Newsletters

4416 East West Highway
Fourth Floor
Bethesda, MD 20814-4568
Phone: (301)986-9600
Fax: (301)986-1301
Toll Free: (888)986-9600
E-mail: sgro@sgrolaw.com

Legal Alert:
Current legal trends affecting you and your business

March/April 2003

View this newsletter in Adobe PDF format

In this issue . . .

• Will Your Power of Attorney Expire Before You Do?
• Take Minutes To Preserve Corporate Status: Don’t risk losing your tax advantages and liability protection
• Testing Job Candidates: Handle With Care
• Who Can File Suit To Recover Preferences In Bankruptcy?

Will Your Power of Attorney Expire Before You Do?

The power of attorney for property is a key element of a solid estate plan. A durable power of attorney authorizes your agent (also known as attorney in fact) to take care of your nontrust property if you are absent, incapacitated or otherwise unable to do so.

But with a nondurable power of attorney, your agent’s authority ends if you become incapacitated. Then either your spouse or a court-appointed person will manage your property.

But married couples shouldn’t assume that a spouse can step in and manage an incapacitated spouse’s financial affairs. For example, a spouse can’t dispose of property in your name — or sell jointly owned property — without your permission.

DURABILITY

If you want to continue your agent’s authority after you become incapacitated, the power of attorney must state explicitly that:

• The power is “durable,” and
• The agent’s authority won’t terminate if you become disabled or incapacitated.

A durable power remains in effect until you revoke it or die. In most cases — especially if you fear incapacity due to advancing age or serious illness — you’re probably wise to make your power of attorney durable.

SPRINGING POWER

If you are robust and fearless, and decide you don’t need to grant legal authority to an agent now, you should at least create a “springing” power of attorney. It authorizes your agent to act on your behalf only if you are physically or mentally incapable of doing so. The springing power is durable by definition.

To create a springing power, you need to incorporate language similar to this: “The agent’s authority will take effect on my attending physician’s written certification that I am unable to promptly and intelligently consider financial matters.”

STATUTORY LIMITS

In most states, some matters fall outside your agent’s authority — such as caring for minor children, executing or amending a trust, changing beneficiaries for nonprobate assets, and making healthcare decisions. Healthcare decisions usually require a separate durable healthcare power of attorney.

You may revoke a power of attorney at any time for any reason. If you do, be sure you notify all third parties so they will know that you no longer authorize your agent to act on your behalf.

CHOOSING AN AGENT

You can appoint almost any responsible adult as your agent. Spouses often appoint each other, with an adult child as successor. But your spouse may not be the wisest choice. Your agent should be qualified to professionally carry out the granted powers, according to strict fiduciary standards. Whomever you choose as your agent must at all times use due care to act in your best interest and for your benefit. Be sure to find out if your choice is willing to assume the duties before you appoint him or her.

Usually no official or government agency monitors an agent’s conduct, so choose somebody you trust. And you should specify that your agent keep records of all transactions conducted on your behalf.

You can make your agent’s authority broad and general. Or you can limit the authority to a specific transaction or time period. Specific transactions might include managing your investments, selling a home, paying bills, collecting debts, filing tax returns, executing contracts and perhaps operating your business. A specific period might include an extended vacation when you will be inaccessible.

EXERCISE CAUTION

The power of attorney is a powerful legal tool that, if not carefully worded, can serve as a signed blank check. Please call us for advice on whether you need a power of attorney and how to properly word it if you decide to create one.

SPELL OUT YOUR AGENT’S POWERS

Even if you create a general power of attorney giving your agent broad powers, what should it contain to be on the safe side? The document should list the transactions or types of transactions that you want it to cover. Failing to mention a specific power could conceivably exclude it from your agent’s authority.

A 1991 appellate court decision, Estate of Swanson , illustrates this point. Two months before her death, Mrs. Swanson created a general durable power of attorney and appointed her nephew as agent. When she was on her deathbed, her nephew made gifts of $10,000 each to 38 of her relatives and close friends. Making such gifts used the annual gift tax exclusion and removed $380,000 from her taxable estate.

But the IRS claimed the nephew had exceeded his authority despite the durable power's broad language. As a result, Mrs. Swanson’s gross estate included the $380,000, and the estate owed an additional $140,000 in tax.

If you wish to authorize your agent to make annual exclusion gifts, limited currently to $11,000 ($22,000 for couples) — whether to family or non-family members — spell it out in your power of attorney.

Take Minutes To Preserve Corporate Status:
Don’t Risk Losing Your Tax Advantages and Liability Protection

Nobody enjoys taking and reviewing minutes and making sure everyone approves them. But look at the benefits you derive from keeping good minutes:

• You comply with state and federal regulations — not to mention your own corporate bylaws — that require thorough and accurate corporate records.
• You create a permanent history of executive decisions and the reasons for making them.
• You satisfy those in a position to help your business succeed, including directors, shareholders, creditors, judges and the IRS.

Also, leaving a paper trail can help resolve disputes about matters discussed at a meeting. Both S and C corporations must take corporate minutes.

Failure to take and maintain good minutes — primarily in meetings of directors and shareholders — may jeopardize your corporate status. If you lose that status, you’ll also lose the tax benefits, personal-liability protection and capital-raising ability the corporation offers.

RESOLUTIONS AND CONSENTS

Minutes are essentially a meeting summary, most often involving corporate shareholders or directors or both. When participants vote to approve a course of action, the minutes should include a resolution that describes the action.

Not all corporate resolutions require a face-to-face meeting. In many cases, if a decision requires directors’ or shareholders’ approval, a virtual meeting — by correspondence, telephone or e-mail, for example — can do the job, as long as participants submit signed consent forms to confirm that they approved the resolution.

Here are answers to questions that clients frequently ask about corporate minutes, resolutions and consents, starting with the basics:

Q: In a closely held corporation with few shareholders or directors, when decisions are made quickly and most meetings are informal, do we still need to take minutes?

A: Yes. In larger corporations, the meetings — and therefore the minutes — are usually more formal, but minutes are required regardless of size of company or its board of directors.

Q: Can we get into trouble if we take minutes 95% of the time, but forget to do it once in a while?

A: You certainly can. For example, if the IRS ever audits you, the auditor may want to examine minutes to substantiate that you made a specific decision for sound business reasons and not merely to evade taxes. Another example: An OSHA inspector may want to review minutes to determine whether directors expressed concern for worker safety when they debated a resolution.

You must be consistent and take minutes at all meetings of shareholders and directors and whenever directors or shareholders or both make a significant corporate decision. In fact, neglecting to take minutes (or to get consents) only once might look suspicious, as though you were trying to hide something.

Q: What kinds of corporate decisions would you consider “significant”?

A: Examples of significant corporate decisions requiring a written record in the form of minutes or consents include decisions to:

• Ratify amendments to bylaws or articles of incorporation,
• Issue shares of stock,
• Declare a dividend,
• Change corporate status (from an S to a C corporation, for instance), or
• Change your fiscal year.

And in most corporations, these kinds of decisions would be considered significant:

• Key legal or tax decisions,
• Adoption or cancellation of employee benefits,
• Borrowing or lending a large sum of money or authorizing a substantial credit line,
• Approving the purchase of or entering into a long-term lease of real estate or any other costly asset,
• Setting officers’ and key employees’ salary and benefits, or
• Dissolving or selling the corporation.

Minutes or consents aren’t necessary in routine business decisions that don’t require board or shareholder approval. These decisions may include:

• Hiring and firing employees,
• Buying supplies, equipment or vehicles,
• Launching a new product or service,
• Planning a marketing campaign, or
• Expanding an office, warehouse or plant.

Q: What information should routinely be included in corporate minutes?

A: First, the essential who-what-where-when information, including:

• The meeting’s date, time and location,
• Who was present and who was absent,
• The meeting’s purpose — for example, whether it was an annual directors’ or shareholders’ meeting or a specially convened gathering to vote on an urgent matter,
• Who presided and who recorded the minutes,
• Start and adjournment times, and
• Approval of previous minutes.

Some meetings require advance notice of the purpose or proposals to be considered. In those cases, insert into the minutes a copy of the notice (and perhaps acknowledgments of receipt of the notice).

In addition, the minutes should summarize the discussions leading to a resolution’s approval or rejection. The summary needn’t go into great detail, but simply reflect the gist of each speaker’s concerns. Occasionally, more details may be advisable to show compliance with a standard of care or fiduciary duty.

If a proposed action is approved, the minutes should include formally worded resolutions attesting to the approval.

Q: How do you write a resolution?

A: Most resolutions employ these terms:

The undersigned, being all of the shareholders of the corporation, hereby take these actions:

RESOLVED, that the bylaws now submitted to the meeting are hereby adopted as the corporation’s bylaws.

RESOLVED, that the seal of this corporation is in oval form and has the name of the corporation inside the oval. This seal is impressed on this page, below, and is adopted as the seal of the corporation.

Sometimes you may need to attach additional documentation to substantiate a resolution.

For example, if you write a resolution approving a loan, attach the promissory note.

When participants reject a proposed action, instead of a formal resolution, the minutes should simply say, for example, “The directors considered and declined to approve Mr. Doe’s request to change the shape of the corporate seal from an oval to a circle.”

Q: Can we tape-record meetings and transcribe the tape, rather than take notes by hand?

A: Legally, you may take minutes using any tools you prefer, including a tape recorder, laptop computer, pen and paper, or a combination. But make backup notes in case the electronic devices malfunction — that’s much easier (and more accurate) than trying to reconstruct minutes from memory.

Q: Do any rules dictate how soon after a meeting we must type up the minutes and distribute them for approval?

A: No, but you should prepare minutes for approval as soon as possible — the same day is best — while the meeting is fresh in everyone’s memory. The longer you wait, the more cryptic your handwritten notes tend to become.

Q: Should I ask our lawyer to review minutes or consent forms before we file them in the minutes book?

A: That’s not necessary. But ask your attorney for guidance if you have any questions about when you must take minutes, what information to include in the minutes, or how to word a complex resolution or consent form.

TAKE ACTION TODAY

Call a meeting of the people who are responsible for recording, processing, and distributing your minutes, and make sure they know 1) the benefits of taking good minutes, 2) the rules they must follow, and 3) the penalties for neglecting to follow them. To impress on them the seriousness of this subject, invite your attorney to the meeting and ask him or her to explain the rules and answer questions.

Testing Job Candidates: Handle With Care

Screening job applicants is a critical step in the hiring process. You want to make certain — to the extent possible — that those you hire can perform the tasks and shoulder the responsibilities you assign them.

So you review resumes, conduct interviews, call previous employers and check references. What else can you do? Many companies test job applicants to gauge their capabilities — ranging from typing skills to management aptitude. But along with the benefits of testing comes some risk.

PROCEED WITH CAUTION

As long as a test accurately measures a candidate’s ability to perform essential job functions — and doesn’t discriminate against minorities or other protected-class members — administering a test can be relatively risk-free. For example, most cognitive tests that measure reading comprehension or math skills are usually low-risk. But if you test one candidate for a job, you must test all.

On the other hand, giving a psychological test can be dicey. Exams that try to evaluate personality or measure integrity — and in some states tests that unduly invade privacy — generally pose the greatest risk of a lawsuit if you use them to weed out unqualified candidates. Tests that illegally discriminate are more than risky — they’re almost guaranteed to land you in court. For example, you wouldn’t want to use a test that weeds out applicants on the basis of ethnic background, age or gender. Here’s how the three main areas of testing risk shape up.

Disparate impact. Plaintiffs often base legal challenges to job testing on Title VII of the 1991 Civil Rights Act. If you use a test that consistently and disproportionately rejects members of a protected class — such as ethnic minorities, seniors or women — the test can be said to affect different groups disparately and may be unlawful. Experts often win in court by using sophisticated statistical methods to demonstrate discrimination under the disparate-impact theory.

Disabilities. Any test that identifies an applicant as mentally or physically impaired could raise issues under the Americans With Disabilities Act. But you may administer these tests after you hire an applicant.

Privacy. Some psychological exams, such as those that try to measure a person’s emotional maturity or judgment skills, may violate a job candidate’s right to privacy under some state laws. Tests that measure emotional stability tend to be more appropriate in positions that involve security or carrying a weapon.

REDUCE RISK

If you don’t want to abandon the testing methods that work for your business, take these steps to minimize legal liability:

• Review your screening tests to determine whether they accurately measure skills or traits necessary for success in your company.
• Explore other recruiting techniques — such as more thorough interviews — that might just as effectively assess the same skills or traits.
• Customize your tests to measure potential performance on the specific jobs for which applicants apply. Avoid using commercially marketed, “off-the-shelf” tests without reviewing them to determine how effectively they will serve your company or department.
• Before you test any job applicant, ask an attorney experienced in employment law to review your tests.

And those administering tests must refrain from trying to elicit illegal behavior.

TESTS CAN BE CONSTRUCTIVE

Using tests to screen job applicants can be both constructive and lawful, and help you match the best candidate for the job. To be safe, let us review not only your tests before you use them, but also questions asked during interviews.

Who Can File Suit To Recover Preferences In Bankruptcy?

An appellate court recently threw a monkey wrench into the practice that allows creditors’ committees to pursue the recovery of preference payments and other transfers of assets which were made prior to the filing of a Chapter 11 bankruptcy proceeding. A “preference” is defined by § 547 of the Bankruptcy Code as a payment or other transfer of assets made by a debtor on account of an antecedent debt (generally a receivable that is not paid according to normal business terms) made within 90 days of the filing of a bankruptcy petition, while the debtor was insolvent, and is in an amount which is more than the creditor would have received if that same claim were to be paid through the Chapter 7 liquidation of the debtor. Preference claims can be a burden on a small business with a tight margin. On occasion a preference claim has been known to cause the business being sued to file for bankruptcy protection.

Many preference actions are filed by a committee, even though the Bankruptcy Code delegates that power to the “trustee” or the “debtor-in-possession” (“DIP”) in Chapter 11. Most defendants that have challenged the ability of a committee to “stand in the shoes” of the trustee or DIP have failed. Recently, however, a three judge panel in the case of The Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery , 2002 WL 31102712 (3rd Cir. September 20, 2002), held that the plain language of the Bankruptcy Code restricts the right to bring an action to recover assets, like a preference action, to the trustee or the DIP, alone. The result of that case is directly at odds with the decisions of several other appellate courts. In November 2002, the 3rd Circuit vacated the decision in Cybergenics in order to allow the case to be heard by the all of the judges of that court. If the initial decision in Cybergenics is upheld, it is bound to be heard by the Supreme Court since it represents a significant split of authority between appellate courts. At this time, there exists no controlling appellate decision in Maryland, D.C. or Virginia that would allow or restrict the ability of a committee to bring preference actions.

If a business or individual is sued by a committee for the recovery of a preference, that defendant must specifically plead that the committee lacks the capacity to bring suit in order to perfect an objection to the proceeding. The defense of a preference case requires you to work closely with an experienced bankruptcy lawyer to ensure that specialized defenses that arise under the Bankruptcy Code are used to your best advantage.

Protecting yourself from a preference claim is not easy. There is no certain way to predict which slow paying customer will file for bankruptcy protection. The best way to protect yourself from a preference, insisting on cash on delivery, is generally not practical or commercially acceptable. The most reasonable steps that can be taken to protect yourself from a preference claim is to set out clear and unambiguous payment terms, which are common within your industry, and strictly enforce those terms. In other words, if payments are due “net 30 days”, do not wait until day 45 to demand payment. If, however, a payment does come in late, never send it back just because it might become a preference claim at a later date.

Patrick J. Kearney has represented numerous debtors in all aspects of Chapter 11 proceedings, including government contractors, real estate limited partnerships and retail organizations. He has also represented creditors’ committees in cases involving retail businesses, developers, and real estate limited partnerships, in addition to his representation of a variety of secured and unsecured creditors in matters including defense of preference claims, relief from the automatic stay, plan confirmations, and sale of assets. Further, he has experience in litigating the enforcement of creditors’ rights under confirmed plans of reorganization and represented Chapter 7 trustees in actions to deny discharge to debtors.

This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting, or other professional advice or opinions onspecific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use.