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I. PART (A) Able was successful in his accounting practice in Cobb County and also in his personal investments. At age 55, he decided to retire and sold his practice to an accounting firm with offices throughout the state (Buyer).
In part, the sales agreement provided:
"Able agrees he will not within the boundaries of Cobb County, directly or indirectly, for a period of five years from the date of sale, directly or indirectly, own, manage, operate, join, control, assist, participate in, or be connected with any person, partnership, personal corporation, or other legal entity that is directly or indirectly in competition with the business of Buyer in the providing of public accounting or bookkeeping services."
After the sale of the practice, Able suffered financial reversals and decided to return to work. He opened a new office and again began practicing accounting in Cobb County. He has solicited and is serving some of the same clients that he had before he sold his practice.
Question 1:Will Buyer be able to obtain an injunction against Able to enforce the restrictive covenant and prevent Able from practicing accounting within the county for the remainder of the term of the covenant? Please explain why or why not.
PART (B) Buyer purchased another accounting practice on January 1, 1990 for $350,000.00. $300,000.00 was paid in cash at closing, and the balance was paid under a note where Buyer promised to pay Seller "the sum of $50,000.00 with interest at 12% per annum from January 1, 1990." No time for payment was stated in the note.
In March, 1996, Seller made a demand on Buyer for the payment of the promissory note with accrued interest. Buyer had made no payments on the note. Buyer ignored the demand. On June 1, 1997, Seller filed suit against Buyer to collect on the note.
Buyer counterclaimed for fraud and seeks damages of $50,000.00 per year and punitives. In his counterclaim, he contends that Seller promised that the accounting practice produced $300,000.00 per annum minimum in gross receipts. Buyer contends that it learned that the practice had only been producing $250,000.00 per annum in gross receipts prior to the sale, and has only produced that amount or less since.
The sales agreement itself was silent on the annual gross receipts of the accounting practice, but it did contain a clause that stated: "This document contains the complete agreement of the parties. All promises, representations and agreements between the parties are contained herein."
Question 2:Does Buyer have a valid fraud claim against Seller? Explain why or why not.
PART (C) The statewide accounting firm has a 10-year lease on space in an office building in Cobb County. The lease agreement provides that the accounting firm may not sublet or assign its space without the landlord's written permission and without remaining as guarantor on the lease obligations. The lease further provides that the space may only be used as an office. It provides that the landlord has a right of entry for specified purposes and that the accounting company may not change the locks. There is also provision for the landlord to provide services such as janitorial, heating, air conditioning, elevators, building security and parking.
Cobb County has now assessed ad valorem taxes against the tenant's lease interest in the building.
Question 3:Explain whether the accounting firm's lease is a taxable interest.
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II. You have been employed by a large Atlanta law firm that primarily represents liability insurance carriers. As an associate, you are assigned to assist one of the firm's senior partners in drafting defensive pleadings to a number of recently filed Complaints. You have also been asked to review selected evidence issues which may arise at the trial. Your supervising attorney asks you to answer the following questions:
(a) Plaintiff, a citizen of Alabama, has sued your firm's client, who is a citizen of Georgia. The Complaint, filed in Atlanta in Fulton County Superior Court, and served upon your client as defendant, seeks damages in the amount of "$250,000.00, exclusive of interest and costs." Can this civil action be removed by you to the jurisdiction of the United States District Court for the Northern District of Georgia, Atlanta Division?
(b) Plaintiff, a citizen of Georgia, has filed a Complaint against your firm's corporate client in federal court in Georgia. Your client has a registered agent in Georgia but is incorporated only in the state of New York where it has its principal place of business. Plaintiff seeks $50,000.00 "exclusive of interest and costs" in damages from your client. Is diversity of citizenship jurisdiction present? Do not discuss venue or long arm jurisdiction.
(c) Plaintiff has sued your firm's trucking company client in federal court, contending that a vehicle owned by your client struck and injured him. Your firm contends that the vehicle in question was being operated by a third party who was in the process of purchasing it from your client. Plaintiff will offer evidence that liability insurance on the vehicle was in the name of your client and that your client was paying the current premiums on that policy.
Is this evidence regarding liability insurance admissible under any theory or provision of the Federal Rules of Evidence?
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III. Lucky Client, a gentleman in his mid-seventies, has come to you, his attorney, for estate planning and tax advice. Lucky and his Wife have been married fifty-one years, and they have three grown children: Andy, who has three children; Bill, who is not married; and Claire, who has one child, Clarence, who is slightly retarded and is Lucky's favorite grandchild.
Lucky has been very successful in his home improvement store and has a net worth of approximately $4,000,000.00. About half of Lucky's net worth is in cash and marketable securities. One-fourth of his property is in real estate, and the other one-fourth consists of the value in his home improvement business. Even though all of Lucky's property was accumulated during his marriage, all of the property is titled in Lucky's name, except for his house, which is titled in both Lucky and Wife's names as joint tenants with right of survivorship. Lucky is particularly proud of the fact that he and Wife bought the house only two and one-half years ago for $250,000.00, and it already has a fair market value of $375,000.00. Lucky also owns a life insurance policy on his own life in the face amount of $500,000.00. Wife is the named beneficiary of the policy. His estate is the secondary beneficiary. Even though Lucky has been very successful, neither he nor Wife has ever written a Will.
Please answer the following questions asked by Lucky:
NOTE: There are various sub-parts. Please make your answers succinct.
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IV. The senior management ("Management") of Black Corporation, a publicly held company ("Black"), made a proposal to acquire ownership of Black through a leveraged buy-out. The Board of Directors of Black, which consisted of its chief executive officer, its chief financial officer and five independent directors (the "Board"), determined to weigh the proposal against other available alternatives. A press release disclosing these facts was made immediately thereafter.
The Board received three bids: (1) the proposal from Management, (2) a cash bid from White Corporation ("White") and (3) a cash bid from Green Corporation ("Green"). The cash bids from White and Green each clearly indicated that the price per share offered therein could be renegotiated following receipt and evaluation of additional non-public financial information.
The Board, with the advice of Black's investment bankers and lawyers, analyzed the three proposals. The Board and Management agreed that the bid from Management was noncompetitive, and Management abandoned its efforts. White's bid was significantly higher than Green's, but White was engaged in a business similar to the business in which Black was engaged, raising concerns of the Board that a merger between White and Black could raise serious antitrust concerns. The divestiture of certain assets by White could solve these problems, but any such remedial actions could delay a merger. A merger with Green did not present any antitrust concerns. The Board concluded that the antitrust concerns rendered White's bid less advantageous to Black's shareholders because they created legal uncertainties and the possibility of delay, and Black signed a merger agreement with Green. White, however, continued to express interest in raising its bid if warranted by its review of the non-public business information it still aggressively sought. White also explored and in fact entered into contracts providing for the sale of certain assets anticipated to be required for antitrust clearance, based upon the public information available to it. Black refused to discuss any aspect of the sale with White, and moved quickly to complete the merger with Green.
White commenced legal action against Black, the Board and Green; that suit was consolidated with an earlier filed stockholder class action seeking judicial review of the evolving transaction in which Black would inevitably be sold. Specifically, it was maintained in the complaint that the Board, in a course of conduct over a several month period, had breached its fiduciary duties to Black's shareholders by repeatedly favoring the Green proposal, by placing expensive impediments in the way of the White proposals and ultimately by failing to attempt in good faith to achieve the highest available price for the shareholders of Black. The complaint alleges that the Board preferred the Green proposal because Green had expressed an intention that Management continue to operate the company and that equity participation by Management in the acquisition would be considered. The complaint seeks (among other remedies) to enjoin the completion of the Green offer for a reasonable period to allow White to consider making another higher offer with the use of all available financial information it sought to be provided by Black.
You have been asked to advise the court as to the following matters only:
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DISCLAIMER |
Part A
Conclusion: Buyer will not be able to obtain an injunction to enforce this restrictive covenant.
Analysis: Covenants not to compete must be reasonable in geographic area, reasonable in duration, and reasonable in restrictions to be enforceable. Here the geographic area is reasonable because it is limited to the county in which Able did business before the sale of his business. The duration, of five years, is probably reasonable, although on the edge of reasonableness is too long, because the value of the sale of business would be substantially decreased if Able were to enter the accounting field in less than five years. Before five years passed his client base might well remember and return to him. The extent of the non-compete clause, covering both direct or indirect competition from virtually any source, appears unreasonably broad and somewhat vague. However, because Georgia courts will "blue-line" contracts for sales of business, if the court believes this provision is too broad it might edit it out of the agreement. Unfortunately, that would leave an agreement not to compete without a provision restricting competition. Although injunctive relief is available to enforce a non-compete agreement that is reasonable, it would not be available here if blue-lining were necessary. Moreover, if blue- lining were not necessary, I question the feasibility of enforcing such a broad and vaguely drafted provision.
Part B
Conclusion: The Buyer does not have a valid and enforceable claim for fraud.
Analysis: A counterclaim, to be valid, must arise from the same transaction or occurrence as the underlying suit. Here that requirement should be met because the underlying action for payment of the note arose in the context of the purchase of the business, as did the alleged fraud. To meet the test for fraud the Buyer will need to prove that Seller made an intentional misrepresentation of a material fact. Here the $50,000 decrease in business, because it amounted to one-sixth of the business, would probably be material because it is substantial and of a magnitude that would influence the decision making of a reasonable person. While Seller might argue it was "puffery" because the alleged misrepresentation was specific and factual, that argument should fail. However, it is unclear whether Buyer could have and should have investigated the matter before the purchase. Without knowing what evidence of the profits was offered this is difficult to determine. Moreover, the agreement does include the provision stating that it is the complete agreement of the parties. If fraud in inducement can be proven, however, this contract provision should not defeat a claim of fraud if the contract is rescinded. Finally, the claim is a bit more than seven years old. Since it arose from the contract and, presumably was discovered in the first year, the claim fails because it does not meet the statute of limitations of 6 years for written contracts.
Part C
In Georgia, a lease for less than five years is called a usufruct, and does not transfer an interest in property, but merely a contractual privilege to use the property. Such a contractual privilege is not a taxable interest, as it is not an interest in the real property.
In this case, however, the lease is for ten years and is not limited to being a usufruct, and thus transfers to the accounting firm a leasehold interest in the office building. Although the landlord's maintenance of significant control over the premises would be consistent with a usufruct, and not a lease, in that the lease is not for less than five years and is not expressly labelled a usufruct, it is a lease and grants a leasehold interest. Thus, the accounting firm's lease is a taxable interest. If the accounting firm's lease were, instead, a usufruct, it would not be a taxable interest.
Part A
Buyer will be able to obtain injunctive relief against Able to enforce the restrictive covenant. Able sold his accounting practice (business) to Buyer and as part of the sale, agreed to a non-compete clause. Although the non-compete clause is ambiguous and overbroad in trying to ban "indirect" competition, Georgia law would allow a court to "blue-pencil" and strike those portions that are ambiguous and overbroad. Although blue-pencilling and saving/preserving portions of this non-compete clause would not be allowed in an employer-employee setting, Georgia law provides for such modification or saving of portions of the non-compete clause where the clause concerns the sale of a business.
Able's return to his accounting practice in Cobb County is in direct contravention to the non-compete clause, which provides in pertinent part "Able agrees he will not within the boundaries of Cobb County ... own, manage, operate ... in competition with the business of Buyer in the providing of public accounting." Able opened a new office and began practicing accounting in Cobb County, and has solicited and is serving some of the same clients that he had before he sold his practice. The court should provide injunctive relief, at least for the 5 year period, which Georgia courts have found to be a reasonable time period.
Although the Georgia Constitution prohibits unlawful restraints of trade, this non-compete clause shall not be construed as unlawful, after "blue- pencilling" and considering the geographic time constraints. The geographic boundary is Cobb County. This appears reasonable for the sale of the business. The 5 year period also appears reasonable, particularly in light of the fact that Able had been working in Cobb County for some time to establish his successful practice. 5 year time would enable the Buyer to establish relations with the clients of Able's business.
Part B
Buyer does not have a valid fraud claim against Seller. The sales agreement was silent as to annual gross receipts of the accounting practice and stated this "document contains the complete agreement of the parties. All promises, representations and agreements between the parties are contained herein." Buyer is precluded by the parol evidence rule from presenting any evidence of representations made prior to or contemporaneously with the making of the agreement, to modify or change the agreement. A promise that the accounting practice produced $300,000 per annum minimum would modify and/or change the agreement, placing a greater burden on Seller.
Moreover, the Buyer was duty bound in Georgia to investigate whether the practice did in fact produce $300,000 per annum minimum if such representation was made prior to the sale. Buyer had an obligation to find out, to the extent it was within his power to do so, the validity of the Seller's alleged representation concerning income. The Buyer should have asked for profit/loss statements or other documents establishing the income of the practice. Buyer, by the facts, did not do so.
In addition, there may be a statute of limitations issue, for the Buyer delayed in bringing its action seven years. Assuming the statute of limitations is 4, 5 or 6 years for fraud actions, Buyer's contention is untimely.
Part C
The accounting firm's 10-year lease is a taxable interest. Although leases for less than 5 years are considered usufructs and not interests in land, the firm's lease is for 10 years. Because the firm leases space in an office building, the firm will not incur ad valorem tax on the whole building but only so much as its space is a fraction of the building.
The firm's lease for 10 years gives the firm an "interest" in the real property, subjecting the firm to an appropriate pro rata share of the ad valorem tax levied on the property. The firm may argue that because the landlord retains the right of entry and precludes the firm from changing the locks, that its interest is really not an interest in the real property but something less. If so, then perhaps the landlord is responsible for the firm's portion of the tax. Added to this argument would be that the lease was restrictive, allowing the space to be used only for office, and that the firm could not sublet or assign without permission.
Part A
The sales agreement between Able and Buyer contains a "covenant not to compete" clause. Courts will enforce these clauses and enjoin those persons who violate them if (1) the covenant is related to a reasonable business need and tailored to protect that need; (2) the covenant is reasonable in its geographic scope; and (3) the covenant is reasonable in duration.
Here, there are questions about the reasonableness of this covenant. The covenant is overbroad in that it prohibits both "direct" and "indirect" competition, without any indication of what "indirect" means and how preventing Able from indirectly practicing in Cobb County will protect their business need. Although the covenant is reasonable in its geographic scope in that it is limited to Cobb County, the duration of the covenant, which is five years, is arguably too long. Two or three years is a more reasonable duration.
Because the problems with the reasonableness of the covenant can be remedied, because Georgia allows blue-pencilling in the sale of a business (cutting out unreasonable portions) which the party prohibited is not an employee or a partner, the court will likely grant the buyer's injunction, but blue-pencil it, so as to limit it to 2 or 3 years, a more reasonable duration for the covenant, and perhaps tailoring it to reflect only "direct" competition. The duration is the primary flaw though and will not likely prevent the buyer from obtaining relief.
Part B
Buyer does not have a fraud claim against Seller. To state a claim for fraud, the allegedly defrauded party, here the Buyer, must show that the Seller made an affirmative misrepresentation, knowing it was false, and intended to induce reliance by Buyer. The Buyer must also show he justifiably relied on the Seller's representation and that he has suffered damages.
Here, the Seller made the promise or statement that the practice produced $300,000, with knowledge of its falsity. However, even if the Seller intended to induce reliance, the Buyer's reliance was not justifiable because he knew prior to the sale that the statement/promise was false and that the practice had only been producing $250,000. Thus, even if Buyer could introduce parol evidence of an agreement or promise of the $300,000 amount, because there is no justifiable reliance, Buyer does not have a valid fraud claim. Moreover, the contract does not allow representations not in writing, and the contract has not been revoked.
Part C
The accounting firm has a 10-year lease. A lease that is five years or less is presumed to be a non-taxable usufruct, and a lease that is more than five years in duration is presumed to be a taxable leasehold interest.
However, under Georgia law, this presumption can be rebutted by the terms of the lease agreement. If the terms reveal that the parties intended to create a nontaxable usufruct, the court will find the interest nontaxable, even if the lease is 10 years, as it is here.
Thus, typically this lease would be taxable as a leasehold interest because of its 10-year duration. However, the terms of the lease arguably reveal the parties' interest to create a mere nontaxable usufruct, evidenced in particular by the landlord's retention of control. Here, the lease has a restriction on assignment without the landlord's consent and without remaining as guarantor; it limits the use of the leased property to a particular use; it allows the landlord a right of entry for certain purposes and refuses to allow the locks to be changed. Lastly, the lease provides that the landlord provides utilities, services, amenities, and janitorial services, which could include repairs. While none of these provisions standing alone indicate a usufruct, together they're non-taxable.
(a) The general rule regarding removable cases is that if the case is filed in a state court it can be removed to federal court if it could have originally been filed in federal court by the plaintiff. Here, the plaintiff is a citizen of Alabama and the defendant is a citizen of Georgia, therefore, there is diversity of citizenship. Plus, as stated in the facts, the amount in controversy is greater than $75,000.00. This means diversity is met. The case could have originally been filed in federal court based on diversity. This is true as long as the claim was a proper claim for federal court. That is, if the federal courts could hear it. State courts have exclusive jurisdiction over certain types of cases. For example, probate, divorce and alimony.
However, there is a special rule in federal courts that removal is not proper in diversity cases when the defendant is a citizen of the forum. By that I mean, if the case had been originally filed in Alabama's state court, then the Georgia defendant based on diversity could have removed the case to the proper Alabama district court. However, as here, the proper district court is the Northern District but the defendant may not remove the case, because he is a citizen of Georgia, based on a diversity claim.
If the claim is based on a federal question, then the defendant can remove the case to federal court. It does not appear to be a federal question based on our facts.
(b) No diversity of citizenship jurisdiction is not present based on these facts. The plaintiff is a citizen of Georgia and the defendant is a citizen of New York. Therefore, the plaintiff is diverse from each and every defendant. (Georgia v. New York). However, for diversity of citizenship, the plaintiff must allege in good faith more than $75,000.00 amount in controversy. Here, the plaintiff is only alleging $50,000.00. Therefore, the amount in controversy is not met and there can be no diversity of citizenship.
An aside: to determine diversity of citizenship for a corporation, a corporation is a citizen of every state in which it is incorporated and the state in which it has its principal place of business. A corporation can only have one principal place of business. Therefore, the corporation in this case is a citizen of New York.
(c) The general rule under the Federal Rules of Evidence is that evidence of liability insurance is not allowed. The reason for this rule is a public policy reason. The courts want to encourage people to have insurance and if the existence of insurance could be used against people, either the premiums would be higher or people would not get insurance.
Based on the general rule, that evidence of insurance is not allowed to show ability to pay the claim or damages, there are a few exceptions. The evidence relating to insurance is allowed to prove ownership, if ownership is in controversy. However, here it seems that the defendant is claiming to own the car so ownership is not in controversy.
However, evidence is also to show control. That is who owned the truck and who controlled the truck. If the plaintiff can get this information in, it will be based on this exception to the rule.
However, the court in its discretion can exclude this evidence if it does not find that the probative value of letting in the evidence substantially outweighs the prejudicial effect.
(a) It depends on whether the basis of the complaint is a federal question or a state law claim based on diversity of citizenship. A federal question case may always be removed by the defendant to federal court, as long as removal occurs in a timely fashion and is not waived, for example, by filing permissive counterclaims. A diversity case may ordinarily also be removed by the defendant. This claim fulfills the requirements for diversity jurisdiction because plaintiff and defendant are of diverse citizenship and the amount in controversy exceeds $75,000.00. However, there is a special exception to the removal statute which provides that a defendant sued in state court in the state of which he is a citizen may not remove. Here, our client, a citizen of Georgia, has been sued in a superior court of its state of citizenship; so removal would not be possible based on diversity. The facts provide information about the parties' citizenship and the amount-in-controversy, but do not state the nature of the plaintiffs claim. If it is a state law, removal is not possible, if federal, then removal is possible.
(b) No, the case does not fulfill the amount-in-controversy requirement. Plaintiff and defendant are of diverse citizenship. Plaintiff is a citizen of Georgia. For diversity purposes, a corporation is a citizen of its state of incorporation and where it has its principal place of business. The facts indicate that defendant has its principal place of business in New York and that New York is its only state of incorporation. Thus, defendant is a citizen of New York. Defendant's registered office might subject it to personal jurisdiction in Georgia, but does not make it a Georgia citizen for diversity purposes.
Although diversity is present, the amount-in-controversy requirement has not been met. Prior to 1997, the case would have to exceed $50,000.00, thus plaintiff would have failed even under the former statute because plaintiffs claim is only for $50,000.00 exactly. In any case, the new and current amount-in-controversy requirement is $75,000.00 which plaintiff also fails to fulfill. The facts do not indicate when exactly the case was filed (before or after the effective date of the increase to $75,000.00), however because the claim does not exceed $50,000.00 (it is only for $50,000.00 exactly), diversity jurisdiction would be absent under either the new or old amount-in-controversy requirement.
(c) Evidence concerning liability insurance is inadmissible to prove negligence or ability to pay. If offered for this purpose, the evidence will be excluded. Plaintiff may argue, however, that the evidence of insurance is being offered to prove ownership or control of the vehicle by the defendant. Use of evidence of liability insurance is permissible for these purposes. The plaintiff's argument would be that the defendant would not have maintained liability insurance on the car if it had surrendered ownership and control of the car to a third party. The insurance evidence could also potentially be used to make the related argument that the third party was an agent of the insured, thus making the insured vicariously liable for his torts. If admitted on this argument, defendant would be entitled to a limiting instruction explaining that the evidence of insurance could be used only to determine ownership and control not negligence or ability to pay.
The evidence would probably not be admitted on this theory however. Federal Rule of Evidence 403 provides that relevant evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice. The insurance is relevant because it makes a fact of consequence to the case more likely to be due. However, it may not be used to prove negligence or ability to pay, and its probative value on the issue of ownership and control is low.
The policy might well have extended beyond the planned time of sale to the third party, and thus the insured would have had no reason to terminate the policy. The danger of unfair prejudice however is quite high, because a jury could well be influenced by the fact that the insured will not have to pay any damages award; the insurance company will. Thus, if the general exclusion of evidence concerning insurance does not apply, the evidence would nonetheless likely be excluded on grounds of unfair prejudice.
(a) In order for removal the defendant must not be a citizen of the state in which the case will be moved to. Because our client is a citizen of Georgia, he may not seek removal to the U.S. District Court for the Northern District of Georgia, Atlanta Division. This is not true if this were a case based on a federal question.
(b) Under the Federal Rule of Civil Procedure to bring a claim in federal court, there must be diversity of citizenship and the amount in controversy must be greater than $75,000.00.
Under the facts given, while there is diversity of citizenship (Georgia plaintiff v. New York corporation) the amount in controversy is not over $75,000.00, thus this claim may not be pursued in federal court based on diversity of citizenship. Both must be present.
(c) Yes. Under the Federal Rules of Civil Procedure, evidence of liability insurance is not permissible to prove negligence or the ability to pay. Evidence of liability insurance is admissible to show ownership or control. Plaintiff would be able to offer this evidence to show ownership (vehicle was in the name of our client). However, it may yet be excluded based on relevancy. The facts don't suggest that we are denying ownership, just that someone else was driving or operating the truck. If we admit ownership of the truck the offering of liability insurance to show ownership or control would not be relevant.
No, Lucky will not have to pay gift tax on a transfer of any amount to his current wife, provided she is a U.S. citizen (if she is not, he can only transfer $100,000 without incurring gift tax). No tax is owed on such a transfer because gifts from one spouse to another are exempt from gift tax (subject to the citizen issue).
If Lucky leaves all his property to his wife, and then dies, the estate will not owe any federal or state estate taxes, because all property left to a spouse is exempt from inclusion in the gross estate, which is taxed. If spouse is not a citizen, the exemption is still available, subject to requirements to insure the property remains in the U.S. and can be taxed at spouse's death. I would not recommend he leave everything to wife, however, because he would then fail to take advantage of the $600,000 exemption for lifetime /death time transfers. $600,000 should be given to others, which should still leave wife well-situated financially.
I recommend you transfer at least $600,000 to your wife. This is a tax-free gift because it's to your spouse. Then, in her will, she should devise that property to others (not you). This will not be taxed, due to the $600,000 in exemptions available for lifetime & death time transfers. Had it remained in your estate and been devised to others besides your wife, it'd be taxed at death, so by giving it to your wife and her devising it as noted, you save about $192,000 in estate taxes.
You may make gifts during life of up to $10, 000 per year, without paying gift taxes or reducing your unified credit. This is the product of a federal estate/gift tax rule. It not only applies to gifts to your children, but to anyone. You can combine your credit with your spouse's too, allowing the two of you to gift up to $20,000 per year, per recipient (even if one property gifted actually is legally yours).
If you die owning your house, and your wife is still alive, your interest in the house will pass automatically to your wife, because she is a joint tenant with right of survivorship ("JTWROS"). The interest will not pass through your will or probate, even if your will purports to address the house. However, if your wife predeceases you, you will take her interest at her death, and will be the sole owner. In that case, your interest in the house will pass as specified in your will or, if you have no will, under the rules of intestacy.
Federal law imposes a tax on capital gains from the sale of a home, subject to 2 exceptions. The first exception applies if you buy a new home within 2 years of the sale, for a price at least equal to the old home's sale price. That is not applicable, because you do not want to buy a new home, but rent one.
There is a second exemption, which allows you to exclude $125,000 in capital gain from income tax if you meet these conditions: 1. over 55 years old (you are); 2. Lived in home for 3 of last 5 years. Since you have only been there 2.5 years, your should wait 6 months to sell, which your buyer is willing to do. Note that you and your wife only get one exemption for $125,000 between you. Right now, it appears to be sufficient to cover the entire gain, if it's sold for $375,000 (less basis of $250,000). If the price goes up, however, you'll have to pay tax on the gain over $125,000.
The "basis" of property that is inherited is either the value at death, or the value on a day 6 months later. Assume that you establish the basis at your death of $350,000; that is your children's basis too. Thus, if it is sold for $350,000, there is no gain that is taxable under income tax.
Such a trust for Clarence would be called a "generation shipping trust" because Claire is still alive. Each US citizen can place up to a total of $1 million in such a trust or trusts during their life (or in a trust established at death), without paying gift or estate taxes on the amount. Any amount over $1 million is taxed at a very high rate of 55%. The $1 million exemption is separate from the gift/estate tax exemption of $600,000. I believe the $200,000 over the million that you want to leave counts against your $600,000 exemption. Thus, it might be best just to leave $1 million in trust.
(a) Your wife gets a "child's share", but no less than 25%. However, since you have three kids surviving, the math is easy and each (wife + 3 lineal descendant kids) gets 25% (not including the house, which is not passed via intestacy). (b) Yes, if you die intestate, you do not qualify all your property for the spousal exclusion, as you would if all of it went via will to your wife. This is because if you die intestate, some goes to your kids.
Lucky's estate will not be taxed so long as Lucky predeceases wife and she is a U.S. citizen. Again there is an unlimited exclusion for transfers between spouses who are U.S. citizens. This includes transfer by will. If wife is not a U.S. citizen the excluded amount is $ 100,000.
Everybody has an equivalent exemption of $600,000 they should take advantage of That is they can give away up to $600,000 without incurring the fed. estate and gift tax. Assuming Lucky and wife will ultimately leave their estate to kids or grandkids, Lucky should transfer $600,000 to his wife so she can pass it to the children and take advantage of the exemption equivalent. If not, the value of the estate of the second to die between Lucky and wife will be taxed and only one $600,000 equivalent exemption will be used.
Each taxpayer has an exemption for gifts of up to $ 10,000 per donee per year. These gifts are said to be dominimus. Since both Lucky and Wife can take advantage of this they can transfer $20,000 to each child per year without incurring the gift tax, (deemed to be $ 10,000 from each Lucky and wife). They can also do this for their grandchildren. This also will not effect their unified credit as these gifts are not included in calculating that amount.
If Lucky dies owning house the answer depends on if wife predeceased him. If she did not, the house will pass to wife in its entirety automatically since they owned it as joint tenants with right of survivorship. If wife predeceases Lucky he owns the house in full and it will pass to the person he may designate in his will or through intestacy if he has no will.
Assuming Lucky is at least 55 years old, since they have been married 51 years, Lucky should wait 6 months to sell the house as long as he is living in it. Each taxpayer has the right to exclude $125,000 of gain from the sale of the house if she is over 55. Upon her election. However, she must have used it for personal residence 3 of the past 5 years. Lucky and wife have lived in house 2 1/2 years so they should live in it for 6 more months. Assuming they sell it for $375,000 their gain would be amount realized minus adjusted basis or $375,000 minus $250,000. This is $125,000 all of which can be excluded from income tax if they so elect.
The children will not have to pay income tax on sale of the house. Taxpayers are taxed on gain which is amount realized minus adjusted basis. Property passing through a will is taken with a basis of fair market value at time of decedents death or at alternate valuation date 6 months later. If the fair market value of the house is $350,000 when the children get it by will that will be their basis and gain will be zero.
This will trigger the generation skipping tax which is additional to the estate and gift tax. So long as the trust is irrevocable and Lucky gives up dominion and control the trust will trigger this tax since he skipped over his daughter Claire. This tax is a flat tax of 55% on top of the applicable estate and gift tax and is bad for Lucky's estate. There is a $1,000,000 dollar exclusion however so only $200,000 will be subject to this tax
(a) Lineal descendants take by intestacy per stirpes. Wife gets 1/4 (least amount she can get) and each child gets 1/4. (b) yes, more tax because of the unlimited exemption for gifts between spouses if U.S. citizen. Money going to children through intestacy is taxed.
(a) yes, amount of policy will be included for calculating estate because Lucky owns it. (b) if wife receives money from insurance Lucky's estate should not be taxed due to unlimited exclusion for transfers to spouses. Her estate will be taxed when she dies though. (c) Lucky could transfer ownership of the policy to his wife then his estate would not be taxed. He also could leave the benefits of policy to charity.
There will be no gift tax on the transfer of half of Lucky's property to his wife. Provided his wife is a U.S.citizen, one can make unlimited gifts to a spouse without incurring any gift tax.
There will be no estate tax on the transfer of all of Lucky's property to his wife at his death. When one dies their estate tax is computed based on the value of all gifts made prior to death and the value of the decedent's estate at death. Lucky would get an unlimited marital deduction for transfers to his wife, which would be his entire estate. Therefore, his gross estate would be 0.
Transferring property to his wife would be a good idea for Lucky. The transfer itself would be subject to gift tax. Plus any transfer to his wife would allow her estate to utilize the $600,000 unified credit. Therefore, wife's estate could pass $600,000 worth of property to someone other than Lucky and would not be subject to any estate tax. Also, if Lucky's estate were split in half, it would allow each estate to run through the gradual rates of the estate tax (provided none was left to the surviving spouse) and each would get the $600,000 unified credit.
Each child could get a gift of $20,000/yr without the gift being subject to gift tax. There is a $10,000 per year, per donee gift tax exclusion. However, each gift can be split between Lucky & his wife. Thus each gets to use the $10,000 exclusion as to each child (for a total gift of $20,000).
If Lucky dies owning the house in joint tenancy with right of survivorship it will pass automatically to his wife (if she's still alive). It will only go to whom Lucky devises in his will if Lucky serves the joint tenancy before death or his wife is already dead.
Lucky should wait six months before selling his house. If he has lived in his house for 3 of the last 5 years then Lucky can avoid tax on $125,000 worth of gain. If the house did not increase in value over the next six months, Lucky would owe no tax. The gain on the sale would be $375,000 (proceeds) - $250,000 (basis) = $125,000. This would be offset by the one time exclusion of $125,000 for individuals over the age of 55 who sell their house. Lucky would get this provided he had not used it on another sale.
The children will have no income tax on the sale of the house. Property transferred at death takes on the fair market value of the property at that date. If that were $350,000 when the survivor dies, there would be no income tax because the stepped-up basis would also be $350,000. ($350,000 proceeds - $350,000 basis = 0 taxable gain)
The transfer in trust to Clarence is subject to the generation-skipping tax, in addition to the estate tax in Lucky's estate. The generation-skipping tax is a flat 55%. However, there is a one million dollar exemption. So in Lucky's case, only $200,000 would be subject to the flat generation-skipping 55% tax. However, the $1,200,000 would still be included in his gross estate for estate tax purposes.
(a) If Lucky dies intestate, his surviving spouse and lineal descendants take per stirpes. The surviving spouse gets a minimum 1/4 (1/3 under the new statute). Therefore, each shares equally and thus each gets 1/4- (Andy, Bill & Claire get 1/4 each as does the surviving wife). (b) The estate will pay more taxes if Lucky dies intestate. If everything went to Lucky's wife then there is no estate tax because of the unlimited marital deduction. However, under intestacy, only 1/4 of the estate goes to wife. Therefore, the remaining 3/4 would be taxed after deducting the $600,000 unified credit.
(a) If Lucky owns the policy, then the value of the policy will be included in Lucky's estate at death. If one owns a policy or can change the beneficiary, then the value of the policy is included in the decedents gross estate. (b) If wife receives the money from the insurance policy, then Lucky's estate is not taxed on that amount. The amount would not be included in the gross estate or would be subject to the marital deduction. (c) The estate can avoid tax by giving the policy away (retaining no ownership). If Lucky doesn't own the policy or can't change the beneficiary then the policy is not included in his gross estate. However, if the transfer is made within 3 years of Lucky's death the value will still be included.
Question 1) Duty of Care
The Board has both the duty of care, and the duty of loyalty. The duty of care owed by the Board is that it will exercise that some care which others in similar positions would exercise. Thus, while this is a fairly nebulous sounding standard, it is judged by what reasonable actions others of similar status would take under similar circumstances.
The obvious issue of concern is that the Board failed to expand reasonable effort to secure the highest possible price for Black. The Board has the duty under such circumstances to maximize the value of the company. If it does not expend reasonable efforts to do so, it has breached its duty of care to the shareholders.
A) The Board's Failure to Pursue Other Offers
While an argument could be made that the Board has a duty to actively solicit additional offers, there is no question that it must give legitimate consideration to the offers on the table. The record indicates that the Board failed to properly consider White's bid. The record indicates that White's bid was "significantly higher," and that they were probably willing to raise it. Furthermore, White anticipated the same anti- trust problems as did Black, and took affirmative steps to remedy any potential problems. In spite of this, Black refused to acknowledge White's request for information and effectively dismissed the offer.
B) Auction
One potential method that others in similar situations as the Board have employed is auction. This situation seems especially well suited to an auction because there were two bidders, each of whom expressed a willingness to raise the price. If reasonable people of equal status in a similar situation would have conducted an auction, the Board may be found to have breached the duty of care. Active solicitation of bids may have produced an even more advantageous deal. There is also a duty of loyalty which will be discussed more fully under question #3.
Question 2)
Courts are reluctant to interject judicial impositions on the legitimate business decisions of companies; therefore, there is a very high threshold regarding striking down a decision such as this. Only when the actions of the Board are obviously not in the legitimate interests of the company will the courts step in and alter a ruling.
The courts have expressed a willingness to leave business decisions to the businesses rather than impose business rules from the bench; however, if there is significant mismanagement or malfeasance, the court will step in to protect the shareholders. This will be further discussed under Question 3 "The Business Judgment Rule." The court will generally act only where the duty of care or loyalty are breached.
Question 3)
The Business Judgment Rule grants significant freedom to businesses to operate as they wish. This freedom, however, is not unlimited. In the instant case, the Board may be able to claim the protection of the BJR if the decisions were not motivated by self-interest, but the BJR will not protect against breaches of the duty of care or the duty of loyalty.
A) The Board's Position
The Board will argue that it considered all of the relevant information and came to a legitimate business decision which was in the best interest of the company. It will contend that, based on the potential antitrust concerns and fears of delay, that they properly rejected the proposals from White. Even if White was taking steps to correct the antitrust problems, there is no guaranty that the problems would be cured. Also, the delay is a legitimate reason not to wait for the problems to be corrected. If the court rejects the plaintiffs contentions of lack of good faith, this position could be successful for the Board. The problem for the Board, however, is that the additional evidence in the record reflects badly on them.
B) Breach of Duty of Care
As discussed above, the breach of duty of care will not be protected by the BJR. Also, as discussed in question 1, there is serious concern for the Board that it did breach the duty of care by rejecting what appeared to be a legitimate offer that would, at least, allow Black to bargain for a higher price from Green. If the Duty of Care is breached, the BJR doesn't help.
C) Breach of Duty of Loyalty
The Board is a fiduciary of the Corp. and the stockholders. It is therefore held to a duty of loyalty to the shareholders. The BJR will not protect the Board if it has breached the duty of loyalty.
This appears to be the most significant problems for the Board. If the allegations prove true, the Board will be liable for breach. The shareholders and White allege that the rejection of White's bid was based on self-interested motivation by the Board. Specifically, Management would keep its job and even gain equity if the Green deal went through. The fiduciary relationship forbids this type of self dealing, and, thus, the Board will not be protected by the BJR if the allegations of White and the shareholders are proven.
The plaintiffs can also argue that the Board was even active in its breach of its duty of loyalty by "placing expensive impediments" in the way of White's proposal. Unlike the breach of duty of care, which may sometimes be merely laziness or negligence, the Board is accused of actively sabotaging the best interests of the shareholders.
Conclusion
According to the allegations of the record, the Board has breached both the duty of care and the duty of loyalty. It will not be protected by the BJR, and will, therefore, lose the case brought by White and the shareholders if the allegations are proven.
1. The Board owes its share holders fiduciary duties of care and of loyalty. Under its duty of care, the Board must exercise reasonable care in seeking the best interests of the corporation for the shareholders. This duty of care is mitigated by the business judgment rule, discussed below. Basically, a court should not second guess the business decisions of the Board in business decisions. Courts will neither use hindsight to second-guess good faith actions by the Board nor set themselves up to run corporations by issuing pronouncements on how to run companies.
However, the Board also owes the shareholders a fiduciary duty of loyalty. This duty includes a prohibition on self-dealing, which includes commingling funds and usurping business opportunities. The Board also owes shareholders a duty of information; it must inform shareholders fully of material facts that will effect their decisions when shareholders vote their shares. Finally, the duty of loyalty includes a prescription on conflicts of interests. Board members should not allow conflicts to develop, and should disclose to shareholders any conflicts that might exist.
The Board's duty, then, is to exercise its best judgment to secure the best interests of the shareholders and not, in the process, to compromise its duty of loyalty to those shareholders. While under, say, Delaware law, the Board can consider the interest of outsiders, like company creditors or neighbors, under Georgia law the presumption is that, unless the Articles of Incorporation say otherwise, the Board can only consider the interests of the shareholders.
Finally, this is a major impact decision, with implications for dissenters to have rights. A merger requires a majority vote of the stocks eligible to vote for a merger for such a merger to occur, and if dissenters don't like the idea they can notify the corporation of their dissent, refrain from voting, and then be cashed out by the corporation if the vote passes anyway. Thus, the Board's duty to inform the shareholders is strong here; to protect their rights, shareholders need to be fully informed of all material facts, and the Board can be liable if it violates its duty to so inform them.
2. The Board's decisions will be reviewed under the equitable standards of their duty of loyalty- - did their own interests impair their decisions as agents of the corporation.
First, two of the seven board members, the C.E.O. and the C.F.O., are management. Why did they make their initial bid, and why was it "noncompetitive"? Such behavior suggests management was pursuing its own agenda, and a noncompetitive offer certainly makes questionable the loyalty of the C.E.O. and C.F.O. to the Board. Second, why the big hurry to accept a lower bid by Green? Why the refusal to wait and receive another bid by White? There seem to be triable issues of fact, and possible grounds for a court sitting in equity to issue an injunction on this rapid sale. To obtain such review, a stockholder class action has already commenced. An injunction could issue its balancing the equities, the court finds that the shareholders are likely to prevail on the merits; that their legal recourse in this matter is inadequate; that the balancing of issues and externalities favor the plaintiffs; that the relief requested is feasible; and that there are no valid defenses to the claim. Here, a breach of duty could be found to be a meritorious cause of action; a balancing of a short delay for White to make another bid does not seem overbearing by the Board's perceived need to sell for less quickly; if the Board sells to Green for too little money, the damage to the shareholders could be irreparable and hard to measure and the court can easily issue an order delaying the merger for a short time. The Board seems to have no defenses -- enough time has not passed to indicate laches applies, and no one has asserted unclean hands, so the injunction should issue if the business judgment rule does not apply.
3. Unless the plaintiffs can prove fraud on the Board's part, the business judgment rule will protect the contract rights of Green from judicial review.
A shareholder does not have a right to the best possible price for her shares; the Board is entitled to use its business judgment, and has great latitude to make bad decisions that cost shareholders money. The proper shareholder recourse is to replace the Board through a proxy fight.
However, if fraud occurred, the plaintiffs can seek a recision of the contract and obtain judicial relief. This is a very high threshold of proof for the plaintiffs; the Board is entitled to be stupid, but its not titled to be actively dishonest. Unless there is a strong showing of affirmative proof of fraud on the Board's part, the court should accept the Board's actions as justified under the business judgment rule.
The Board of Directors must discharge its duties in what it believes in good faith to be in the best interests of the corporation and with the care that a reasonably prudent person would use. This includes the duty of care to the corporation.
The duty of care can be breached in one of two ways: misfeasance and nonfeasance.
Misfeasance occurs when the Board fails to make decisions prudently and with sufficient information. Nonfeasance occurs when the Board fails to hold meetings or members fail to attend meeting, or where some necessary action is not taken.
Under these circumstances, the Board's duty of care imposed a duty to investigate each proposal and determine possible results of accepting each individual bid. The Board's duty of care included investigating the potential for antitrust violations upon the merger with White more closely.
The Board had a duty to discuss all aspects of the sale and merger with each bidder. The Board also had a duty to achieve a favorable price, for the shareholders, while balancing the potential for legal problems and unnecessary delay.
In addition, the duty of loyalty which is a related duty of Directors, required the Board to act for the best interests of the Corporation. The Directors were to avoid competing with the corporation in other ventures, to avoid usurping corporate opportunities, and to avoid interested transactions and self dealing.
Under these circumstances, the Board specifically had a duty to disregard its personal benefit attained from merging with Green in making its decision. The Board had a duty to act in good faith and disregard promises of personal benefit made by Green and other bidders.
Lastly, the Board had a duty to cooperate with potential bidders in order to achieve a favorable position with a bidder. The Board was required to receive and consider bids, giving bidders reasonably necessary information needed for their bids.
2. The Board's actions will be reviewed from a subjective and objective point of view. Subjectively, the Board must have acted in good faith and with what they believed to be in the best interests of the corporation.
Objectively, the Board's actions will be reviewed to see if they meet the reasonable and prudent person standard. The Board was required to discharge its duties in the manner that a prudent Board would under the circumstances.
Thus, even if the Board's actions do not benefit the corporation as much as expected or if the premature acceptance of Green's bid causes the corporation to lose money, the Board will not be liable so long as they acted in what they thought at the time was best for the corporation and if a reasonably prudent person in their situation would have chosen Green's bid, as well.
The Board's case will be well supported if it relied on legal analysis from its lawyers, information from its accountants, to other reliable advice. Such reliance on other professionals' evaluations tends to show the Board acted in good faith and prudently.
3. The Business Judgement Rule (BJR) is a rule that courts use to avoid second guessing legitimate business decisions. Where a court finds that a Board's actions are legitimate exercises of its power to run the corporation and where no bad faith is present, the court will not hold the Board liable.
Here, the facts indicate that the Board's decision to award the sale to Green was based in part on the fear of legal problems and a potentially unprofitable delay in acquisition. If the Board repeatedly favored Green for these reasons, the court will use the BJR and the Board will be protected. The court will not second guess the Board's evaluation of its merger benefits and disadvantages.
However, if the shareholders can establish self dealing on the part of the Board by showing that they only favored Green for personal benefit, then the Board will not be protected by the BJR.