by Lara E. Shipkovitz, Esq.

A trade-for-debt equity swap offered by a debtor to a large creditor can provide a viable alternative to liquidation while offering that creditor potential more value on its debt and a role in the company’s future growth.  Specifically, where a failing business is in need of capital, it can offer a trade creditor to convert its existing debt into equity in the company – i.e., the creditors will forgive the debt owed to them by the failing business in exchange for a share in the business.  This might pose the question – why would a creditor want a share in a failing business?  In fact, such a swap can work to the advantage of both the creditor and the business.  If the creditor does not make the trade, the Debtor may become insolvent and forced to liquidate and the creditor in turn may get pennies on the dollar for its debt.  If however the trade debt is reduced, the failing business can pull itself up and the value of its equity can grow.

A debt for equity swap may be appropriate where a company is having solvency issues but is still ultimately viable, is over geared and/or is unable to obtain finance.  One example of where this proved to be a success was in the furniture retailer, Jennifer Convertibles, Inc., bankruptcy cases.  Prior to filing for bankruptcy, the company owed almost half of its total unsecured debt to a foreign furniture supplier.  This foreign furniture supplier was the debtor’s sole supplier for many of its products.  The supplier entered into an agreement with the Debtor prior to the filing of the bankruptcy agreeing to convert the debt into a controlling stake (90%)in the reorganized debtor’s new common stock.  Significantly, the Supplier also recovered more than 87% of its claim. See, ABI Journal, July/August 2011, “Converting Trade Debt to a Controlling Stake: The Pragmatic Path to Jennifer Convertibles’ Unique Reorganization”, Neiger, Edward E.

Obviously, the debt for equity swap works best when dealing with parties who are otherwise indispensable to a debtor’s reorganization.  An equity interest may be used such as ordinary shares, fixed coupon ordinary shares, preference shares and equity warrants.  It is important to recognize this swap also helps the debtor by reducing corporate debt, which in turn strengthens the balance sheet improving their borrowing position and status with customers, suppliers and other investors.  The swap however also is based on an inherent risk- that the reorganized business will be successful.  In the event the business cannot become solvent or the reorganization is impractical (and results in a liquidation), the creditor would lose its investment.  If successful however, this allows the debtor to substantially de-lever its balance sheet and significantly reduce its debt.  In sum, the pre-arranged swap for debt to equity prior to a business filing for bankruptcy can provide a creditor with potential for great recovery and opportunity if they are willing to take that risk.

by Peter J. Ashcroft, Esq.

An interesting question was addressed by the Supreme Court in June of 2011 regarding the limits of bankruptcy court jurisdiction.  In the case of Stern v. Marshall, the Supreme Court held that Section 157(b)(2)(c) of the Bankruptcy Code unconstitutionally violates Article III of the Constitution because it allowed non-tenured judges to render final judgments on state common law tort claims. 

Bankruptcy court judges were created by statute under Article I of the Constitution.  Bankruptcy judges are appointed for 14-year terms.  Federal court judges have lifetime tenure and are given their powers pursuant to Article III of the Constitution.  The Supreme Court determined that only Article III judges were given the power under the Constitution to enter final judgments on state court issues.  Bankruptcy judges are limited to decisions on bankruptcy related matters.

Section 157(b)(2) gives the bankruptcy court jurisdiction over “core proceedings” related to the bankruptcy.  One of the “core proceedings” was subsection (c) which included “counterclaims by the estate against persons filing claims against the estate.”  This meant that if the debtor filed a counterclaim related to a proof of claim filed by a creditor the bankruptcy court could judge the entire matter.  However, the Supreme Court has now said that if the counterclaim is a common law tort claim, the bankruptcy court can only issue proposed findings of fact and proposed conclusions of law and the actual action will have to be adjudicated by an Article III federal court judge or state court judge.

The actual facts of the Stern v. Marshall case were quite interesting in their own right. The case involved Anna Nicole Smith’s battle for the estate of her deceased elderly Texas oil millionaire husband against the millionaire’s son.  Ms. Smith filed for bankruptcy while litigation was pending regarding the legitimacy of the estate’s gift to Ms. Smith.  The son, Mr. Marshall, filed a proof of claim for damages for defamation and Ms. Smith filed a counterclaim for tortious interference with her gift.  The bankruptcy court awarded Ms. Smith $400 million on her counterclaim.  However, the Supreme Court nullified the decision because it said the bankruptcy court did not have jurisdiction over the common law tort counterclaim.

The future result of this decision will be extended and bifurcated litigation unless all parties involved consent to bankruptcy court jurisdiction.

by Jennifer L. Tis, Esq.

Many times a matter involving breach of contract will come down to who has the best documentation. You could be completely in the right but if you haven’t kept proper records of all activity with customers you may have no way to prove it. In order to bolster your stance and put yourself in the best position for success in a breach of contract case I recommend the following:

1.  Be certain that you have clear protocol for all orders placed and deliveries made so that all employees understand and are able to articulate the process.

 2.  If you deliver goods, be sure to get a signed delivery slip from every customer, every time.

3.  If possible, require signed purchase orders from customers in order to effectively eliminate any dispute based upon denial of placing an order.

4.  Require a written contract. I know that many businesses operate on a purchase order/invoice basis which is not out of the ordinary, however, if you want to make it easier to also claim interest and attorneys’ fees in a breach of contract matter it’s a good idea to have each customer sign a written contract providing for interest on overdue balances and the recovery of reasonable collection costs, including reasonable attorneys’ fees, prior to beginning a business relationship.

Finally, make sure to provide ALL documentation regarding the business relationship with the Defendant to your attorney. It is not necessary to wait until the Defendant has served discovery requests upon you before you hand over all of those emails that you’ve saved and each individual invoice to your attorney. Don’t worry that you’re providing too much information…there is no such thing. By supplying your attorney with every bit of documentation regarding your claim you will be supplying him/her with the ability to see the big picture right from the start. This will allow your attorney to more efficiently and more effectively litigate your claim.

by Jodi L. Hause, Esq.

A recent bankruptcy decision out of the Third Circuit Court of Appeals hit home for lots of law firms and creditors alike.  In the wake of higher scrutiny of mortgage companies and lenders and the enforcement of strict Proof of Claim standards, the case of In re Taylor is a cautionary tale. 

Much like the Nosek case a few years ago in the 1^st Circuit, Taylor involved a bankruptcy court issuing Rule 9011 sanctions against a mortgagee, the law firm acting on the creditors’ behalf, and individual attorneys at the law firm.  Taylor highlights the problems inherent in high volume practices and mortgage servicing where too much emphasis is placed upon computerized practices.   Like many large mortgage companies, the creditor in this case used a third-party vendor to service its loans and to provide financial information and payment records to its law firms in bankruptcy and foreclosure proceedings. 

The Taylors filed a Chapter 13 bankruptcy case in the Eastern District of Pennsylvania.   Their mortgage company filed a proof of claim and subsequently filed a motion for relief from the automatic stay in the Debtor’s Chapter 13 case, alleging that the Debtors were not current on their post-petition contractual mortgage payments.   Prior to the commencement of the bankruptcy case and after the filing date, the Debtors made only partial mortgage payments because they disputed the need for flood insurance on the property.   In disputing this, the Debtors paid the amount of their mortgage payment minus the component of the payment for flood insurance.  One law firm filed the proof of claim, while another law firm filed the motion for relief from the automatic stay.   The vendor did not convey the payment dispute to either firm.  Unfortunately, the proof of claim and the motion for relief contained glaring inconsistencies with regards to the amount of the monthly payment and the value of the real estate.  The Bankruptcy Court found (and the 3^rd Circuit ultimately agreed) that a reasonable inquiry by the filing attorney would have identified those inconsistencies and remedied them before making misleading representations in the pleadings.     To make matters worse, the attorneys who appeared on behalf of the creditor at the hearings made misleading and inaccurate verbal representations to the Court.   The Court was not impressed by the attorneys’ exclusive reliance on information provided by the mortgage company’s vendor.    The misrepresentations and the inaccurate pleadings caused the Bankruptcy Judge to investigate the practices employed by the creditor and its agents and attorneys in this case to determine whether Rule 9011 sanctions were warranted.

Rule 9011 of the Federal Rules of Bankruptcy Procedures require that representations and allegations made to the court are based on evidentiary support or are likely to have evidentiary support.   In making this conclusion, the party must conduct an “inquiry reasonable under the circumstances.”  It is not necessary that a party act in bad-faith to violate Rule 9011.  Rather Rule 9011 sanctions are implicated when a party makes representations without having taken reasonable steps to inquire into the truth of the allegations.  The 3^rd Circuit in Taylor recognized that lawyers “constantly and appropriately rely on information provided by their clients, especially when the facts are contained in the client’s computerized records.”   In this opinion the Court did not suggest that lawyers must independently verify and investigate all factual allegations made by their clients.  However, the Court found that the law firm’s actions in this case were unreasonable in light of the circumstances.

Essentially, the law firm should have investigated the cause of the delinquency and should have identified the inconsistencies between the information it received from the vendor when it was assigned the task of filing a motion for relief and that which was already contained in the Proof of Claim.   These errors were warning signs that should have caused the attorney to contact the client to clarify and provide accurate information.   Instead, the law firm did not take the steps to review the referral information and ask necessary questions.  It essentially continued with the automation and filed the motion for relief in autopilot.    Computerized databases may be appropriate, but the ultimate responsibility and accountability when the information derived from the database is inaccurate falls to the attorney.   Material misrepresentations are made when a law firm relies on inaccurate records contained in a database which may have been inaccurately transmitted by the creditor.   The fact of the matter is that it is the attorneys who certify to the court that the representations are grounded in law and fact.  

Courts want accountability and rightfully so.  This decision is unsettling for lawyers because we must rely on the information that is provided to us by our clients.   We usually do not have access to our client’s internal records that would allow us to somehow independently audit their records, nor would we be equipped to do such an audit in most cases.   On the other hand, creditors’ lawyers are on egg-shells right now because we know that our clients are heavily scrutinized in bankruptcy and foreclosure cases.    

At the Bernstein Law Firm, we are fortunately ahead of the game in this regard.   We are on heightened alert in that we take the time to review our pleadings before they are filed to ensure that they are accurate.   For example, we are careful to file proofs of claim with accurate figures and complete supporting documentation.   Correct and accurate pleadings are important because material errors will cause deeper scrutiny.  We have a reputation for zealous representation and we are well-respected for our attention to detail.   (A sloppy reputation is like wearing a target on your back).

In the end, we can take away several lessons from Taylor.         First, do it right the first time.  Take the necessary steps to ask additional questions and get clarifications before a pleading is filed to avoid even an inadvertent material misrepresentation.  Second, creditors and attorneys must be prepared to adjust their own procedures and systems to fit the rules and requirements of the courts.   One cannot simply rely on “screen prints” as the firm did in the Taylor case when a reasonable inquiry would reveal a material inaccuracy.  Third, when mistakes happen correct them.  Errors will occur because no system is infallible.  Taking responsibility for the error and taking the steps to correct it immediately will go a long way in both the specific case where an inaccurate representation is discovered and in maintaining a reputation that will enable the courts and adverse parties to give you the benefit of the doubt in future cases.          

The citations for the opinions discussed are below:

In re Nosek, 406 B.R. 434 (D. Mass. 2009) aff’d in part, modified in part, 609 F.3d 6 (1st Cir. 2010)

In re Taylor, 655 F.3d 274 (3d Cir. 2011)

by Lara Shipkovitz, Esq.

An interesting article on the effect preferences and state law fraud statutes can have on recovery for the estate through analysis of the Madoff bankruptcy.

The Madoff trustee, Irving H. Picard, had sought to recover fictional profits paid out in the six years before the collapse, citing provisions of New York State law that allow for a six-year recovery window. The judge also threw out the trustee’s bid to recover so-called preference claims, the cash paid out to the NY Met’s owners in the final 90 days of the fraud.
 
By reducing the time window and eliminating preference claims ­ actions that lawyers said would most likely apply to all the lawsuits the trustee has pending in Federal Bankruptcy Court in Manhattan ­ the decision still “has significant potential ramifications that could affect recoveries as well as distributions” in the legal efforts to unwind Mr. Madoff’s Ponzi scheme, Mr. Picard said in a written statement released on Thursday.
 
Read the details of this action at:
http://www.nytimes.com/2011/09/30/business/madoff-trustee-says-mets-ruling-wont-be-as-bad-as-first-thought.html?_r=1
and
http://tech.mit.edu/V131/N41/long4.html

by Arthur W. Zamosky, Esq.

Are you looking to end a controversy with another party?  Or do you have uncertainty as to how an adverse situation will pan out?  If so, you may want to consider a declaratory judgment action – often called a “Dec” action. 

The Pennsylvania Declaratory Judgment Act (hereinafter “Act”) permits a party to bring a Dec action for a number of reasons.  Dec actions are permitted to determine the construction or validity of a contract (often, but not always, an insurance contact), statute or ordinance.  A Dec action can also be filed regarding a deed, will or lease as well.  Once properly filed and prosecuted, a Court will render a judgment or decree as to an interested party’s rights, status or legal relations with respect to the above.

 A Court will only hear a declaratory judgment action if it will end a controversy or uncertainty between the parties.  However, there is no requirement that a Dec action must settle all issues that may exist between the parties.  The party bringing the action has the burden to demonstrate the existence of an actual controversy.  The controversy must be related to an invasion or threatened invasion of one’s legal rights.  Further, a Dec action is not proper for the determination of future rights which may never occur, for moot cases or for a purely academic determination.

Under the Act, a Dec action can be brought in a Pennsylvania State Court within its respective jurisdiction, including Courts of Common Pleas.  The Court must also have subject matter jurisdiction over the case.  It should be noted that State Courts do not have jurisdiction to hear a Dec action for a matter within the jurisdiction of the Federal Government or which is before an administrative agency.  It is also improper for a party to bring a declaratory judgment action when a contract has an arbitration clause.

A  Dec action is instituted by filing a complaint in the proper jurisdiction. Selecting the proper parties to include in the suit should always be carefully considered.  The Act sets forth that the parties must include all who have or claim any interest which would be affected by the declaration and no declaration shall prejudice the rights of persons not parties to the proceeding. 

A  judgment in a Dec action may be either affirmative or negative and has the effect of a final decree.  Keep in mind that declaratory judgments are subject to the general rules regarding conclusiveness of judgments, collateral attacks and res judicata. 

This is a brief overview of a declaratory judgment action and not intended to be legal advice.   There are many nuances to properly bringing or defending such an action.  For more information, the Act is contained at 42 Pa. §§7531 through 7541.  As always, for a more detailed analysis of a specific claim or dispute, you should consult an attorney. 

by Jodi L. Hause, Esq.

             Having practiced in bankruptcy court in both consumer and commercial cases for the last eight years, I have seen a variety of pleadings crafted with varying degrees of creativity and skill.    On one hand, there are those that are so short and cryptic that it’s difficult to ascertain how exactly the party’s argument gets them from point A to point B.   Others are so painstakingly technical that the argument itself is lost in the monotony of citations, references, and legalese.    In my opinion, neither of these extremes do much to further your client’s interests.    Simply stated, the best pleading is the one that tells the most convincing story and makes the most sense to the adjudicator.   Too much or too little factual detail will only confuse and frustrate the reader (i.e. the Judge).   A winning pleading clearly states what relief is being sought and explains how the law applies to the relevant facts of the case.

           The Federal Rules of Civil Procedure are based upon the concept of notice pleadings.  The general rules of pleadings under the FRCP require that the pleading must contain (1) a short and plain statement addressing the Court’s jurisdiction; (2) a short and plain statement of the claim asserted in the pleading; and (3) a demand for the relief sought.  

            The notice pleading requirement is intended to be less formal and intended to simply provide notice to parties of the general issues in a case without having to allege detailed facts in support of the claims.   It is a general notice of asserted claims, the details of which can be fleshed out as the case progresses.  

            The result of the notice pleading requirement is sometimes the filing of bare bones motions and responses.   In some cases the factual details may not be available to supplement the pleading or response, but more often than not a bare bones pleading in a contested matter is a poorly drafted pleading.   The issues in contested bankruptcy matters are often complex, particularly in complex commercial matters.   Even the relatively straightforward matters often contain potentially mitigating facts and circumstances.   Every opportunity should be taken within reason to make clarity out of chaos.  

            In my experience, Bankruptcy Judges tend to be learned and prepared individuals.  They will take the time in advance of the scheduled hearing to read and understand the pleadings filed in the matters before them.   Accordingly, your filed pleading is the very first opportunity for you to present your side of the story to the Judge.   If you have written it in a way that clearly and concisely explains your client’s position and how the law supports that position, then you are on the right path.   The benefits of a well-written pleading are far out-weighed by the additional time it takes to draft it.     A well-written pleading will lay the foundation for a solid argument and will make your job at the hearing that much easier.   It will enable you to more effectively and efficiently argue in support of your client’s position at the hearing and will enable you to be a better advocate overall.

by Shawn P. McClure, Esq.

At the end of June 2011, the Third Circuit Court of Appeals, in the case of Leshner v. The Law Offices of Mitchell N. Fay, F.3d, 2011 WL 2450964 (3d Cir. 2011), found that settlement letters sent on a law firm’s letterhead implied that there was forthcoming legal action, and therefore were “false and misleading” under section 1692e of the FDCPA, because the firm was not acting in a “legal capacity” when the letters were sent.  This ruling was made despite the existence of a disclaimer on the letters concerning the attorney involvement in the case.  

Section 1692e of the FDCP prevents, “false, deceptive or misleading representation or means in connection with the collection of any debt.”  The use of attorney letterhead and an attorney signature on a letter is enough to find that letter “false and misleading” if the attorney is not sufficiently involved in the sending of the letter so that the court finds that the letter is not actually “from” an attorney.

The leading case on debt-collection letters from attorneys is Clomon v. Jackson, 988 F.2d 1314 (2d Cir. 1993).  In Clomon, the court found that collection letters on attorney letterhead with mechanically reproduced signatures were “false and misleading” under the FDCPA.  Even though the attorney approved the form of the letters and the procedures by which the letters were sent, the court still found that the attorney had no direct personal involvement in the mailing of the letters.  The court in Clomon expressly stated that several factors were taken into account when determining whether the letters violated the FDCPA, including: the attorney did not review each debtor file; the attorney did not determine when particular letters should be sent; the attorney did not approve the sending of particular letters based on the recommendation of others; the attorney did not see particular letters before they were sent; and the attorney did not know the identities of the persons to whom the letters were issued.   

That being said, debt-collection letters from law firms do not necessarily require attorney review. If the letter has a clear disclaimer explaining the limited extent of the law firm’s involvement in the collection action, then the letter does not “mislead” the debt with respect to the attorney involvement and will not be in violation of 1692e of the FDCPA.  For example, a debt-collection letter with the following disclaimer, “[a]t this time, no attorney with this firm has personally reviewed the particular circumstances of your account,” was found not to be in violation of the FDCPA because the court found there to be no false representation or implication that the letter was from an attorney or that an attorney had meaningful involvement in the case at that point. 

The fact that the letters in the Leshner case contained a disclaimer, but were nonetheless found to be in violation of the FDCPA is why this ruling is so impactful on creditors.  The disclaimer language in the present case stated, “[a]t this point in time, no attorney with this firm has personally reviewed the particular circumstances of your account.”  The disclaimer was also located on the backside of the letter.  The Third Circuit found that the language and location of this disclaimer insufficient to ensure that the “least sophisticated debtor” (the applicable standard when viewing potential FDCPA violations) wouldn’t have reasonably believed that an attorney had reviewed the file and determined that the debtor was a candidate for legal action.

This ruling by the Third Circuit emphasizes how important it is for creditors to be knowledgeable of the FDCPA and be aware of what seems to be its ever expanding landscape.    

I also believe that a couple of years ago, the Third Circuit handed down a decision involving “safe harbor” language on consumer debt collection letters (i.e., saying “may take legal action” instead of “will take legal action.”)  I believe the case caption was Brown v. Credit Card Services, but I do not recall the citation.  In any event, I believe the decision supported the proposition that even the use of such “safe harbor” language in consumer debt collection letters, MAY be deceptive or misleading if the record shows that the debt collector has a history of NOT taking legal action despite regularly saying only that legal action “may be taken.”  Here again, however, I think we actually have sued on enough retail claims that we would not be vulnerable under this standard either.  But still something to keep in mind.

by Arthur W. Zamosky, Esq.

In the United States, the concept of replevin dates back to the late Nineteenth Century and has been available in most jurisdictions to the present day. 

A replevin action is used to regain possession of chattels that are being wrongfully detained by another party.  The action allows a Court the ability to order that the property be returned to the party asserting rightful ownership prior to a final judgment on the merits. 

Historically, a replevin action could only be sustained by a party that had full ownership of the property sought.  However, Pennsylvania Courts have held that a security interest coupled with a right of immediate possession is sufficient to maintain an action.  Since the Pennsylvania UCC allows a secured party to take immediate possession of the collateral, an action for replevin is appropriate even if the moving party does not have full ownership.

As a prerequisite to bringing a claim for replevin, the moving party must make a demand for return of the property.  Assuming the moving party has either 1) full ownership or 2) a security interest and an immediate right to possession, if the party with possession at the time of the demand refuses to return the property, he or she will have satisfied the “wrongful detention” requirement for replevin.

Actions for replevin must be brought in the County in which the property is located or in any County that the wrongful possessor can be sued under the Rules of Civil Procedure.  An action for replevin is brought by filing a Complaint in the appropriate County. 

After the filing of the Complaint in replevin, in order to take immediate possession of the property, the party seeking the property can seek a writ of seizure from the Court.  The writ must be prepared and served in accordance with the Pennsylvania Rules of Civil Procedure.  The moving party must also post a bond with the Court of double the value of the property at issue.  A hearing on the writ of seizure is then held and a judgment on the disposition of the chattel is made.

The case then goes to trial in a fashion similar to most matters before the Court of Common Pleas.  The parties can opt to have the trial before a Judge only (instead of before a jury) if they like.  The issues in a replevin trial are typically limited to the plaintiff’s ownership or security interest in the chattel and the plaintiff’s right to immediate possession of the chattel.  Those matters need to be proven by a preponderance of the evidence to be successful.  A successful plaintiff in a replevin action also has the right to recover costs and damages, however, exemplary damages are awarded very rarely.   

As with all areas of law, the specific facts of any scenario could change the manner in which to proceed.  The preceding was intended to give a basic outline of a replevin action in Pennsylvania.  For a more specific analysis of a specific claim or dispute, you should consult an attorney.

by Kit F. Pettit, Esq.

With all of the types of business entities available to choose from when starting a new business, how do you know which business entity is best? There are LLC’s, LP’s, S-Corps and C-Corps, and each type of entity has its own advantages and disadvantages depending on a number of considerations. Some of the advantages and disadvantages are tax matters, asset protection, liability protection and transferability. Some of the considerations include the entity’s size, the type of business activity, desired governance structure and other business investment matters.

Typically, tax treatment is one of the most important factors in choosing the form of business entity. Among other things, one of the basics tax matters an entrepreneur should know when deciding which entity may best suit his or her business plan is that C-corporations are subject to double-taxation while S-corporations are generally not subject to the two layers of taxation. A new business owners should also be aware that limited liability companies and partnerships are flow through entities and the earnings of these types of entities are not subject to federal income tax, however, Pennsylvania treats all limited liability companies as corporations for capital stock taxes. There are numerous tax advantages and disadvantages for each type of entity and a skilled legal practitioner along with advice from an accountant can help an entrepreneur through this maze.

Once the entrepreneur is aware of the tax considerations, personal liability protection is often the next most important factor to consider. The various entities can have different liability shields. Careful planning and consideration should be given and knowledge of the statutory liability limitations is most important. For example, 15 Pa.C.S.A. § 1526 sets forth the statutory rules with respect to the personal liability of shareholders of a business corporation while 15 Pa.C.S.A. § 8922 provides the rules for personal liability of members and managers in partnerships and limited liability companies. Business trusts are governed by a different statute. 15 Pa.C.S.A. § 9506.

The governance structure and standards of conduct of the shareholders, partners or members is also a very important consideration when organizing and forming a new entity. The governance structure of each type of entity differs and there are business, legal and other reasons why an individual or group of individuals may prefer one management structure over another. In Pennsylvania, corporations have established governance principles and structural formalities that are for the most part defined by statute and case law. 15 Pa.C.S.A. § 1701 et al. Partnerships are primarily governed by contract between the partners, i.e., a partnership agreement, however, there are certain rights and duties of partners governed by statute. 15 Pa.C.S.A. §8331 et al. As for limited liability companies, they have significant flexibility with respect to governance of the company. For example, a Pennsylvania limited liability company can be “member-managed” which follows the general partnership rules, or it can be “manager-managed” which governance mechanism is most similar to that of a corporation. 15 Pa.C.S.A. § 8941.

The above matters highlight some basic and important considerations when starting a new business. Corporate formation and organization is more than an online “check-the-box” process. It takes knowledge and careful planning based on information provided by the client. For example, does a majority-member of a limited liability company really want unanimous consent provisions in the company’s operating agreement that would require the consent of a 5% member for certain company actions? Would you incorporate as an S-corporation if you anticipate distributions to some shareholders and not others? After all of the considerations have been discussed and the form of entity selection is made, an entrepreneur should also know that each type of entity has its own formation and organization requirements and respective formalities that should be properly observed and followed once incorporated or organized. Observation and practice of these important formalities such as annual meetings of members and shareholders is a part of the liability protection mechanism and should not be ignored or forgotten once your business is up and operating.