San Francisco Bankruptcy Lawyer Blog

In USAA Federal Savings Bank v. Thacker (In re: Taylors), 2010 U.S. App. LEXIS 5793 (9th Cir. 2010), the Ninth Circuit decided on an issue where the bankruptcy court held a security interest was avoidable as a preferential transfer, but the value of the security interest was not readily ascertainable.

In the case, the buyers of a Toyota Camry borrowed $18,020 from USAA Federal Savings Bank and used money, as well as their trade-in vehicle, to purchase the Camry. The buyers gave USAA a purchase money security interest in the Camry. USAA perfected this security interest in Idaho. Four weeks after buying the Camry, the buyers filed for bankruptcy. Thacker, the bankruptcy trustee, filed suit against USAA seeking to avoid the transfer of the security interest under 11 U.S.C. § 547(b). The bankruptcy court held the value of the security interest was the full value of the loan. The bankruptcy court cancelled the security interest, entered judgment against USAA for $18,020 plus interest, and ordered USAA to pay $18,020 into the bankruptcy estate. The bankruptcy court allowed USAA to file an unsecured debtor's claim for the second $18,020 loan, plus interest. The bankruptcy estate kept the car and the original loan obligation of $18,020 used to buy the car. USAA had a security interest in the car, and was ordered to loan the bankruptcy estate another $18,020 in return for an unsecured claim against the estate.

The Ninth Circuit said the value of the security interest was related to the value of the secured asset which depreciated over time. The value of the security interest declined as the car buyers made loan payments. The bankruptcy court erred in deciding the value of the security interest was readily ascertainable. The security interest was not worth the same amount as the loan involved. The bankruptcy court had to return the security interest, not its value, to the bankruptcy estate.

The value of the Camry, and security interest, began to decline the moment the buyers drove the Camry off the lot.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

It seems the economy is not getting better for bank failures. In mid-May 2010, the Washington Department of Financial Institutions closed Frontier Bank, headquartered in Everett, Washington, and appointed the FDIC receiver. The FDIC entered into a purchase and assumption agreement with Union Bank, National Association, headquartered in San Francisco, California, and a subsidiary of Japan's Mitsubishi UFJ Financial Group, to assume all of the deposits of Frontier Bank.

With bank failures, businesses in financial distress may have problems getting more loans. One way for financially distressed businesses to delay bankruptcy and to decrease the need for debt is to do debt-equity exchanges. The business issues equity to its lenders in exchange for cancellation of debt. The debt and interest payment expenses are reduced, helping out the balance sheet.

For the equity holders, they get diluted, but this is better than Chapter 7 bankruptcy in which the equity owners may get nothing. If the company survives the lender gets upside.

For debt-equity exchanges, the business needs valuations of different classes of debt and equity, how much to exchange, and tax consequences. If debt cancelled exceeds the fair value of the equity issued in exchange for the debt, the business recognizes cancellation of debt (COD) income in the excess. I.R.C. § 61(a)(12), § 108(e)(8). For a Limited Liability Company (LLC), the equity may be a capital or a profits interest in the LLC. COD income of an insolvent LLC is allocated to the members.

The Bankruptcy Code provides an insolvency exception to recognizing COD. The tax obligation is deferred but not eliminated. The deferred income may be included in the taxpayer's income ratably over a period of several years.

Continue reading "Debt-Equity Exchanges" »

The Supreme Court in Jerman v. Carlisle, McNellie, Rini, Kramer & Ullrich LPA, No. 08-1200 held that a debt collector who makes an incorrect statement of law in communications with a debtor may not invoke the Fair Debt Collection Practices Act's "bona fide error" defense, 15 U.S.C. § 1692k(c), even if it was unintentional error.

In Jerman, defendants, an attorney and a law firm, filed a complaint seeking foreclosure on property owned by plaintiff Karen Jerman. Attached to the complaint was notice that provided the alleged debt would be assumed valid unless Jerman disputed the debt "in writing." Jerman filed her own lawsuit, complaining the defendants did not provide proper notice because the Act did not require dispute of the debt "in writing." The trial court held the notice violated the Act. The Sixth Circuit on appeal found the violation was based on the defendants' good-faith error so the defendants could use the Act's "bona fide error" defense, which provides immunity if the debt collector can prove the violation of the Act was unintentional and "resulted from a bona fide error." 15 U.S.C. § 1692k(c).

The Supreme Court concluded the Act's "bona fide error" defense is limited to clerical or factual mistakes and does not extend to mistakes of law.

The availability of statutory damages, punitive damages, and attorney's fees for violations of the Act provides incentives for plaintiffs to fight debt collection claims.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

When dealing loan defaults, it is a choice between whether to workout the loan (e.g., extension of maturity date, restructuring the interest rate or other loan terms, or waiving certain defaults) or allowing the lender to exercise its rights and remedies (e.g., foreclosure, appointment of a receiver, action against the guarantor). Gather the following before speaking with the lender:

First, review the collateral. The lender will want to update its valuation of repayment sources, including loan collateral. At the lender's request and expense, allow for appraisal, title report searches, environmental assessment, improvements to collateral like entitlements, construction, contractor obligations, and insurance coverage.

Next, review loan documents to see if there are clauses that would make remedies by the lender difficult. For instance, for a California real estate secured loan, if the deed of trust does not have the "power of sale" language, the lender may not pursue a non-judicial foreclosure sale of the real property collateral. The lender may be limited to a judicial foreclosure sale, which is more costly, unless the lender enters into an agreed loan workout to cure this deficiency in loan documents.

Go over any inappropriate loan administration. Review evidence of oral agreements modifying the written loan documents, or course of conduct that suggest implied waiver of the terms of the written loan documents.

If the lender agrees to a workout, the lender might want to enter into a pre-negotiation agreement with the borrower, guarantors, and any third-party pledgors or indemnitors before negotiations. The pre-negotiation agreement says that there is no deal until it is in the final documents, that there are no oral agreements, that negotiations will not be discoverable in a lawsuit, and that the parties are not letting go of alternatives.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

If a bank needed to foreclose on property with a short sale, it must complete the foreclosure first and then assert a deficiency judgment against the owner to recover the remaining deficient amount left on the loan.

A bank that breaches the implied duty of good faith and fair dealing may be barred from collecting its deficiency judgment in a foreclosure action. de Jong v. Leitchfield Deposit Bank, 254 S.W.3d 817, 823 (Ky. App. 2007) (quoting Farmers Bank and Trust Co. v. Willmott Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky. 2005)). The implied duty of good faith and fair dealing is imposed in every contract, which "impose[s] on the parties ... a duty to do everything necessary to carry" out the contract.

In Harvest Homebuilders LLC v. Commonwealth Bank and Trust Company, 2008-CA-001897 (01/29/2010), the Kentucky Court of Appeals affirmed awarding Commonwealth Bank a deficiency judgment against the borrower and an individual guarantor. The Kentucky Court held that the bank did not breach the implied covenant of good faith and fair dealing because Commonwealth Bank neither entered into a contract to sell the subject real property during the foreclosure proceedings nor sold the real property to a third party. There was no consent to a sale of the property prior to foreclosure because an unacceptable condition was imposed by the borrower and individual guarantor that the sale only occur if they were released by the bank from liability for any resulting deficiency.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

For many years, employers favored forcing employees to agree to arbitration when there were employment disputes rather than litigation because they thought arbitration decisions were not subject to appeal even when arbitrators made legal errors. Employees who were just happy to land a job signed up to these arbitration clauses, and since the arbitration was at the expense of the employer, there did not seem to be much worry. The California Supreme Court issued a decision on April 26, 2010, in Pearson Dental Supplies, Inc. v. Superior Court that might change all this.

Pearson hired Luis Turcois as a janitor in February 1999. In January 2001, Turcois signed a dispute resolution agreement requiring him to arbitrate disputes that arose out of his employment within one year. Pearson terminated Turcois in January 2006. In October 2006, Turcois filed a lawsuit alleging age discrimination in violation of the Fair Employment and Housing Act, wrongful termination in violation of public policy, and breach of implied-in-fact contract or obligation not to terminate him without good cause. Pearson filed a demurrer and motion to strike, which the court overruled. Then, Pearson filed an answer. In neither the demurrer nor the answer did Pearson assert Turcois' claim must be arbitrated. In February 2007, Pearson argued Turcois' employment contract required him to arbitrate disputes and the court agreed. The case was sent to arbitration, and the arbitrator dismissed Turcois' claim because he failed to seek arbitration within one year of employment termination according to the contract.

The California Supreme Court held that an arbitrator's dismissal of a claim as untimely, based on his clear legal error in interpreting state law tolling provisions, exceeded his powers under the California Arbitration Act and warranted overturning his award. Although the employee sued within the one-year period, and California Code of Civil Procedure Section 1281.12 allowed tolling from the date the civil action was commenced, the arbitrator failed to recognize that tolling "stopped the clock" between the time the civil action was filed and the time the employee demanded arbitration. Based on an erroneous reading of Section 1281.12, the arbitrator determined that the employee's demand was untimely.

The California Supreme Court held that it was inconsistent with the protection of Turcois' statutory rights if "as a result of allowing the procedural error to stand, and through no fault of the employee or his attorney, the employee will be unable to receive a hearing on the merits of his FEHA claims in any forum." The decision is another step closer to judicial review of arbitration decisions.

Continue reading "Arbitration" »

On March 18, 2010, the Hiring Incentives to Restore Employment (HIRE) Act became law to stimulate employers to hire. The Act provides tax benefits to non-governmental employers in payroll tax exemption and up to a $1000 tax credit for each qualified new hire.

Qualified new hires must be:

1. hired by the employer between February 3, 2010 and January 1, 2011;
2. certified by signed affidavit, under penalty of perjury, that he has not been employed for more than 40 hours within 60 days prior to hire date;
3. not hired to replace any current employee unless the current employee left the employer voluntarily, or terminated for cause; and
4. not own more than 50% of the employer or not related to, anyone who is an owner.

Employers who retain new hires for a 52 consecutive-week period can get up to $1000 tax credit per new hire. To get $1000 credit, a new hire's wages for the period must exceed $16,129.03. If the wages are less, the credit received by the employer will be equal to 6.2 percent of the wages earned during the 52-week period. A new hire's pay for the second half of the 52-week period must be at least 80 percent of the pay provided in the first half. The credit can be taken on the employer's 2011 tax return.

On the payroll tax exemption, the HIRE Act exempts employers from paying the employer part of the social security taxes for wages paid to some new hires between March 19, 2010 and January 1, 2011. For the first quarter of 2010, instead of the exemption, the employers get a credit in the second quarter of 2010. While the employer is exempt from paying social security taxes, the employee portion must still be withheld by employer and paid to the government.

Continue reading "HIRE Act" »

With businesses conducting mass layoffs and declaring Chapter 11 bankruptcy to survive this economy, many disgruntled employees are getting even with employers by taking away confidential information.

For example, on September 16, 2008, Connexus Corporation filed a lawsuit in San Francisco Superior Court against Ty Lim and Cypher Media LLC for breach of contract, breach of fiduciary duty, intentional interference with contractual relationships, and intentional interference with economic advantage. From the complaint, it appeared Lim formerly worked in marketing at Connexus, and allegedly used company property to start his own business, Cypher Media. From the court files, the case apparently settled in December 2009.

With the flash drive and access to personal email accounts at work, people can carry out the door all the work that a company has paid for without much notice. Some companies who have allowed their employees to use their own computers or mobile phones for work are in even more difficulty protecting trade secrets.

A few measures a company can take in protecting its confidential information:

• Require employees sign a non-disclosure agreement. Though, in California, even if employees do not sign confidentiality agreements, by statute, they are not allowed to disclose an employer's data.
• Conduct training to ensure employees understand the consequences of taking company property.
• Backup employee hard drives and email accounts. If an employee leaves with information, it could be gone forever, especially if the relationship turns sour and an employer is unable to contact the employee on friendly terms.
• Have departing employees acknowledge their agreement to confidentiality.
• When an employee leaves, disable the person's access to company networks, computers, and buildings.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

In recessions, people start to take advantage of other people's personal information to get through financial difficulties. Companies have taken more initiative in protecting consumer personal data: 1) to be customer friendly, 2) to stay ahead of, or keep pace with, competitors, 3) to comply with federal legislation, and 4) to comply with international laws.

To ensure the growth of electronic commerce and the use of the Internet for marketing products and services, a company needs to ease concerns that customers have regarding the security and use of personal information collected through the Internet. With a privacy policy that discloses to customers what information is collected, how the information will be used, and how a company will protect the confidentiality of the data, a company gains consumer confidence and trust.

By implementing a privacy policy, a company stays ahead of, or keep pace with, its competitors in alleviating consumer privacy concerns.

In the United States, the Children's Online Privacy Protection Act (Act) requires verifiable parental consent, such as written permission, before a web site may collect individually identifying information online from children, or use or disclose information that is collected online from children. Under the Act a child is defined as anyone under age 13.

Because of First Amendment rights and restraints on commerce concerns, there has not been passage of much privacy legislation in the United States compared to countries outside of the United States.

The computer industry, along with many privacy protection advocates, such as the Online Privacy Alliance, the Software Publishers Association ("SPA"), have advocated avoidance of government regulation with effective self-regulation.

International privacy laws that are of main concern are those in Europe. In Europe, the EU Data Protection Directive (the "Directive") went into effect on October 24, 1998. The goal of the Directive is to prohibit companies from using information about customers in ways the customers never intended. For example, when a customer sends in his personal information to register his ownership of a product, use of the information for marketing purposes would be prohibited. Under the Directive, European citizens are guaranteed the following privacy rights, regardless of how the data is collected:

1) to refuse to allow data to be used about them without their consent,
2) to have access to information about data held electronically or manually about them,
3) to investigate how data was collected, and where it came from,
4) to require inaccuracies to be corrected,
5) to require corrupted and lost data to be restored,
6) to obtain compensation or recourse if personal data is misused.

The Directive affects US businesses in storage, use, and transfer of the personal data of European citizens, and would prohibit the transfer of data to countries outside Europe where there are not similar protections. Also, there is a requirement to register with the Data Protection Commissioner who will be in charge of enforcing consumer privacy rights and handling complaints from consumers regarding companies' use of personal data.

The difficulty in complying with the Directive is that each country in Europe has separate privacy laws that cover the mandate of the Directive.

Privacy seal programs are dedicated to building consumer confidence and trust on the Internet. Organizations that currently offer privacy seals are: 1) TRUSTe, 2) BBBOnLine.

The TRUSTe program licenses web sites that meet its privacy principles. These principles include:
1) disclosing what information is collected, 2) disclosing how collected information will be used, 3) disclosing who information may be shared with, 4) providing opportunities for consumers to opt out of subsequent or third party use of information, 5) setting precautions for security protection of information against loss, misuse, or alteration, and 6) offering consumers access to their information and allowing them to correct inaccuracies. By adhering to the principles, the licensee is able to display a TRUSTe seal to verify the licensee's cooperation. TRUSTe also offers consumers a dispute resolution process, and performs periodic audits of the licensee.

BBBOnLine is a subsidiary of the Council of Better Business Bureaus. It has a privacy seal program that gives consumers confidence that their personal information will be safeguarded by companies that participate in the program. The program awards a seal to members that post online privacy policies, offers dispute settlements to consumers, refers violations of policies to government enforcement agencies, and monitors members for compliance with BBBOnLine's privacy practices. BBBOnLine's privacy practices are similar to TRUSTe's. BBBOnLine's seal program began in November 1998.

Continue reading "Purpose of Privacy Policy" »

All the rage these days is whether to buy an iPad that can only be accessed at wireless outlets, or iPad 3G where someone has to pay a monthly telecommunications charge. The unemployed struggling to find access to free computer services wish they had such dilemmas. These people go to public libraries that usually kick them off computers after 30 minutes.

Besides being reminded they are low, people who access public computers need to be careful of privacy so their email passwords and other confidential information do not get saved on the computer for users that come after them to access. One concern is cookies. Cookies are small text files from a web server. A web server is a computer that delivers web pages. Cookies are stored onto a user's computer hard drive with the user's browser. A browser is a software application used to locate and display web pages. Each time the browser requests a web page from the server, the text files are sent to the server, enabling a web site to track a user's activities on the web site. Cookies give users a unique, random ID, allowing a user to navigate the web site with ease or customization. Because cookies are just strings of text, they cannot be used as viruses, and do not infiltrate a user's hard drive or take away personal information contained on a hard drive. Further, cookies contain expiration dates. Browsers discard expired cookies every time they open.

Some web sites set cookies to expire. Some web sites use cookies on the home page to save users time so they do not have to choose certain features such as a country site each time they visit the web sites. Some web sites use cookies on its trialware download page to speed up users' activities in not having to register more than once.

Most cookies do not contain personally identifying information. Users are free to change their browsers to prevent the acceptance of cookies or to notify them when they receive cookies. Review browser help information on changing cookie preferences.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

Sometimes people run in difficult financial challenges not because they do not know how to make money or save, but because they invest poorly. The Investment Advisers Act of 1940 (Advisers Act) defines an investment adviser as any person who 1) provides advice or analyses regarding the value, purchase, or sale of securities, 2) provides these services as a business, and 3) receives compensation for these services.

A person associated with an investment adviser means: any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser, except persons associated with an investment adviser whose functions are clerical or ministerial.

An investment adviser who uses any means of interstate commerce in connection with its business must register under the Advisers Act.

To register, an investment adviser must file an application called Form ADV with the SEC and pay a filing fee. Form ADV is a disclosure document divided into two parts. Part I of the form is a disclosure for SEC and state use. Information in the ADV needs to be kept current and needs to accurately reflect an investment adviser's business practices. It is unlawful to make untrue statements of material fact, or omit to report material facts, in the ADV (or any report filed with the SEC).

Part II of the form contains information about an investment adviser's background and business practices. It is filed with the SEC and the State Administrator, and acts as a disclosure for clients. A written disclosure statement must be delivered annually to clients, and to prospective clients no less than 48 hours prior to entering into a written or oral advisory contract. As to prospective clients, it may be delivered no later than the time of entering into the contract if the prospective client has the right to terminate the contract without penalty within five business days. However, delivery of the disclosure document need not be made in connection with: 1) investment company contracts, and 2) contracts for impersonal advisory services.

State laws vary as to whether an investment adviser needs to register in order to provide investment advisory services in a state. There may be differences in the definitions of "giving advice" and "soliciting business". Further, registration requirements for investment adviser representatives vary by state and often require the passing of a securities exam.

Continue reading "Investment Advisers" »

Knowing telemarketing rules helps consumers prevent financial scams. The Federal Communications Commission (FCC) issued rules regulating cold calling by businesses to consumers with the Telephone Consumer Protection Act of 1991. The rules restrict who may be called and when they may be called. The following are other requirements of the rules.

One requirement is that a telemarketer establish and maintain a national "Do-Not-Call List" of persons who instruct the telemarketer not to call them again. The rules say nothing about what specific words are sufficient to trigger placement on the "Do-Not-Call List". However, there must be an actual request not to be called again. Words merely indicating displeasure at the call, or irritation about the interruption at an inopportune time would not necessarily constitute a request not to call again.

A telemarketer is obligated to maintain a "Do-Not-Call List" which must be checked prior to making any cold calls, to determine whether or not the phone number being called is not the list. A failure to do so can subject the adviser and the firm to significant sanctions. The "Do-No-Call List" must be kept for a period of at least ten years.

However, calls made to any person with that person's prior express invitation or permission, or to any person with whom there is an established business relationship, would not be deemed as cold calls. These persons include brokers, dealers, and existing customers .

No cold calls may be made to an individual's place of residence before the hour of 8:00 am or after 9:00 pm, local time, at the called party's location. There are no restrictions on cold calls to business telephone numbers. No automatic telephone dialing systems or artificial or pre-recorded messages may be used for solicitations.

When the telemarketer calls, he or she must, promptly and in a clear and conspicuous manner, provide the called person his or her name and the identity of the firm. The FCC rules also require disclosure of the office telephone number and address where the telemarketer may be contacted. Further, the telemarketer must state that the purpose of the call is to solicit.

Persons cold calling on behalf of financial or securities institutions must be registered employees. The individual must not be subject to statutory disqualification from the securities industry.

Telemarketers are required to be fair and ethical in their dealings with customers. Fair and ethical dealings prohibit abusive calls. Examples of when calls become abusive include: 1) language that can be interpreted as threatening or intimidating; 2) the use of profane or obscene language; 3) causing a phone to ring repeatedly or continuously with the intent to annoy, abuse, or harass; 4) engaging a person in a telephone conversation repeatedly or continuously with the intent to annoy, abuse, or harass. While there is subjectivity in what constitutes an annoying or harassing call, the safest course is to contemplate how the person called would perceive the conversation.

Continue reading "Telemarketing Rules" »

When involved in litigation, people cannot be afraid to make their lives public. Each party will be asked numerous questions on not only the incident at hand, such as a lender acting badly, but their personal lives as a way to find out relationships and credibility. In California, any party may obtain discovery regarding any matter, not privileged, that is relevant to the subject matter involved if the matter is itself admissible in evidence or reasonably calculated to the discovery of admissible evidence. Cal. Civ. Proc. Code § 2017(a).

Interrogatories are series of questions answered by a party under penalty of perjury. The party to whom interrogatories have been propounded shall respond in writing by (1) an answer containing the information sought, (2) an exercise of the party's option to produce writings, or (3) an objection to the interrogatories. Cal. Civ. Proc. Code § 2030(f). Interrogatories provide a discovery procedure directed to an adverse party. Associates Discount Corp. v. Tobb Co. (1966) 50 Cal.Rptr. 738, 241 C.A.2d 541. When a party to whom interrogatories have been directed fails to serve a timely response, that party waives any right to object to the interrogatories, including those based on privilege or on the protection for work product under California Code of Civil Procedure § 2018. Cal. Civ. Proc. Code § 2030(k).

Requests for production of documents is another form of discovery. Any party may serve on any other party a request to identify such documents, papers, books, accounts, letters, photographs, objects, or tangible things, which are relevant to the subject matter of the action, or are reasonably calculated to discover admissible evidence. Cal. Civ. Proc. Code § 2031(a). In an inspection demand, the party to whom the demand is directed may (1) move for a protective order, (2) respond separately to each item, (3) make a representation that the party lacks the ability to comply with the inspection demand, or (3) make an objection to the particular demand. Cal. Civ. Proc. Code § 2031(e) and (f).

As a consequence of a party's failure to serve timely responses, the party propounding the interrogatories may move for an order compelling response to the interrogatories. Cal. Civ. Proc. Code § 2030(k). Silence is not a justified discovery response.

If a party must go through the trouble of asking the court to help in the other party not answering discovery, it can ask the court to impose a monetary sanction under California Code of Civil Procedure § 2023 against any party, person, or attorney who unsuccessfully makes or opposes a motion to compel a response to interrogatories, or to an inspection demand, unless the court finds that the one subject to the sanction acted with substantial justification or that other circumstances make the imposition of the sanction unjust. Cal. Civ. Proc. Code §§ 2030(k).

The court may impose a monetary sanction ordering that one engaging in the misuse of the discovery process pay the reasonable expenses, incurred by anyone as a result of that conduct. Cal. Civ. Proc. Code § 2023(b)(1) (West Supp. 1994). Misuses of the discovery process include failing to respond or to submit to an authorized method of discovery. Cal. Civ. Proc. Code § 2023(a)(4). If a party is able to ignore its discovery obligations until the moving party brings a motion to compel, then the legislature's intent in enacting California Code of Civil Procedure § 2023 is defeated.

Continue reading "Motion to Compel Discovery" »

According to a study by the LexisNexis® Mortgage Asset Research Institute, mortgage fraud and misrepresentation increased 7% from 2008 to 2009.

Reasons the LexisNexis® Mortgage Asset Research Institute cited for the increase include "new opportunities to take advantage of consumers, maintenance of lifestyles obtained during the boom period, consumers who are desperate for the American dream of home ownership, and the need for new, creative methods of moving illicit funds." It also states that the fraud is being facilitated by technology which provides "fraudsters with the ability to access information, conduct criminal activities and remain anonymous via the internet, and manipulate processes that rely on the need for expediency."

Appraisers had a role in fraud in that "[t]he most prevalent types of appraisal fraud and misrepresentation for loans originated in 2009 involve incorrect comparables, omitted information, and value inflation. Thirty-six percent of loans with reported appraisal fraud and/or misrepresentation have misused comparables. Thirty-three percent involve a material omission of relevant information that would have affected the value. Value inflation . . . is also a large portion of reported appraisal fraud and misrepresentation."

Sometimes mortgage fraud may occur in false advertising and email scams. Consumers receiving emails should know they can file suit for unwanted emails, even when it is from banks or companies they have done business with. California's anti-spam law prohibits the sending of an uninvited commercial e-mail from California or to a state resident that misrepresents either the source or the subject of the message.

California's law allows private suits and recovery at $1000 per violation even when someone does not actually lose money or accept an offer from the unwanted email. For example, Daniel Balsam filed suit against Trancos Inc., a Redwood City, California advertising company, after he received a number of unwanted e-mails in 2007.

In Balsam's case, Balsam complained the "from" line in the eight e-mail messages he received from Trancos did not name Trancos as the sender. None of the e-mails provided a toll-free number to opt out and seven of them did not provide the ability "unsubscribe" by e-mail.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

Sometimes people suffering from debts are the best targets for identity theft, leading to further money problems. People should be wary of the information they leave on Internet sites so their personal information is not a target for scammers.

With social networks like FaceBook, be careful of "friend" connections. Someone who has not communicated in a while may no longer be a real friend, but surfing what people are saying they are doing so they can go into their homes at just the right time to steal. Friends can also leak information to the Internet at large.

In April 2010, FaceBook rolled out new schemes to share users' information with websites. One feature is "Instant Personalization" which gives websites like Yelp, Pandora, MicrosoftDocs personal information from a user's FaceBook profile when the person visits these websites. For someone to opt out, he has to block each application. Electronic Frontier Foundation wrote a HOW TO on opting out of Instant Personalization: www.eff.org/deeplinks/2010/04/how-opt-out-facebook-s-instant-personalization.

On April 19, 2010, FaceBook removed its users' ability to control who can see their interests and personal information on current city, education and work. To make this information nonpublic, delete them. Targeted advertisers and data miners will be inclined to analyze this data.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

For the business interested in learning more about its finances in order to meet debts, it may engage a CPA to study its prospective financial statements.

Every business should know its worth. Don't be treated like the bad boyfriend. Be valued so that time is not wasted running around thinking a contract is forthcoming when it is not. Ultimately every business has to be itself. Like someone who is beautiful - that person doesn't have to tell someone. Destiny is not from excuses or outside blame, but control. There is the saying that power comes from showing it, respect from earning it, and more from taking it.

For a new business, with no historical financial statements, a financial forecast is based on expected courses of actions. For instance, a restaurant owner already has a loan and determines what he expects from the loan money. The financial forecast may be for limited use like to get a loan or general use. Projections are based on hypothetical assumptions, and are ok for limited use. In the creative process, one of the most important qualities is persistence. Prize-fighters keep getting hit, but don't go down. Projections are used with people the business is negotiating directly with. For example, a restaurant owner does not have a loan yet, but determines what he expects to do with loan money when he gets a loan. There is no financial comparison to be done with new companies because there is no history to compare to. If a business makes a mistake, it deserves a chance to clean up them.

Prospective financial statements are different from proforma financial statements where in proforma statements, the analysis focuses on the historical financials and making a hypothetical based on those financials like if a fact changed, what the financials would look like.

Continue reading "Prospective Financial Statements" »

On November 5, 2009, www.kansascity.com reported in "Back from bankruptcy, Willie Aames looks to make change" that Willie Aames, the television actor who played roles on "Charles in Charge" and "Eight is Enough" had financial troubles throughout his life, and filed bankruptcy twice after a divorce. Despite once making $1.5 million per year, he ended up with no car, no computer, no home, no electricity, no gas, and had to make money from woodworking and garage sales.

The story was a great example to show that in life there is very little difference between winning and losing. This is why businesses like to have auditors on their side attesting to their financial statements and internal controls.

Auditors follow attestation standards when they attest to anything other than financial statements. For financial statements, they follow Statement on Auditing Standard (SAS). Internal controls include management discussions and analysis (MD &A), anything supplemental to financials, IT systems, webtrust (for ecommerce businesses).

There are 2 forms of reporting attestation statements. The auditor must obtain a management assertion letter regardless of the format. In one format, the management gives the auditor the management assertion letter, and the auditing refers to the letter side by side, and says it agrees to the management assertion letter. In the second format, the auditor keeps the management assertion letter, but writes its own direct report on the subject. If the auditor disagrees with the management assertion letter, it needs to write its own report and cannot refer to the management assertion letter.

Management is responsible for internal controls at a company. If the management does not give an assertion letter, the auditor attestation letter is restricted. If the auditor gives an opinion, it chooses the procedures. If other people tell the auditor the procedures to use, the auditor report is restricted, and the procedures need to be agreed to by all parties. The report cannot be relied on by anyone except the parties. Other people outside do not have privity with the auditor. The auditor does not make conclusions. It only writes out the procedures and does what the parties tell it to do. It gives its findings, but no opinions.

Continue reading "Attestation Statements" »

Sometimes people fall into bankruptcy not because they do not handle debts well in their personal lives, but because they are not able to meet expenses from a business. A business may file bankruptcy under Chapter 7 or Chapter 11 depending on the entity type.

A Chapter 11 bankruptcy is a bankruptcy reorganization plan through a payment plan. It is like a Chapter 13 bankruptcy. The debtor prepares a disclosure statement which describes the proposed reorganization payment plan. The proposed plan is voted by the classes of creditors and then submitted to the bankruptcy court for final approval.

A Chapter 11 filing may be converted to Chapter 7 liquidation plan when the debtor-in -possession fails to propose a plan that is approved by the court.

One way to stay in touch with finances while running a business to prevent falling into debt is to engage a CPA. The CPA may be part of a business at many stages. A business may first start out as a sole proprietorship, but to limit the personal liability of the owner, the company may change into a limited liability company. As the business grows, the entity may change its form to a corporation.

If a corporation ever reaches the IPO stage, the company may need assistance from an underwriter. The CPA helps at this point with a letter for the underwriter. At the IPO stage, the underwriter is responsible for making sure the company prospectus is correct. Underwriting gets from the CPA a comfort letter so that it is sure the prospectus is checked for accuracy. If there is interim information, the CPA reviews the interim information and gives a negative assurance. A negative assurance tells the letter user that nothing adverse has come to the CPA's attention about the financial data reviewed. The comfort letter is not a public document and does not get filed with the company registration statement. The comfort letter gives the underwriter a due diligence defense.

The CPA gives the comfort letter after the underwriter gives the CPA an attorney letter that says the underwriter has the due diligence defense. The CPA does not want the IPO to be based only on the CPA's letter. The comfort letter is limited only to financial information. It gives positive assurance on independence. If information still needs to be audited, the CPA gives negative assurance that the information needs to be reviewed later. Verification is an audit procedure.

Continue reading "Certified Public Accountant (CPA)" »

On April 30, 2010, there was a talk in San Francisco on career transition. Many times people turn to bankruptcy because they cannot pay their bills not because they incur a lot of expenses out of being materialistic, but because they lose their jobs and are not able to pay for life's necessities.

Part of financial planning means getting out of a box where it is safe to find a job that's a stepping stone to something more. Dealing with debts is not just about options for bankruptcy, but options for career.

The next job is not going to be a person's last job so there is not need to find perfection. Everyone no matter how old is a long way from retirement. Most people hold jobs for 2-3 years, and have 2-3 careers in their lives. Every job just needs to get someone a step ahead.

Evaluate jobs on how they will make a person look in terms of company brand and title for the next employer. What skills will be learned to make the person more valuable? What are the connections? In bankruptcy, people learn about asset protection. This can be applied to career. Asset protection is like preserving wealth or the assets of a business by minimizing the risk that various creditors will find and take hard earned assets. In career, use every job to build more skills so that the job becomes more than what it was when it was advertised.

In bankruptcy, asset protection strategies can vary depending on the type of location and property that a person owns. In career, look at the gross earned each year not the net. A good business should gross 60% of the expenses. This means trimming expenses to do only what is necessary. If a career does not require a degree, do not go back to school. Make interviews and resumes sales presentations. Do not put irrelevant personal information like information about families and health. Show what can be done for the employer to persuade an employer to hire.

One asset protection tool in bankruptcy is the offshore asset protection trust, set up in an offshore jurisdiction, where assets cannot be touched by anyone attempting to sue or claim money from the settlor. These trusts are irrevocable for a set period of time. In career, an analogous tool would be to protect the reputation asset of being non-confrontational by not bad mouthing former colleagues. Look at how much the media loves Sandra Bullock when she takes on her problems with dignity. When a person starts claiming other people are problems, they are looked at as problems.

With asset protection, California has asset exemption protection laws. This includes:

•Alimony.
•Personal injury settlement.
• Social Security.
•Construction materials used to fix a home.
•Union benefits from labor disputes.
•Lost future earnings.
•Veteran's benefits.
•Victims of crimes compensation
•Business licenses.

These exemptions usually relate to basic necessities. With career, look for a job that relates to what is needed rather than wanted also.

When walking on the edge and having fallen off a cliff, grasp onto a tree branch, but do not be afraid to let go for fear of crashing. Take risks in order to see the meadows.

Continue reading "Career Transition" »

In running a company, when a company does not follow corporate formalities, it may fall into bankruptcy. Investors should be aware of what happens to their investments by reading company disclosures of significant transactions.

The statute of frauds requires certain agreements to be in writing and signed by the parties sought to be bound in order to be enforced. A transfer of interest in real estate is within the statute of frauds and must be in writing. Modifications of such contracts must also be in writing. When a director or officer does not follow the statute of frauds, a company may enter into an agreement that is not enforceable. Such agreement could lead the company into debt if it affects the company finances.

A company is liable for contracts entered into by its agents if the company authorizes the agent to enter the contract. There are 3 types of authorization (1) express, (2) implied, or (3) apparent.

Express authority occurs when a principal uses words to express authority to an agent. An officer's duties are determined by bylaws or the board, or delegated from an officer authorized by the board. Express authority is that which is actually contained in an agreement.

Implied authority is that which the agent reasonably believes he has as a result of the principal's actions or prior dealings. It includes authority arising out of necessity or custom known to the agent. For instance, absent an express provision to the contrary, a president of a company has implied authority to enter into contracts and act on behalf of the corporation in the ordinary course of its affairs.

An officer may have apparent authority to act and to bind the company in situations where actual authority does not exist, has not been granted, or when the company holds out an officer as possessing certain authority, inducing others to reasonably rely that authority exists. Apparent authority comes from a third party's reasonable beliefs. What occurs between the company and a third party is a factor in determining if there is apparent authority.

Not following corporate formalities in entering into contracts may lead to unapproved decisions. A board can take actions at a meeting where there is a quorum. A quorum requires the minimum number of directors to be present at a meeting to transact business. Usually, a majority of the directors present at a meeting constitutes a quorum unless the bylaws or articles of incorporation allow for a greater or lesser number. If a quorum is met, resolutions passed by a majority of the directors will be considered approved unless the articles of incorporation or bylaws require the vote of a different number.

An investor should look out for significant transactions by the companies they invest in. The investor may hear of bankruptcy filings in the news. The investor may be requested to vote on the plan of reorganization, although the investor does not get the full value of an investment returned. Before voting, an investor should read the reorganization plan.

When a company is in bankruptcy, the investor can find out case information through the bankruptcy court, which is usually located where the company has its main place of business or where the company is incorporated.

Continue reading "Corporate Formalities" »

For an investor, understanding corporate status is important when determining rights during a bankruptcy. A de jure corporation is formed when the incorporator files the articles of incorporation with the state and pays all applicable fees. A corporation is not liable for pre-incorporation contracts unless it adopts the contract. Adaptation may be either express or implied.

Absent a novation, a corporation does not have any liability for pre-incorporation contracts entered into by a promoter in the corporation's name. A novation is an agreement among the corporation, promoter, and third party that the promoter be released from liability from the agreement obligations, substituting in the corporation in the promoter's place. Adoption of a contract does not relieve a promoter from liability for the contract.

Someone dealing with a business as a corporation, treating it as a corporation may be estopped from denying its corporate status.

Generally, shareholders are not liable for the debts of a corporation. Courts may however, disregard the corporate entity and pierce the corporate veil by holding individuals liable for corporate obligations where: (1) the shareholders are treating the corporation as their alter egos, ignoring corporate formalities, or (2) the corporation was inadequately capitalized. Undercapitalization is determined by looking at whether the corporation has adequate funds to cover potential liabilities.

When a company files for bankruptcy, it usually uses Chapter 13. The U.S. Trustee appoints committees to represent the interests of creditors and stockholders in working with the company to develop a plan of reorganization to get out of debt. One committee is the "official committee of unsecured creditors." This committee represents unsecured creditors, including bondholders.

The plan must be accepted by the creditors, bondholders, and stockholders, and confirmed by the bankruptcy court. If creditors or stockholders reject the plan, the court can disregard the vote and confirm the plan if it finds that the plan treats creditors and stockholders fairly.

With publicly traded companies, the SEC reviews the disclosures by the company to determine if the company is telling investors and creditors the information they need to know on the bankruptcy. The SEC does not negotiate the economic terms of reorganization plans.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

With companies collapsing the economic downturn, investors should be aware of insider trading laws and how bankruptcies affect the companies they invest in. Rule 16(b) of the Securities Exchange Act of 1934 provides that directors, officers and ten-percent shareholders shall not buy and sell stocks or sell and buy stocks within a six-month period. Any profits acquired in violation of Rule 16(b) must be returned to the company. The profit is calculated by matching the highest sales price against the lowest purchase price for any six-month period. The profit can be either an avoided loss or a gain.

An officer and director of a company owe a duty of loyalty to the corporation and is required to put the company's interests ahead of his own at all times. Thus, if they are involved in any short-swing profits, they must return the money to the company.

When a company files bankruptcy, the officers and directors must perform in good faith and act in a manner the officer believes is in the best interest of the corporation, exercising that degree of care an ordinary person exercises under similar circumstances. Under the business judgment rule, officers and directors are insulated from liability for decisions that turn out poor or erroneous, when they act in good faith, exercise due care, and have a rational basis when making decisions.

Most publicly-held companies will file under Chapter 11 so management can still run the business and control the bankruptcy process. If the company still trades on a stock exchange, the company must continue to file SEC reports informing significant developments.

During bankruptcy, bondholders will stop receiving interest and principal payments, and stockholders will stop receiving dividends. A bondholder may receive new stock, new bonds, or combination of stock and bonds in exchange for bonds. For a stockholder, the trustee may ask a shareholder to send back the certificates for the old stock in exchange for new shares in the reorganized company. The new shares may be fewer in number and may be worth less than old shares. The reorganization plan spells the rights for an investor.

If the company's liabilities are greater than its assets, an investor's stock may be worthless.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

Every investor should understand Rule 10b-5 of the Securities Exchange Act of 1934 makes it unlawful for any person directly or indirectly, (1) by use of any means of interstate commerce (2) to make a material omission or misrepresentation of material fact, (3) with scienter, (4) in connection with the purchase or sale of any security.

Means of interstate commerce include transactions involving a publicly traded company listed on a national exchange, and use of the telephone. A fact is material, if a reasonable investor would consider it in making an investment decision. Scienter involves the intent to deceive.

Sometimes, there may be a Rule 10b-5 violation if a company knew that it might suffer a shortfall in its revenue but while in its earnings announcement it omits this information. A decline in its revenue, leading to inability to pay creditors, may not just be a Rule 10b-5 violation, but a bankruptcy concern.

If the company comes out of bankruptcy, investors should be aware there may be different types of common stock, with different ticker symbols, trading for the same company. One common stock is the stock on the market when the company went into bankruptcy, and the second is the common stock that the company issued as part of its reorganization plan.

The investor should be sure to understand which shares the investor purchases. The shares issued before the company filed for bankruptcy may be worthless if the company emerges from bankruptcy and has issued new common stock.

A person commits insider trading when he trades on material nonpublic information, or omits material nonpublic information in the course of dealing in securities. Persons with insider information are required by Rule 10b-5 to abstain from trading or to disclose the information. A duty to disclose applies to persons who have a fiduciary relationship with the stock issuer like directors and officers.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.