimilar, the Auditor will not accept the comparison as an indicator of your property’s fair market value. A qualified appraiser will make adjustments based on disparities between properties to arrive at an accurate value under the Sales Comparison Approach.

The Cost Approach estimates the fair market value of the property based upon the cost to replace all buildings and improvements on the property, deducting depreciation or other loss in value, and adding the estimated value of the land on which the building and improvements are located. This approach is best for newer construction, as well as in locations where the Sales Comparison approach is precluded by a lack of comparable properties in the area.

Finally, the Income Capitalization Approach determines the fair market value of real property based upon the property’s ability to produce an income stream. The appraised value is determined by such factors as vacancies, debt service, and the owner’s return on investment. This approach primarily evaluates commercial properties.

Whichever valuation method is appropriate for you, an experienced and qualified appraiser should conduct the appraisal. An appraisal’s cost will vary based upon the property type involved, the appraiser’s experience, among other factors.  However, the county auditor will not accept the opinion of a person that is not a certified appraiser as to any of the forgoing valuation methods.  If your property is not the subject of a recent sale, then an appraiser almost certainly must be retained in order to successfully reduce the valuation of the property.

Furthermore, before firing off a Tax Complaint to the county auditor, property owners should also be aware of a few pitfalls. First, the application must be filled out properly, if not perfectly. Tax Complaints can be dismissed on the slightest technicality. In the past, Tax Complaints have been dismissed for

• incomplete or incorrect owner’s name
• incorrect parcel number
• failing to indicate the dollar amount of reduction sought
• even forgetting to “check” the correct box

If your Tax Complaint is dismissed, you lose the opportunity to challenge the real estate taxes for the tax year filed, resulting in your taxes remaining at their current assessed value.

Second, strict evidentiary rules govern who is permitted to testify as to the value of the real property. For example, if the person who performed an appraisal is not present at the hearing, hearsay rules may disqualify the written appraisal as evidence.  This especially applies in the case of appraisals prepared in connection with refinancing prepared by your lender (generally not accepted as evidence of value).

Finally, if a corporate entity owns the property, only certain individuals (a licensed attorney being one of them) can file the Tax Complaint and present testimony at a hearing.

Property owners should be aware that in many cases the local school board may file a Counter-Complaint to contest your revised property valuation. In fact, the law requires the Board of Revision to notify the local school board if the property owner seeks a decrease in value of $50,000 or more. An attorney will represent the school board, and you can be sure that they will seek to dismiss your Tax Complaint based on the technicalities addressed above.

Given the various pitfalls it is highly advisable that property owners contact an attorney prior to filing a Tax Complaint on their own. If you have any questions, please call our offices at 614-344-4800.

Links:

Property Value Reappraisal and Update Schedule

Franklin County Auditor

On Monday, the popular smart phone photo app, Instagram, released a controversial updated version of its privacy policy and terms of service. The new language implicated a potentially startling change, which seemingly could allow Instagram to sell user’s photos to third parties for advertising. Numerous articles have speculated about the pending privacy implications and members have already publicly announced their departure from Instagram. On Tuesday, in response to the uproar, co-founder of Instagram Kevin Systrom replied to alleviate some of these concerns and suggested that the terms are not intended to give Instagram such broad controls.

New Terms

The updated terms of service included a controversial provision stating, “To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you.” Further, “You acknowledge that we may not always identify paid services, sponsored content, or commercial communications as such.”

In contrast, the old terms only included a statement that the service could display advertising and promotions and that by assenting to the terms, users “agree that Instagram may place such advertising and promotions on the Instagram Services or on, about, or in conjunction with your Content.”

Interpretations of What the Changes Mean

The main concerned raised is that terms seem to give Instagram an unrestricted right to license all public photos to other organizations for advertising purposes. In other words, by uploading a photo to the site, users consent to Instagram’s ability to sell the photo for commercial purposes on any medium, and without any compensation. This also implicates that Instagram could profit from users’ photos and that advertisers could use the photos without users’ knowledge or consent. Electronic Frontier Foundation senior staff attorney Kurt Opsahl commented that the terms are “asking people to agree to unspecified future commercial use of their photos. That makes it challenging for someone to give informed consent to that deal.”

However, the terms could also be interpreted more narrowly, with less cause for alarm. The new policy may only give Instagram the power to link user’s photos to advertisements used solely in the Instagram service. In other words, users would not have to worry that their photos could show up on advertisements on billboards or the sides of buses; rather, photos could only be linked to advertisements within the Instagram service.

While the actual effect of the changed terms is not clear, the Instagram user community was certainly alarmed. Another concern is the fact that Instagram is open to anyone over thirteen years old. By accepting the terms, users under eighteen consent to the fact that their parent or guardian is aware that their image, username, and photos can be used in an ad. However, the service simply assumes parental consent. Plus Instagram assumes that underage users have not fabricated their age. Further, the terms do not provide an “opt out” process, so if you do not want to accept the new terms, your only option is to delete your account.

Instagram’s Response

The co-founder of Instagram responded to the uproar in a blog post on Tuesday. Kevin Systrom stated that the purpose of updating the terms was to help with advertising on Instagram. He acknowledged that, “it was interpreted by many that we were going to sell your photos to others without any compensation.” However, he clarified that, “This is not true and it is our mistake that this language is confusing. To be clear: it is not our intention to sell your photos.”

Additionally, Mr. Systrom stated that the Instagram users own their own content and Instagram does not claim any ownership rights over the photos.  He further noted that users remain in control over who can see their photos. If a user’s privacy settings are set to private, their photos can still only be shared with people they have approved to follow them.

More specifically, Mr. Systrom commented on what the terms would allow Instagram to do. “Let’s say a business wanted to promote their account to gain more followers and Instagram was able to feature them in some way. In order to help make a more relevant and useful promotion, it would be helpful to see which of the people you follow also follow this business. In this way, some of the data you produce — like the actions you take (e.g., following the account) and your profile photo — might show up if you are following this business.”  This remark seems to imply that Instagram may be adopting a plan similar to Facebook’s. Facebook currently uses sponsored pages that link to friend’s accounts in order to promote advertising.

In sum, Instagram’s updated terms reflect its interest in experimenting with new ways of advertising in order to fund the app. Acquiring Instagram cost Facebook over a billion dollars and it needs to see a return. Instagram’s updated terms are not effective until January 16th, and we may see some new changes in the policy before then.

Lesson for Website/App Owners and Users

With news reports over policy changes becoming commonplace and because changes to such policies now require clear notification to users, users are becoming more aware and more concerned about the terms of policies they are subject to. Even though the uproar over these Instagram changes may have been exaggerated, it should remind website and app owners to carefully craft the terms and policies of their social media accounts for not only legal compliance, but to also consider how users may react to any changes.

For users, including businesses with social media accounts, it is important to remember that social media can be a powerful promotional tool but there is a possibility that your material may be used or viewed in unexpected ways. In order to be certain of what apps or websites may do with your content, you should endeavor to keep up to date with the policies of any social media accounts you use.

 This year, Ohio made important updates to both its corporate and LLC codes. Overall, the changes to the corporate code were well warranted and should be seen as an improvement over the previous iteration of the code. However, the updates to the LLC code, especially in the area of fiduciary duty, may prove to be too broad and might have the effect of causing Ohio businesses to more frequently organize LLCs in alternate jurisdictions such as Delaware. Importantly, these changes apply not only to new entities, but entities that have already been formed in Ohio.

 Revisions to the Corporate Code.

The revisions to both the general corporate code and the limited liability code went into effect in Ohio on May 4, 2012. The revisions to the corporate code add flexibility and certainty to the code, making Ohio a slightly more attractive jurisdiction in which to organize a corporation than before.

Board of Directors

First, bringing the Ohio code in line with Delaware, ORC 1705.56 now allows for a board of directors to have only one member no matter how many shareholders there are. Under the previous rule, a one-member board was not allowed if the company had more than one shareholder.

Voluntary Dissolution and Creditors Claims

Next, the corporate code saw changes to the laws pertaining to voluntary dissolution of a corporation. Now, a resolution to dissolve can set out the future dissolution date as well as provide for authorization for the directors or officers to abandon the proposed dissolution before filing the certificate of dissolution. This gives companies greater flexibility when planning for dissolution.

Next, the statute sets out a procedure for notifying creditors and any party holding a potential claim against the company about the impending dissolution and allows the company to set a deadline to make a claim before such claim is statutorily barred. This notice procedure, which is now similar to that used by Delaware, will add some procedural complication to the dissolution process; however, it will give dissolving corporations greater certainty in the dissolution process – which is ultimately good for both the corporation and for legitimate creditors of the corporation.

Indemnification

The corporate code also now provides that indemnification provisions for directors and officers cannot be eliminated after a claim has arisen. This provides certainty for directors and officers serving Ohio corporations.

Revisions to the Limited Liability Company Code.

Overall, the changes to the LLC code are troubling – working to make the LLC both less flexible and less certain than before. It is also important to note that these changes apply to already existing Ohio LLCs, not just to LLCs formed after the effective date of the changes.

Fiduciary Duties of Members and Managers

The LLC Code now clarifies many of the fiduciary duties of members and managers and limits how these duties can be adjusted in the operating agreement. These changes make Ohio LLC law divert pointedly from Delaware law.

First, the duty of loyalty is now defined in 1705.281(B):

(B) A member’s duty of loyalty to the limited liability company and the other members is limited to the following:

            (1) To account to the limited liability company and hold as trustee for the limited liability company any property, profit, or benefit derived by the member in the conduct and winding up of the limited liability company’s business or derived from a use by the member of the limited liability company’s property, including the appropriation of a limited liability company opportunity;

            (2) To refrain from dealing with the limited liability company in the conduct or winding up of the limited liability company’s business as or on behalf of a party having an interest adverse to the limited liability company;

            (3) To refrain from competing with the limited liability company in the conduct of the limited liability company’s business before the dissolution of the limited liability company.

Importantly, unlike in Delaware, these duties of loyalty may no longer be eliminated from the operating agreement. However, these duties may be limited by “identifying specific types or categories of activities that do not violate the duty of loyalty if not manifestly unreasonable, and all of the members of a percentage specified in OA authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.”

This is important for any member of an LLC who also participates in or even plans to participate in a possibly competing company. In the tech and startup community, these “competitive” practices are very common and will now need to be expressly set out and agreed to by the other members. Furthermore, it may prove difficult to adequately set out just what the competitive practices may be since nothing can be eliminated that is “manifestly unreasonable,” a term that is by its nature, not entirely defined. It will be up to a court to decide what is or is not “manifestly unreasonable,” which will lead to uncertainty for owners and potential litigation costs in the event of a dispute.

Delaware, the likely alternative candidate for a company considering LLC formation in Ohio, allows the duty of loyalty to be entirely eliminated, and because of this, some companies may elect to choose Delaware over Ohio for organization.

Next, the statutory duty of care for members under 1705.281(C) is now limited to “refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.” Under 1705.81 this duty cannot be “unreasonably” reduced. Similarly for the duty of good faith and fair dealing, 1705.081(B)(5) states that the duty cannot be eliminated, but the operating agreement may “prescribe in writing the standards by which performance is to be measured or specify types or categories of activities that do not violate the duties in each case if not manifestly unreasonable (emphasis added). Along those same lines, under 1705.081(B)(6) the duty of a manager to act in good faith may not be eliminated from the operating agreement, but it may “prescribe in writing the standards by which performance is to be measured or specify types or categories of activities that do not violate the duties in each case if not manifestly unreasonable.”

Again, Delaware allows for the full elimination of these duties in LLC operating agreements. Entrepreneurs should consider whether the elimination of flexibility and the potential for greater risk for managers or investors merits forming a Delaware rather than Ohio LLC, or possibly even whether it would be prudent to convert an existing Ohio LLC to a Delaware LLC.

Conclusion

While the changes to the corporate code are welcome and work to make Ohio a better jurisdiction in which to incorporate, the changes to the LLC code will likely make business owners less confident in choosing to organize an LLC in Ohio. The new statutes have reduced some of the flexibility associated with LLCs and reduced the certainty of a court’s treatment of the operating agreement.

A trademark attorney can help to guide your overall brand growth as well as help you in the selection and marketing of your trademarks. If your business involves any aspects of building or maintaining a brand, then the resource of a knowledgeable trademark attorney should be utilized throughout this process. Proper branding will improve the public’s recognition of ones product and aid the brand-producer in the promotion and sales of other products.

Trademarks and Branding

With the economic incentives of creating a strong and growing brand, there are dangers. This is where trademark law comes in. Say you start a business making a new type of golf ball called “Spartan Golf Balls.” Sales start to go up, investors are calling, and golfers everywhere are excited about your product. But then you get a call from a small golf club manufacturer on the other side of the country selling a product called “Spartan Golf Clubs.” Worse yet, this company owns a federal trademark and is demanding that you to stop using the word “Spartan.” Under trademark law and the likelihood of confusion test, you will have to stop using “Spartan” and start all over with a new brand. The lesson here is clear: even if you aren’t ready yet to register a trademark, it is important to evaluate your branding from a trademark perspective.

A Warning About Online Trademark Registration Services

It may be tempting to use an online legal services provider such as Legal Zoom to register a trademark; however, trademark registration is nuanced and many of these providers will take your money without first telling you whether it is even possible to obtain registration for your trademark. Furthermore, each trademark registration includes the trademark you want to register (whether it is a word mark, image mark, or mix of both) selecting the international class that will the mark will be protected in, a description of the product or services that the mark will be utilized with, and a specimen of the trademark as it will be used in commerce. Each of these requires careful selection and presentation and mistakes or unclear aspects of your filing will cost you more money down the line or worse yet, may leave you with no federal registration at all.

Using an online registration service will work for a small amount of registrants, but few trademark registrations are so simple as to require no specialized attention. Essentially, each trademark is unique and requires a trained eye to understand and craft the proper registration.

A trademark attorney will do the following for you:

• Search for other companies already using your brand terms. The search for existing trademarks can be a complex and painstaking process – one that requires skill and experience. A trademark attorney will be able to find brands that might conflict with yours that you might not find on a Google search. If you start to build your brand only to find that someone else is using it, you could be out money and time – both wasted on building a brand you can’t keep!

• Evaluate your brand terms to determine whether they can be protected. Trademark law is nuanced and not all terms will qualify for trademark protection. An unprotectable brand will be both a waste of time and money.

• Guide you in selecting brand terms and style based on what is available and protectable. If you discover that your brand ideas are either already being used or are not protectable, a trademark attorney will be able to guide you in the selection of protectable branding concepts.

Every brand is different and so are the trademark implications. Often, a clever idea or a Google search alone is not enough to know if your trademark can be protected. The resource of a good trademark attorney will save you time and money in the long run, and may even save you from having to start over with a new brand.

In today’s roller coaster of a housing market, more homeowners are turning to short sales as an alternative to avoiding foreclosure. A common misconception though among some homeowners is that they might not be as free and clear from further financial liability as they think they are after their short sale is completed. In reality, they could still be liable for thousands of dollars owed on the deficiency balance equal to the total principal balance of the homeowners existing loan minus the net proceeds paid to the lender at the closing of their home. News stories about shocked homeowners who receive demand letters from lenders that are seeking additional amounts from homeowners after they have completed a short sale are certainly on the rise. One of the main reasons for confusion among homeowners regarding their liability is the difference among state laws on short sales.

What is a short sale
An alternative to foreclosure, a short sale is when you sell your home to pay off the remaining balance on your mortgage. However, if the amount received for the home is less than the remaining balance, the homeowner may still owe the mortgage lender. Say for example, a home sells for $150,000, but the remaining balance on the mortgage is $200,000. After paying realtor fees and other closing costs, the net proceeds from the sale that are paid to lender are roughly $136,000.  The seller is left with a loan balance of $64,000.  This balance is what we refer to as a deficiency.  The obvious issue then becomes whether a homeowner is still on the hook for that amount.

Pros and cons of a short sale
Some lenders recommend a short sale for a few reasons. Perhaps the biggest reason is that a short sale is a way to eliminate a large chunk of mortgage debt while avoiding the process and emotional impact of foreclosure. With a short sale, some homeowners can take a measure of pride in the fact that they themselves sold their home. Certain banks also claim that a short sale will have less of a negative impact on your credit score compared to going through foreclosure, but this is contingent on the homeowner’s short sale agreement with its bank and whether the bank pursues the deficiency.

Short sales are not without their drawbacks though. One of the primary disadvantages is that unlike loan modifications or mortgage refinances, the homeowner does not get to keep the home. Further, if a lender does actually agree not to pursue a deficiency, the lender still may be liable to the IRS and may have to report the forgiven deficiency amount as taxable income. Also, as touched on above, if lenders do not expressly agree to doing so, they can report the short sale as a mortgage account “not paid as agreed,” which can negatively impact your credit score just as much as foreclosure. Another drawback is that short sales can take months to complete and can make for an extremely long and slow process because most buyer offers are contingent on lender approval.

Difference in state laws
Perhaps one of the biggest potential disadvantages of a short sale lies in the state in which you reside. Some states, called deficiency judgment states, allow lenders to pursue the full deficiency amount after a short sale has been completed. Referencing the example above, a lender in a deficiency judgment state can sue a homeowner for the $64,000 deficiency remaining after the short sale.

Ohio law
Ohio is a deficiency judgment state. Not only are lenders here allowed to sue for the deficiency, but they can also sue for costs associated with pursuing the deficiency. The only way in Ohio to avoid being sued for a deficiency is to get your bank to waive its right to pursue the deficiency judgment or agree in writing not to pursue it. Never assume in a deficiency judgment state that a short sale releases you from the mortgage balance; you must get your lender to specifically agree to release you from the deficiency judgment.

Non-recourse states
In contract though to deficiency judgment states, certain states called non-recourse states have laws that expressly prohibit lenders and banks from pursuing a deficiency judgment. Returning to the example above, if the homeowner lived in California or Arizona, if a bank forecloses, and once the process is complete, the homeowner would not be liable for the deficiency following a sheriff’s sale. Currently, there are 12 non-resources states, with the others (in addition to California and Arizona) being Alaska, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.

Just how popular are short sales in non-recourse states? According to the Office of Mortgage Settlement Oversight, from March 1, 2012 to June 30, 2012, there were $8.669 billion in short sales. This number does not reflect the sale amount of a home but is actually the total for all the remaining deficiencies for every short sale completed during this time period. California accounted for the most in deficiency amounts forgiven, coming in at $3.9 billion alone. Arizona is second with $522 million. Ohio had about $47 million in short sale deficiencies forgiven.

In my practice, we deal with a lot of commercial leases on a regular basis, especially long-term leases. One problem that some landlords and tenants can run into with multiple year leases is that they are unaware of Ohio’s signature and notarization requirements. Ohio Revised Code 5301.01 (the Statute of Conveyances) requires that all leases three years or longer be signed and notarized. 5301.08 exempts leases not exceeding three years from notarization requirements, so if a lease is less than three years exactly, it does not have to be notarized.

However, any lease (or any other instrument conveying real property) three years or longer needs to be notarized or the lease could be held by a court to be invalid or in the alternative could be held to be a month-to-month lease. For example, in Burger v. Buck, 2008 Ohio 6061 (Ohio Ct. App., Portage County Nov. 21, 2008), the lessees argued that the lack of notarization required by 5301.01 did not invalidate the lease. The appellate court held that, because the 15-year lease agreement between the lessees and the decedent (the lessor) was not notarized as mandated by the Statute of Conveyances, the trial court properly held that the lease was invalid and a month-to-month tenancy was created. It was undisputed that the lease agreement between the parties was not acknowledged before a notary as required by 5301.01. Therefore, the lease was invalid, and, as the lease provided for a monthly rent payment, the trial court correctly concluded that the lessees’ leasehold became a month-to-month tenancy. 5301.08 exempted leases not exceeding three years from the formalities required by R.C. 5301.01. See also Delfino v. Paul Davies Chevrolet, Inc., 2 Ohio St. 2d 282 (Ohio 1965).

Parties to a lease also need to look for leases that have automatic extensions, even if the initial lease term is less than three years. Under Ohio law, a one-year lease that provides for automatic extensions is a lease for more than three years for purpose of R.C. 5301.01 and 5301.08. Zunshine v. Wallace F. Ackley Co., 2000 Ohio App. LEXIS 1302 (Ohio Ct. App., Franklin County Mar. 30, 2000).

Determining the length of a lease is not just limited to factoring in automatic extensions though. Ohio courts will also count option periods with the initial lease period in examining 5301 compliance issues. 380 East Town Assoc. v. Mangus, 1991 Ohio App. LEXIS 2924 (Ohio Ct. App., Franklin County June 20, 1991). Thus, if two parties sign a one-year lease but the lease provides for two options where tenant can renew the lease for one-year periods, then the lease will be considered a three-year lease and must be notarized and signed.

Lease modifications can also require 5301 compliance. Ohio courts have found that when a modification to a lease alters the fundamental possessory interest of the property, then the lease must comply with 5301. Translated to plain english, when the physical space of the lease premises or the duration of lease is changed, the lease parties may have to sign off on the changes and have them notarized. For example, if lease parties originally enter into a month-to-month tenancy but then later agree to change it to a term of years, the parties must ensure that the lease adheres to 5301 if the new term is longer than three years. Regency Plaza, LLC v. Morantz, 2007 Ohio 2594, P39 (Ohio Ct. App., Franklin County May 29, 2007).

In the past, 5301.01 required that leases longer than three years both be notarized and that they be signed in the presence of two witnesses. The witness requirement was changed though when House Bill 279 went into effect on February 1, 2002. The bill eliminated the requirement that two witnesses execute certain real property documents including leases and mortgages of three years or longer.