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Developments in German Company Law and its Impact on US
On January 23rd, 2008 a public hearing was held in the German parliament (Bundestag) in Berlin with regard to the current reform on German corporate law, especially on the Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG). The new limited liability company act will bring massive changes not only in the former German law but also for multinational corporations dealing with German businesses. Therefore, the substantial aims of the new act will be illustrated in the following; after a short introduction to the prominence of the limited liability company in Germany as a business entity. Thereupon, the implications of the new limited liability company act on US businesses and cross border transactions will be displayed.
The GmbH as the most important business entity in Germany
The Reform Act (MoMiG)
memorandum of association
Simplification of German commercial register
Enhancement of international competition
Cash-Pooling regulated by law
Doing Business in Germany
Multinational US corporations have therefore the possibility to found a subsidiary in Germany as a GmbH. The noteworthiness can be concentrated therein that the US business entity does not need to have an administrative center in Germany and can therefore manage the subsidiary or affiliate out of the USA. With the enactment of the MoMiG, factually, a German mailbox company is established.
As the credit markets continue to reel from the mortgage crisis, with the rippling effects now being felt in the credit card industry – many reports have surfaced that homeowners now make mortgage payments with credit cards or are choosing to make their credit card payments instead of their mortgage payments, calculating that it will be easier to deal with their mortgage holder than their credit card issuer – many people believe that the Capital Region is fairing better than larger areas such as Las Vegas or Florida. With the ramifications of the collapse of the sub-prime lending market still to be played out, the Committee on Professional Ethics of the New York State Bar Association has set forth its opinion on “Seller’s Concessions,” a method that is regularly used to help purchasers finance their closing costs. The narrow ethical opinion – can an attorney participate in a scheme to inflate the purchase price – ignores the larger issue; what effect has millions of artificially inflated real estate transactions had on fueling increases in market values and the growth and failure of the market for mortgaged backed securities?
ARE SELLER’S CONCESSIONS ETHICAL? A Review of Ethics Opinion 817
Does an attorney’s participation in a residential closing with a “grossed up” sales price and “seller’s concessions” violate New York’s Code of Professional Responsibility? According to the Committee on Professional Ethics, “a lawyer may not ethically participate in such a ‘gross up’ of the actual purchase price and concomitant seller’s concession, unless there is neither deception nor misrepresentation at work in the transaction.”
The facts considered by the Opinion involved an agreed sales price that was then increased by 3%, in return for which the seller granted the purchaser a “seller’s concession” in the same 3% amount. The artificially inflated purchase price enables the purchaser to obtain a larger mortgage, based upon the increased contract amount and, in theory, use the additional mortgage proceeds to cover closing costs.
The Opinion expresses that, at a minimum, the gross up and seller’s concession must be fully disclosed in the transaction documents. However, the Opinion stops short on defining “full disclosure” and passes up an opportunity to provide specific guidelines for attorneys by failing to detail which transaction documents the gross up and seller’s concession should be reported on. Thus, this Opinion leaves two matters to be further resolved: (1) what forms should a seller’s concession be reported on to satisfy the full disclosure standard set forth in the Opinion; and (2) how is the seller’s concession disclosed to the secondary market – does an attorney’s responsibility for full disclosure include disclosure to the secondary market?
In most Capital Region residential real estate transactions, the Purchase and Sale Contract is a standard form negotiated by the parties with input by the real estate brokers involved. An attorney is not usually hired until the gross up and concession are negotiated and set forth on the contract. Is the inclusion of the gross up and concession in the contract sufficient for full disclosure? Is reference to the concession in the HUD-1 at closing sufficient? Should the attorney include in their attorney approval letter additional language that states that the gross up and concession are contingent upon full disclosure in writing to the Lender? At a minimum, both attorneys should retain for their files copies of the transaction documents where disclosure is made as this discussion is most likely to continue.
YES, NO, UNKNOWN, N/A: What Should a Seller’s Attorney do with the Property Condition Disclosure Statement?
When the Property Condition Disclosure Act was first enacted, the purpose behind a seller completing the Property Condition Disclosure Statement (“PCDS”) was to provide a prospective purchaser with certain conditions and information concerning the property known to the seller and move New York away from a “Buyer Be Ware” state. Though the original intent behind the PCDS was not to provide a warranty of any kind, it has now been held that any knowingly false or incomplete statements by the seller can subject the seller to claims of fraud after the completion of the sale.
In Simone v. Homecheck Real Estate Services, Inc., the Seller-Defendant answered “No” to certain questions on the PCDS and the Plaintiff-Buyer’s home inspector did not report that the property had any material defects during the inspection. However, after the closing Plaintiff-Buyer allegedly discovered several material defects with the property, including several leaks which resulted in mold and rot problems. Accordingly, Plaintiff-Buyer asserted two causes of action; fraud and breach of contract.
The breach of contract cause of action was dismissed since the contract provided for the property to be sold “as is” and had a specific merger clause therein. Thus, upon closing and delivery of the deed, the doctrine of merger extinguished any claim the buyer may have had regarding the contract. However, the court found that when a “Seller makes a false representation in a Disclosure Statement, such a representation may be proof of active concealment” . Therefore, the court held that the Supreme Court properly denied Defendant-Seller’s motion to dismiss the cause of action alleging fraudulent misrepresentation.
This decision provides that the doctrine of merger does not apply to the PCDS and allows for a seller to be brought into court to defend his or her answers to the PCDS after title has been transferred. Justifiably so, a cause of action may be warranted against a seller who intentionally misrepresented facts about the property on the PCDS. However, what happens to the seller who mistakenly or accidentally completed the PCDS in error, with no intent to mislead or commit fraud? Does the $500.00 cost/credit of not completing the PCDS outweigh the expense and fees associated with defending a seller’s answers?
In most transactions, an attorney rarely has an opportunity to counsel a seller about the ramifications of the PCDS before the contract is executed and the PCDS is provided to the purchaser. In some parts of the state real estate brokers will not even show a house or strongly discourage an offer if the PCDS is not provided. Thus, what is an attorney to do in light of this decision? One option is for the attorney to explain the PCDS to the seller and verify the seller’s answers to the PCDS and make any changes thereto during the attorney approval. Another option to consider is the inclusion of a provision in the attorney approval letter that the representations made in the PCDS shall not survive closing.
LATE BREAKING: Did You Know that the Legislature and Governor were Negotiating to Increase the Filing Fee of the RP-5217?
As part of the 2008 Budget process, the New York State Legislature and Governor’s Office were negotiating an increase in the filing fee of the RP-5217 up to $575.00 for a transaction with a reported sales price of more than $1,000,000.00. The filing fee, which is currently $75.00 for qualifying residential and agricultural property or $165.00 for all other lands, would have varied from $75.00 to $400.00 based on the reported sales price if the property was qualifying residential property or agricultural property or $165.00 to $575.00 for all other lands. However, the Bill was not included in this year’s final budget.
Please visit www.smprtitle.com and click on Industry News to obtain any late breaking industry news.
Portions of this Article were previously published in the Albany County Bar Newsletter.
1 Committee on
Professional Ethics of the New York State Bar Association, Opinion 817
Lighter Side of Being a Young Lawyer
I have a
suggestion for your publication which comes under the heading of
laughter being the best medicine. I think that all of us as new lawyers
either have already or will shortly experience embarrassing moments that
tend to let some of the air out of the rather overinflated egos we've
been developing since we first added Esq. to the end of our names. I
know that I
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Seeking nominations for Outstanding Young Lawyer Award
The New York State
Bar Association’s Young Lawyers Section is seeking nominations for
its annual Outstanding Young Lawyer Award, honoring a young lawyer who
has rendered outstanding service to both the community and the legal
profession. The award will be presented at a reception on January 29,
2009 at the Association’s Annual Meeting at the Marriott Marquis
in New York.
Previous winners of the Outstanding Young Lawyer Award include Immediate Past President Kathryn Grant Madigan of Binghamton (Levene Gouldin & Thompson LLP); David A. Kochman of New York (Reed Smith); Laurie A. Giordano of Rochester (Leclair Korona Giordano Cole LLP); Michael C. Rakower of New York City (Law Office of Michael C. Rakower); and Elissa D. Hecker of Irvington (Law Office of Elissa D. Hecker),
To qualify, nominees must be admitted to practice in New York and have practiced less than 10 years at the time of their nomination. Nominees also must primarily be involved in the active practice of law as distinguished from an attorney who has primarily been engaged in business, or served as a legislator or other holder of public office or position, where admission to the Bar is not required.
Nominations should be postmarked by November 7, 2008 and returned to Megan O’Toole, New York State Bar Association, One Elk Street, Albany, New York 12207. For further information, please visit: www.nysba.org/oyl.
Section Sponsoring Law Student Writing Contest
The Torts, Insurance & Compensation Law Section of the New York State Bar Association (NYSBA) is sponsoring a Law Student article writing contest for the Torts, Insurance & Compensation Law Journal. The winner of this contest will have his/her article printed in the Torts, Insurance & Compensation Law Journal and win $250, plus a free admission to the NYSBA annual meeting in January.
The subject of the article must be about recent changes to New York Insurance Law § 3420 and how the other states across the country apply the issue of prejudice to insurance companies who seek to disclaim coverage for late notice of claims. On July 21, 2008, New York Governor David Paterson signed into law Chapter 388 of the Laws of New York 2008. This legislation contains amendments to §3420 of New York's Insurance Law and §3001 of the New York Civil Practice Law and Rules that, among other things, changes New York law on late notice of insurance claims from a “no prejudice” standard to a standard which requires insurance companies to show prejudice. The article should contemplate what will constitute prejudice in New York.
Save the Dates
Lawyers Section Fall Program
U.S. Supreme Court Admissions Program
For more information on upcoming meetings and events, please feel free to contact Megan O'Toole, YLS staff liaison, at 518.463.3200, or via email at firstname.lastname@example.org.