Thus, to the extent that a borrower's liability includes both purchase money and non-purchase money sums, a lender may pursue a deficiency judgment for the latter amounts, to the extent that they can be segregated and traced.
Tuesday, April 24, 2012
Recent Decision by Arizona Court of Appeals Impacts Anti-Deficiency Statute
Thus, to the extent that a borrower's liability includes both purchase money and non-purchase money sums, a lender may pursue a deficiency judgment for the latter amounts, to the extent that they can be segregated and traced.
Monday, April 23, 2012
Twenty-Three Jennings Strouss Attorneys Recognized in 2012 edition of Southwest Super Lawyers®
Jennings, Strouss & Salmon, PLC announced that twenty-three attorneys have been have been listed in Southwest Super Lawyers® magazine for 2012, including five 2012 Southwest Rising Stars.
The Jennings Strouss attorneys listed in 2012 Southwest Super Lawyers are:
- Gerald W. Alston - Business Litigation; Alternative Dispute Resolution
- John R. Christian - Tax, Estate Planning & Probate; Corporate Governance & Compliance
- Frederick M. Cummings - Personal Injury Defense: Medical Malpractice; Personal Injury Defense: General, Health Care
- Richard K. Delo - Personal Injury Defense: Medical Malpractice; Professional Liability: Defense; Personal Injury Plaintiff: General
- John J. Egbert - Employment & Labor; Appellate
- Lee E. Esch - Real Estate; Business/Corporate
- Michael J. Farrell - Civil Litigation Defense
- Jay A. Fradkin - Personal Injury Defense: Medical Malpractice
- Carolyn J. Johnsen - Bankruptcy & Creditor/Debtor Rights
- Gary G. Keltner - Bankruptcy & Creditor/Debtor Rights; Real Estate; Alternative Dispute Resolution
- Stephen E. Lee - Tax; Closely Held Business; Non-Profit
- Richard Lieberman - Mergers & Acquisitions; Securities & Corporate Finance; Corporate Governance & Compliance
- Bruce B. May - Real Estate
- Michael R. Palumbo - Business Litigation
- J. Scott Rhodes - Professional Liability: Defense; Government/Cities/Municipalities; Utilities
- Jack N. Rudel - Tax, Business/Corporate; Real Estate
- Brian N. Spector - Bankruptcy & Creditor/Debtor Rights; Business Litigation; Business/Corporate
- Bradley J. Stevens - Bankruptcy & Creditor/Debtor Rights; General Litigation
The attorneys listed as 2012 Southwest Rising Stars are:
- Terence N. Cushing - Civil Litigation Defense
- Eric D. Gere - Business Litigation
- Kami M. Hoskins - Bankruptcy & Creditor/Debtor Rights
- Bradley V. Martorana - Business/Corporate; Mergers & Acquisitions; Health Care
- Anne McClellan - Civil Litigation Defense; Business Litigation
The selections for the top attorneys in Arizona are made by the research team at Super Lawyers, which is a service of the Thomson Reuters Legal Division based in Eagan, MN. Each year, the research team undertakes a rigorous multi-phase selection process that includes a statewide survey of attorneys, independent evaluation of candidates by the attorney-led research staff, a peer review of candidates by practice area, and a good-standing and disciplinary check. State-wide, only five percent of attorneys are named by Super Lawyers, and just 2.5 percent of attorneys under the age of 40 and practicing 10 years or less are included as Rising Stars.
Friday, April 20, 2012
Do Directors and Officers Owe Fiduciary Duties to Creditors?
It is generally understood that a company’s directors and officers owe fiduciary duties to its shareholders. In Arizona, they also owe them to creditors – at least once the company becomes insolvent.
Arizona follows the “Trust Fund Doctrine.” It was first recognized here in A.R. Teeters & Assocs. v. Eastman Kodak Co., 172 Ariz. 324, 836 P.2d 1034. (App. 1992), in which the Arizona Court of Appeals explained:
"The theory of the trust fund doctrine is that all of the assets of a corporation, immediately on its becoming insolvent, exist for the benefit of all of its creditors and that thereafter no liens nor rights can be created either voluntarily or by operation of law whereby one creditor is given an advantage over others."
Teeters, 836 P.2d at 1041 (citation omitted). In Teeters, the court held that an officer, director, and stockholder who loaned money to the company breached a fiduciary duty owed to the company’s other creditors where (i) he caused the transfer of corporate assets to himself (ii) the transfer occurred while the corporation was insolvent; and (iii) the transfer had the effect of preferring him to the disadvantage of other creditors of the same priority.
A few points worth noting:
- The Trust Fund Doctrine is similar to, but in some ways broader than, the concept of a “preference” under the Bankruptcy Code.[1] Liability arises under state law and exists regardless of whether (i) the transfer occurs within certain proximity of a bankruptcy filing or (ii) a bankruptcy case is ever filed. There must be a showing, however, that the company was insolvent at the time of the transfer. E.g., In re Weinberg, 410 B.R. 19, 28-19 (9th Cir. BAP 2009). There is no fiduciary duty to, or trust fund for, creditors until then.
- Teeters’ language appears to make the Trust Fund Doctrine applicable whenever, as a result of the transfer, “one creditor is given an advantage over others.” Thus far, it has been applied in Arizona only when the transferee is, or is related to, a director, officer, or stockholder. No reported Arizona case has been found applying it to transfers to non-insider, arms-length creditors.
- The source of recovery is a breach of fiduciary claim against the officer or director that caused the company to make the transfer. Liability, if established, is limited to the value of the assets received by the transferee.
- Query whether the doctrine will be applied and/or fiduciary duties extended where the transfer occurs within the “vicinity” or “zone of insolvency” or where it causes the company to become insolvent. This issue has been addressed in other jurisdictions.[2] For now, Teeters’ language suggests that in Arizona, the trust fund does not arise until the company becomes insolvent.
No Arizona cases could be found applying the Trust Fund Doctrine in the context of an Arizona limited liability company. It would seem logical, however, to do so.
The bottom line is that officers, directors, and others in control of a company’s affairs need to be careful about transfers made while the company is insolvent. Such transfers could result in liability to them where none previously existed.
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[2] See, e.g., Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Ch. 1991)(unpublished opinion by the Delaware Court of Chancery suggesting that the expansion of duties to creditors can occur in the “vicinity of insolvency”); but see RSL Communications PLC v. Bildrici, 649 F. Supp 184, 206 (S.D.N.Y. 2009)(applying New York law and rejecting a “zone of insolvency” theory); North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A. 2d 92, 101 (Del. 2006)(applying Delaware law, the Delaware Supreme Court held that no direct claim for breach of fiduciary duty may be asserted by the creditors of a solvent corporation that is operating in the zone of insolvency).
Tuesday, April 10, 2012
The Jobs Act Eases Rules on Capital Formation
By Alan Rukin
The new Jumpstart our Business Startups Act of 2012 ("JOBS Act"), signed into law on April 5, 2012, implements significant changes to the federal securities laws, in an effort to assist small and mid-sized businesses seeking to raise capital. This Client Alert, which focuses on "Crowdfunding," is the first in a series addressing some of those key changes.
Part One: CROWDFUNDING IS AUTHORIZED AT THE FEDERAL LEVEL - Caution Regarding State Law Compliance
The Crowdfunding title of the JOBS Act will allow a private company to raise funds from a larger pool of investors who are not "accredited" so long as the amounts raised from those investors is limited and the offering complies with additional requirements.
Companies using these provisions can raise up to $1 million from the "crowdfunding investors" in a rolling 12-month period. A company using crowdfunding must sell its securities either through a registered broker or through a funding portal registered with the Securities and Exchange Commission ("SEC") and a self-regulatory organization.
Investors whose annual income or net worth is less than $100,000 will be able to invest up to the greater of $2,000 or 5% of their annual income or net worth in the company. Investors whose annual income or net worth is at least $100,000 will be able to invest 10% of their annual income or net worth up to a maximum of $100,000.The JOBS Act mandates that a company using the crowdfunding provisions must disclose information regarding its officers, directors and shareholders with more than a 20% stake in the company, and background checks on those individuals must be performed. In addition, these companies must make financial disclosures, which will vary, based on size of the offering.
The JOBS Act imposes various other required disclosures and conditions, including disclosure of risk factors, establishing a minimum threshold for the offerings and allowing investors to cancel their investment commitments as set forth in new SEC rules to be adopted. The SEC is required to adopt conforming rules within 270 days after enactment.
Companies making securities offerings under the crowdfunding provisions will be subject to tiered financial disclosure. The level of disclosure will be based on the aggregated total value of securities offered within the prior 12 months, including the offering for which the company will make the disclosure. The law directs the SEC to adjust the following amounts for inflation at least every five years.
For offerings of $100,000 or less:
o Income tax returns for most recent year; and
o Financial statements certified by principal executive officer
For offerings greater than $100,000 up to $500,000:
o Financial statements reviewed by an independent public accountant using SEC approved standards and procedures
For offerings greater than $500,000 up to $1 million:
o Audited financial statements
Important Notes: Although the JOBS Act implements certain changes at the federal level, securities offerings must continue to comply with applicable state securities laws. While the JOBS Act limits the reach of some state laws, others continue to apply to the offerings, and those laws do not yet contain similar exemptions. In addition, the JOBS Act contains numerous technical provisions regarding eligibility and compliance requirements. The SEC is required to publish rules designed to more fully clarify many of these new requirements. Accordingly, readers are urged to consult with counsel when contemplating any securities transactions, including those using the new JOBS Act exemptions.
Friday, April 6, 2012
Distinguished Attorney Rodney Q. Jarvis Joins Real Estate Department at Jennings, Strouss & Salmon
PHOENIX, Ariz. (April 6, 2012) – Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that Rodney Q. Jarvis has joined the firm as a Member in the Phoenix office.
“Rod is a talented attorney with extensive experience in the areas of land use and planning in Arizona,” states J. Scott Rhodes, Managing Attorney of Jennings, Strouss & Salmon. “His knowledge of the market, and his ability to effectively navigate clients through each stage of real estate development, will provide great value to our clients.”
Jarvis will focus his practice in all aspects of land use and planning, including zoning approvals, development master plans, variances, use permits, design review, building permitting, subdivision approvals and development agreements.
“Jennings Strouss has a solid reputation for delivering great client service,” said Jarvis. “It is exciting to join such a dynamic firm and I look forward to being a part of a team of attorneys who are well-respected in the real estate industry.”
Jarvis is a member of the Maricopa County Comprehensive Plan Advisory Committee, the Maricopa County Parks & Recreation Commission, the Citizens Transportation Oversight Committee and Lambda Alpha International. He earned both a J.D. and B.A., cum laude, from Brigham Young University.