CLIENT ADVISORY: WITH COVID-19, IT’S TIME TO CONSIDER SELF-REPRESENTED ADR INSTEAD OF LITIGATION

The current COVID-19 crisis has severely impacted the civil court system.  Already overwhelmed prior to the pandemic, courts have had to deal with closures and the transition to online hearings.  Most surveys show delays in the majority of filed cases, while new case filings have dropped significantly due to the overall uncertainty caused by the pandemic.  For litigation already ongoing, parties and their attorneys must weigh the effects of delays and the parties’ continued ability to pay attorney fees if the current recession endures or devolves into a depression.  Attorneys facing significant drops in new cases may be reluctant to settle existing cases too soon.  Meanwhile, many businesses with legitimate claims may forego litigation for these same reasons, leaving unresolved the losses suffered in the first place.  Some businesses must decide between not addressing an ongoing business loss and enforcing a claim it may be unable or unwilling to pay for.

One often overlooked solution for parties in dispute is pre-suit alternative dispute resolution (ADR).  ADR—primarily mediation and arbitration—present compelling alternatives to litigation for parties with pressing claims but limited time and/or resources.  Mediation provides parties with a means to achieve a quick settlement out of court with the assistance of a neutral (the mediator) who brings the parties to a compromise they can live with.  On the other hand, arbitration is an adjudication out of court by a neutral (the arbitrator), whose job it is to declare a winner and impose an award like a judge but in an expedited manner.  While courts will often order parties to mediate or arbitrate after litigation has commenced, agreeing to mediate or arbitrate prior to litigation (pre-suit) is more cost-effective and preferable.

As with court cases, most ADR is conducted by parties represented by lawyers.  While the need for competent counsel is generally manifest, expense is a deterrent for many these days, particularly in matters involving less than $100,000.  For parties wishing to resolve their disputes in the most cost-effective way possible, both sides could appear without counsel to mediate or arbitrate their dispute.  Self-representation in ADR occurs in family, employment, securities, and small claims disputes, among others.  However, if one side is represented by counsel, an inherent imbalance occurs, which can strain the neutral’s ability to ensure a fair process without unduly assisting one side over the other.

If both sides are self-represented, the process becomes more balanced and the neutral’s role is more easily preserved to the benefit of both sides.  With the current disruption to the court system and the pressure to avoid undue expenses, a mutual self-represented mediation conducted via Zoom could cost a fraction of litigation in court and be concluded in 1-2 days as opposed to years of litigation in many cases.   For businesses seeking to resolve their dispute out of court, ADR (with or without legal representation) should be seriously considered before litigation.

Coradin Law P.A. offers ADR services as a neutral and as counsel to parties.  Ahpaly Coradin, Esq. is a mediator and arbitrator with experience in resolving commercial disputes.  Mr. Coradin provides ADR services in English, French, Portuguese, and Spanish.

To inquire about our services, please contact us at +1-305-714-9532 or at ahpaly@coradinlaw.com.

UPDATE ON PAYCHECK PROTECTION PROGRAM: FEDERAL RESERVE ANNOUNCES NEW CREDIT FACILITIES

The Federal Reserve today announced nine new or expanded lending programs totaling another $2.3 Trillion in loans to sustain the U.S. economy from the economic effects of the Coronavirus pandemic.
Among these, the Fed announced a new Paycheck Protection Program Lending Facility to facilitate continued lending by banks to small businesses under the Small Business Administration’s Paycheck Protection Program (PPP) that went into effect last week pursuant to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  Under the new PPP Lending Facility, banks that provide PPP loans to small businesses can now borrow funds from the Federal Reserve Bank in their district on a non-recourse basis, using the PPP Loans as collateral.
The PPP Lending Facility will charge banks 35 basis points (0.35% interest rate) and no fees.  Banks will pledge their PPP Loan principal as collateral, which will equal the principal amount of the loan from the Fed to the bank.  There will be no recourse to the banks, and the PPP Loan will be assigned a 0% risk weight under federal banking agency capital rules, thereby allowing banks to exclude PPP Loans from required capital ratios.  As a result, banks can make more PPP Loans with the liquidity provided by the Fed’s lending facility.
This could be welcome news for small businesses, as banks have been overwhelmed by the volume of PPP applications in the first week of the program, and some were already reaching their quotas.  The deadline to apply for a PPP loan is June 30, 2020, but there has been growing concern that the $349 Billion program will run out well before.  A further expansion of the PPP loan program is expected from Congress by the end of the month.
UPDATE ON PPP ELIGIBILITY FOR FOREIGNERS:
Our advisory of April 3, 2020 stated that the PPP loan eligibility requirements were that any individual shareholder, member or partner owning at least 20% of the business must be a U.S. citizen or resident.  This requirement was eliminated on April 3, 2020.  Therefore, there is no longer a citizenship or residency requirement for owners of small businesses applying for a PPP loan.
For further information on federal assistance for your business, feel free to contact us directly.

 

CLIENT ADVISORY: TAX DEDUCTIONS UNDER THE PAYCHECK PROTECTION PLAN

On April 30, 2020, in its Notice 2020-32, the IRS issued a controversial guidance regarding income tax deductions for taxpayers who receive small business loans under the Small Business Administration’s Paycheck Protection Plan (PPP).  The guidance clarified that tax deductions will not be allowed for expenses that normally would be deductible if the payment of the expense results in forgiveness of a PPP loan.
PPP loans are federal loans meant to help small businesses cover certain operational expenses.  Borrowers can apply for loan forgiveness for up to eight weeks of salary costs, plus mortgage interest, office lease, and utilities (electricity, water, transportation, telephone, internet).  The forgiven amount could equal the principal amount of the loan or be less, depending on whether total expenses equal or exceed the principal loan.  Furthermore, under Section 1106(i) of the CARES Act, the forgiven loan amount is excluded from gross income for tax purposes.  The result was previously understood to mean free money for small businesses experiencing financial stress due to the COVID-19 pandemic.  
 
However, the IRS has taken the position that, if a taxpayer receives a PPP loan that is ultimately forgiven, the covered business expenses that would make the loan forgivable cannot be deducted as well.  If the PPP loan becomes tax-exempt income, then it would be a double tax benefit for expenses paid with the PPP loan to be deductible as well.  For example, for a small business that receives a $1 Million PPP loan and uses the entire amount for wages, employee benefits, rent and utilities, the $1 Million loan will become forgiven tax-exempt income.  However, the wages, employee benefits, rent and utilities paid for with the $1 Million loan will be disallowed as deductible expenses. The end result is that recipients of PPP loans whose loans are forgiven will owe federal income taxes on the forgiven amount, in most cases at least 21% on the forgiven amount.  
 
The IRS’s guidance is based on Section 265 of the Internal Revenue Code.  While it correctly applies the Code, the guidance contravenes the intent and spirit of the CARES Act.  As a result, on May 5, 2020, the Senate introduced Senate Bill 3612 that clarifies that “receipt of coronavirus assistance does not affect the tax treatment of ordinary business expenses.”  If passed and enacted into law, the bill will reverse the IRS guidance and correct what will otherwise become a significant tax burden for many recipients of PPP loans.  However, until the bill becomes law, the IRS’s guidance must be followed.  We will provide updates on this legislation as appropriate. 
 
If you have any questions about your business, please feel free to contact us.  If you would like to schedule a consultation by phone or video-conference, please go to:  https://calendly.com/coradinlaw

CLIENT ADVISORY: COMMERCIAL LEASES DURING COVID-19 PANDEMIC

With the exception of certain essential businesses, such as supermarkets, clinics and banks, most businesses are either temporarily closed or operating partially or remotely.  As a result, many commercial and residential tenants are unable to pay rent, which places financial stress on landlords as well.  The CARES Act enacted a 120 day moratorium on foreclosures of residential mortgages backed by the federal government and on evictions from affordable rental housing, such as Section 8.  Several states, including Florida, have also enacted moratoriums on all residential evictions.  Florida’s moratorium on residential evictions expires on May 17, 2020.  It is yet unclear whether or not it will be extended.
Unlike other states such as New York, in Florida none of the aforementioned relief extends to commercial leases, which has left commercial tenants subject to eviction in addition to coping with lost revenue and employee layoffs.  Many businesses (both tenants and landlords) have yet to receive federal assistance under either the Paycheck Protection Program or the Economic Injury Disaster Loan Program, both of which are expressly meant to assist small businesses.  With both commercial tenants and landlords in legitimate financial distress, it behooves both parties to work together now more than ever to survive the present crisis.
Regardless of whether a lease is triple net, gross or some hybrid form, and regardless of whether the leased premises are retail, office, single or multi-tenant, tenants and landlords should communicate on options arising from a tenant’s temporary or permanent closure due to COVID-19.  Landlord options include seeking immediate enforcement (eviction or a guarantee), taking no action, or negotiating a payment plan with the tenant.  Under current conditions, eviction may be the least desirable option, as courts are operating at reduced capacity.  On March 24, 2020, the Florida Supreme Court suspended the requirement that the clerk issue writs of eviction, which effectively suspended commercial evictions. That order has been extended to May 29, 2020.  Furthermore, many landlords will be hard pressed to find suitable replacement tenants in the near term.  If the lease is guaranteed by an equity owner of the tenant, then in many cases the financial wherewithal of the guarantor will be tied to the financial capability of the tenant, making enforcement of the guarantee a less attractive recourse for the landlord.
If the tenant is unable to pay rent, the tenant should be prepared to make non-monetary concessions to the landlord in return for rent abatement, deferral or forbearance.  Concessions might include waiving certain rights under the lease such as the right to expand or right to renew; or the tenant could agree to an extended term of the lease.  Regardless of a tenant’s particular circumstances, communication and cooperation with the landlord is advisable.
If you have any questions about your business, please feel free to contact us.  If you would like to schedule a consultation by phone or video-conference, please go to:  https://calendly.com/coradinlaw

How do you structure a merger?

A merger is a process whereby two companies statutorily cease to exist and combine into one of the two or into a new entity.  The surviving company or new company absorbs all the assets and liabilities of the merged company.

How do you structure a stock purchase?

A stock purchase refers to a business acquisition by purchasing the company that owns the business.  If the company is a corporation, it’s a stock purchase.  If it’s a limited liability company, it’s a membership interest purchase.  If it’s a partnership, it’s partnership interest purchase.

What is Regulation D?

The Securities Act prohibits offering a security for sale until a registration statement covering the security has been filed with the SEC.  Section 4(2) of the Act establishes a statutory exemption from registration for private offerings—i.e. private placements of securities.  Regulation D specifies the conditions for claiming the statutory private placement exemption, which is the most common exemption for start-ups.

What is Regulation S?

Regulation S provides an exemption from the registration of securities offered and sold outside of the United States.  There are two main exemptions under Reg S, which are called safe harbors.  Rule 903 and Rule 904.

NOVAS REGRAS PARA COLOCAÇÃO PRIVADA DE TÍTULOS NOS ESTADOS UNIDOS: REGULAMENTO D

Empresas que buscam levantar capital nos Estados Unidos com a venda de valores mobiliários são obrigados a registrar seus títulos com a Securities Exchange Commission (SEC) ou fazer uma colocação privada de títulos de acordo com uma isenção de registro.  Até recentemente, essas colocações privadas proibiram a oferta de valores mobiliários ao público, seja através da Internet ou através da publicidade.  No entanto, no 10 de julho 2013, a SEC emitiu uma série de alterações às suas regras de colocação privada de títulos no âmbito do Regulamento D (Regulation D):  Os emissores podem agora optar por aumentar o capital com a venda de títulos não registrados através da solicitação e publicidade ao público em geral.  Além disso, colocações privadas de títulos envolvendo alguns “maus atores” estão agora proibidos.  As novas regras entraram em vigor no 10 de setembro 2013.