Contracts: The Basics

Understanding contracts is essential for a small business. Contracts are the basic building block of our economy and the legal principles of contract formation and enforcement go back centuries but are still in effect today.

Contracts require a “meeting of the minds” between the contracting parties and are enforceable in our courts. Contracts need to be clear and unambiguous and should be in writing and signed by the parties. In certain cases, oral contracts are enforceable but without a writing the terms are very hard to prove. For this reason, business contracts should always be in writing. The basic principle of contract interpretation by the courts is to determine what is the intention of the parties as determined by the four corners of the written document. Deals may be sealed with a handshake but fade away without a written document.

Contracts also require consideration to be enforceable. Consideration means that the parties exchange mutual promises or that one party agrees to provide a benefit to the other party or agrees to accept a detriment in consideration for the contract. A promise to make a gift is not enforceable because the receiving party has made no promise, payment or other consideration to the gifting party.

Under the Uniform Electronic Transactions Act (UETA), contracts can be signed electronically by using systems such as DocuSign as long as the parties intend to sign and do business electronically and keep a record that can be stored and reproduced as a copy. All states have adopted the UETA, including Missouri (codified at Section 432.200 RS MO 2003). Electronic contracts are just as enforceable as traditional signed contracts. Thus, it is important to note that the same basic principles of contract formation, interpretation and rules of enforcement apply to contracts in electronic or digital form. Continue reading »

Navigating the Emerging Industrial Lease Market: What You Should Know

While the national real estate landscape is evolving and somewhat unsettled for commercial office space, industrial real estate is in high demand. This reflects a shift in the need for logistics and manufacturing as well as employers seeking alternate and hybrid office settings.  Traditional office and industrial leasing share many of the same key terms, including pricing, common area expenses, and operational costs. However, there are additional and unique considerations for industrial landlords and tenants.

One key consideration is the appropriateness of the facility for the tenant’s use. Industrial tenants often have substantially different use needs from other industrial tenants, based upon the tenant’s industry and operations. This includes the possibility of vastly different needs in terms of transportation and loading facilities, HVAC and ventilation, floor loads, the use of data centers, and power needs.

Tenants also need to ensure that the zoning is appropriate for their needs (light vs. heavy industrial) and that there is flexibility in the lease and the facility for the tenant’s possible evolving needs over the term of the lease.

Both landlords and tenants should also consider the burden and expense of removing industrial fixtures like mezzanines, cabling, and cranes and the lease should clearly allocate these responsibilities and costs between the parties. This may require discussions about specific financial considerations to ensure the availability of funds to de-mobilize a site at lease end, including guaranties and letters of credit. Continue reading »

Before You Personally Guarantee a Business Loan, Read This

Most small businesses owners have borrowed money to start and grow their businesses and, in most cases, had been requested by the lender to personally guarantee those debts. Sometimes the lender also requires the spouse to guarantee the debt, even if the spouse has nothing to do with the business.

In a loan context, a guarantee is a promise to pay the debt if the borrower is unable to do so.

In a business loan context, a personal guarantee is the promise of an individual, often the business owner, to pay the debt if the business is unable to do so.

Why is it important to pay attention to these personal guarantees?

Because starting and growing a small business is risky. If the startup fails, the personal guarantor is on the hook for those debts. All of the guarantor’s assets can be seized by the creditor once it obtains a judgment against the guarantor.

Why is it important to pay attention to a request that the spouse guarantee the debt?

Because when in Missouri a husband and wife own an asset together, such as a home or joint bank account, it is said to be owned as “Tenants by the Entirety” or TBE. In Illinois, TBE ownership is limited to homes owned by married couples.

TBE ownership is different than joint ownership. If two owners of an asset aren’t married, creditors of only one owner can reach that owner’s interest in the asset. With TBE ownership, however, only creditors of both owners can reach the asset. Obviously, it is to the business owner’s advantage not to have the spouse on the guarantee. This prevents the lender from seizing the jointly owned asset should the business fail.

Federal law protects a lender from demanding a spouse’s signature unless the spouse is a partner, director, or officer of the business or a shareholder or member. Regulation B, a provision of the Equal Credit Opportunity Act, provides that a lender cannot demand the signature of a spouse who is not involved in the business if the applicant qualifies for credit without the spouse’s guarantee and the spouse is not a joint applicant. Before your spouse signs any loan documents, be sure to consult with your attorney to ensure that a spousal signature is not required.

Should your business fail, and the lender tries to enforce the guarantee, your attorney should review the loan documents to determine if you have any defenses to the guarantee. For instance, a lender cannot enforce an “embedded guarantee,” in which some provision in the loan document itself states that the owner’s signature as a representative of the borrower also serves as a personal guarantee of the loan personally. These are not enforceable.

Because of the risk inherent in signing a personal guarantee, a separate individual signature underneath the terms of the guarantee is required for the guarantee to be effective. This can be either in a separate portion of the loan document or in a stand-alone guarantee document.

Can I limit my risk under a personal guarantee? Continue reading »

Should Your Contracts Anticipate Another Pandemic?

The widespread impact of the COVID-19 pandemic caused many businesses to evaluate whether they are obligated to perform under certain contracts, or whether they can invoke unique contract provisions to excuse a possible or likely failure to perform. While no business wants to consider a downturn due to another worldwide health or other catastrophe, the last several years have made clear it could happen, and there are ways to minimize losses.

Specifically, a “force majeure” clause is a contract provision that excuses a party’s performance of its obligations under the contract when certain circumstances arise beyond the party’s control, and making performance inadvisable, commercially impracticable, illegal, or impossible. These clauses vary in language and length, but many clauses include events like fire, war, unrest, epidemic or pandemic, famine, or otherwise “acts of God.”

There are examples of businesses seeking to excuse or delay performance due to COVID-19.  One such case was Pacific Collective, LLC v. ExxonMobil, in California, in which a developer asked the court to prevent ExxonMobil from selling a property to other buyers, claiming that California’s lockdown during the pandemic was an act of God that prevented the developer from completing the multi-million-dollar property acquisition. Continue reading »

Your Business Needs an Estate Plan, Too

Yes, small businesses need estate plans. Business estate plans determine what happens if the owner can no longer operate the business due to death or disability. A plan must be in place to address either potentially devastating situation.

Businesses with multiple owners commonly use Buy/Sell Agreements for such a plan. These provisions can be inserted into the Operating Agreement if the business is a limited liability Company (LLC) or can be provided in a separate agreement if the business is a corporation or partnership. There are two general forms used:

• Buy/Sell Provisions: Remaining owners (whether shareholders, members, or partners) buy the deceased owner’s interest from the estate. A life insurance policy can provide funds for the purchase.
• Redemption Agreement: The company buys the deceased owner’s interests from the estate. The remaining owners own the company. Proceeds from the sale go to the estate. This arrangement can also be funded by a life insurance policy.

Because of the tax and legal considerations involved, it is critical that these plans be thought out and planned in advance with the advice and input of the business’ attorney, accountant, and insurance professional.

If no agreement exists, the remaining owners must deal with the deceased owner’s estate, possibly controlled by the spouse, children, or other persons not involved in the business. This can be very disruptive. The business may have to be sold or liquidated to the detriment to all concerned. The value of the business is not passed on to the estate. The remaining owners must deal with a hostile party and potential litigation which could destroy the business.

The loss of an owner can also cause a vacuum in the management of the company. Continue reading »

Getting Through Chapter 11 – Part Two: Plan of Reorganization

Part 5.2 of a 5-part series: Options for Small Business Owners in Financial Distress

Your company’s Chapter 11 bankruptcy has been filed and you’re now running your business under the provisions of the United States Bankruptcy Code.

It’s now time to work toward the ultimate goal of a Chapter 11: a Plan of Reorganization, confirmed by the court, allowing your company to restructure its debts, exit Chapter 11, and continue in business. It is important that you explain all of your concerns about all aspects of your business to your attorney and provide complete and accurate information, all before you even file the case. This will help both of you develop good ideas for successfully navigating your reorganization case and getting a plan confirmed. Advise your attorney if a new problem develops so you can consider all the potential solutions available to you.

Your next steps in planning for reorganization will include you and your attorney:

• Participating in two mandatory meetings with a U.S. bankruptcy trustee within the first 30 days after filing and begin filing monthly operating reports.
  1. “Initial debtor interview:” Learn procedural issues such as the ins and outs of filing periodic operating reports such as monthly operating reports and where and how your company can bank.
  2. Section 341 “meeting of creditors:” Be questioned under oath by the U.S. trustee’s office about your need to file Chapter 11, your plan to exit bankruptcy, how you will implement your ideas, etc. This meeting is open to all interested parties.
• Negotiating the terms of your proposed plan with the creditors’ committee if one has been formed by large unsecured creditors.
• Negotiating lease terms. Any lease which commenced prior to the filing can be “rejected.” You can then renegotiate the terms or terminate the lease, in which case the lessor’s claim will be treated as a pre-petition claim.
• Treating an equipment lease as an installment purchase agreement secured by the equipment, possibly converting a portion of the secured debt to unsecured and altering the terms of repaying the secured debt.

Continue reading »

Getting Through Chapter 11 – Part One: After Filing

Part 5.1 of a 5-part series: Options for Small Business Owners in Financial Distress

Your attorney has just filed your company’s Chapter 11 reorganization case and you have no clue what to do next. Seriously, the first thing you should do is nothing. Take a breath and keep running your business.

That’s not to say there’s nothing for you to do during the entire Chapter 11 process – there’s actually quite a lot for which you will be responsible. Any competent bankruptcy attorney already has discussed your statutory and practical responsibilities in a Chapter 11 case with you prior to filing.

Now is the time to implement those decisions made before the case was filed. If you forget a decision you made (or come across an issue you hadn’t discussed), call your attorney. The two of you should be in frequent contact during the case to be sure that you don’t take any actions which don’t make sense in the Chapter 11 context, or which might violate the Bankruptcy Code, Bankruptcy Rules, or Local Rules.

Your primary concern after the case is filed is, of course, money to operate with. That topic should be discussed thoroughly with your attorney prior to filing. Be sure your attorney discusses post-petition financing and use of ‘cash collateral’ with you. Be sure that you have post-petition financing lined up before you file, either from internal operations or from a lender. If your post-petition financing falls through, or you’re not as profitable as you expected to be after filing, you may not be able to afford to operate during the Chapter 11. If so, there is  no way for you to reorganize and your Chapter 11 case may be dismissed outright. Continue reading »

Asset Protection and Estate Planning Perspective on the Importance of Holding Investment Properties in an LLC

Most small business owners today are aware of the importance of forming a legal entity before beginning their business operations. However, more individuals and families are turning to rental properties as an investment strategy, and they do not necessarily think of themselves as small business owners. But that is exactly what they are. It is critical to ensure that if you or your family own rental or other investment properties, you protect your personal assets from liability by setting up a legal entity to be the owner of the properties.

The best option for most of these types of small businesses is to form a Limited Liability Company (LLC). Limited Liability Companies require less formality than corporations and are generally less costly to form. They also offer the benefit of pass-through taxation. Though liability insurance offers protection, the one-time cost of setting up an LLC is typically less than the cost of an umbrella insurance policy over time. However, there are still coverage limits with an umbrella insurance policy: If the rental property is owned in your individual name and your liability exceeds the coverage limits, your personal assets could be at stake. LLCs shield their members from personal liability when formed and operated properly.

If you are going to own multiple properties, it may be wise to form a different LLC for each property to shield each property from the liabilities of the other properties. You will want to consult with an experienced attorney to make certain that you are following the correct procedures in establishing your LLC, such as registering the LLC with the Secretary of State, creating an operating agreement, and obtaining a tax ID number for the business.

As you can see, LLCs are extremely useful as a means of asset protection. They are also a great tool for estate planning purposes. Continue reading »

Religious Exemptions to COVID-19 Vaccination Mandates under Title VII and the EEOC’s Additional Guidance

With continued and widespread COVID-19 infection and the FDA’s full approval of the Pfizer-BioNTech COVID-19 vaccine, many employers have instituted COVID-19 vaccination mandates. Title VII requires employers to provide reasonable accommodations for employees with sincerely-held religious beliefs that conflict with getting vaccinated. Given that religious beliefs are difficult to disprove, many employees have taken this as an opportunity to request religious exemptions to avoid COVID-19 vaccination mandates.

The Law – Title VII

Title VII of the Civil Rights Act of 1964 prohibits employment discrimination on the basis of religion and requires employers to provide reasonable accommodations to employees claiming their sincerely-held religious beliefs conflict with getting vaccinated. Title VII protects not only people who belong to traditional, organized religions, such as Buddhism, Christianity, Hinduism, Islam, and Judaism, but also others who have “sincerely-held religious, ethical or moral beliefs.”

Given this sweeping definition of religion, the U.S. Equal Employment Opportunity Commission (“EEOC”) has cautioned that an employer should generally assume that an employee’s request for a religious accommodation is based on a sincerely-held religious belief. Nevertheless, an employer is permitted to question the sincerity of an employee’s purported religious belief where there is an objective basis for doing so. Further, an employer is not required to accommodate an employee’s religious beliefs and practices if doing so would impose an “undue hardship” on the employer’s legitimate business interests. For the EEOC’s list of factors to be considered when determining whether an accommodation imposes an undue hardship on an employer, visit: EEOC Undue Hardship.

The EEOC’s Guidance on Religious Exemption Requests

On October 25, 2021, the EEOC updated its technical assistance related to the COVID-19 pandemic, which included additional guidance on how employers should handle religious exemption requests (Section L). Read the full EEOC update here.

The key takeaways are:

1. Employees who have a religious objection to receiving a COVID-19 vaccination must inform their employer and request a reasonable accommodation to be afforded protection under Title VII. Reasonable accommodations may include telework or reassignment.
2. If an employer has an objective basis for questioning either the religious nature or the sincerity of a particular belief, the employer can make a limited factual inquiry seeking additional supporting information.
3. An employer who objectively demonstrates that it would be an “undue hardship” to accommodate an employee’s request for religious exemption to the employer’s vaccination mandate is not required to provide the accommodation.
4. An employer is not required to grant all employees’ requests for religious exemptions on the basis that it has granted some employees requests for religious exemptions. The determination is fact-intensive and specific to every request.
5. While an employer should consider the employee’s preference, if there is more than one reasonable accommodation that would resolve the conflict between the vaccination requirement and the religious belief without undue hardship, the employer may choose which accommodation to offer.
6. An employer has the right to discontinue a previously granted religious accommodation. If the employer learns that the belief is not religious in nature or sincerely-held, or if the accommodation becomes an undue hardship, the employer can discontinue the accommodation.

Continue reading »

Medical Marijuana Use by Employees in Missouri: Where Are We Now?

Due to the pandemic and labor shortage, Missouri courts have not had an opportunity to consider Amendment 2 and employment issues related to medical marijuana in the workplace. Amendment 2 allows state licensed physicians to recommend medical marijuana to patient employees diagnosed with chronic debilitating conditions. It also protects employees with a medical marijuana card issued by the Department of Health and Senior Services (DHSS) from being terminated unless the employer proves that the employee is “under the influence of marijuana.”

There are no reliable tests available yet to scientifically confirm if someone is “under the influence” of marijuana. A person will test positive for marijuana for up to 25 days after use. However, there are impairment tests on the market that can help determine whether workers in safety-sensitive positions are at risk by testing current fitness for duty.  Those tests include computer-based alertness tests similar to a video game and apps that test for cognitive and motor impairment. Some tests take 20 seconds and are advertised as testing for fatigue, dehydration, emotional distress, alcohol, cannabis, etc.

Without more guidance, employers will have to create Observed Behavior tests that are signed by company personnel to bolster an argument of “under the influence.” Further, because Amendment 2 is a constitutional amendment, it would necessarily trump existing Missouri law found in laws such as workers’ compensation and unemployment statutes.

Another possible employee defense is an Americans with Disabilities Act (ADA) defense where the employee is taking physician-prescribed medical marijuana for a chronic debilitating condition that is protected by the disability laws. Missouri has no case law at this time. U.S. case law trends are that when courts are asked to apply federal law (the ADA) versus state law (i.e., Missouri Human Rights Act), federal courts are not finding a protected disability due to the employee using an illegal drug. Continue reading »