October, 2018

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Play By the Franchise Rules

Wednesday, October 31st, 2018

In its simplest form, “Franchising” is the license of the franchisor’s business or operating system and its trademark to a franchisee for some period of time, in exchange for a fee. The fee usually takes two forms: an initial franchise fee paid up front and an ongoing monthly royalties paid during the life of the franchise.

A common mistake of businesses wishing to expand in the U.S. is their attempts to avoid U.S. state and federal franchise laws that may apply.  In other words, these would-be franchisors attempt to avoid the disclosure requirements applicable to all franchisors in order to save on legal fees in the short-term.  However, this mindset may lead to substantial problems down the road.  These businesses oftentimes try to hold themselves out as “licensors” instead, and in doing so fail to provide to their “licensees” the franchise disclosure document (“FDD”) required of franchisors.

Although the preparation and annual maintenance of an FDD may not be cheap, the short-term legal costs are money well spent compared to the financial and other costs associated with lawsuits from disgruntled licensees, or even worse, investigations by state franchise administrators.

For example, a company’s failure to abide by state and federal franchise laws that require franchisors to disclose to the prospect in an FDD all material facts relating to the franchise system to prospective franchisees, and to register that FDD in certain states, can be catastrophic.  In addition to potentially giving a licensee/franchisee the right to rescind its agreement, other penalties include repaying back to the licensee/franchisee of all amounts paid to the company.  In addition, fines and/or penalties payable to the state may also be required.  Not to mention the legal fees that accrue with dealing with all of these potential issues.

The message is simple – don’t trade long-term security for short-term savings.  Have an experienced franchise lawyer advise you on the requirements of franchising at the outset.

 

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Post Judgment Oral Examination of a Judgment Debtor

Monday, October 29th, 2018

Following up on my earlier blog posts that included post-judgment interrogatories and requests for documents, a judgment holder can also request that the debtor appear before a court-appointed examiner and answer questions under oath from the judgment holder’s counsel.  Failure of the Debtor to appear for the exam or answer the questions truthfully could lead to imprisonment of the Debtor.

Here is a sample of some of the questions I ask in an oral examination:

Background

  1. Please provide your full name, including aliases.
  2. What is your soc Sec No.
  3. What is your Driver’s License Number.
  4. What is your date of birth.
  5. How many children do you have?
  6. What are the names of your children and their ages?
  7. Provide your children’s social security numbers.
  8. What is your current home telephone.
  9. What is your current cell phone numbers?
  10. Provide all email addresses you have used during the past 3 years?
  11. Provide the name, address and phone number for your 3 closest relatives not living with you?

Residence

  1. What is your current residence as of this morning?
  2. Do you own or rent?
  3. Are you current on your mortgage payments?
  4. Name all other real property owned by you or your spouse jointly or individually.
  5. Name all other real property rented by you or your spouse jointly or individually.
  6. [If renting, give name/address/phone number of the estate agent/landlord.]
  7. Have you recently moved?
  8. Name all addresses where you and/or your spouse have slept over the past 90 days.
  9. Provide all of your previous addresses utilized by you or your spouse over the past 7 years.
  10. Is your current residence up for sale?
  11. How much are you asking for it?
  12. How much is owed on it?
  13. Are you planning on moving?
  14. Are you in the process of purchasing or renting a new residence?
  15. If so, what will be your new address?
  16. How much did the new house cost?
  17. Provide the names of all persons currently living in the same location with you. 

Vehicles

  1. Name all motor vehicles owned by you or your spouse.
  2. Owned or leased?
  3. Year/make/model/condition?  Registration number?  License plate number?
  4. Are the vehicles owned outright or are they financed?
  5. If so by whom?
  6. Are you in the process of buying a motor vehicle?
  7. What are the vehicles worth today?
  1. List the automobiles purchased by you or your spouse within the past 7 years.
  2. Do you or your spouse own a boat? If so, follow up.

I also ask detailed questions about current employment and employment history, bank accounts, general financial questions dealing with stocks and other investments, IRAs, retirement, life insurance, wages and income, tax returns, and any other sources of income or assets.

 

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Post Judgment Request for Documents

Monday, October 29th, 2018

Following up on my earlier blog post that included post-judgment Interrogatories, whereby a judgment holder can require a debtor to answer certain questions about the debtor’s assets and wages, a judgment holder can also request that the debtor turn over documents.

Here is a sample of some of the documents I request.

  1. Defendant’s federal and state income tax returns for the years ____, ____, and ____, including any Schedules thereto, whether such returns were individually filed or jointly filed.
  2. For all automobiles which Defendant has any ownership interest, exercise control or possession or have any financial responsibility for, provide the following documents for each vehicle:
    1. Copies of the official vehicle Titles;
    2. Copies of the Vehicle Registration document;
    3. Any documents showing the Tag number;
    4. Any documents showing the VIN number;
    5. Copies of loan statements for past 12 months;
    6. Copies of records indicating payments made during the last 12 months; and,
    7. Copies of all loan agreements and notes.
  3. All documents concerning payments, loans, exchanges, sales, distributions or transfers of cash or assets (including automobiles, boats, jewelry, electronics, etc.) with value of $2,000 or greater made by Defendant since __________ through the present.
  4. All documents and bank account statements from any financial institution where Defendant has, or had within the past 3 years, an account.
  5. All documents and brokerage account statements from any bank, financial institution, or brokerage firm, where Defendant has, or had within the past 3 years, a brokerage or stock account.
  6. For any real estate owned by Defendant either individually or jointly with another person or entity at any time since __________, provide all documents related thereto, including any rental/lease agreements, rental receipts, deeds, purchase contracts, mortgage contracts, mortgage notes, and mortgage statements.
  7. For any income earned by Defendant during the past 3 years, provide copies of documents related thereto, including pay stubs, checks, receipts, statements, work orders, bank documents, including deposit slips and wire transfers, related to any payment to Defendant.
  8. For any business entity, corporation, company, partnership, (“Entity”) for which Defendant has or had an ownership interest or management control at any time during the past 3 years, provide all documents concerning any bank or investment account of the Entity, all documents concerning any loans or disbursement made by the Entity to Defendant or one of your family members, and all financial statements including general ledgers, accounts receivable, accounts payable, income statements, balance sheets and profit and loss statements concerning the Entity.
  9. For any Entity for which Defendant has or had an ownership interest or management control at any time during the past 3 years, provide copies of the Articles of Incorporation or Organization, By Laws, Shareholder Agreement, Operating Agreement, Partnership Agreement and Minutes of any Board or Shareholder meetings.
  10. Provide all documents concerning any financial agreements, transactions or loans made between Defendant and any other individuals or entities during the past 3 years.

 

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Reviewing a Commercial Lease

Monday, October 29th, 2018

When reviewing a commercial lease on behalf of a business tenant client, my goal is twofold: to obtain the most favorable terms possible for my client in the short term, while also protecting the client’s long term interests by limiting risk and personal exposure in the event of an unforeseen event that hurts or derails the business.

These are some of the issues I look to in my review:

  1. Make sure all lease terms mirror the terms found in the Letter of Intent executed by my client and the landlord.
  2. Attempt to obtain an abatement of rent for a period of a minimum of 60 days, to as much as 180 days if possible. Regardless of the rent abatement, at minimum we also want to make sure that the rent commencement date, which is the first date rent is due, is pushed far enough out to make sure we are open and operating at that time.
  3. Attempt to obtain tenant improvement money, which is money paid by the landlord to my tenant client and which the tenant must use to build out and renovate the premises. The amount of any TI money can fluctuate dramatically depending on how much work the space needs, and the business of the tenant.
  4. Understand whether we are dealing with a gross (“all-in”) lease where the tenant makes one monthly payment including everything due, or a triple net lease (“NNN”) where rent and CAM fees and taxes and insurance are broken out separately, or a hybrid of the two? Oftentimes a client can be confused about what the monthly payments actually are and not understand terms like additional rent, operating costs, and CAM fees.
  5. What about the HVAC unit, which in many instances can be a costly repair or replacement in the event the tenant takes on the responsibility to maintain and replace the HVAC if it breaks down. I recommend an inspection of the HVAC prior to signing the lease, as well as some warranty period where the landlord guarantees the operation of the HVAC.
  6. Is the tenant free to sublease a portion of the premises without landlord interference?
  7. Is there a liquidated damages clause in the event the lease is terminated early? This would mean that the tenant is on the hook for the entire remaining term for rent and all other expenses due and owing in the event of default.
  8. If this is a retail establishment, does my client tenant have exclusivity? In other words, is the landlord prohibited from permitting the operation of another wings place in the same plaza that my client who sells wings is in?
  9. Finally, there is most likely a personal guaranty.  Do spouses and even silent partners have to sign it? Is there a cap on it or is it unlimited?  I normally try to negotiate some type of cap on the guaranty.  Six months to one year’s worth of rent is oftentimes a manageable “out” for a tenant looking to get out from under a lease for a dying business.

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Forming a Benefit Corporation/LLC in Maryland

Monday, October 29th, 2018

A Benefit corporation/LLC is formed to create a public benefit, in addition to creating profit for its shareholders. In Maryland, a company can be recognized by the state as a benefit corporation/LLC by stating in its corporate charter that it is a benefit corporation/LLC, getting certified as providing a public benefit, taking into consideration more than just profit, and submitting an annual benefit report to each stockholder or member.

How to Form a Benefit Corporation/LLC with Maryland SDAT:

1.  Draft or amend existing Articles of Incorporation/Organization by making reference to the election to be a benefits corporation/LLC at the top of the charter document, or the amendment to the charter document;

2.  State in the Articles or the amendment to the Articles that the corporation/LLC is a benefit corporation/LLC and has the purpose to create a general public benefit, defined as a “material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of specific public benefits.”

3.  A business has the option of stating in the Articles or the amendment to the Articles a specific public benefit that the business seeks to provide, for example:

    • providing individuals or communities with beneficial products or services;
    • promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
    • preserving the environment;
    • improving human health;
    • promoting the arts, sciences, or advancement of knowledge;
    • increasing the flow of capital to entities with a public benefit purpose; or
    • the accomplishment of any other particular benefit for society or the environment

 

4.  A business may also change its name to “xyz, Benefit corporation/LLC” or “xyz, A Benefit corporation/LLC”.

5.  Also, the company must deliver an annual benefit report to each stockholder/member, which must include:

  • the ways the a general public benefit was pursued and to what extent one was created;
  • the ways the any specific public benefit was pursued and to what extent one was created;
  • any circumstances that hindered the creation of the public benefit; and
  • an assessment of the societal and environmental performance of the benefit corporation prepared in accordance with a third-party standard applied consistently with the prior year’s benefit report or accompanied by an explanation of the reasons for any inconsistent application.

The report must be delivered by the company to each stockholder/member within 120 days of the end of each fiscal year, and must publish it on the company’s public website.

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Reviewing a Franchise Agreement for a Franchisee Client

Monday, October 29th, 2018

When a franchisee client asks me to review a franchise agreement prior to signing, I review it with the mindset that if the franchisee’s business performs well, the franchisee will be happy with the franchise relationship and the agreement he or she signed, BUT if the franchised business ultimately fails, it is my job to protect the franchisee at the outset in the strongest way possible. Therefore I review a franchise agreement focusing on how best to protect my franchisee client’s personal assets in the event the franchised business fails.  Here are some of the things I look for in the franchise agreement:

1.  does the franchisee have an exclusive territory?

2.  may the franchisor alter the franchisee’s territory during the term of the agreement?

3.  may the franchisee advertise or market for clients outside the designated territory in areas that are not owned by other existing franchisees?

4.  what are the franchisee’s renewal rights? Attempt to limit what terms of the agreement the franchisor may change on renewal.

5.  what social media presence is the franchisee permitted to maintain?

6.  while there is most likely a personal guaranty, who is required to sign it? ie. spouses and/or passive investors?

7.  is there a cap on the personal guaranty of a reasonable amount that the franchisee and franchisor are comfortable with, or is it an unlimited guaranty? When negotiating on behalf of a franchisee, I attempt to limit the cap with the mindset that this amount is the franchisee’s buyout amount in the event the worst occurs and the franchisee has to stop operating.

8.  is there a right of first refusal of the franchisor in the event the franchisee wishes to sell the business, and what are its terms?

9.  is there a unilateral right of the franchisee to terminate the agreement? There are rare, but franchisee counsel should try to push for such a provision anyhow.

10.  are any of the franchisor’s rights to terminate the agreement out of the ordinary or particularly onerous?

11.  is there a liquidated damages clause in the event the franchise agreement is terminated?

 

 

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FDD – Sample Franchise Disclosure Questionnaire

Friday, October 26th, 2018

Below is a sample franchisee questionnaire that I recommend be included as an exhibit in each FDD I prepare.   In the event of a problem with the franchisee in the future, it is a powerful document for a franchisor to have, where the franchisee essentially stated at the time of sale that everything told by the franchisor to the franchisee during the sales process was included in the FDD.  In other words, no oral promises, representations or statements were made by the franchisor that did not mirror the FDD.

[SAMPLE]

FRANCHISEE DISCLOSURE QUESTIONNAIRE

As you know, _____________ “Franchisor” and you are preparing to enter into a Franchise Agreement for the operation of a Franchised Business. In this Franchisee Disclosure Questionnaire, Franchisor will be referred to as “we” or “us.”  The purpose of this Questionnaire is to determine whether any statements or promises were made to you that we did not authorize and that may be untrue, inaccurate or misleading.  Please review each of the following questions carefully and provide honest and complete responses to each question.

1.  Have you received and personally reviewed the Franchisor’s Franchise Agreement and each exhibit, addendum and schedule attached to it?

Yes        No

2.  Do you understand all of the information contained in the Franchise Agreement and each exhibit and schedule attached to it?

Yes        No

If “No”, what parts of the Franchise Agreement do you not understand?  (Attach additional pages, if necessary.)

3.  Have you received and personally reviewed our Franchise Disclosure Document we provided to you?

Yes        No

4.  Do you understand all of the information contained in the Franchise Disclosure Document?

Yes        No

If “No”, what parts of the Franchise Disclosure Document do you not understand?  (Attach additional pages, if necessary.)

5.  Have you discussed the benefits and risks of operating a Franchised Business with an attorney, accountant or other professional advisor and do you understand those risks?

Yes        No

6.  Do you understand that the success or failure of your business will depend in large part upon your skills and abilities, competition from other businesses, interest rates, inflation, labor and supply costs, lease terms and other economic and business factors?

Yes        No

7.  Has any employee or other person speaking on our behalf made any statement or promise concerning the revenues, profits or operating costs of a Franchised Business that we or our franchisees operate?

Yes        No

8.  Has any employee or other person speaking on our behalf made any statement or promise concerning a Franchised Business that is contrary to, or different from, the information contained in the Franchise Disclosure Document?

Yes        No

9.  Has any employee or other person speaking on our behalf made any statement or promise concerning the likelihood of success that you should or might expect to achieve from operating a Franchised Business?

Yes        No

10.  Has any employee or other person speaking on our behalf made any statement, promise or agreement concerning the advertising, marketing, training, support service or assistance that we will furnish to you that is contrary to, or different from, the information contained in the Franchise Disclosure Document?

Yes        No

11.  If you have answered “Yes” to any of questions seven (7) through ten (10), please provide a full explanation of your answer in the following blank lines.  (Attach additional pages, if necessary, and refer to them below.)  If you have answered “No” to each of such questions, please leave the following lines blank.

12.  Do you understand that in all dealings with you, our officers, directors, employees and agents act only in a representative capacity and not in an individual capacity and such dealings are solely between you and us?

Yes        No

 

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Mandatory Maryland Franchise Agreement Amendment

Friday, October 26th, 2018

Pursuant to the Maryland Franchise Registration and Disclosure Law, below are the mandatory amendments that must be made to a franchise agreement contained in a Franchise Disclosure Document attempting to be registered in the state of Maryland.  There are additional changes that must also be made to the disclosure portion of the Franchise Disclosure Document.

Maryland Franchise Agreement Amendment

In recognition of the requirements of the Maryland Franchise Registration and Disclosure Law, the parties to the attached Franchise Agreement (the “Agreement”) agree as follows:

1.     “execute a general release, in a form prescribed by Franchisor, of any and all claims against Franchisor and its subsidiaries and affiliates, and their respective officers, directors, agents, and employees.  Notwithstanding the above, pursuant to COMAR 02.02.08.16L, the general release required as a condition of renewal, sale, and/or assignment/transfer shall not apply to any liability under the Maryland Franchise Registration and Disclosure Law.”

2.     “the Franchisee’s execution of a general release of the Franchisor, in a form satisfactory to Franchisor, of any and all claims against Franchisor and its affiliates, successors, and assigns, and their respective directors, officers, shareholders, partners, agents, representatives, servants, and employees in their corporate and individual capacities, including, without limitation, claims arising under this Agreement, any other agreement between Franchisee and Franchisor or its affiliates, and federal, state, and local laws and rules.  Notwithstanding the above, pursuant to COMAR 02.02.08.16L, the general release required as a condition of renewal, sale, and/or assignment/transfer shall not apply to any liability under the Maryland Franchise Registration and Disclosure Law.”

3.     “Notwithstanding the above, the provision in the Franchise Agreement which provides for termination upon bankruptcy of the franchisee may not be enforceable under federal bankruptcy law (11 U.S.C. Section 101 et seq.).”

4.     “Notwithstanding the above, the parties agree that only with respect to claims arising under the Maryland Franchise Registration and Disclosure Law, Franchisee may bring such claims in any federal or state court in the state of Maryland.”

5.      “Limitations of Claims.  ANY AND ALL CLAIMS AND ACTIONS ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE RELATIONSHIP OF FRANCHISEE AND FRANCHISOR, OR FRANCHISEE’S OPERATION OF THE FRANCHISED BUSINESS, INCLUDING ANY PROCEEDING, OR ANY CLAIM IN ANY PROCEEDING (INCLUDING ANY DEFENSES AND ANY CLAIMS OF SET-OFF OR RECOUPMENT), MUST BE BROUGHT OR ASSERTED BEFORE THE EXPIRATION OF THE EARLIER OF (A) THE TIME PERIOD FROM BRINGING AN ACTION UNDER ANY APPLICABLE STATE OR FEDERAL STATUTE OF LIMITATIONS; (B) ONE (1) YEAR FROM THE DATE UPON WHICH A PARTY DISCOVERED, OR SHOULD HAVE DISCOVERED, THE FACTS GIVING RISE TO AN ALLEGED CLAIM; OR (C) TWO (2) YEARS AFTER THE FIRST ACT OR OMISSION GIVING RISE TO AN ALLEGED CLAIM; OR IT IS EXPRESSLY ACKNOWLEDGED AND AGREED BY ALL PARTIES THAT SUCH CLAIMS OR ACTIONS SHALL BE IRREVOCABLY BARRED; EXCEPT THAT ANY AND ALL CLAIMS ARISING UNDER THE MARYLAND FRANCHISE REGISTRATION AND DISCLOSURE LAW (MD. CODE BUS. REG. §§ 14-201 THROUGH 14-233) SHALL BE COMMENCED WITHIN THREE (3) YEARS FROM THE GRANT OF THE FRANCHISE. CLAIMS OF FRANCHISOR ATTRIBUTABLE TO UNDERREPORTING OF SALES, AND CLAIMS OF THE PARTIES FOR FAILURE TO PAY MONIES OWED AND/OR INDEMNIFICATION SHALL BE SUBJECT ONLY TO THE APPLICABLE STATE OR FEDERAL STATUTE OF LIMITATIONS.”

6.     “No Waiver.  The foregoing acknowledgments are not intended to nor shall they act as a release, estoppel or waiver of any liability incurred under the Maryland Franchise Registration and Disclosure Law.”

7.     Each provision of this amendment shall be effective only to the extent, with respect to such provision, that the jurisdictional requirements of the Maryland Franchise Registration and Disclosure Law are met independently without reference to this amendment.

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Washington State Franchise Addendum

Friday, October 26th, 2018

This is the mandatory addendum that must be included in any Franchise Disclosure Document that a franchisor is attempting to register in the state of Washington.  No edits/changes may be made:

Washington Franchise Agreement Addendum

The state of Washington has a statute, RCW 19.100.180 which may supersede the franchise agreement in your relationship with the franchisor including the areas of termination and renewal of your franchise. There may also be court decisions which may supersede the franchise agreement in your relationship with the franchisor including the areas of termination and renewal of your franchise.

In any arbitration involving a franchise purchased in Washington, the arbitration site shall be either in the state of Washington, or in a place mutually agreed upon at the time of the arbitration, or as determined by the arbitrator.

In the event of a conflict of laws, the provisions of the Washington Franchise Investment Protection Act, Chapter 19.100 RCW shall prevail.

A release or waiver of rights executed by a franchisee shall not include rights under the Washington Franchise Investment Protection Act except when executed pursuant to a negotiated settlement after the agreement is in effect and where the parties are represented by independent counsel. Provisions such as those which unreasonably restrict or limit the statute of limitations period for claims under the Act, rights or remedies under the Act such as a right to a jury trial may not be enforceable.

Transfer fees are collectable to the extent that they reflect the franchisor’s reasonable estimated or actual costs in effecting a transfer.

The undersigned does hereby acknowledge receipt of this addendum.

Dated this _____ day of __________________ 20______.

 

 

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Subcontracting Agreements / Master Agreements

Friday, October 26th, 2018

How do business owners handle subcontracting agreements when the subcontractor may work on several different projects for several different clients of the Contractor, simultaneously or over a period of years?  The answer is to tweak the standard Subcontractor Agreement to make it a “master” agreement, so that it covers not just the first project, but future projects as well.  Here is some language I add:

WHEREAS, Contractor and Subcontractor (the “Parties”) agree that for mutually agreed upon Clients, Contractor may choose to utilize Subcontractor with respect to certain Services specifically set forth herein and in any Statement of Work attached to this Agreement;

WHEREAS, Contractor and Subcontractor desire to enter into a master agreement that sets forth the terms and conditions pursuant to which Contractor and Subcontractor shall, for mutually agreed upon Clients, provide certain Services to one or more of Contractor’s clients;

Statement of Work.  The parties will memorialize the Subcontractor work in the attached Statement of Work (a “Statement of Work” or “SOW”) that is entered into between the parties and is incorporated into and made a part of this Agreement.  Contractor may issue a purchase order (“Purchase Order”) with the mutually agreed upon and signed Statement of Work attached for all work to be performed by Subcontractor under this Agreement.  A SOW, if and only to the extent then followed by a Purchase Order, constitutes the only authorization for Subcontractor to take any action that will result in any expense to Contractor.  Any SOW shall be substantially in the form of the representative SOW attached as Exhibit A to this Agreement and shall reference this Agreement and shall specify: (a) the overall project description and Subcontractor’s requirements for the services; (b) the services to be performed, including materials to be provided, by Subcontractor; (c) the charges or billing rates and payment milestones for the services performed by Subcontractor; (d) the location(s) where the services are to be performed;  (e) the acceptance criteria and warranty provisions for such work; (f) anticipated start and finish dates; and (g) any other information and/or associated terms and conditions that may be required by the circumstances of a particular Statement of Work.

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