Home Electronically In Touch Newsletter 2008 Issues October 2008

October, 2008

Welcome to the October issue of Electronically In Touch. Yes, your favorite Young Lawyer E-Mail publication is back from hiatus. We have some great articles for you this month. David Eckner, Esq., an attorney in Dusseldorf wrote an article on German Business Law. Nicholas Ihnatolya, Esq. presents an update on Real Property. Also, we have information on our Fall Meeting in Albany, the NYSBA Annual Meeting and our US Supreme Court Admission.

We accept articles on any subject and size. The only articles we are unable to accept are those which would make it appear as if the section were endorsing a product or service. If you have a interesting topic, please feel free to submit it to me at pfortino@twcny.rr.com.

Philip G. Fortino
Editor

Recent Developments in German Company Law and its Impact on US Businesses
by David Eckner, Dusseldorf/Germany

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.

Part 1: The GmbH as the most important business entity in Germany
As evidenced by several studies and statistics (see e.g. Business Entity Statistics of German Federal Statistical Office, www.destatis.com), there are more than one million GmbH registered in the German Commercial Register. In 2005, the total turnover of GmbH lies at 34.57 %. Therewith, the GmbH is the most common and trustworthy business organization. With regard to US company law, the GmbH could be compared with the LLC. The similarities can mainly be focused on the limited liability to its owners and the hybrid of corporation and partnership in its legal formation. Closer details on other common grounds but also differences will become clear when displaying the reform act in the following.

Part 2: The Reform Act (MoMiG)
Reduction of company minimum capitalisation The German legislature was looking forward to disburden start-ups and start-up capitalisation, especially with regard to the huge proliferation of British LLP start-ups in Germany. Therefore, the common stock to found a GmbH will be reduced to ten thousand Euros. This paid-in capital stock was usually divided in shares of each member of the company, whereas a single shareholder needed a minimum of EUR 100 as an initial contribution. The new act envisions in contrast an initial contribution of solely EUR 1. The advantage of this regulation will possibly be a more efficient division of the common stock in a German limited liability company.

Model memorandum of association
For the first time in German corporate law, the new act has a model memorandum of association in the official appendix of the GmbH-Gesetz (German Statutes of LLCs). A lot of start-up companies can benefit from this and just implement the provisions to their individual memorandum. The model memorandum of association is appropriate to uncomplicated start-ups, e.g. formation of a company by cash subscription. On this point, one has to adhere to the circumstance that the model is just suitable for at most 3 shareholders. If the model is used for a start-up, the new act regulates that a notarization is not necessary. There solely will be an official authentication required which is much more cost-efficient than a notarization.

Simplification of German commercial register entries
A lot of companies are subject to authorization by official agencies of the state. So far, there was a long process of authorization accompanied by costs for the company. As a consequence, MoMiG will simplify the authorization process by just requiring a written or oral affirmation of the company that it has filed an application for authorization at the responsible agency. Additionally, a 1-person-company (so-called Ein-Mann-GmbH) does not need to register any securities.

Enhancement of international competition
The foundation of a limited liability company under current German company law requires an administrative center of the company in Germany. In reaction to a ruling of the European Court of Justice, the MoMiG now implements the possibility for limited liability companies to have an administrative center in foreign countries. Therewith, the German legislature intends to enhance the competitiveness of the GmbH. A more detailed view on this point and the accompanied possibilities for US companies to do business in Germany is described in part of 3 of this article.

Cash-Pooling regulated by law
Cash pooling is an internationally recognized cash management tool used on a group wide basis, e.g. consolidated companies and corporate groups. In general, it balances the accounts of group’s subsidiaries. It is a common finance management in Germany but there were no regulatory rules so far. In addition there are huge uncertainties with regard to the legitimacy of cash pooling as a financial management instrument. With MoMiG, there will be a unique law concerning all aspects of cash pooling in corporate groups. Moreover, the draft proposes a wide range of regulations about financing and loans from the company to shareholders.

Preventing corporate malpractice
Finally, one of the main goals of MoMiG is a huge corpus of legislation with regard to prevention of corporate malpractice and abusiveness. Actually, this is an idea of corporate practice and their report on fraudulent use of limited liability companies in Germany which was implemented in the draft by the Bundestag. The law enforcement and assertion of legal rights compared to companies should be accelerated. For this reason, it will be compulsory to declare a German business address in the commercial register entries. The former reasons of exclusion of a member of company will be expanded by rules about wrongful trading, delay in filing a petition in insolvency, false statements and misrepresentations as well as common corporate crime offences under the German penal code.

Part 3: Doing Business in Germany
The implementation of MoMiG in the existing statutes will also have strong influences on the international attractiveness of a GmbH as a business entity. As already indicated, the German legislature was mainly looking for an expansion and enhancement of international competitiveness and mobility of the GmbH. With eliminating an aspect of a historical German company law regulation (§ 4a GmbH-Gesetz and § 5 Aktiengesetz [securities law], concerning the registered office theory), the implementation of MoMiG will allow German GmbH and also Aktiengesellschaften (corporations) to relocate their administrative center to foreign states.

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.

Further readings
Noack/Beurskens, “Modernising the German GmbH – Mere Window Dressing or Fundamental Redesign?”, European Business Organization Law Review (EBOR), Volume 9, Issue 01, March 2008, pp. 97-124

Real Property Update
Nicholas M. Ihnatolya
nihnatolya@smprtitle.com

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 (2007).
2 Simone v. Homecheck Real Estate Services, Inc., 2007 NY Slip Op 6224 (Third Dept.), decided July 24, 2007.

The Lighter Side of Being a Young Lawyer
Patricia Stuart, Esq. proposed the following idea for an EIT column.

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
have! How about a call for accounts of some of those moments from the members of the YLS for inclusion in EIT? I'll share mine only if and when others do the same!

Please let us know if this is something you would like to see in the EIT. If you have a story you would like submitted, kindly forward it to me at pfortino@twcny.rr.com. All submissions will be published anonymously unless directed otherwise.

YLS Seeking nominations for Outstanding Young Lawyer Award
Prestigious award honors attorneys practicing less than 10 years

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.
“The Young Lawyers Section is proud to once again honor the next rising star in New York’s legal community. Through this award, we recognize the valuable contributions that young attorneys make to the practice of law and encourage them to continue on a path toward leadership in our profession,” said Young Lawyers Section Chair Sherry Levin Wallach of Mount Kisco (Wallach & Rendo LLP). “Many past winners have gone on to become successful leaders in the legal community and across this organization, and they continue to serve as inspirational role models for today’s young attorneys.”

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.

TICL Section Sponsoring Law Student Writing Contest
Dan Gerber, Section Chair

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.

The deadline for entries is November 30, 2008. All submissions are to be sent in Microsoft Word via e-mail to either Paul Edelman at pedelman@kreindler.comor David Glazer at DGlazer@shaferglazer.com.

Save the Dates

Young Lawyers Section Fall Program
Friday, October 24 - Saturday, October 25, 2008
New York State Bar Association Headquarters
Albany, New York

NYSBA Annual Meeting
January 26-31, 2009
New York Marriott Marquis

2009 U.S. Supreme Court Admissions Program
Tuesday, May 26, 2009
Washington, D.C.

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 yls@nysba.org.

NEW YORK STATE BAR ASSOCIATION, ONE ELK STREET, ALBANY, NY 12207   PH: (518) 463-3200   FX: (518) 487-5517

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