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Pierce and Mandell PC Blog


Commercial Lease Guarantee Survives Tenant Settlement

Friday, March 16, 2018

By: Michael C. Fee

The Appeals Court’s recent decision in Cedar-Fieldstone Marketplace, LP v. T.S. Fitness, Inc., 17-P-791, 2018 Mass. App. LEXIS 30, serves as a stark reminder to commercial tenants and their counsel of potential guarantor liabilities that live on even after settlement of an underlying lease debt.

The facts in Cedar-Fieldstone are familiar and common. The defendant tenant, a corporation, rented commercial property from the plaintiff landlord in New Bedford. The tenant’s president executed a detailed, three-page personal guaranty. The guaranty provided that the president’s liability was “co-extensive” with the tenant corporation, and was capped at a specific amount. The guaranty also recited:

[T]he liability of [guarantor] hereunder shall in no way be affected, modified or diminished by reason of . . . any consent, release [,] indulgence or other action, inaction or omission under or in respect of the [l]ease, or . . . any dealings or transactions or matter or thing occurring between [the l]andlord and [the t]enant.

Finally, the guaranty drew a bright line between the landlord’s relationship with the tenant and the tenant’s guarantor, noting that “[a]ll of [the l]andlord’s rights and remedies under the [l]ease and under this [g]uaranty, now or hereafter existing at law or in equity or by statute or otherwise, are intended to be distinct, separate and cumulative and no exercise or partial exercise of any such right or remedy therein or herein mentioned is intended to be in exclusion of or a waiver of any of the others.”

When the tenant defaulted under the lease the landlord brought a summary process action to recover the premises and money damages. The summary process action was resolved by the parties entering into an agreement for judgment, which the tenant president/guarantor signed in his corporate capacity. Thereafter, the landlord brought a separate action against the president, in his capacity as guarantor, to recover amounts left unsatisfied by the tenant. A superior court judge granted summary judgment for the landlord. The guarantor appealed and the Appeals Court affirmed. On appeal, the guarantor argued that once the tenant no longer was liable under the lease, he automatically was relieved of his guaranty obligations as a matter of law. He based that contention on the “black letter legal principle that a guarantor’s obligations are coextensive with those of the principal obligor.” The Appeals Court was unpersuaded.

The Appeals Court first addressed cases standing for the broad principle that “the liability of the guarantor cannot exceed the liability of the debtor.” 275 Washington St. Corp. v. Hudson River Intl., LLC, 465 Mass. 16, 30 (2013). However, on these specific facts, the Appeals Court found that such proposition establishes only that “a guarantor’s own liability is bounded by the scope of the underlying liability that he has guaranteed,” or, stated another way, the guarantor’s liability under the guaranty could not exceed the tenant’s payment obligations that arose under the terms of the lease.

The Appeals Court then applied an entirely different lens to the question of whether a subsequently negotiated compromise of such underlying lease liability affected the president’s obligations as guarantor, and held:

We consider it self-evident that parties negotiating the terms of a guaranty would be free to agree that a subsequent release of a principal obligor’s underlying debt would result in a discharge of the guarantor’s own obligations. But we see nothing in the case law or elsewhere that requires such a term as a matter of law.” Put differently, we see no legal bar to a guarantor’s agreeing – as part of the negotiated terms of a guaranty – that his obligation to fund the underlying debt would survive a settlement of that debt between the principal obligor and the recipient of the guaranty. Rather, what the parties to a guaranty agree to in this regard is simply a matter of contractual intent. After all, “[a] guaranty is a contract ‘like all other contracts.’” Federal Financial Co. v. Savage, 431 Mass. 834, 817 (2000), quoting from Merchants Natl. Bank v. Stone, 296 Mass. 243, 250 (1936). Accordingly, “[t]he liability of a guarantor is to be ascertained by which the obligation is expressed, construed according to the usual rules of interpretation.” Agricultural Natl. Bank of Pittsfield v. Brennan, 295 Mass. 325, 327 (1936).

The ruling may come as a surprise to some, and offers a cautionary tale for tenants, guarantors, and those who draft and negotiate their documents. First, in many instances, the boiler plate terms of a personal guaranty are barely negotiated. Lawyers often assume that when a landlord requires a guaranty as a condition of entering into a lease there can be little discussion about terms. If the tenant defaults, the guarantor is liable. End of story. Careful attention should be paid, however, to the type of broad and all-encompassing guaranty language that the Appeals Court found so compelling in Cedar-Fieldstone. Guarantor’s counsel should at least attempt to carve out a limitation such that if an agreement of compromise is struck between landlord and tenant, the guarantor’s liability may be extinguished as well.

Second, provisions in an agreement for judgment in a summary process case, must, if possible, specifically address and include the guarantor. The Court in Cedar-Fieldstone remarked that the prefatory “Whereas” clauses contained language that could suggest the agreement for judgment was intended to resolve the entire dispute between the parties:

“WHEREAS, by this Agreement, the [landlord] and [the tenant] desire to settle the [District Court summary process action] and any and all of the disputes, if any, arising out of [that action];

“WHEREAS, by this Agreement, the [landlord] and [the tenant] also desire to settle any and all of the disputes, if any, arising out of the [l]ease, whether or not such disputes could have been raised by the [tenant] within this court proceeding;

“WHEREAS, the [landlord] and [the tenant] have agreed that it is in their mutual interest to resolve fully and finally all of the disputes which were, have been, or could have been raised in connection with the [summary process action] and/or [the l]ease, whether or not such disputes could have been raised by the [tenant] within this court proceeding.”

Ultimately, however, such general language was insufficient to overcome the clear, unambiguous, and all-encompassing provisions of the guaranty. Thus, both the trial court and Appeals Court correctly construed the agreement for judgment as a final resolution of disputes between the landlord and tenant, but not between the landlord and the guarantor.

Drafters and litigators beware: at least when a personal guaranty is involved, sometimes a final settlement agreement can be anything but the end of the story.

Michael Fee is a shareholder at Pierce and Mandell, P.C. and former chairman of both the Boston and Massachusetts Bar Association’s Real Estate Sections. The firm frequently represents both landlords and tenants in commercial and residential lease negotiations and litigation matters.

We Need Legal Reform to Protect our Children in School and all People Attending Public Gatherings

Monday, February 19, 2018
Pierce & William Mandell

In addition to establishing a sane level of controls and limits on semi-automatic weapons and ammunition under both federal and state law, and better security, all states must look closely at their laws to strike the right balance between patient privacy and the need to protect public safety. I am reposting a blog and article about this topic I wrote after past mass shooting and terrorism tragedies.

See: http://www.piercemandell.com/pierce-and-mandell-pc-blog/bill-mandell-revisits-the-need-for-clarity-under-massachusetts-law-for-permitted-health-provider-dis

Partners Robert Kirby and Thomas Kenney: “Lawyers of the Year” for 2017

Wednesday, January 24, 2018
Pierce & Mandell - Robert Kirby and Thomas Kenney as “Lawyers of the Year” for 2017

Partners Robert Kirby and Thomas Kenney were selected as “Lawyers of the Year” for 2017 by Massachusetts Lawyers Weekly. Read More…

Practice Transitions - Process and Substance

Monday, January 22, 2018
Pierce & William Mandell

When buyers and seller of dental, medical and other professional practices begin to think about practice sales, associate buy-ins, mergers or other major acquisition events, most of the focus is on the substantive terms. What is the value of the practice? What is being purchased and sold and what is the purchase price? How will the deal be structured and what are the tax consequences? Will there be major conditions involving financing, lease assignments or building or condo acquisition or purchase rights? What about any post-closing seller service commitments and/or restrictive covenants?

All such substantive terms are essential to practice transitions. But what should be given as much thought and consideration is the process of the transaction as well. How will the parties communicate? Who else will be involved and when and how will they be deployed? What are the steps and what is the sequencing of taking those steps?

If any step of the process is missing or rushed it can often lead to unnecessary delays, additional costs and even a break-down of the anticipated transaction.

The most important first step of the process for both buyer and seller is to identify the professionals needed and to line them up as early as possible. Buying or selling a professional practice is a major life cycle event for the solo or small practice owner. It is important to understand where you will need professional help and guidance and seek it out early so that you have advisors who exclusively represent your interests, who have specific experience with health and dental professionals, as the deal is forming to provide insight and guidance.

No transaction is like any other and a variety of different advisors may be needed during the process. Some sellers and buyers need transition consultants/brokers to find the right transaction counterpart. All buyers and sellers, no matter how large or small, need their own legal counsel and CPA/tax and financial advisor who are not conflicted and can give their client independent advice. Lender financed practice and/or real estate acquisitions warrant an early role for bank representatives. Other professionals that can play a crucial role in certain deals include insurance advisors, practice managers and technology experts.

There are different phases to every transaction but almost all practice transitions have three major phases: establishing the essential terms; drafting and negotiating binding legal documents; and, consummating the transaction or “closing”.

During the initial phase of establishing the essential terms, it is highly productive to first work on a simple initial written description of the material terms. This type of document can be called an offer letter, a memorandum of understanding or “MOU”, a letter of intent or “LOI” or term sheet, among other names. They are all basically the same thing: a short but comprehensive written recitation of the essential terms of the transaction. Having such a preliminary term document is very helpful and desirable. But, having your advisors in place at the start of the preliminary negotiations is vital, as these documents can be non-binding, binding or even both at the same time. It all depends on the language used in the document. Such a critical part of the transaction should not be pursued, and such a document should not be signed, without prior legal and financial/tax review. Buyers and sellers who wait until it is time to work on the actual legal agreements to retain their advisors often find out some important material terms were not addressed effectively leading to regrettable consequences.

After the initial negotiations lead to a preliminary transaction written summary, the parties will generally set forth a scheduled time frame to complete due diligence, negotiate and enter into formal binding legal agreements, satisfy closing conditions and close the transaction.

Due diligence involves the investigation and review of the financial, regulatory and liability facts of the other party. Financial review can begin even before the initial term sheet is created. Prior to any disclosure of financial and proprietary information to the other party it is customary and advisable to enter into a confidentiality or non-disclosure agreement, to protect the disclosing party and its information from improper re-disclosure and often to keep the existence of the negotiations themselves confidential. Many confidentiality agreements or “NDAs” are presented with hidden binding clauses, such as a “no shop” clause that prohibits a seller from talking to other parties about a practice sale, or a clause that may prematurely bind a buyer to a purchase. So legal review of any NDA or confidentiality agreement for all parties is very important.

Ultimately, every transaction will require binding agreements between buyer and seller setting out all of the terms and conditions of the transaction. Depending upon the nature of the sale these may include purchase agreements for assets, equity, goodwill and real estate. The main purchase agreements (often referred to as the “P&S”) should cover all aspects of the transaction: how the purchase price is to be allocated, if it is an asset or stock/equity purchase, what happens to names and phone numbers, the conditions of closing, including financing, and office leases, post-closing covenants, such as employment and non-compete of the seller, patient letters and practice management.

The P & S will generally include many other vital and binding agreements that will be negotiated at the same time as the P & S but will not be executed and become effective until the closing date. These can include, documents of transfer, patient record custody agreements, restrictive covenant agreements, assumption of leases and contracts, and new partnership agreements if there will be two or more owners going forward.

The final phase -- from execution of the binding purchase agreements to the closing -- will involve satisfaction of closing conditions, often involving third parties (e.g. lenders for financing; landlords for new or assigned leases; payers for credentialing; government agencies for regulatory approval in sales involving licensed facilities; and creditors for payoffs and release of liens).

Needless to say planning for the process of a practice transaction is as important as the substantive terms.

For assistance with the sale or purchase of professional practices, including dental and medical practices, William Mandell, Esq. can be contacted at bill@piercemandell.com, or 617-720-2444.

Pierce & Mandell, P.C. at Yankee Dental Congress 2018

Wednesday, January 17, 2018

For the ninth consecutive year, Pierce & Mandell, P.C. is proud to be part of the Yankee Dental Congress, January 25th through January 27th at the Boston Convention & Exhibition Center.

Yankee Dental Congress is an educational program and convention that draws thousands of dental professionals each year. Pierce & Mandell attorneys who focus on representing dental professionals and practices with dental practice transitions and sales, associate buy-ins, leases, employment and service agreements, and staff employment issues will be at our booth (814) on the Exhibit Hall.

Pierce & Mandell Health and Dental Law Practice Area leader, Bill Mandell will be featured at two educational programs at this year’s Yankee Dental Congress. On Thursday, January 25, from 2 to 4 pm, he will be presenting “Legal Issues in Practice Transitions”.

On Friday, January 26, form 10 am to 12 noon, Bill will be a panelist on “Taking the Fear Out of Buying or Selling a Practice: Ask the Experts”.

If you are planning on attending Yankee Dental come by our booth and say hello.

Click here for more information on the 2018 Yankee Dental Congress. For more information on our services for dental practices contact Pierce & Mandell, P.C. or email Bill Mandell at bill@piercemandell.com.

Curtis Dooling Promoted to Counsel at Pierce & Mandell

Friday, January 12, 2018

Pierce & Mandell, P.C.Curtis B. Dooling was recently promoted to counsel at Pierce & Mandell, P.C. Curt has been practicing law for ten years and has been with the firm for over five years. Curt is a skilled litigator who has tried three cases to verdict in the last year and a half.

Curt has a robust litigation practice that encompasses a wide range of matters, including complex commercial and business litigation, construction, personal injury, zoning and land use disputes, health care, and insurance defense and coverage issues.

Pierce & Mandell Attorney Sam Hoff Explains the Distinctions in Tax-Exempt Status Choices

Tuesday, December 05, 2017

501(c)(3) v. 501(c)(6): What Every Non-Profit Incorporator Needs to Know

Sam Hoff, Pierce and Mandell, P.C., Boston, MABy Sam Hoff

One question that we often receive from clients seeking to form a new non-profit corporation is “Should I apply for 501(c)(3) or 501(c)(6) tax-exempt status?” The short answer is that it depends! The type of tax-exempt status that a corporation can obtain is influenced by its stated purpose, if it intends to engage in political activity, its Board structure and membership, and several other factors. Understanding the differences between 501(c)(3) and 501(c)(6) tax-exempt status, which are explained in greater detail below, is critical in order for your corporation to operate legally and efficiently.

Before exploring the differences between 501(c)(3) and 501(c)(6) tax-exempt status, it’s useful to understand the difference between forming a non-profit corporation and obtaining tax-exempt status. The formation of a corporation occurs at the state level, according to state law. In Massachusetts for example, a corporation is formed by filing Articles of Organization with the Massachusetts Secretary of State and registering with the Massachusetts Attorney General’s Office, the Department of Revenue, and the Department of Unemployment Assistance. Once the corporation is formed, it may apply for tax-exempt status at the federal level with the Internal Revenue Service (“IRS”) by filing Form 1023 if it seeks 501(c)(3) tax-exempt status, or Form 1024 if it seeks 501(c)(6) tax-exempt status.

501(c)(3) tax-exempt status. An organization that is organized and operated exclusively for the purpose(s) of religion, charity, science, public safety, literature, education, amateur athletics, and/or the prevention of cruelty to children or animals may file IRS Form 1023 to apply for 501(c)(3) tax-exempt status. To qualify, the organization must generally be a corporation, trust, or fund. An individual or partnership will not qualify. Contributions to corporations with 501(c)(3) tax-exempt status are deductible as charitable contributions on the donor’s federal income tax return.

The assets of a corporation with 501(c)(3) tax-exempt status must be permanently dedicated to one or more of the “exempt” purposes stated above. This means that, should the corporation dissolve, its assets must be distributed in a manner that benefits the exempt purpose(s). The assets cannot be distributed to members of the corporation or private individuals or for any purpose other than the corporation’s exempt purpose(s).

A corporation with 501(c)(3) tax-exempt status may not engage in political activity, such as campaigning for or against a national, state, or local candidate, and generally may not devote a substantial part of its activities to lobbying.

501(c)(6) tax-exempt status. An organization that is a non-profit business league, chamber of commerce, real estate board, or board of trade may file IRS Form 1024 to apply for 501(c)(6) tax-exempt status. No part of the net earnings of a corporation with 501(c)(6) tax-exempt status may inure to the benefit of any private shareholder or individual. The corporation must be primarily engaged in activities or functions that are the basis for its exempt purpose(s). It must be supported by membership dues and other income from activities substantially related to its exempt purpose(s).

Unlike a corporation with 501(c)(3) tax-exempt status, contributions to a corporation with 501(c)(6) tax-exempt status are not deductible as charitable contributions on the donor’s federal income tax return. Such contributions may be deductible, however, as a trade or business expense if they are ordinary and necessary in the conduct of the donor’s business. Further, a member may be able to deduct the dues that he or she pays to the corporation from his or her taxes depending on what the dues are used for.

Unlike a corporation with 501(c)(3) tax-exempt status, a corporation with 501(c)(6) tax-exempt status may generally engage in political activity and lobbying and work toward the enactment of laws which advance the common business interests of the corporation’s members.

So, which is the correct tax-exempt status for you? As you can see, a variety of factors go into the determination of whether your new non-profit corporation should apply for 501(c)(3) or 501(c)(6) tax-exempt status. If you find yourself wondering which tax-exempt status is correct for your corporation and how to obtain it, the experienced Business Law and Non-Profit Organizations attorneys at Pierce & Mandell are here to assist you.

Recent SJC Decision Establishes That Insurer’s Duty to Defend Does Not Include Counterclaims

Monday, November 20, 2017

Curtis B. DoolingBy Curtis B. Dooling

Under Massachusetts law, an insurer’s duty to defend its insured is broad. An insurer has a duty to defend its insured if the allegations against the insured are “reasonably susceptible of an interpretation that states or roughly sketches a claim” that falls within the defense obligation’s scope. Billings v. Commerce Ins. Co., 458 Mass. 194, 200 (2010).

Even where some claims against an insured are not covered by insurance, if some of the claims are covered, an insurer has a duty to defend the insured against all claims. This is commonly referred to as the “in for one, in for all” doctrine.

Until recently, the law was unsettled in Massachusetts as to whether an insurer had a duty to pay the legal costs associated with a counterclaim filed by an insured in response to a covered claim against the insured. In the case of Mount Vernon Fire Insurance Company v. Visionaid, Inc., the Supreme Judicial Court, in a 5-2 opinion, held that an insurer is not required to pay for its insured’s counterclaim. Massachusetts has joined the majority of jurisdictions that don’t obligate an insurer to cover the costs of an insured’s counterclaim, even where the counterclaim is related to and assists in the defense of the underlying case.

The defendant/insured, Visionaid, Inc., argued that the duty to defend included all reasonably necessary steps to reduce the liability of the insured, including the costs of a counterclaim. The SJC relied on the plain meaning of the insurance policy and held that the policy did not impose an obligation on the insurer to fund a counterclaim.

Chief Justice Gants dissented and noted that an insurer can’t fulfill its duty to defend without prosecuting related counterclaims that reduce its insured’s liability. The majority disagreed and held that an affirmative counterclaim did not fall within the definition of “defend” under the policy.

Practically speaking, an insured who believes that it has valid counterclaims may still assert the claims, but will have to do so at its own expense. When this scenario occurs, insurance defense counsel will have to work closely with the insured’s personal counsel to both defend the case and prosecute the counterclaim.

Pierce and Mandell’s insurance and litigation attorneys are well-versed in these areas and can assist both insurers and policyholders in assessing what claims are covered under an insurance policy.

Pierce & Mandell’s SJC Victory Could Have Lasting Impact on Trust and Estates Law in Massachusetts

Tuesday, November 14, 2017
Pierce Mandell - SJC Victory

The SJC’s recent decision in Ajemian v. Yahoo, overturning the grant of summary judgment against Pierce & Mandell’s clients, continues to reverberate in the legal community. A link to the Lawyer’s Weekly article entitled “SJC Ruling Could Have Significant Implications for T&E Law” can be found here.

SJC Ruling Provides New Remedies for Shareholders of Deadlocked Corporations

Monday, November 13, 2017

Sam Hoff, Pierce & Mandell, P.C.By Sam Hoff

In its recent ruling in Koshy v. Sachdev, the Massachusetts Supreme Judicial Court issued an early holiday gift to any shareholder of a deadlocked Massachusetts corporation. Thanks to the SJC’s ruling, such shareholders now have available to them several alternative forms of relief which may allow them to regain control of their corporation, as opposed to taking the “extreme” measure of dissolving their corporation.

The facts in Koshy are all too familiar to any shareholder who has experienced the frustration of corporate deadlock before. Two friends, Koshy and Sachdev, co-founded a corporation which provided computer aided design services. They split the corporation’s shares 50/50 and served as its only two directors. After some initial growth and success, Koshy’s and Sachdev’s relationship began to deteriorate. They differed in opinion on a variety of issues including strategic business decisions, the amount and frequency of distributions, and managerial hiring. Their inability to compromise with one another on these issues eventually caused business to grind to a halt. Koshy and Sachdev each attempted to buy the other out and, as a last resort to get out of business with Sachdev, Koshy brought suit claiming that the corporation was deadlocked and must be dissolved. A Superior Court judge found that no deadlock existed, and Koshy appealed the finding.

Koshy is the first case in which the SJC has been called to interpret Section 14.30 of the Massachusetts Business Act (the “Act”). The Act allows any shareholder who holds 40% of the combined voting power of a corporation’s outstanding stock to petition the Superior Court to dissolve the corporation in the event that its directors are deadlocked. The SJC determined that the Act applies only in cases of “true deadlock” and set forth four factors which are relevant in determining whether true deadlock exists:

(1)Whether irreconcilable differences have resulted in a “corporate paralysis,” which is defined as a stalemate between the directors concerning a primary function of management (e.g., payroll, client services, hiring and retention of employees, and/or corporate strategy).

(2)The size of the corporation at issue, with deadlock more likely to occur in a small or closely held corporation, particularly one where ownership is divided on an even basis between two shareholder-directors.

(3)Any indication that a party to a lawsuit has manufactured a dispute in order to engineer a true deadlock.

(4)The degree and extent of distrust and antipathy between the directors.

Where true deadlock exists, relief is available under the Act so long as the shareholders cannot work around the deadlocked directors and irreparable injury is threatened to or being suffered by the corporation as a result of the true deadlock. The SJC found this to be the case in Koshy. Further, the SJC found that the relief available to shareholders of a deadlocked corporation is not limited to the “extreme” measure of dissolution, but includes alternative remedies such as a court-ordered buyout of one shareholder by another or the sale of the corporation to a third-party buyer. The appropriate remedy must be determined by the Superior Court on a case-by-case basis.

From a legal standpoint, the SJC’s ruling in Koshy is a major break from the prior understanding of the Act, as it opens the door for alternative equitable forms of relief. The key takeaway for shareholders of Massachusetts corporations is that they need not resign themselves to the dissolution of their corporation should it become truly deadlocked. This is especially good news for shareholders of small or closely-held Massachusetts corporations, many of whom have built their business from scratch and are personally invested in the goodwill and future success of the corporation. It is understandable that any such shareholder may be reluctant to dissolve his or her corporation. In light of the SJC’s ruling in Koshy, they may now bring suit and argue before the Superior Court that they should be allowed to regain control of their corporation and continue business by buying out their fellow shareholder(s).

Being a shareholder of a deadlocked corporation can be stressful and harmful to your bottom-line. If you find yourself in this situation, please contact the experienced business litigation attorneys at Pierce & Mandell to learn more about your rights and secure the future of your corporation.

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