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Choosing the Right Legal Form for Your Business

Choosing the appropriate legal form for a business is one of the first issues most entrepreneurs face. It is an important decision at the formation stage and also as a business grows. Sole proprietorships are generally the easiest. Corporations offer some different advantages, but often with additional complexity.
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Legal Structure Considerations

This article addresses some of the pros and cons of different types of legal structures for businesses. Even if your enterprise has been in existence for a while, it may be time to review your options. There can be many complexities in determining the best legal structure and a qualified attorney may be of value when evaluating your choices.
At a minimum, consider the following issues when evaluating the business structure decision:

    • Number of owners
    • Personal liability of owners
    • Tax treatment
    • Control and management
    • Capital contributions

Business Structure Alternatives

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It is always important to consider the costs and benefits, advantages and disadvantages from legal and tax/accounting perspectives. Thus you should talk with your attorney AND your accountant to discuss your unique situation, possible future scenarios, and other considerations before rushing into formation without proper advice.

Why Business Owners Don’t Plan for Succession … and Why it’s Critical

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Many business owners procrastinate putting a well-conceived succession plan in place. The reasons are understandable. It can be difficult to plan for your replacement and deal with your mortality.
Here are five of the top reasons why business owners don’t have an exit strategy, along with the reasons why it’s best to make a proactive plan.

Reason Number 1: No Time

Business owners are busy with the day-to-day tasks involved in running their companies. There are deadlines to meet and deals to be made. Succession planning can be done … later.
Why this thinking is wrong: Waiting too long can cause the outcome to be less beneficial to the owner and his family. If a rushed decision is made, the owner may get a low price or pay more in taxes than he or she would if adequate planning was done. And in a worst case scenario, “later” may never come. An unexpected death or disability might result in succession occurring sooner than expected and without a solid plan, the future of the business can be placed in jeopardy.

Reason Number 2: Loss of Control

In some cases, business owners may not want to stop working for the companies they spent years building. Giving up control is difficult. Owners may worry they will be bored in retirement or their companies will no longer flourish if they are not in charge. So they hang on.
Why letting go is a better approach: The most successful exit strategy takes months or even years to complete. With proper planning, you may be able to secure a position after the sale as a consultant. If you want to pass on the business to your children or grandchildren, you can be involved in training them to help them achieve success. In other words, a proactive approach brings more control over the end result.

Reason Number 3: Ignoring Tax Issues Because They are Complex

There are obviously a number of ways to structure a succession transaction. The most tax-efficient way depends on the company, the parties involved and when you sell (federal tax capital gains rates may increase in the future). The tax implications of a sale or transfer can be extremely complex.
Why it’s best to get professional tax advice: You have to make several decisions that will affect the tax bill, such as whether to sell assets or stock. Your company may wind up with unknown, costly liabilities if the transaction isn’t structured properly. Handling the sale in a tax-wise manner can save you a fortune in the long run — not only with income and capital gains taxes but also with estate and gift taxes. Consult with your tax adviser well in advance of the actual sale.

Reason Number 4: Not Sure Who Is Going to Take Over

For many owners, there is not a clear-cut successor. Are there partners? Should you sell to employees via an Employee Stock Ownership Plan (ESOP)? Sell to a third party?
In the case of a family business, there are even more questions. What if some children are active in the company and others are not? Which child is going to run the company? Does the “heir to the throne” have the business skills to succeed? Will a formal succession plan cause family conflict?

Without all the answers, a business owner may do nothing.

Why this is a mistake: Without a solid plan, the company you spent years building could cease to exist. There are many options for ownership transfer. You can sell outright, sell to your children, gift interests to family members at a low tax cost — and more. But if you don’t explore the possibilities, you leave the outcome to chance.

Reason Number 5: Not Enough Retirement Savings

While building their businesses, many owners put off making adequate contributions to retirement plans. The result may be insufficient savings. Where is income going to come from during retirement — especially if the owner wants to pass the company onto family members? Often, there is a conflict between wanting comfortable golden years and wanting to transfer the company to heirs as part of an estate plan. So the owner just keeps working.
Why continuing to work without a succession plan is a mistake: By planning ahead, you can take care of your retirement and your heirs. With certain financial strategies, you may be able to retire comfortably and plan for the eventual sale or transfer of the company.

These are just some of the reasons business owners procrastinate and why they need to have proactive exit strategies. Start well in advance. Assemble an advisory team that includes your accountant, estate adviser, corporate attorney, and possibly other professionals.

And if you transfer your business to your children, urge the next generation to start thinking about their succession plans.

The Basics of Gift Taxes

 

The Basics of Gift Taxes-2

For many people with large estates, planning ahead and gifting to family members can save a bundle in taxes. This ultimately means your heirs may get more and Uncle Sam may get less. But before you start stuffing checks in envelopes and passing them out to your loved ones, you should know the basics of gifting. This article explains the current rules.

For federal purposes, the gift and estate taxes are unified. In other words, you can’t save on estate taxes by giving your fortune away shortly before you die. Once you’re above the exemption amount (discussed below), $1 of gifts reduce your estate tax exemption by $1. The 2016 exemption amount is currently $5.45 million (up from $5.43 in 2015 and adjusted annually for inflation) for a single individual. An individual can use his or her spouse’s unused exemption amount — effectively doubling the amount for a couple to $10.86 million.lores_envelope_red_satin_bow_gift_ah

For example, Fred is single but has a favorite nephew. Fred’s net worth is $7 million. He gives $5.45 million to his nephew free of the gift tax. But two years later, he dies with a $1.55 million estate. He’s used up his exemption so the estate pays tax at 40 percent on the $1.55 million. The tax result is the same as if he had given the entire $7 million to his nephew on his death. (We’ve ignored the annual gift tax exclusion and any increase in the estate tax exemption for inflation to keep it simple.)

Clearly, it can be more complicated. Even calculating the tax can be complicated for a number of reasons. There are differences between making gifts and leaving assets in your will. We’ll deal with the most frequently encountered below. Keep in mind that a number of states have gift and estate taxes. Some of them are structured the same way as the federal tax, but some are not. In some cases, the exemption is lower than the federal and the rates are high enough that the tax consequences cannot be ignored.

Annual Exclusion

One frequent comment we hear is: “I know I can give away a certain amount every year without paying any gift tax but I’m not sure of the amount.” For 2016 (and 2015), the exclusion is $14,000. It is indexed for inflation so it may change in future years. Tax law has contained an annual exemption amount for many years. The way it works is simple. Let’s say you give $14,000 to your favorite niece in 2016. The $14,000 does not affect your $5,45 million estate tax exemption.

Exclusion Mechanics

The $14,000 exemption is available annually and applies to each donee. Thus, Sue can give $14,000 tax free to each of her 10 children and grandchildren (each year), or $140,000, without impacting her estate exemption. Over a 10-year period she could give away $1.4 million. Her husband, Fred, can do likewise, giving an additional $14,000 annually to each child and grandchild.

What if Sue controls all the money? She takes care of all the family finances and all the bank accounts are solely in her name. Sue and Fred could elect to “split” any gifts they make. In this case, Sue writes a check for $28,000, but Sue and Fred are each deemed to give $14,000 if the election is made. The election is made on IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

As you can see from the example of Sue and her husband, if you elect to split a gift, even if you don’t go over the $14,000 threshold, you’ll need to file a gift tax return if one spouse controls all the money. If may be just as easy for Fred to ask Sue to deposit $14,000 in his personal checking account. Then, both could write $14,000 checks and avoid filing a gift tax return.

The exclusion applies to each donee and expires at the end of each year. Once the year is over, you’ve lost a chance to reduce your estate tax by $14,000. That’s why year-end gifts can be important.

Considerations for Donees

Usually we think of making gifts to our children, or close relatives. But the gift tax rules aren’t limited to that. Let’s say you have a friend you have been close to since college. The friend has a talented son who could go on to become a professional musician but he needs funds to live on. From a gift tax standpoint, a gift to the talented musician is the same as one to your children.

The exclusion applies to an unlimited number of donees. So you can reduce your estate by giving gifts to 10, 20 or even more children, grandchildren, relatives and others. But there’s a prohibition against reciprocal gifts. For example, Ken and Keith are brothers who each have two children. Ken can give $14,000 to each of his two children and $14,000 to each of Keith’s two children. But if Keith reciprocates giving $14,000 to each of Ken’s children, the exclusion may be denied. On the other hand, Sue and Sharon are sisters. Sue is a neurosurgeon who makes more than $800,000 a year. Sharon is a tropical medicine specialist who volunteers in Africa. Sue gives $14,000 annually to Sharon’s daughter, but Sharon doesn’t reciprocate. In this case, the exclusion applies.

Note: Gift taxes do not apply to gifts to political organizations.

Keep in mind that a gift is a transfer where no “consideration” is received. For example, let’s say your business is short-staffed, your secretary works long hours during the year so you give her a check for $10,000 in late December. That would probably be considered a fully taxable bonus and not a gift. On the other hand, your secretary and wife have been good friends for years. Your wife becomes ill and your secretary, without being asked, takes her to doctors’ appointments, stays with her after an operation, and helps out as a friend. You give her $10,000. That might be considered a gift. The facts are important. Get professional advice.

Spousal Gifts

Gifts of cash or property to your spouse are not considered gifts for gift tax purposes. Put another way, there’s an unlimited exemption. For example, let’s say you inherit a small office building worth $750,000 from your parents. The attorney titles it in your name. The following year, you get married and retitle the property in both your name and your spouse’s name. There are no gift tax consequences.lores_envelopes_bow_gold_silver_ah

Exceptions and notes: If your spouse is not a U.S. citizen and the total gifts exceed $148,000 in 2016 (up from $147,000 in 2015), you need to file a federal gift tax return.

There are some gifts (certain terminable interests) to a spouse that also require the filing of a return.

Same-sex couples who are legally married in a state that recognizes such unions qualify for the unlimited exclusion, even if they move to a state that does not recognize such marriages.

Medical, Tuition Exclusion

Amounts you pay for qualified medical or tuition expenses are excluded from gift taxes, no matter what the amount. However, there are two requirements.

The expense must be qualified. For medical expenses, they must meet the requirements for a deduction. For example, amounts paid for cosmetic surgery generally don’t qualify. In the case of education expenses, the payment must be made to a qualifying domestic or foreign educational institution for tuition. College tuition qualifies, horseback riding lessons don’t.
The amount must be paid directly to the provider — a doctor, hospital, etc. for medical expenses or to a college or school for education expenses. You can’t cut a check to your daughter so she can pay for her tuition.
While contributions to 529 plans are subject to the $14,000 exclusion, you can make a lump-sum payment and treat it as made ratable over a five-year period. For example, you can write a check to the plan for $70,000 and treat it as you made $14,000 annually for five years.

Return Requirements

If you don’t make any gifts that exceed $14,000, you generally don’t have to file a return. A gift can involve cash, marketable securities or property. For marketable securities, you’ll have to list how you calculated the value. For other property, you’ll need a qualified appraisal. Giving your son a classic car? You need more than a handwritten note from a guy down the street who rebuilds old cars. Depending on the property, an appraisal might be costly. And the appraisal must be attached to the return. For these, and other reasons, you might want to just give cash.

Keep in mind that giving property may have implications in terms of your basis, which we’ll describe below.

Failure to file a return with the IRS or to disclose all required information will keep the statute of limitations open. Gifts must be reported on the donor’s estate tax return and if no gift tax return is filed, the valuation of the gift is open to challenge. If a valuation question is involved, convincing the IRS of the value you claimed could be difficult years down the road. In addition, there are penalties for willful failure to file and substantial understatement (such as undervaluing the property subject to an appraisal).

Gifts to Minors

A gift to a minor is considered a present interest and qualifies for the $14,000 exclusion if all of the following conditions are met:

Both the property and its income may be expended by, or be for the benefit of, the minor before the minor reaches age 21.

All remaining property and its income must pass to the minor on the minor’s 21st birthday.

If the minor dies before the age of 21, the property and its income is payable either to the minor’s estate or to whomever the minor may appoint under a general power of appointment.

Basis in Property Received

There’s a big difference in the recipient’s basis in the property if the transfer is a gift versus an inheritance. A donee’s basis in the property is the same as the donor’s basis for gain — but the lesser of the donor’s adjusted basis or the fair market value of the property at the time of the gift for loss. If an individual inherits property, the basis is the fair market value at the date of death of the transferor for gain or loss.

Example 1: Fred bought a corporation at $1 a share in 1994. His total investment was $10,000. The stock is now worth $2 million. He gives his entire holdings in the corporation to his daughter, who sells the stock the next day for $2 million. She has to report a long-term capital gain of $1,990,000.lores_envelope_money_bow_ah

Example 2: The facts are the same as in Example 1, but Fred leaves the stock to his daughter in his will. On his death, the stock is valued at $2 million. She sells it the next day for $2 million and reports no gain.

The differences in basis will make a big difference in what assets should be gifted or left in your estate and the timing of any transfer.

For example, Fred inherited a lake house from his parents that has been in the family for years. The house is not only valuable monetarily (worth $500,000), it has sentimental value. Fred’s basis is $50,000. Fred is single and will have a taxable estate. His two children, Sue and Sharon, both enjoy the property with their children. Sue and Sharon are on good terms and want to keep the property. Because of the lake’s location and a low turnover of properties, prices have been climbing at more than 12 percent per year. Fred’s in good health. It’s not unreasonable to assume that the property could double in value before he dies. Gifting the property now would keep at least $500,000 (the additional increase in value) out of his estate. Moreover, the stepped-up basis on an inherited property doesn’t mean much in this case because the beneficiaries have no intention of selling.

Giving property that has declined in value generally doesn’t make sense because neither the donor nor the donee gets a tax benefit for the loss in value.

If you own a business or have income-producing assets such as rental properties, etc., talk with your tax adviser about your options.

Income Tax Implications

You can’t claim a deduction on your income tax return for gifts to your children, relatives, etc. On the other hand, the recipient is not generally liable for income taxes on the amounts received.

 

The more complicated your assets, the more planning opportunities there may be and the more complex those opportunities become to implement. While there are steps you can take if your family assets consist only of a personal residence, vacation home, and $10 million in marketable securities, your options increase if your assets consist of one or more active businesses, rental properties, farm or timber land, etc. Planning involves tradeoffs and an analysis of both the estate tax and income tax implications of any actions.

Other planning options may include setting up a family limited partnership, gifting property at a discount because of minority interests or other restrictions, using strategies to leverage basis in business ownership (S corporation, partnerships, LLCs, etc.), taking passive activity losses associated with business ownership, creating special trusts including charitable trusts, and implementing strategies involving the generation-skipping transfer tax. Consult with your estate planning adviser about these and other potential avenues to explore.

Factors that Courts Use to Determine the ‘Best Interests’ of Children

In family law, a central doctrine in cases affecting children is that decisions should be made in the children’s “best interests.” This can include who a child lives with, who has custody, what is the visitation schedule and whether or not a parent’s rights should be terminated.

There is no standard definition of a child’s best interests, but all states, the District of Columbia, American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands have laws requiring courts to examine them when making decisions.

According to the U.S. Department of Health and Human Services (HHS), “‘Best Interests’ determinations are generally made by considering a number of factors related to the circumstances of the child and the circumstances and capacity of the child’s potential caregiver(s), with the child’s ultimate safety and well-being as the paramount concern.”

Divorce and family law statutes vary from state to state. Here are some of the common guidelines and factors used by courts to help determine what is in the best interests of a child, according to HHS’ Child Welfare Information Gateway:

  • The importance of family integrity and preference for avoiding removal of the child from
    his/her home (approximately 24 States, American Samoa, Guam, Puerto Rico, and the U.S. Virgin
    Islands).
  • The emotional ties and relationships between the child and his or her parents, siblings, family and household members, or other caregivers (13 States and the District of Columbia).
  • The capacity of the parents to provide a safe home and adequate food, clothing, and medical care (eight States).
  • The mental and physical health needs of the child (five States and the District of Columbia).
  • The mental and physical health of the parents (six States and the District of Columbia).
  • The presence of domestic violence in the home (eight States).
  • The child’s wishes (Approximately 11 States and the District of Columbia). In these cases, the courts are required to consider the child’s wishes when making a determination. Courts will also consider whether the child is of an age and level of maturity to express a reasonable preference.

Your child’s best interests will be determined under the laws of your state. Consult with one of our attorneys with questions about your situation.

Two ‘Best Interests’ Cases

In one well-publicized, controversial case, a court in Ohio took an 8-year-old boy away from his family and placed him in foster care because he was obese. Caseworkers testified that the mother did not do enough to control the third grader’s weight, which was reported at more than 200 pounds.thmb_day_care_mother_child_stroller_bz

The child was returned to his family in May of 2012 after losing approximately 50 pounds. “The best interest of the child has been protected and supported,” the judge stated. “The system worked.”

In another case that went to the U.S. Supreme Court, a Washington grandmother and grandfather petitioned a court for visitation with two daughters of their deceased son. The mother of the children opposed the petition.

A lower court determined that visits with grandparents were in the best interests of the children. However, the Supreme Court disagreed. Forced visitation, the ruling stated, “violated (the mother’s) due process right to make decisions concerning the care, custody, and control of her daughters.” (Troxel v. Granville, No. 99-138, 6/5/00)

(The HHS Child Welfare Information Gateway maintains a state-by-state database covering child-related laws. Click here to access it.)

Starting a New Company in the New Year? Corporation vs. LLC? Find the Right Entity Form!

Business Entity Formation

Business entities can take many different forms – sole proprietorships, partnerships, limited liability companies (LLC), and corporations are the most common ones. Although they are simple and have the most flexibility and least regulation, sole proprietorships and partnerships fail to protect the company’s assets and the owners’ assets, and they fail to take advantage of many of the tax advantages of other types of entities. Additionally, entities such as LLC’s and corporations tend to present a more professional image and allow for greater future growth.

Corporations

There are a few different types of corporations: non-profit corporations, C corporations, and S corporations. Non-profit corporations must qualify as such under the restrictions of Federal law as stated in the Internal Revenue Code, one of the most important of which is that they must be formed for a charitable purpose as defined there. When incorporating a for-profit company, the default form is a C corporation. Companies must elect to be treated as an S (small business) corporation by the IRS, should they wish to do so, and if they meet certain criteria, such as having no more than 100 shareholders, not having shareholders that are partnerships, corporations or non-resident aliens, and having only one class of stock. C corporations are taxed on their profits, and the shareholders are taxed on the dividends they earn (if declared and distributed), which can result in “double taxation.” S corporations have their income or loss pass through to the shareholders, who report that on their personal tax returns and pay tax at their individual income tax rates.

LLCs

3LLCs are similar to corporations in that they provide a shield to personal liability, and they also enjoy the benefits of pass through taxation. Some have even argued that they provide an even better shield to personal liability than corporations. Additionally, when compared to S corporations, LLCs have fewer restrictions relating to the number and types of owners, and in Texas and many other states, there are less administrative requirements. Also, the form and structure of LLC management is more flexible when compared to corporations.

Comparisons and Considerations

Corporations and LLCs create a legal “person,” (separate entity with rights like a person) that insulate owners’ legal liability for the debts and actions of the company. In Texas, and in most other states, both corporations and LLCs can be owned and managed by just one person. Importantly, however, in order to ensure the limitation of personal liability, all must follow certain financial, accounting, recordkeeping and operational formalities.

It is always important to consider the costs and benefits, advantages and disadvantages from legal and tax/accounting perspectives. Thus you should talk with your attorney AND your accountant to discuss your unique situation, possible future scenarios, and other considerations before rushing into formation without proper advice.

New Year Special!!! Discounted Pricing for Business Formation

From now until January 31, 2016, I will offer anyone who mentions this blog post a special price for my legal services related to forming a business entity. During that time, I will take 25% ($300) off the normal price of forming a corporation or LLC, making the price only $900, plus the filing fee owed to the Texas Secretary of State. Included for this price is the drafting and filing of the Certificate of Formation, as well as the drafting of bylaws (corporation), company agreement (LLC), organizational minutes, and templates for future years annual minutes. Additionally, we include a company records binder, company seal, and pre-printed stock (corp) or membership (LLC) certificates. If you prefer a different entity, I am also offering special pricing on partnerships (general, limited, and LLP). I look forward to hearing from you!

May you have very happy holidays and a healthy and prosperous new year!

Why Do I Need a Will?

We feel that having a will, and related powers of attorney and advanced directives, is one of the most important tasks one should complete, and at this time of year, being around family and making new year’s resolutions, people are often thinking of getting this done soon. So we’ve decide to repost this article.

After working hard your entire life to provide for your family, you should not allow the Texas Probate Code and the courts to decide how your assets are distributed. This newsletter points out the various problems of dying without a will and how these consequences are eliminated with a properly drafted will that disposes of your assets in accordance with your wishes.2

Name Your Own Beneficiaries

When you die without a will, you are considered to die intestate and your property will pass in accordance with the descent and distribution provisions of the Texas Probate Code. Sometimes these individuals are the same you would provide for under your will, but not always. When you die with a will, the beneficiaries named under your will inherit your property exactly as you specify.

Reduce the Cost and Time of Probate

If you die without a will, the cost to probate your estate is substantially higher because of additional requirements, such as filing a determination of heirship with the court to decide the rightful heirs of your estate. This procedure is not necessary when the beneficiaries of your estate are named in your will. In addition to the increased expense, the probate process is substantially more time consuming if a dependent administration is required in which the court has to approve every action taken by the administrator. On the other hand, an independent executor named in your will administers your estate with minimal court supervision. This allows the probate process to be completed in a timely and cost effective manner.

Name Your Own Executors

If you die without a will, the court will appoint an administrator of your estate based on the order specified in the Texas Probate Code. If you die with a will, the court will appoint the executor(s) named in your will before considering any other individuals.

Extend the Time in Which Beneficiaries Receive the Bulk of Your Estate

If you have minor children and you die without a will, your children will receive their share of your estate when they reach 18 years of age. With a properly drafted will, a contingent trust can hold your children’s share until they turn an age that is more appropriate for them to receive the bulk of your estate. The trustee named in your will manages the children’s inheritance until they turn an appropriate age. The trustee may make distributions to your children during the life of the trust for their health, education, maintenance and support. While the use of a contingent trust is most common when minor children are involved, they work just as well for any individual under a certain age or otherwise incapacitated. Any beneficiary designations for your life insurance policies or retirement plans should also be coordinated with your will to make sure they are distributed to the children’s trust if they are under a certain age.

Eliminate or Reduce Any Estate Tax

Under current law, if your gross estate, including life insurance and retirement, is under $5.45 million, your estate will typically pass tax-free to your beneficiaries (and a married couple typically can pass up to $10.9 million of their wealth estate tax free). However, if your gross estate exceeds that number, you should contact an estate planning attorney to learn about estate planning options that can eliminate or substantially reduce any estate tax which would otherwise be payable to the Internal Revenue Service. With a federal estate tax rate as high as 40%, this issue should not be ignored.

Don’t wait…. Do it now….  Make it your New Year’s Resolution this year

While most people realize they should have a will, they still tend to procrastinate over having it done. Most attorneys can have a will prepared within days of the initial meeting, which will alleviate the many problems your loved ones will face if the time is not taken to get your affairs in order.

Communication Is Key to Avoid State Bar Grievance

Texas Attorneys are governed by a set of ethical guidelines called the Texas Disciplinary Rules of Professional Conduct. These rules are enforced by the Chief Disciplinary Counsel’s office, which is a division of the State Bar of Texas. A disciplinary action against an attorney can result in the loss of the attorneys license to practice law, either temporarily or permanently. Other sanctions that do not involve the suspension of an attorney’s law license are also possible.

I, Keith Leuty, spent the past 6 years working as an Attorney for the Chief Disciplinary Counsel’s office, but now I have re-entered private practice as a named partner here at Barnett & Leuty, PC. This blog is intended to provide insights into the disciplinary process.

The law office of Barnett & Leuty, PC provides representation for Texas attorneys who find themselves in potential trouble with the State Bar. We welcome your questions. Please visit our website at http://www.civil-law.com for more information.

In 6 years I reviewed more than 15,000 grievances against Texas attorneys. One of the most common complaints that clients, (or former clients) had was that their attorney did not communicate with them.

Sometimes this meant that the attorney did not return their phone calls or e-mails, and sometimes this meant that the attorney did not take the time to answer their specific questions. Many times clients may be confused by the legal process and/or the ramifications of the choices they are facing.

Rule 1.03 governs attorney communication. It is split into two parts:

(a). A lawyer shall keep a client reasonably informed about the status of a matter and promptly comply with reasonable requests for information.

(b). A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

The key element is the “reasonableness” factor which is included in both subsections. It is hard to pin down exactly what is reasonable and what is unreasonable. Quite honestly, some clients have more questions than others, and call more frequently.

The safest course of action is to return all phone calls or requests for information as soon as possible. When necessary, a certified letter may even be needed if the attorney believes that he or she might some day need proof of compliance with Rule 1.03.

“You’ve been served!” on Social Media

Recently, I saw a story that ran on a KEYE-TV (ch. 42, in Austin) newscast about a bill that has been proposed in the Texas legislature by Representative Jeff Leach (R) from Plano. That bill, HB 1989, is proposing to allow people to be served subpoenas through social media.  When I first saw KEYE’s story, I must admit I thought this proposal was one of the worst ideas to be proposed in our Texas Legislature in recent memory.

Opponents of the concept argue that most people (myself included) miss posts and messages sent through social media all the time, there’s no way to confirm receipt by the actual person, and it is hard to confirm that a particular account is actually created, monitored and maintained by the particular individual sought to be served. They also say that serving someone in this manner is inappropriate because it would make the fact that the individual was being sued more public than it should be. While it is true that most court cases are public record, they are passively so–one has to go to the courthouse or to an online site to specifically look for the case. It is not like when someone files a lawsuit, it makes the front page of the paper, except in rare high-profile cases of public interest, and most lawsuits don’t fit that category.

But after reading the article on KEYE’s website (http://www.keyetv.com/news/features/top-stories/stories/texas-bill-would-allow-serving-subpoenas-through-social-media-7193.shtml?wap=0) and reviewing the actual text of the bill (http://www.capitol.state.tx.us/tlodocs/83R/billtext/html/HB01989I.htm), I realized it was not emphasized in the story that the same base criteria that have been in place for “substituted service” or alternative service plus additional safeguards/restrictions applicable only to social media under this bill, would be applied to these situations. Currently, under Rule 106 of the Texas Rules of Civil Procedure, which has been in place over 70 years,

(a) Unless the citation or an order of the court otherwise directs, the citation shall be served by any person authorized by Rule 103 by

(1) delivering to the defendant, in person, a true copy of the citation with the date of delivery endorsed thereon with a copy of the petition attached thereto, or

(2) mailing to the defendant by registered or certified mail, return receipt requested, a true copy of the citation with a copy of the petition attached thereto.

(b) Upon motion supported by affidavit stating the location of the defendant’s usual place of business or usual place of abode or other place where the defendant can probably be found and stating specifically the facts showing that service has been attempted under either (a)(1) or (a)(2) at the location named in such affidavit but has not been successful, the court may authorize service

(1) by leaving a true copy of the citation, with a copy of the petition attached, with anyone over sixteen years of age at the location specified in such affidavit, or

(2) in any other manner that the affidavit or other evidence before the court shows will be reasonably effective to give the defendant notice of the suit

Citation by publication, or serving someone through a newspaper or other published media, has also been provided for in our court procedural rules for over 70 years, and it provides,

When a party to a suit, his agent or attorney, shall make oath that the residence of any party defendant is unknown to affiant, and to such party when the affidavit is made by his agent or attorney, or that such defendant is a transient person, and that after due diligence such party and the affiant have been unable to locate the whereabouts of such defendant, or that such defendant is absent from or is a nonresident of the State, and that the party applying for the citation has attempted to obtain personal service of nonresident notice as provided for in Rule 108, but has been unable to do so, the clerk shall issue citation for such defendant for service by publication.

It is not being proposed that social media be allowed as the primary or first option for serving someone, only when under the rules that already exist here in Texas (and similarly in most states and under Federal court rules also) it would be okay to serve someone by a substitute or alternate method to personal service by a constable or authorized private process server. If a litigant can show a court that service in person or by certified mail as authorized has been unsuccessful and can show that the criteria for obtaining substitute service or citation by publication have been met, under under the procedural rules the court may allow service by such alternate means.

In addition, as described in HB1989, additional procedures and safeguards must be followed.

If substituted service of citation is authorized under the Texas Rules of Civil Procedure, the court may prescribe as a method of service under those rules an electronic communication sent to the defendant through a social media website if the court finds that:

(1)  the defendant maintains a social media page on that website;

(2)  the profile on the social media page is the profile of the defendant;

(3)  the defendant regularly accesses the social media page account; and

(4)  the defendant could reasonably be expected to receive actual notice if the electronic communication were sent to the defendant’s account.

Bradley Shear, a Washington DC area social media lawyer, stated in an ABC News story last year, “Authentication [of the social media user who is sought to be served through such social media] is a major issue since you must be sure that the person with whom you are trying to serve online is the same person offline. You don’t want to have someone’s due process rights infringed upon due to not being properly notified.” This principle is addressed by the first two criteria, as long as the courts hold the attorneys and litigants hoping to use this method to strict and high burden of proof to show that the online person is actually the same person in “real life” who is sought to be served..

So, given the advancement of technology, and the reality that it is possible that it could even be MORE likely in some situations that someone might see the subpoena or other legal process if served through the social media source than by some other means currently becoming less used (i.e., newspaper), if implemented right, I believe that service of process through social media could actually be a better and more appropriate method than certain currently allowed alternative methods.

Service by social media has been allowed  in New York, Minnessota, Nevada (Federal appeals court – 9th Circuit), Australia, New Zealand, Canada, and the United Kingdom, and other jurisdictions are being added all the time.

We will have to wait and see if the Texas Legislature passes HB 1989 to know whether service through social media officially becomes a permissible means to serve someone in a case.

Estate Administration: The Will After Death

Wills are the most common way for people to state their preferences about how their estates should be handled after their deaths. A person who makes a will is known as a testator (male) or testatrix (female). A will is similar to an instruction booklet for the probate court. It provides the court with guidance as to how to distribute the person’s assets in accordance with the person’s wishes. Generally, a gift after death cannot be made to anyone other than a surviving spouse, children, or other relatives specified in state law in the laws pertaining to intestacy (dying without a will), unless there is a will that meets all the legal formalities required by state law. Thus, a will is the cornerstone of any estate plan.

A will is a very important legal document. The law favors the testamentary disposition of property, which is a main purpose and function of a will – to dispose of property which the testator owns. However, the disposition of property is not an essential characteristic of a will and a valid will may be made for the sole purpose of naming an executor. In general, people make wills in satisfaction of moral obligations. With such an obligation in mind, the testator almost always drafts a will that includes provisions for the distribution of his or her property after death. As circumstances, including applicable law, change, it is wise to consider updating your will.

Wills only control probate assets, that is, those assets that can be transferred by the probate court. Some assets do not have to be probated and generally are not controlled by a will. These assets include life insurance proceeds, which are paid to the beneficiaries designated in the policy. Other non-probate assets include property held in joint tenancy, which provides that, upon the death of a joint tenant, the deceased person’s interest automatically passes to the surviving joint tenant(s). Because these assets are transferred by means other than the probate process, a will generally does not control how they are distributed. A skilled estate or elder law attorney is the best source of advice regarding which assets are best distributed through a will, and which should be distributed through other estate planning instruments.

Example: A person names her spouse in a beneficiary designation (within the policy documents) to receive her life insurance proceeds on her death. In her will, she names her sister to receive those same proceeds. Because the proceeds are paid directly to the spouse, they never become part of the deceased person’s estate. Therefore, her will, which only controls her estate, cannot override the beneficiary designation.

A will must meet certain formal requirements in order to be valid. These requirements vary from state to state. Generally, the testator must be an adult of sound mind, meaning that the testator must be able to understand the full meaning of the document. Wills must be written. Some states, including Texas, allow a will to be in the testator’s own handwriting, which is known as a holographic will.  But it is generally considered a better and more enforceable option to have a typed or pre-printed document. For non-holographic wills, a testator must sign his or her own will, unless he or she is unable to do so, in which case the testator must direct another person to sign the will in the presence of witnesses, and  the signature must be witnessed and/or notarized. A valid will remains in force until revoked or superseded by a subsequent valid will. Some changes may be made by amendment (a “codicil”) without requiring a complete re-write.

Some legal restrictions prevent a testator from giving full effect to his or her wishes. Some laws prohibit disinheritance of spouses or dependent children. A married person cannot completely disinherit a spouse without the spouse’s consent, usually in a prenuptial agreement. In most jurisdictions, including Texas, a surviving spouse has a right of election, which allows the spouse to take a legally determined percentage (up to one-half in some places and circumstances) of the estate when he or she is dissatisfied with the will. Nondependent children may be disinherited, but this preference should be clearly stated in the will in order to avoid confusion and possible legal challenges.

A will usually appoints an executor or personal representative to perform the specific wishes of the testator after he or she dies. The personal representative consolidates and manages the testator’s assets, collects any debts owed to the testator at death, sells property necessary to pay estate taxes or expenses, and files all necessary court and tax documents for the estate. In many states, if the language of the will provides for it, the personal representative may act independently of court oversight and approval; in Texas, this is called being appointed as an independent executor or independent administrator.  If language allowing a personal representative to be independent is not included in the will, by default generally the administration of the estate must be “dependent” and must have court oversight and approval of most actions. Under certain conditions, it is possible to avoid a dependent administration even when the will does not provide for an independent executor.

While wills may be “tickets” to go through the probate process, not having a will forces the probate court to distribute the property without guidance from the testator. Dying without a will leaves an estate intestate, and a probate court must step in to divide up the estate using legal defaults to give property to surviving relatives. A personal representative must still be appointed, but the court must choose someone rather than following the deceased person’s wishes.

The court requires that any unpaid debts and death expenses be paid first, and then any distributions follow the legal guidelines found in the probate statutes. The rules vary depending on whether the deceased was married and had children, and whether the spouse and children are alive. If the intestate individual has no surviving spouse, children or grandchildren the estate is divided between various other relatives. Therefore, intestacy means that people who would never have been chosen to receive property may do so. Additionally, state intestacy laws only recognize relatives, so close friends or charities that the deceased favored do not receive anything. If no relatives are found, the estate goes to the government in its entirety. When made aware of the consequences of intestacy, most people prefer to leave instructions rather than subject their survivors and property to mandated division.

Why Do I Need a Will?

After working hard your entire life to provide for your family, you should not allow the Texas Probate Code and the courts to decide how your assets are distributed. This newsletter points out the various problems of dying without a will and how these consequences are eliminated with a properly drafted will that disposes of your assets in accordance with your wishes.

Name Your Own Beneficiaries

When you die without a will, you are considered to die intestate and your property will pass in accordance with the descent and distribution provisions of the Texas Probate Code. Sometimes these individuals are the same you would provide for under your will, but not always. When you die with a will, the beneficiaries named under your will inherit your property exactly as you specify.

Reduce the Cost and Time of Probate

If you die without a will, the cost to probate your estate is substantially higher because of additional requirements, such as filing a determination of heirship with the court to decide the rightful heirs of your estate. This procedure is not necessary when the beneficiaries of your estate are named in your will. In addition to the increased expense, the probate process is substantially more time consuming if a dependent administration is required in which the court has to approve every action taken by the administrator. On the other hand, an independent executor named in your will administers your estate with minimal court supervision. This allows the probate process to be completed in a timely and cost effective manner.

Name Your Own Executors

If you die without a will, the court will appoint an administrator of your estate based on the order specified in the Texas Probate Code. If you die with a will, the court will appoint the executor(s) named in your will before considering any other individuals.

Extend the Time in Which Beneficiaries Receive the Bulk of Your Estate

If you have minor children and you die without a will, your children will receive their share of your estate when they reach 18 years of age. With a properly drafted will, a contingent trust can hold your children’s share until they turn an age that is more appropriate for them to receive the bulk of your estate. The trustee named in your will manages the children’s inheritance until they turn an appropriate age. The trustee may make distributions to your children during the life of the trust for their health, education, maintenance and support. While the use of a contingent trust is most common when minor children are involved, they work just as well for any individual under a certain age or otherwise incapacitated. Any beneficiary designations for your life insurance policies or retirement plans should also be coordinated with your will to make sure they are distributed to the children’s trust if they are under a certain age.

Eliminate or Reduce Any Estate Tax

Under current law (through December 31, 2012; Congress has not determined if this will be extended or will change effective January 1, 2013), if your gross estate, including life insurance and retirement, is under five million dollars, your estate will typically pass tax-free to your beneficiaries. However, if your gross estate exceeds that number, you should contact an estate planning attorney to learn about several estate planning options that can eliminate or substantially reduce any estate tax which would otherwise be payable to the Internal Revenue Service. For example, a married couple can pass up to seven million dollars of their estate tax free with a properly drafted estate planning will that includes the use of a bypass trust. With an estate tax rate as high as 35% (or higher if the law changes on Jan. 1), this issue should not be ignored.  Additionally, if Congress fails to address the estate tax soon, the current law will expire and the amount you can pass estate tax free is due to revert downward back to one-million dollars.

Don’t wait…. Do it now….  Make it your New Year’s Resolution this year

While most people realize they should have a will, they still tend to procrastinate over having it done. Most attorneys can have a will prepared within days of the initial meeting, which will alleviate the many problems your loved ones will face if the time is not taken to get your affairs in order.

Starting a New Company in the New Year? Corporation vs. LLC? Find the Right Entity Form for You!

Business Entity Formation

Business entities can take many different forms – sole proprietorships, partnerships, limited liability companies (LLC), and corporations are the most common ones. Although they are simple and have the most flexibility and least regulation, sole proprietorships and partnerships fail to protect the company’s assets and the owners’ assets, and they fail to take advantage of many of the tax advantages of other types of entities. Additionally, entities such as LLC’s and corporations tend to present a more professional image and allow for greater future growth.

Corporations

There are a few different types of corporations: non-profit corporations, C corporations, and S corporations. Non-profit corporations must qualify as such under the restrictions of Federal law as stated in the Internal Revenue Code, one of the most important of which is that they must be formed for a charitable purpose as defined there. When incorporating a for-profit company, the default form is a C corporation. Companies must elect to be treated as an S (small business) corporation by the IRS, should they wish to do so, and if they meet certain criteria, such as having no more than 100 shareholders, not having shareholders that are partnerships, corporations or non-resident aliens, and having only one class of stock. C corporations are taxed on their profits, and the shareholders are taxed on the dividends they earn (if declared and distributed), which can result in “double taxation.” S corporations have their income or loss pass through to the shareholders, who report that on their personal tax returns and pay tax at their individual income tax rates.

LLCs

LLCs are similar to corporations in that they provide a shield to personal liability, and they also enjoy the benefits of pass through taxation. Some have even argued that they provide an even better shield to personal liability than corporations. Additionally, when compared to S corporations, LLCs have fewer restrictions relating to the number and types of owners, and in Texas and many other states, there are less administrative requirements. Also, the form and structure of LLC management is more flexible when compared to corporations.

Comparisons and Considerations

Corporations and LLCs create a legal “person,” (separate entity with rights like a person) that insulate owners’ legal liability for the debts and actions of the company. In Texas, and in most other states, both corporations and LLCs can be owned and managed by just one person. Importantly, however, in order to ensure the limitation of personal liability, all must follow certain financial, accounting, recordkeeping and operational formalities.

It is always important to consider the costs and benefits, advantages and disadvantages from legal and tax/accounting perspectives. Thus you should talk with your attorney AND your accountant to discuss your unique situation, possible future scenarios, and other considerations before rushing into formation without proper advice.

New Year Special!!!  Discounted Pricing for Business Formation

From now until January 31, 2011, I will offer anyone who mentions this blog post a special price for my legal services related to forming a business entity. During that time, I will take 25% ($300) off the normal price of forming a corporation or LLC, making the price only $900, plus the filing fee owed to the Texas Secretary of State. Included for this price is the drafting and filing of the Certificate of Formation, as well as the drafting of bylaws (corporation), company agreement (LLC), organizational minutes, and templates for future years annual minutes. Additionally, we include a company records binder, company seal, and pre-printed stock (corp) or membership (LLC) certificates. If you prefer a different entity, I am also offering special pricing on partnerships (general, limited, and LLP). I look forward to hearing from you!

May you have very happy holidays and a healthy and prosperous new year!

Noncompetition Agreements in the Employment Context

Despite what you may have heard to the contrary through the years, noncompetition (or noncompete) agreements can be enforceable in Texas, and it makes no difference that Texas is an “at-will employment” state. However, if the only promise made by the employer in the agreement is to hire the employee on at at-will basis, the agreement will fail for lack of consideration. In general, for a noncompetition agreement to be enforceable in Texas, the agreement must contain either an express or implied promise (agreement) by the employer to provide confidential information to the employee. Also, the agreement should contain a corresponding promise by the employee not to use the confidential information for his or her own benefit or for someone else’s, and should also restrict or prohibit the disclosure the employer’s confidential information. Together, these promises can create a binding noncompetition agreement in Texas.

Prior to 2006, Texas courts regularly failed to uphold or enforce noncompetition agreements that arose in the context of at-will employment because there was a gap in time between when the employee signed the noncompetition agreement and when he or she received the consideration (i.e., confidential information) from the employer. Texas courts reasoned that since the employer theoretically could have terminated the employee between the time he signed the agreement and the time when the employer conveyed the information, the employer’s promise to provide the information was “illusory” (meaningless) when it was made. Thus, even if the employer did in fact provide confidential information to the employee, the noncompetition agreement would be held to be unenforceable. It left employers in the situation of having to hand over confidential information at the exact moment the noncompetition agreement was being signed in order to avoid being invalid and unenforceable.

In 2006, the Texas Supreme Court handed down its opinion in the Sheshunoff case. Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006) (see copy of case online here: http://www.supreme.courts.state.tx.us/historical/2006/oct/031050.htm) In that case, the court held that a “unilateral contract formed when the employer performs a promise that was illusory when made can satisfy the requirements of the Act.” Thus, in a situation in which (a) an employee was employed “at will”; (b) the non-compete agreement contained a promise by the employer to provide confidential information to the employee; and (c) the employer provided confidential information to the employee, the agreement would become enforceable at the time the confidential information was conveyed. This decision created a dramatic shift in Texas employment law regarding noncompetition agreements.

Even with this shift, for noncompetition agreements to be enforceable in Texas, they must be supported by adequate consideration. In the employment context, the only kind of consideration that the courts have consistently held to be adequate is the employer’s provision of confidential information to the employee. This is not to say that financial consideration—such as the providing of company stock, a promotion, or monetary payment—can never be sufficient. However, generally speaking, for a non-compete agreement to be enforceable in the employment context, the employer must provide confidential information to the employee. This has been the case in Texas before the Sheshunoff case, and remains that way today.

Until 2009, it had also been true in Texas that a non-compete agreement, to be enforceable, had to be worded in a certain way. Specifically, the agreement had to contain an affirmative promise by the employer to provide confidential information to the employee. Thus, in some cases, Texas courts held that covenants not to compete were unenforceable because they did not contain a promise by the employer to provide confidential information to the employee (and this was so even if the employee did, in fact, subsequently receive confidential information from the employer).

In April 2009, the Mann Frankfort case changed this as well. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009) (see copy of that case online here: http://www.supreme.courts.state.tx.us/historical/2009/apr/070490.htm) In that case, the Texas Supreme Court held that a non-compete agreement could be enforceable even if it did not contain an explicit promise by the employer to provide confidential information. The court held that, in some situations, the employer’s promise to provide confidential information could be “implied.” The court noted: “When the nature of the work the employee is hired to perform requires confidential information to be provided for the work to be performed by the employee, the employer impliedly promises confidential information will be provided.”

After the Mann Frankfort case, in certain circumstances, a court will find in a noncompetition agreement an implied promise to provide confidential information, even though the agreement does not contain such an explicit promise. The primary inquiry is whether the employee’s job duties are such that the conveying of confidential information would be required. If that is the case, and if confidential information is in fact disclosed to the employee, then the agreement may be enforceable.

If a noncompetition agreement in Texas is properly worded and supported by adequate consideration, the next question is whether the restrictions contained in the agreement are reasonable. Texas courts have regularly ruled that the scope of the restrictions should bear some relationship to the activities that the employee performed for his former employer. For example, if an employee performs work for his employer only in the Austin metropolitan area, a non-compete agreement that keeps him from competing with his employer anywhere in the State of Texas or throughout the United States might be too broad. In light of the fact that our world getting smaller and potential sales territories getting larger on account of the internet, the facts of each case must be assessed on their own merits, and sometimes even a world-wide restriction could be deemed reasonable. Texas courts have typically focused upon where an employee performed his job duties for the employer.

Courts also have to consider the duration of the noncompetition agreement’s restriction on competing employment. There is no “across the board” bright-line test that provides that less than “this amount” is okay, and more than “that amount” is not. Courts generally look at the totality of the circumstances. In many cases, restrictive periods of 6 months to a year are upheld, while restrictive periods of more than 2 years are often found to be too long. But neither of those describes all cases, and there is a wide range of results along that spectrum as well.

Finally, what is confidential information? Texas courts have long held that an employer’s provision of confidential information can constitute valid consideration for a noncompetition agreement. But it can be difficult to apply this widely accepted premise, as was demonstrated in a recent case. In the case, an insurance broker signed an agreement in which he acknowledged that he would receive confidential information:

This information (hereinafter referred to as “Confidential Information”) includes, but is not limited to, data relating to AJG and the Corporation’s unique marketing and servicing programs, procedures and techniques; the criteria and formulae used by AJG and the Corporation in pricing its insurance and employee benefits products and claims management, loss control and information management services; the structure and pricing of special insurances packages that AJG and the Corporation have negotiated with various underwriters; lists of prospects compiled by AJG and the Corporation’s management and research staff; the identity, authority and responsibilities of key contacts at AJG and the Corporation accounts, including accounts of the Acquired Business; the composition and organization of accounts’ businesses; the peculiar risks inherent in their operations, highly sensitive details concerning the structure, conditions and extent of their existing insurance coverages; policy expiration dates; premium amounts; commission rates; risk management service arrangements; loss histories; and other data showing the particularized insurance requirements and preferences of the accounts. The Executive recognizes that this Confidential Information constitutes a valuable property of the Corporation, developed over a long period of time and at substantial expense.

As can be seen above, the broker was to receive various types of confidential information. The broker argued to the court that much of this information could not be considered “confidential” because it could be obtained from public sources.

The company countered, and argued that its confidential information (a) took years to acquire; (b) was only shared with the company’s employees and agents on a “need to know” basis; (c) was not “readily ascertainable by competitors”; and (d) gave the company a “valuable competitive advantage in the insurance brokerage industry.” The company also argued that it spent substantial resources developing and acquiring the information, and that it took reasonable precautions to prevent the disclosure of what it included in the definition of “confidential information.”

In the end, the court decision was in favor of the company. The court there found it compelling that the company had spent substantial time and resources developing and acquiring the information, it had taken reasonable precautions to prevent disclosure of the information to third parties, the information was not readily available to competitors, and the information gave the company a valuable competitive advantage in the industry. Based upon these factors, the court held that the confidential information was sufficient to make the non-solicitation agreement enforceable.

Internet Defamation: The Law About Attacks on the Cyber Frontier

The internet and social media, such as Facebook and Twitter, have become a huge part of life in 2010, and in recent years. We post  about everything from legal opinions, to what car to buy, to what political candidate to vote for.  We post about ourselves and we post about others. As many have experienced personally, the internet and social media have also become ground zero for
publication of all sorts of defamatory statements. Some sites allow the user to post “anonymously” while others require a user to post by name (or at least a “handle” or login alias). In any event, the opportunities to disseminate defamatory statements in very public ways are much greater now than ever before, and likewise, the opportunities to be held liable for defamation are greater as well. Slander (oral) and libel (written) are both forms of defamation. In my law practice, I receive several calls a year from those who
say they’ve been defamed on the internet.

“To maintain a cause of action for defamation in Texas, the plaintiff must prove that the defendant: (1) published a statement; (2) that it was defamatory concerning the plaintiff; and (3) that it was published with either actual malice, if the plaintiff was a public official or public figure, or negligence, if the plaintiff was a private individual, regarding the truth of the statement. Further, the plaintiff must suffer damages as a result of the defamatory statement; i.e., the statement must impugn the plaintiff’s character or injure the plaintiff’s reputation.” (quoted from the article linked below, citing Texas appellate court and Supreme Court precedent, as well as US Supreme Court legal precedent) Statements of opinion, even if offensive, aren’t enough to satisfy the requirements to establish a case for defamation. (http://www.texasbar.com/Template.cfm?Section=Texas_Bar_Journal1&Template=%2FContentManagement%2FContentDisplay.cfm&ContentID=26431)

A Chicago landlord sued one of its tenants for tweeting about her moldy apartment, but lost because the court found that the statement, especially having been made in the social context and setting where it was published, was just that tweeter’s opinion.
(http://bit.ly/8g6Jig)

An Austin fashion designer sued Courtney Love for Love’s allegedly defamatory tweets that followed the development of a dispute over payment owed for some custom designed clothing pieces Love ordered from the designer. In response to Love’s attempt to
dismiss the lawsuit, the court found that the designer would likely prevail on her defamation case because many of Love’s comments could be construed as statements of fact, in addition to others that were merely opinion. (http://bit.ly/aDLNn0)

There have not been a lot of these cases yet, but there have been some others besides these two. But all the cases thusfar seem to turn on the same issues that have always governed defamation cases. So the land of Facebook and Twitter has not created new law, just a new forum in which that law can be enforced.

People have attempted to sue Twitter, Facebook and various internet service providers that host blogs and other sites that host  people’s posts about businesses, organizations and people. But the Communications Decency Act of 1996 comes to the rescue of these internet service providers and hosts. It protects the owners of these sites from defamation claims, based on the principle that the provider of internet-based services or other users of the same site should not be treated as the publisher; generally only the user who writes the material and posts it may be treated that way, but retweeters and those who share or forward such posts may also share in the potential for liability.

Our office recently received a call from someone claiming to have been libeled by someone’s post to a social networking site. To maintain the privacy of the caller and the attorney-client privilege of the context of the call, I have changed the names of those involved and some of the facts of the story:
Debbie was jogging with some friends on the trail around a small lake in a nearby town one afternoon. As she passed another jogger, that jogger slightly shoved Debbie and made a derogatory remark about Debbie’s weight. One of the friends Debbie had been
jogging with later posted about the incident on a social network site (comments of disbelief, such as “who would do such a thing?”). Word spread and the incident was picked up by a local media outlet. No one knew who the victim of the remark was, but
there were rumors spreading. One woman, “Jane”, in the little town contacted Debbie and asked that she make a public statement to make clear that Jane was not the jogger, which Debbie did (although I’m not sure exactly why). Various people in the town are
still talking about the incident. Debbie also says that Jane continues to say disparaging things about the incident and about Debbie even after she complied with Jane’s request. Debbie even mentioned to us that she is having to deal with an issue on a home loan with
her bank (although it was unclear how this tied into the allegedly defamatory remark). Debbie confirmed during her call to us that the incident has not caused her any issues with the bank or damages beyond “mental anguish” and certainly no identifiable financial
losses have occurred.

This call is muddied with lots of stray facts, but the bottom line here is that the comment made by the passing jogger was not defamation because it was opinion, albeit offensive. To prove defamation, the plaintiff must also show that the people who heard the remark believed it and that the plaintiff was damaged by the statement. It may be a closer call on the comments that Jane may have made about Debbie, but at the time of the call, Debbie could not show that there was anyone who actually believed statements that Jane was making or that she had any monetary damages; all she alleged was some mental anguish (and she had not even been to a therapist, counselor or psychologist to address the issue, which would have been helpful in establishing that kind of claim).

I hope my comments have been helpful and informative. Stay tuned for my next blog entry in the next week or so….