Legal Issues That Matter


Org Charts for Small Businesses

We often form new business entities for clients. Most are limited liability companies, but there are still a few corporations, partnerships, and joint ventures every now and then. Most are owned by just one person or a couple of family members or friends. While the LLC operating agreement or the corporate bylaws and resolutions may establish the company and the general legal foundation of how the entity will exist, those documents don't address the day-to-day operations of the company.

They don't determine who will be responsible for marketing, sales, accounts payable and receivable, inventory control, nor operations. Unfortunately, many people just leave that up to loose agreements among the principals of the company as to who is going to be responsble for what. For instance, Jenny will handle marketing and accounting, while Jim will deal with contractors, inventory control, and licensing. When that happens, feelings get hurt, and customers and business opportunities are lost. In other words, the ball is often hit to left-center field, and everyone looks at each other and says, "I thought you were going to catch it!" when the ball (customer/business opportunity) hits the ground with a thud.

To prevent this from happening, we recommend that all of our new business clients create an organizational chart from the inception of the company. It can be designed like any other large enterprise: C-Level executives at the top (CEO, COO, CFO, CMO, CTO, CIO....) with officers, directors, managers, and staff at various levels underneath. Then, the duties and responsibilities of each position should be detailed as clearly as possible to delineate which position will handle what parts of the daily operations of the company as well as the visioning for the company's growth.

In the beginning, each person may wear quite a few titles. In the case of a solely held company, only one person will wear every hat -- in addition to the hats of the entrepreneur, manager, and technician. However, as the company grows, the org chart roadmap is already written as to who will be needed to handle tasks. Over time, as the business grows, the owner will hire others to take over those positions. The job description will already be written and ready to go, so it will be easy to determine what kind of person would be a good fit, and easier to measure their success in the position.


E-mail Hacking Scams, REALTORs, and Closings

At least weekly, we receive an alert that hackers have found a new way to use social engineering or hacking to gain control of a lender's, buyer's, seller's, REALTOR's, or title agent's e-mail account. Most communications regarding a real estate closing (settlement) are handled via e-mail among the parties. Once a hacker gains access to a party's e-mail account, they can then send a message on behalf of that party at the opportune moment to direct the title agent or closing attorney to send closing funds to a bank account controlled by the hacker. 

One really fast, easy, simple, and efficient way to prevent this is to include the buyers' and sellers' phone numbers (especially mobile numbers), e-mail addresses, and mailing addresses on the contract that is initially signed by them and submitted to the closing agent. Then, the REALTORs should also include a coversheet with the contract that they submit that includes all of their same contact information in addition to their and their brokerages' state license numbers (this information is required on the Closing Disclosures now). 

With that information, the closing agent always has a clean and verified phone number that they can use to contact the parties directly to confirm any e-mails that the closing agent receives during the transaction in case the information looks odd or is a significant change (e.g. revised wiring instructions). Likewise, the REALTORs and parties themselves have the same information that they can use to also verify information they receive during the closing process.

It sounds like such a simple way to avoid the potential of losing hundreds of thousands of dollars (yes, we've seen it happen) of a seller's proceeds or even a mortgage payoff when they are redirected by a hacker to a bank account that is quickly cleaned out via another wire to a foreign country. But you would be surprised at how seldom this simple information is omitted from the contract, even though spaces exist for it on the FAR/Bar contracts, the FAR contract, and even other states' contracts.

So take a few extra seconds to enter that information on the contract and avoid the heartache of a hacked closing and a potential E&O claim.


Checklist for buying a non-performing loan

We represent quite a few clients who purchase non-performing notes and mortgages. We sometimes are called upon to negotiate a workout with the borrower, or a deed in lieu of foreclosure. Sometimes we even have to represent our client as the successor lender to foreclose the property. In that experience, we've learned that there are certain documents that are essential to helping the workouts or foreclosures and the subsequent closings go smoothly. Here is a checklist of those documents that a client should always require that the prior lender provide to them to ensure that things go smoothly:


  1. The Original Promissory Note. If the original is lost, then a copy of the original executed note along with an affidavit of lost note from the lender who last had custody of the original.
  2. An original allonge to the note, or endorsements of the note. Be sure that there is a clear chain of custody from one endorsee to the next, and that there are no gaps in the chain.
  3. The Original Mortgage. If this isn't available, then obtain a certified copy of the recorded mortgage from the public records.
  4. The Original Mortgage Assignment from the current mortgage holder, properly executed. Also get all assignments in the chain of custody and ensure that there are no gaps.
  5. The Original mortgagee/lender's title insurance policy that was issued at the time the loan was originated.
  6. A current ledger of the account that shows a full history of all payments that have been made, including all credits and loan charges to current.
  7. Copies of the closing documents from the initial closing, including Truth In Lending Statements, Good Faith Estimates, Settlement Statements, and any and all other statutorily required documents from the closing as signed by the borrower(s). 
  8. Copies of any servicing and default letters that have been sent to the borrower during the loan's servicing.

This is not a complete listing, but it's a list of the most essential and basic documents that the new mortgage holder's counsel will need to either work out a loan or foreclose it in the new holder's favor, or close the sale of the property after the holder takes possession of it.




Real Estate Brokers and Sales Agents Should Read their E&O Policies

Last week, I attended the 52nd Annual Fund Assembly. The Assembly is a three-day long continuing legal education conference attended by around 2,000 Florida dirt lawyers like Yours Truly. I enjoy the Assembly because I always learn something new. This year, as it has for the past five years, the Assembly focused on CFPB regulations, TRID, the somewhat-new Closing Disclosure, and in-depth title insurance claims issues. 

However, we also had the pleasure of hearing an attorney who represents real estate agents and brokers when they are sued for malpractice. She reviewed a typical E&O Insurance Policy and its terms, and we learned some of the issues that land agents and their brokers in litigation most often. 

Here are some tips she asked us to tell REALTORs who refer business to our title agencies or our law firms for real estate matters:


  1. Once the closing is over, don't continue to be overly helpful to your customers. If they call and request a copy of their contract, don't feel the need to send them a copy of your entire file. Just send them exactly what they need, and -- before you send anything that they may not be entitled to as they would a contract or another document they executed (i.e. your e-mails to and from a home inspector) -- speak with your attorney.
  2. Don't keep more than one file for a transaction. Some agencies have a file at the reception desk, one in the broker's office, and another in the agent's car's trunk. Keep one file, electronically if possible, that has all of the communications and documents related to the transaction in one place. 
  3. Be careful when trying to save money by using procedures manuals or even file folders that were prepared for other brokerages. Those manuals and file folders (if they have checklists on them) set the standard of care that you are to follow in the transaction. If your firm is small, and the manual and checklists came from large firms with large compliance budgets, you are setting yourself up to fail to comply with your own standards of care.
  4. Don't scrimp on E&O insurance. Make sure you get coverage that covers everyone in your firm and not just the broker. Look for a deductible waiver clause in the policy. If this is present, your deductible could be waived so long as you had the following in your file:
    • a seller disclosure form signed by the buyer and seller prior to closing;
    • a home warranty purchased prior to closing (if you have to pay for it, do so)
    • a state or local board approved standard sales contract was used for the transaction; and either
      • a home inspection was completed and a copy provided to the buyer prior to closing; or
      • you acted solely as a buyer's agent, and advised them in writing that they should obtain a home inspection, and provided a list of at least three home inspection companies on the disclosure.
  5. Always check the brokerage records to see if the property you're listing now was ever listed with the brokerage in the past. If so, pull that prior file and review the seller's disclosure statement to make sure the same things are disclosed again in this listing. You're automatically presumed to have knowledge of the property simply because it has been listed with your brokerage before, so you should take steps to ensure you disclose everything your brokerage learned about the property in the prior listing. 
  6. Avoid listing your own properties or properties of family members for sale. Many E&O policies specifically exclude coverage for such transactions. 
  7. Judges are skeptical of transaction brokerage in the first place, so when the defendant REALTOR in a lawsuit is also a part owner of the title agency, the mortgage brokerage, or any other settlement services provider in the transaction, it doesn't help the REALTOR's credibility in the lawsuit.
  8. Report all potential claims to your E&O carrier as quickly as possible. The carrier may be able to assist with claims repair or avoidance to prevent it from becoming a major claim.

Also, be prepared that, if you are sued as a sales agent or broker, your life will be disrupted with depositions, meetings, mediations, and hearings. It will not be a "piece of cake" by any means. However, if you're prepared with well-documented evidence, and disclosures signed and acknowledged by the parties, you should be ahead of the game.

-- JES


LLC's and hidden entities in Miami-Dade and NYC to be scrutinized

Starting March 1, 2016, and ending August 27, 2016, FinCEN will require title companies to report the beneficial ownership information of legal entities purchasing real estate for cash if the purchase price is over $1 million in Miami-Dade County, or $3 million in New York City.

FinCEN is testing the waters to see if foreign or domestic criminals are using real estate to hide their illegally obtained cash in money laundering schemes. It is very common for foreigners and others to have their lawyers to create Delaware, Nevada, or Wyoming limited liability companies or Florida land trusts to be used to take title to real estate for which the member or beneficiary is using cash to purchase the property. The U.S. Government is concerned that they are unable to track the source of the cash being used to purchase the properties.

We don't understand how they aren't tracking the cash already. We know of no settlement agent who would accept a bag of $1 million in cash to purchase a piece of property. So the funds would be required to go through the FED system either by wire or other form of deposit into the settlement agent's account. At that point, the banks would be reporting the large cash deposit already. Secondly, the settlement agent would issue a 1099-S to report the sale to the IRS who -- supposedly -- shares information with FinCEN along with the FED. Finally, if the property is to be held in a land trust, the trustee is filing Form 56 with the IRS to give the IRS notice of the holder of the beneficial interest in the trust since the trust is a pass-through entity for taxation.

We would be surprised if this new required form of reporting provides information to FinCEN than they already have access to, other than a faster and more detailed reporting. However, during the test phase, REALTORs and settlement agents who work with foreign buyers who buy expensive property in Miami-Dade or NYC, utilizing an entity to hold title, should prepare the buyer for the prospect of being required to give the settlement agent true identification of the members, shareholders, partners, or beneficiaries of the entity that is taking title to the property in the cash transaction.

The FinCEN bulletin is available online.