Who are the IRS’s favorite superheroes?  The X-Men.  The IRS loves to hear from ex-spouses, ex-business partners and ex-employees about taxpayers who may not have fully met their federal tax obligations.  The IRS even has official “Whistleblower” programs that reward people for dropping a dime on their follow taxpayers.

The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax that they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to thirty percent of the additional tax, penalty and other amounts it collects.  The IRS only pays awards to people who provide specific and credible information to the IRS and the information results in the collection of taxes, penalties and interest from the target taxpayer.

Internal Revenue Code IRC Section 7623(b) provides for two types of awards. If the taxes, penalties, interest and other amounts in dispute exceed two million dollars, and a few other qualifications are met, the IRS will pay fifteen percent to thirty percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than two hundred thousand dollars.  The IRS has another award program for whistleblowers who do not meet these income thresholds. The awards through this program are less, with a maximum award of fifteen percent up to ten million dollars.

If you decide to submit information and seek an award for doing so, use IRS Form 211. The same form is used for both award programs.

However, anyone thinking about submitting information under the Whistleblower programs will want to consult with a qualified tax attorney for two main reasons.  The first reason is that a qualified tax attorney can make sure that the Whileblower will not be subject to blow back from their whisleblowing activities.  Many “exes” may be jointly liable for the very taxes that they are providing the IRS information about.  Most clear thinking people would not want to engage in the tax equivalent of a murder suicide pact.  A qualified tax attorney would also help in guiding the whistleblower through the procedural steps of the whistleblower program.

Also, do not think that the Whistleblower programs are a way to get rich quickly.  In a 2010 GAO report to Congress on the program, the IRS said whistleblowers are told that completing a claim could take five to seven years and sometimes longer.   Of course most whistleblowers are motivated by “doing the right thing” and not by revenge on someone who wronged them.

On the other hand, the Whistleblower programs are a reminder that you should not play fast and loose with federal tax rules, especially if there are others around who can drop a dime on you later.  Information is the most valuable commodity; don’t give it away to someone who can use it against you later.

The documents are clear!

I see another major law firm has been sued for legal malpractice by a hedge fund manager and a distressed investment firm who claim that their lawyers didn’t advise them about a particular term in a deal involving tens of millions of dollars, if not more.

Well, the term’s in writing, isn’t it?  And, it’s clear?  And, it’s not unusual in the field? These were sophisticated clients dealing in tens of millions of dollars in the regular course of business and, yet, they are innocent little lambs who didn’t know what they were doing?  Or, they didn’t read the documents?  Or, they didn’t understand them because their “sophistication” was a thin veneer?

Somehow, this case doesn’t seem to have much jury appeal.  Funny how these clients don’t want their lawyers as their partners on the upside, but want to turn them into guarantors or insurers on the downside.

While a CYA e-mail can be off-putting to clients, I tell them “I’m going to send you a confirming e-mail for future reference in case one of us gets hit by a meteor or something” and then give a little chuckle.  Such an e-mail (three, actually) nipped a client’s implicit claim in the bud recently.  ”Oh, yeah, now I remember,” the client told me.  Then he stiffed me on part of my bill anyway.

Reprimanded teacher objects to disclosure of the reprimand

The appellate court’s opinion in Marken v. Santa Monica-Malibu Unif. Sch. Dist. (Jan. 24, 2012)  No. B231787 is an excellent recap of the California Public Records Act (Gov. Code sec. 6250, et seq.) with respect to disclosure of certain records of public employees.

The short version is, if the public employee is disciplined in any way, it is almost certain that the public’s interest in knowing that (upon request) outweighs the employee’s privacy rights.

In the Marken case, the teacher was found to have engaged in certain conduct in violation of the school district’s sexual harassment (of students) policy.  A written reprimand was issued.  There was no appeal.

Two years later, a request was made for disclosure of that reprimand and other documents.  The teacher sought an injunction preventing disclosure, claiming a violation of his privacy rights.  Both the trial and appellate courts ruled that the injunction should be denied and the disclosure made (with redactions of certain information pertaining to others).

This is the correct decision for any number of reasons. But, the larger question is, when are some people going to get a clue?

Economic times have been difficult for many businesses throughout Southern California during the past few years. In some instances it appears that the economy is on the mend; other times it appears the economy is getting worse. If your business is continuing to suffer, is there any way to get out from under what may now appear to be an unfavorable lease?

The short answer is that you are ultimately responsible for paying rent for the remainder of the lease term if you terminate the lease early.  However, there are some options if you find yourself in this situation:

• Ask your landlord if he has a smaller unit available that he can rent to you instead. Make sure to document your request in writing. This way, if your landlord ever sues you for rent owed on the remainder of your lease, you can show that you attempted to mitigate or reduce his damages.
• Find a suitable sub-tenant. You may have vacant office space in your unit available if you have been downsizing. Although you will need to obtain approval from your landlord for any subletting, most leases provide that the landlord will not “unreasonably withhold” consent.
• Find someone to take over your lease. For instance, you might want to try selling your business and having the new owner take over your lease. The landlord may be required (under the express terms of your lease) to consent to a lease assignment. Keep in mind, though, that most sophisticated landlords will require you to remain on the lease as a guarantor even if they accept the lease assignment. This means that you may be responsible if the new tenant fails to pay the rent. Consequently, you will want to make every effort to ensure that any prospective buyer of your business is financially sound.
• Renegotiate your lease to reduce your monthly rent. Although not legally required to do so, your landlord may be willing to cut you a break on the rent just to keep you as a tenant. It is tough out there for landlords to keep units filled in today’s economy. Some money is better than no money.
• In some situations, you may be able to terminate your lease if your landlord failed to perform his obligations (e.g., by failing to use your Common Area Maintenance fees to maintain the premises). If you think your landlord may have breached your lease, you should consult with an attorney.

Reid & Hellyer has extensive experience in assisting business clients in a wide range of business and real estate law issues, including landlord/tenant issues.

Employers in California are often faced with lawsuits brought by employees for alleged Labor Code violations. The general perception is that plaintiff employees have a greater chance of obtaining a sizeable recovery against an employer in a jury trial.

The concept is that juries are made up of citizens that are more likely than not to be employees themselves. As a result, there is a preference among employers to avoid having their issues with employees resolved by juries. One potential alternative to resolve such claims is to require binding arbitration.

In Wisdom v. AccentCare, Inc. (Jan. 3, 2012) 2012 DJDAR 105, several employees filed a lawsuit against their employer, AccentCare, Inc., alleging that they were not paid for all of their overtime work. In conjunction with their employment, four of the plaintiffs had signed acknowledgment forms when they applied for employment that included a binding arbitration agreement. The plaintiffs did not negotiate these terms and the terms were not explained to them.

In response to plaintiffs’ complaint, AccentCare brought a motion to compel arbitration of the claims, relying upon the arbitration clause in the employment contract. The trial court denied the motion to compel arbitration, finding that the arbitration provision was both procedurally and substantively unconscionable.

The Court of Appeal in Wisdom upheld the ruling of the trial court, finding that an arbitration provision imposed on employees as a condition of employment, and without the opportunity for negotiation, is adhesive. As noted by the court, in the context of an individual seeking employment, there exists unequal bargaining power between the parties. Moreover, there was no evidence of any negotiation regarding the terms of the agreement between the prospective employee and the employer. Also, there was no indication that the existence of the arbitration clause was brought to the attention of the prospective employee. For these reasons, the arbitration clause was found to be procedurally unconscionable.

The court in Wisdom also noted that the arbitration provision at issue was procedurally unconscionable because it did not create mutual obligations as between the parties. In that regard, under the terms of the arbitration provision, only the employee was agreeing to submit claims to arbitration. For these reasons, the arbitration provision was found to be unenforceable by the employer.

The decision in Wisdom is consistent with prior decisions in California holding that, except in rare circumstances, a binding arbitration provision contained within an employment agreement will generally not be upheld by courts.

In order to make the strongest showing for enforceability, an employer needs to:

1. Direct the prospective employee’s attention to the arbitration clause;
2. Request that the prospective employee review the arbitration clause and ask as to whether the prospective employee wants to make any modifications to the arbitration clause;
3. Allow the employee to strike the arbitration clause while still affording the employee the opportunity to obtain employment; and
4. Include language in the arbitration clause which clearly indicates that it is mutually binding as to both the employee and the employer.

As a practical matter, under circumstances where an employer has a high volume of employees, for the most part, the employees are not in a position to dictate the terms of their employment. As a result, a binding arbitration provision contained in an employment agreement will likely be found to be unenforceable.

The most probable exception is a situation where a prospective employee is a highly sought after skilled employee that, with the assistance of counsel, engaged in detailed negotiations regarding the terms of the employment relationship. In Wisdom, those factors were not present and therefore the court found the arbitration provision to be unenforceable.

If you are in need of a California employment attorney, contact Reid & Hellyer today.

Over the past two plus decades of my business litigation practice, I have repeatedly been asked the question from puzzled clients, “should I cash the check or not?”

This situation usually arises when the client is owed $2,000 (for example) and the customer mails the client a check for $1,500 with a notation “payment in full” written on the check. Should you cash the check and send a follow-up invoice and/or bill for the remaining $500 balance. Can you legally do this?

Cashing a check marked “payment in full” will likely discharge the debtor’s obligation entirely, under the legal doctrine of “accord and satisfaction.” Tendering of a check marked “payment in full” or “paid in full” is an offer to settle the debt of an amount different than what the parties’ contract says. Cashing the check is considered to be acceptance of the offer and extinguishes the debt. In order to be effective, however, the words must be clear and conspicuous on the check. There must be no doubt that the debtor intends the check to settle the debt entirely.

The safest avenue (if you are faced with a situation similar to the above example) is to cash the check, only if you agree to accept the lesser amount as payment in full. Otherwise, return the check to the sender along with an explanation of why you didn’t cash the check.

The legal analysis of whether you can simply strike out the “payment in full” language and cash the check and seek the balance owed under the contract is murky. Civil Code section 1526 provides that a creditor can render the “payment in full” language ineffective by striking it out. However, Commercial Code section 3311 provides that the “payment in full” language is binding regardless of whether the creditor strikes it out. The safe bet, if you like to play it safe, is to not strike out the language and just return the check to the sender uncashed if you do not agree to accept the lesser amount as payment in full.

As in many areas of the law, sometimes there exists ambiguity or what appears to be conflicting code provisions that make doing business frustrating and complicated without the assistance of a good business attorney. Reid & Hellyer has extensive experience in assisting business clients in a wide range of legal issues they may encounter.

What you don’t know can hurt you.

California’s Mechanic’s Lien Law (Civil Code section 3082 et seq.) is littered with short deadlines for accomplishing various tasks.

One is the 90 day time limit in which to file a mechanic’s lien foreclosure action after the mechanic’s lien has been recorded. (Civil Code section 3144.)

The recent case of Pioneer Construction, Inc. v. Global Investment Corp. (Dec. 21, 2011) B225685. reminds us that the 90 days does not include the time that the automatic stay is in effect due to a bankruptcy.

It also reminds us that:

1. the 90 days RESUMES running (nor restarts) when the stay is lifted;
2. the stay does NOT prevent the mere recordation of a mechanic’s lien (11 USC sec. 362(b)(3)); and,
3. in addition to recording the mechanic’s lien, the mechanic’s lien claimant MUST file a notice of lien in the bankruptcy (11 USC sec. 546(b)(2)) so that it will not be subject to avoidance by the bankruptcy trustee.

The good news for the mechanic’s lien claimant’s counsel in this case is that, while he had misspoken in the trial court when opposing the defendants’ demurrer, he had presented the facts that showed that he’d filed suit in a timely fashion, thereby preserving his client’s right to the mechanic’s lien. So, he lives to fight another day, as this case did not adjudicate the merits, i.e., whether the lien claimant would actually prevail at trial.

California Senate Bill 800 (“Right to Repair” or “Fix It” law; Civil Code sec. 895, et. seq.) became effective Jan. 1, 2003.  Among other things, it provided for a pre-litigation process to allow developers to settle potential construction defect lawsuits by offering to repair the claimed defects, mediating the disputes, and/or making a cash offer to buy back the residence. (Civ. Code sec. 910, et seq.)

As an alternative to that method, that law permits a seller-builder to include an alternative pre-litigation procedure in its sales contracts with buyers, subject to certain specified conditions. (Civ. Code sec. 914.)

Last March, we discussed a case wherein the homebuilder’s alternative procedure was disallowed due to unconscionability.

On December 14, 2011, in the case of Baeza v. Superior Court, the court ruled that Castle & Cooke’s alternative procedure passed statutory muster.  The homeowners contended that C&C’s failure to provide certain disclosures and documents (required by Civil Code sec. 912) eliminated any need to engage in any nonadversarial prelitigation procedures, statutory or contractual.  The court disagreed, ruling that C&C’s opting out of the statutory scheme in favor of an alternative process that necessarily included certain disclosures was enforceable.  The court further ruled that C&C’s attempt to limit damages, which the homeowners contended also voided the alternative procedure, was severable and did not eliminate the requirement to comply with the alternative prelitigation process set forth in the sales contracts.

Homebuilders are well-advised to include alternative nonadversarial prelitigation provisions in their sales contracts.  Just be sure they comply with SB 800.

“You can’t build a reputation on what you are going to do” said Henry Ford. Indeed, much of a lawyer’s value is his or her reputation in the legal community, a lesson that I hope no attorney learns the hard way.

On my first day as a Summer Law Clerk at Reid & Hellyer, Senior Attorney Jim Manning made this lesson clear: “New attorneys are presumed to have a good reputation. If you do anything to undermine that presumption, it is difficult to rehabilitate that reputation.”

Dave Moore, a Reid & Hellyer attorney, recalled an incident in which a lawyer’s reputation was destroyed forever over the course of a weekend. The case involved the San Bernardino train disaster of 1989 in which a runaway freight train reached 110 mph while descending the Cajon Pass, eventually derailing into a residential community, killing 6 people.

As Friday discussions in the subsequent lawsuit reached an impasse at 5:30 p.m., the attorney for the victims handed Dave Moore what appeared to be a conformed copy of a temporary restraining order that prohibited his client from operating its pipeline. The attorney also handed a copy to the attorney for Southern Pacific railroad, as the TRO prevented the operation of freight trains through the Cajon Pass. Over the Memorial Day weekend, Southern Pacific redirected all trains around the Cajon Pass at an expense of $139,103.90.

On Tuesday morning after the three day weekend, the attorneys realized that the judge had denied the temporary restraining order, striking those portions of the proposed order, signing only an order to show cause for a preliminary injunction to be heard three weeks later. Instead of providing the real order, the plaintiffs’ attorney had doctored the TRO by re-inserting the stricken portions of the order that denied the TRO and removing the date of the hearing on the order to show cause for a preliminary injunction.

Southern Pacific’s motion for attorneys’ fees in the amount of $22,047.93 incurred in setting aside the void TRO was granted  by the trial court and upheld by Justice Ramirez in the published appellate opinion in Dudley Brewster v. Southern Pacific Transportation Company (1991) 235 Cal.App.3d 701.

The adverse attorneys’ fees were the least of this attorney’s problems, as his reputation had been destroyed in the eyes of Dave Moore and the scores of attorneys that heard about his deceptive and fraudulent activity. “I wouldn’t trust him today if he told me the sky was blue,” said Dave Moore.

Six years later, the attorney resigned as a California attorney with state bar disciplinary charges pending, apparently stealing the proceeds of settlements from clients, according to the L.A. Times.

Warren Buffet made this lesson clear: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

In California, the rules regarding adverse possession and prescriptive easement are well established. Adverse possession requires evidence of payment of property taxes by the party seeking to obtain adverse possession, whereas payment of property taxes is ordinarily not a requirement for a party seeking to obtain a prescriptive easement over the property of another.

A recent decision regarding commercial property in Orange County, California addressed one rare situation in which payment of property taxes may be required to establish a prescriptive easement.

The plaintiff in Main Street Plaza v. Cartwright and Main LLC (2011) 194 Cal.App.4th 1044 owned a retail shopping center. One defendant owned the adjacent property. An alley was located behind the two parcels. The second defendant owned the property behind the other two parcels, on the other side of the alley. To make it even more interesting, there was an easement owned by a railroad for “railroad purposes only” that was located in the alley but which hadn’t been used for many years.

The customers and vendors of Main Street Plaza regularly used the alley for parking and for access, so the plaintiff felt they had obtained a prescriptive easement and filed suit to quiet title to their prescriptive easement. The railroad easement was separately assessed and taxed, and the railroad had paid the property taxes on its easement. Both defendants argued that the case involved a rare exception in prescriptive easement law, where if the underlying easement is separately assessed, the trespasser (plaintiff) was required to pay property taxes on the claimed prescriptive easement in order for the wrongful use to ripen into a prescriptive easement. The trial court agreed, and since the plaintiff had not paid the property taxes assessed on the easement, they had not established a prescriptive easement.

The Court of Appeal reversed, reasoning that the rule about paying property taxes only applies when the prescriptive easement and the granted easement are co-extensive in use. Here, the prescriptive easement was for access and parking. The deeded railroad easement was only for railroad purposes, so the uses were not identical. Consequently, payment of property taxes by the plaintiff was not an element of their claim for a proscriptive easement.

This case demonstrates a couple of legal points. First, that you can have an easement by prescription across another recorded easement. Second, that in rare instances, the prescriptive easement is similar to adverse possession, in that it requires payment of property taxes.

Property owners faced with the complexities of easements, should consult an experienced California real estate attorney. The attorneys at Reid & Hellyer have extensive experience in real estate law.

It is common practice among retailers to use form contracts which are presented to consumers for signing without explanation and without an ability on the part of the consumer to negotiate any of the terms in the form contract.  In the recent case of Sanchez v. Valencia Holding Company, LLC (2001) 2011 DJDAR 15555, the court held that an arbitration clause in a form contract for the purchase of a used vehicle was unenforceable.

The plaintiff in Sanchez brought a class action against the automobile dealer, alleging that the dealer made various misrepresentations regarding the terms of the purchase and charged improper fees when selling a certified used car.  The dealer moved to compel arbitration based upon an arbitration clause contained in the sales contract.  The arbitration clause gave either party the right to submit a dispute to binding arbitration and set forth various rules and procedures governing the arbitration process.  The arbitration clause also included a waiver of the right to pursue a class action.  The trial court refused to compel arbitration, ruling that the waiver of the class action rights was unenforceable and therefore the remainder of the arbitration provision was also unenforceable.

The Court of Appeal in Sanchez also refused to compel arbitration, but based its decision on different grounds.  The Appellate Court found that the arbitration provision was unconscionable and therefore unenforceable.

Initially, the appellate court noted that an arbitration provision cannot be deemed unconscionable unless it is both procedurally and substantively unconscionable.  The court determined that the arbitration provision in this case was procedurally unconscionable because it constituted a contract of adhesion.  In so finding, the court emphasized that the sales contract was a lengthy form contract that was presented to the plaintiff without explanation or an opportunity for negotiation, and that the arbitration clause was located on the backside of the last page of the contract, which was signed only on the front side.

The Court of Appeal in Sanchez then found that the arbitration clause was substantively unconscionable based upon four terms contained in the agreement.  The four terms noted by the court as being substantively unconscionable were

1. a term limiting the right to appeal to an award exceeding $100,000.00,
2. a term that provided for an appeal of an award of injunctive relief,
3. a term that exempted self-help remedies such as repossession from arbitration, and
4. a term that required the payment of arbitration costs as a condition to pursuing an appeal.

In the court’s view, all of these provisions heavily favored the dealer.  As a result, the court concluded that because these terms unfairly favored the dealer, and were so pervasive that they could not be severed from the remaining terms of the arbitration clause, the clause was unenforceable.

In summary, the holding in Sanchez reaffirms that, at least with respect to arbitration clauses, courts will examine the terms of the clause at issue to ensure that it is both procedurally and substantively fair to consumers.  As a result, although the best practice would be for consumers to read and understand form contacts before signing, some relief is available from unconscionable provisions through the court system.

Rule 3-300 of the Rules of Professional Conduct provides that a member of the State Bar shall not enter into a business transaction with a client unless certain requirements have been satisfied.  The main requirement is that the client is advised in writing to seek the advice of independent counsel and given a reasonable opportunity to seek that advice.

In a recent State Bar prosecution, the attorney met a friend in 1998.  Between 1999 through 2002, the attorney performed occasional legal services.  In 2005, the attorney entered into an agreement to purchase a residential duplex from the friend for $700,000.00, and to finance the entire transaction.

When complications arose in financing, the attorney listed the property for sale for $959,000.00, without telling her friend.  The attorney accepted an offer of $895,000.00, subject to the close of the escrow sale with her friend.

When the friend learned of the sale, the friend canceled the joint escrow.   The attorney sued her friend for breach of contract and specific performance.  The friend cross-complained for breach of fiduciary duty and fraud. A jury found for the attorney with a total award of $372,693.85, and found the attorney had done nothing wrong.

The State Bar proceedings against the attorney, the case of In the Matter of Maria Darlene Allen (Nov. 19, 2010) No. 06-O-13329, were dismissed by the trial court and the Review (appellate) Department of the State Bar Court affirmed the dismissal, finding that an attorney/client relationship at the time of the business transaction is an essential element to a violation of Rule 3-300 stating that, “The duration of an attorney/client relationship is dependent upon the nature and scope of the relationship.”

The State Bar ordeal could have been avoided had the attorney treated her friend like an existing client and given her friend a written advisement and opportunity to seek the advice of an attorney of the friend’s choice about the fairness of the transaction.  The frequency of business deals going sour with strangers applies equally to business deals with friends.