Nevada Supreme Court Reviews LLC Claims

This article by Neal A. Klegerman of Emmel & Klegerman PC, Las Vegas, NV is presented courtesy of Nevada Business Law Journal (nevadabusinesslawjournal.com)

©  Neal A. Klegerman

In an unpublished order (not regarded as precedent), JB Carter Props. II, LLC v. Gashtili, 2015 Nev. Unpub. LEXIS 935 (Nev.  July 24, 2015), the Nevada Supreme Court reviewed what was apparently a dispute among members of a Nevada LLC. The Court initially describes the matter as involving a partnership and partners but it appears to be an LLC which was at issue.

One of the members sued another member who counterclaimed.  The District Court found against both the claims and the counterclaims and ordered the LLC dissolved.

The District Court had ruled against the plaintiff on its contract claims and its claim that a withdrawal of funds by the other member was a breach of fiduciary duty. The Nevada Supreme Court affirmed.

As to the contract claim, the Nevada Supreme Court concluded that the District Court did not abuse its discretion in light of the conflicting evidence as to whether an operating agreement signed by all of the parties existed.  Each of the members testified that they had signed an operating agreement but none indicated that it was the versions provided by plaintiff.

As to the breach of fiduciary duty claim, the Nevada Supreme Court found that there was substantial evidence supporting the District Court’s finding.  The District Court had found that the withdrawal of funds was covered by NRS 86.291(1) which provides that: “Except as otherwise provided in this section or in the articles of organization or operating agreement, management of a limited-liability company is vested in its members in proportion to their contribution to its capital…”  There was also testimony that the funds were withdrawn for legitimate LLC expenses.

An obvious lesson of this case, as other cases, is for the parties to document the existence of the constituent documents, in this case the operating agreement, at the inception of their enterprise.

As to the claims, within certain limitations, NRS 86.286 (not at issue in the order in this case) allows the operating agreement to expand, restrict, or eliminate duties of a member or manager or to limit or eliminate liabilities for breach of contract or breach of duties.  Of course, to accomplish any of the foregoing and have it be effective in litigation, the actual operating agreement must be authenticated.

 

Nevada Supreme Court Reviews Partnership Dissolution

This article by Neal A. Klegerman of Emmel & Klegerman PC, Las Vegas, NV is presented courtesy of Nevada Business Law Journal (nevadabusinesslawjournal.com)

©  Neal A. Klegerman

In an unpublished order (not regarded as precedent), Ali v. Arif, 2015 Nev. Unpub. LEXIS 928 (Nev. July 23, 2015), the Nevada Supreme Court addressed the dissolution of Nevada general partnerships.

The case involved two Nevada general partnerships which owned two motel businesses. To resolve litigation concerning management of partnership affairs, the parties agreed to dissolve the partnerships but could not agree on how to wind up the businesses. The district court, apparently based on the conclusions of the court appointed receiver, ruled that one of the motels should be sold on the open market and one at auction.

On appeal, one of the partners raised bias of the receiver but the court based on absence of prejudicial error and waiver of the issue by not raising it in the lower court.

The court also addressed the argument that a provision of the partnership agreement should govern the dissolution. The court also rejected that argument because again it was not raised in the lower court, it was unclear the agreement remained in effect after a change in the partners, and finally because the relevant clause applied only to dissolutions by death or withdrawal.

Therefore, the Nevada Supreme Court found that the district court could order the dissolution pursuant to NRS 87.320 (Dissolution by decree of court) which gives the court the power to dissolve on application of a partner based on a number of different grounds. In this case subsection 1(c), conduct as tends to affect prejudicially the carrying on of the business. Moreover, the district court had the power to direct the winding up pursuant to 87.370 (Right to wind up) which authorizes the district court to wind up a dissolved partnership at the request of a partner who has not wrongfully the partnership.

As to the manner of disposition of the properties, the Nevada Supreme Court did not second guess the lower court which the Nevada Supreme Court determined had broad discretion in the dissolution and liquidation of partnerships. In particular, the Nevada Supreme Court found that sale by auction was appropriate pursuant to NRS 87.380 (Rights of partners to application of property of partnership). The Nevada Supreme Court discussed cases in other jurisdictions construing the same statutory language as favoring liquidation for purposes of discovering the fair market value, presumably as opposed to distributions in kind in which there would be no real market valuation.

Among the lessons which may be taken from this unpublished order are that if a general partner has specific notions concerning the dissolution and winding up of the partnership, the partner should negotiate for such provisions in the partnership agreement and make certain that the agreement remains in effect after changes in partners. Moreover, the broad powers and discretion of the lower court and court appointed receivers should be noted.

TILA-RESPA Integrated Disclosure Rule Effective 8/15/15

This article by Allen D. Emmel of Emmel & Klegerman PC, Las Vegas, NV is presented courtesy of Nevada Business Law Journal (nevadabusinesslawjournal.com)

©  Allen D. Emmel

The Consumer Financial Protection Bureau’s (the “CFPB”) final rule – “Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth-in-Lending Act (Regulation Z)” (the “Integrated Disclosure Rule”) (78 FR 7973, Dec. 31, 2013) – integrates existing mortgage disclosures currently required under the Truth in Lending Act (“TILA”) implemented by Regulation Z and the Real Estate Settlement Procedures Act of 1974 (“RESPA”) implemented by Regulation X.  Lenders have been required by TILA and RESPA to provide two different disclosure forms to consumers at the time of applying for a mortgage, the RESPA Good Faith Estimate (“GFE”) and the TILA Initial Truth-in-Lending disclosure (“Initial TIL”); as well as two different disclosures at or shortly before closing, the RESPA HUD-1 and the TILA Final Truth-in-Lending disclosure (“Final TIL”).  These forms were developed separately under TILA and RESPA resulting in the information on the forms being duplicative and inconsistent.  The new integrated forms are designed to be easier for consumers to understand and locate key information about the mortgage loan.  The Integrated Disclosure Rule becomes effective August 15, 2015.

The Integrated Disclosure Rule consolidates the GFE and Initial TIL into one new form, the “Loan Estimate,” which must provide consumers with a good faith estimate of credit costs and transaction terms. The Integrated Disclosure Rule also consolidates the HUD-1 and Final TIL into one new form, the “Closing Disclosure,” which must generally contain the actual terms and costs of the transaction. The Loan Estimate must be delivered or placed in the mail no later than the third business day after receiving the consumer’s mortgage application. The Closing Disclosure must be provided to the consumer at least three business days prior to closing of the loan.  For purposes of the Loan Estimate, “business day” means a day on which the creditor’s offices are open to the public for carrying out substantially all of its business. For purposes of the Closing Disclosure, “business day” means all calendar days except Sundays and legal public holidays.

The Integrated Disclosure Rule applies only to closed-end consumer credit transactions secured by real property (which includes most consumer mortgages) but does not apply to HELOCs, reverse mortgages or mortgages secured by a dwelling not attached to real property. Creditors originating HELOCs, reverse mortgages, or other transactions not covered by the Integrated Disclosure Rule must continue to use the GFE, HUD-1, and Truth-in-Lending disclosures required under current law.  The new integrated disclosures must be provided by a creditor or mortgage broker that receives a consumer application on or after August 15, 2015. For applications received prior to August 1, 2015, creditors must follow the current disclosure requirements under Regulations X and Z.

The Integrated Disclosure Rule can be found at the CFPB’s website at:  http://www.consumerfinance.gov/regulations/integrated-mortgage-disclosures-under-the-real-estate-settlement-procedures-act-regulation-x-and-the-truth-in-lending-act-regulation-z/

 

 

 

 

 

 

Nevada Supreme Court Addresses Check Forgery

This article by Neal A. Klegerman of Emmel & Klegerman PC, Las Vegas, NV is presented courtesy of Nevada Business Law Journal (nevadabusinesslawjournal.com)

©  Neal A. Klegerman

The Nevada Supreme Court recently addressed issues surrounding check forgery.  C. Nicholas Pereos, Ltd. v. Bank of Am., N.A., 131 Nev. Adv. Rep. 44 (Nev. 2015) Section 4-406 of the UCC governs the relationship between a bank and its customer.

  1. A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount and date of payment.
  2. If the items are not returned to the customer, the person retaining the items shall either retain the items or, if the items are destroyed, maintain the capacity to furnish legible copies of the items until the expiration of 7 years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank must provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy of the item.
  3. If a bank sends or makes available a statement of account or items pursuant to subsection 1, the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.
  4. If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection 3, the customer is precluded from asserting against the bank:

(a)  His or her unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure; and

(b)  His or her unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank.

  1. If subsection 4 applies and the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply with subsection 3 and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay the item in good faith, the preclusion under subsection 4 does not apply.
  2. 6Without regard to care or lack of care of either the customer or the bank a customer who does not within 1 year after the statement or items are made available to him or her (subsection 1) discover and report his or her unauthorized signature or any alteration on the item, is precluded from asserting against the bank the unauthorized signature or the alteration. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under NRS 104.4208 with respect to the unauthorized signature or alteration to which the preclusion applies.

NRS 104.4406

In 2010, the customer, a law firm, discovered that a long time employee had been embezzling money since 2006.  The law firm had removed the employee as a signatory on the account but the employee nonetheless deposited law firm checks and wrote and signed checks for her own use.  Moreover, the employee without knowledge of the law firm had enrolled the firm online banking which had the effect of the bank ceasing to mail statements to the law firm.  The law firm sued the bank based on the losses from the unauthorized signatures and also for the failure to make statements available pursuant to subsection 1 of UCC 4-406 although he had picked up statements which did not include copies of the cancelled checks. The district court granted summary judgment to the bank finding that the statements provided were sufficient and thus the claims were time barred pursuant to subsection 6 of UCC 4-406.

The Nevada Supreme Court explained that generally the statute absolves a bank of liability for its payment on an unauthorized transaction when it provides the customer with information that would allow the customer to identify any unauthorized transactions and then the customer fails to act timely in response to an unauthorized transaction reflected therein.

Without regard to whether the bank or the customer did not exercise care, the customer is precluded from asserting the unauthorized signature against the bank if the customer does not discover and report the unauthorized transaction within one year after a statement complying with subsection is made available to the customer.

The Nevada Supreme Court reversed the summary judgment and remanded to the district court. The Nevada Supreme Court held that there were issues of fact as to the manner and delivery of the statements provided to the customer by the bank. The court also held that the 30 day requirement for the customer to act with respect to the second or subsequent in a series of forgeries by the same forger pursuant to subsection 4 did not apply if the bank did not pay the item in good faith as provided in subsection 5.  Thus if the bank did pay an item in good faith, claims by a customer would not be precluded even if the customer did not act within 30 days after the customer had the opportunity to examine the forged item or bank statement.

Perhaps most noteworthy, the court also held that the one year statute of repose in subsection 6 applied separately to each alleged forgery even if committed by the same forger.  The court held that unlike the 30 day rule in subsection 4 which applies to the second or later forgeries by the same forger, the one year statute of repose in subsection 6 does not differentiate between a single forgery and multiple forgeries by the same forger. Among other things, the facts of the case point to the risk of the availability of online banking in a small business setting where there may not be the more extensive internal controls of a large business.  It may be that a small business which does not avail itself of online banking should advise the bank accordingly and that any efforts should be blocked unless confirmed in person by an authorized signatory.  Whether or not such advice would be binding or effective is unclear but it would seem helpful in litigation with the bank in the event of a forgery based on or abetted by an unauthorized use of online banking.