Pennsylvania Law Monitor : Pennsylvania Lawyer & Attorney : Stark & Stark Law Firm : Yardley, Philadelphia, New York, New Jersey

Stark & Stark is pleased to announce that Henry E. Van Blunk has been appointed to the Bucks County Community College Foundation Board. As a member of the Board, Mr. Van Blunk will serves as an advocate of Bucks County Community College and its Foundation and seek opportunities to promote the Foundation’s mission and vision to all communities.  Additionally, as a member of the Board, Mr. Van Blunk will assist in determining and monitoring the Foundation’s programs and services and manage the organization’s financial resources effectively.

Mr. Van Blunk is a Shareholder and member of Stark & Stark's Business & Corporate and Public Finance Groups. Mr. Van Blunk's practice emphasizes corporate law, labor law, banking law, real estate law, estate planning and administration.  He represents numerous businesses in the following industries: health care, banking, gaming, home building and commercial building, construction, technologies and manufacturing. Mr. Van Blunk assists these clients with initial formation, financing, employment issues, acquisitions and sales, liquor license issues, shareholder agreements, succession planning, banking work outs and litigation.

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Henry E. Van Blunk, R. Tyler Tomlinson, Joseph A. Cullen, Jr., and Jeffrey A. Krawitz have been appointed by the President Judge of Philadelphia County to serve as a Judge Pro Tem to assist the courts in resolving civil litigation cases.

As part of the Judge Pro Tem program instituted by the Philadelphia Court of Common Pleas, Messrs Van Blunk, Tomlinson, Cullen and Krawitz were part of a select group of experienced attorneys appointed for the purpose of serving at the request of the court. The duties of the Judge Pro Tem include helping the parties mediate settlements of cases about to go to trial in order to preserve judicial economy.

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The Pennsylvania Senate approved legislation on Tuesday, May 24, 2011 that would require contractors and subcontractors to verify legal employment status for all employees working on public building projects.

Senate Bill 637, which passed 47-7, makes use of the federal E-Verify system, operated by the Department of Homeland Security, mandatory to confirm that all employees are eligible to work in the U.S.

Employers would be required to submit employment verification statements to the Pennsylvania Department of Labor and Industry prior to beginning work on any public contract.  The Secretary of Labor and Industry will provide the form of the verification.  Additionally, Contractors will be required to provide to the public entity with the verification statement before it can commence work for the public entity.  Any subcontractor will be required to provide a verification statement to the Contractor prior to commencing work on a public building project and the Contractor will provide a verification statement to the public entity for all subcontractors it uses or intends to use on the public building project.  The verification statements will contain a certification signed by the Contractor or Subcontractor, as the case may be, that the information in the verification is true and correct and that submission of false or misleading information shall subjection the person signing the verification to sanctions.

The following constitutes a violation of this provision:

1. Employment of an employee on a public works project whose eligibility has not been verified through the federal E-Verify system.
2. Use by a Contractor of a Subcontractor on a public works project prior to the submission by the Subcontractor of a verification statement.
3. Commencement of work by a Subcontractor on a public works project prior to the submission by the subcontractor of the verification statement.
4. Making a false statement or misrepresentation in a verification statement.

Penalties for violation of this provision can be a fine, cancellation of the contract and possible debarment or suspension for one year. A Contractor will be immune from sanctions if it in good faith relies upon the federal E-Verify system and was provided with incorrect information.

We will follow this legislation and advise of any amendments and if the Governor signs this legislation into law.

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Pennsylvania is part of the small minority of states that provides for a peculiar form of ownership of property between a husband and wife which often frustrates the creditors of one spouse. Known as a “tenancy by the entireties,” this estate in property is founded upon the idea that when spouses marry, they become a single legal entity or person. Therefore, when a husband and wife purchase a house or other real or personal property, each is deemed to acquire a one hundred percent undivided interest in the property which cannot be severed or encumbered by the acts of only one of the spouses.  This form of ownership is presumed in Pennsylvania upon conveyance to a husband and wife unless there is an affirmative effort to title the property in another matter.

The practical consequence of a tenancy by the entireties is that the debts and judgments against one spouse cannot affect property held by the entireties.  To the extent that all of a judgment debtor’s property of value is held with the judgment debtor’s spouse, it is shielded from execution.  In Pennsylvania, a tenancy by the entireties can even survive the sale of property – Courts in Pennsylvania view the proceeds of sale of property held as a tenancy by the entireties to be exempt from execution, even after deposited into the bank account titled only in the name of the debtor spouse. 

There are very few ways around the roadblock of a tenancy by the entireties for creditors.  If a debtor conveys property to himself and his spouse in an effort to frustrate his creditors, the transfer may be avoided under Pennsylvania’s Fraudulent Transfer Statute.  If the non-debtor spouse predeceases the debtor spouse, then title to the property passes to the surviving spouse by operation of law, and a judgment creditor may execute upon the property. 

To illustrate how a tenancy by the entireties benefits creditors, the 2005 Pennsylvania Supreme Court case of Regions Mortgage, Inc. v. Muthler is instructive and eye-opening.  In Regions Mortgage, a husband and wife applied for a Mortgage jointly.  The Mortgage Company, in a unilateral mistake, prepared the Mortgage with only the husband’s name, however the Deed named the husband and wife as grantees, creating a tenancy by the entireties.  Shortly after recording the Deed, the husband passed away, and by operation of law the wife became the sole owner of the house, however the debt to purchase the property did not pass to the wife.  The Mortgage Company then sued the wife to “reform” the Mortgage to make the wife responsible for the debt.  The Pennsylvania Supreme Court held that the Mortgage Company could not reform the Mortgage to make the wife responsible for the debt, and when the husband died, the wife came to own the property free and clear of the Mortgage Company’s Mortgage Lien. 

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In Pennsylvania, “The Landlord and Tenant Act of 1951” (“The Act”) governs all residential leases entered in Pennsylvania. The Act provides certain terms in the relationship between a landlord and tenant that cannot be waived by the tenant, even where the written lease has provisions contrary to the Act. 

A common issue that arises between landlords and tenants in residential leases governed by the Act is the handling of the tenant’s security deposit at the conclusion of the lease. Residential landlords should be wary of the Act’s remedies for improperly withheld security deposit monies. The Act requires a landlord under a residential lease to provide the now former tenant with a written list of the damages to the premises that the landlord claims are the tenant’s responsibility within 30 days of the termination of the lease.

The list of damages must be accompanied by payment of the difference between the amount claimed for the damages and the amount of the security deposit with interest.  If a landlord fails to provide the written list of damages and repayment of security deposit amounts in excess the amount of damages claimed within the 30 day window, they will be deemed to forfeit the rights to withhold any portion of the security deposit or to sue the tenant for damages to the premises. If the landlord fails to pay the amount of the security deposit for which no claim is made within 30 days of the termination of the lease, the landlord can be held civilly liable for double the amount of the security deposit wrongfully withheld. A tenant’s claim for double the security deposit can be mitigated if the landlord can prove the amount of actual damages done to the premises to the satisfaction of the Court. This procedure may be employed by a tenant regardless of the terms of the written lease agreement or other writing between the landlord and the tenant.

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As the economy continues to restrict the availability of credit to small businesses, many borrowers are finding that lenders with which they have had long and mutually beneficial relationships have been restricting lines of credit or adding additional requisites to extend or renew existing lines of credit.  Principals of newer small businesses may be shopping for credit for the first time, or are presented with a first commercial lease.  One requirement that is becoming ubiquitous in lending and leasing in Pennsylvania is a Confession of Judgment clause in loan agreements, often accompanied by personal guarantees.   This article will give consumers of credit a brief primer on what Confessions of Judgment are, and what rights a borrower is waiving by signing one.

A Confession of Judgment is a written agreement entered between a lender and a borrower that allows the lender to summarily enter Judgment against the borrower upon the occurrence of a stated event, usually default under the terms of a loan agreement or lease.  A Confession of Judgment differs from normal civil actions to collect a debt in that the borrower essentially waives his due process rights to a trial and permits the lender to proceed directly to a Judgment without giving evidence, holding a Court hearing, allowing the borrower to present a defense or even giving the borrower notice that the lender intends to enter the judgment.  A Confession of Judgment provision is designed to give the lender a quick, easy, and low cost method to obtain a Judgment against a delinquent borrower or lessee and to preserve the priority of the lender’s lien. Proceeding upon a Confession of Judgment is extremely quick compared with the time, cost, and expense associated with normal civil actions.

Though their use in commercial transactions seems to be growing, Confessions of Judgment in Pennsylvania actually pre-date the formation of the Commonwealth and enjoy a lengthy history, long being criticized for their susceptibility to be employed in predatory ways against the unwary borrower.  A creature of English common law, the author Charles Dickens noted Confessions of Judgments – then called “cognovits” – with disfavor in his first novel The Pickwick Papers .  The United States Supreme Court, quoting a 1824 New Jersey opinion, noted that Confessions of Judgment are “the loosest way of binding a man's property that ever was devised in any civilized country.”   Many states have altogether invalidated Confessions of Judgment under their respective State Constitutions, and Pennsylvania remains one of the very few jurisdictions that permits them at all.  In 1996, however, the Pennsylvania Supreme Court restricted the use of Confessions of Judgment to non-consumer debts – and now Confessions of Judgment can only be used in association with commercial transactions in the Commonwealth.

Once a Judgment is entered by Confession, a delinquent borrower or lessee will receive a notice from the Court notifying the borrower that the Judgment has been entered.  The lender can then begin execution efforts and levy the borrower’s property within 30 days.  If the loan agreement has a personal guarantee, the lender may confess judgment against the individual and execute against his property in short order.   The only recourse that a borrower at this point is to Petition the Court to Strike or Open the Judgment, and to file a separate emergency Motion to Stay the execution of the Judgment, though it is possible that a Court will not stay execution of a Judgment while a Petition to Strike or Open is pending.  

As one can see, a Confession of Judgment clause in a commercial loan or lease should not be taken lightly, and a prospective borrower or lessee should be aware of the severe consequences if the lender or lessor elects to enforce a Confession of Judgment.

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Most family-owned business owners put off their succession planning because they don’t want to think about their retirement, disability or death, however, business succession planning should be a priority in every family owned business. A family owned business owner’s decision to eventually retire is not as simple as no longer going to the office. Key questions need to be answered before the family owned business owner can “leave” the business: i) will he or she have enough money at retirement; ii) who is going to own and manage the business; iii) how will ownership and management be transferred to new owners; and iv) should the business be carried on or sold to a third party.

A proper business succession seeks to alleviate or lessen the above issues by setting up a smooth transition between the family owner business owner and the future owners of the business. Business succession planning can be broken down into three distinct categories: i) ownership; ii) management; and iii) tax savings. It is very important, at the outset, to recognize that ownership and management do not have to be combined. A small business owner may decide to transfer equal ownership in the business to all of his or her children, even though only one child is involved in and manages the business. The tax aspect of a proper succession plan tries to minimize estate taxes at the death of the family business owner.

What follows is a list of tips that may assist you in your own succession planning:

1. It is never too early to start planning. Unforeseen events, such as death and disability, often cause a rapid transition of the family owned business. The time to begin a succession plan is now. The longer the succession plan is in place, the smoother the transition of the business will be.
2. Involve your family in the succession planning process. Involving your family in the succession planning serves two purposes: 1) it cuts down family discord later, as each family member knows where he or she “stands” relative to the business; and 2) it allows you to determine the best successor for the business. You may find, in your discussions with your family, that not every family member desires to be involved in the business, as they may have their own businesses or careers they desire to pursue. Involving your family also gives you the opportunity to do an honest assessment of the persons desiring to succeed you. While it may have been your great desire to leave the business to your first son or daughter, that person may not have the managerial skills and other skills necessary to lead the business.
3. Train your successor(s). Your succession plan should not be simply about transferring ownership; it should also be about training your successors to properly execute your succession plan. There are few things as devastating as watching a business fail that you worked so hard to build. In executing any succession plan, adequate time must be given to train those who are eventually going to run the business.
4. Seek outside assistance. You should seek an attorney, accountant and other professional advisors knowledgeable in the succession planning field to assist you with your succession plan.

Putting off business succession planning is a mistake. A proper succession plan can help ensure that your retirement needs are met and that the business you worked so hard to build will continue to flourish for years. 

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The Internal Revenue Service recently extended the deadline for small non-profit organizations (those with gross receipts normally under $25,000.00) to maintain their tax exempt status by filing Form 990-N to October 15, 2010. Previously, small non-profit organizations did not have to file any return at all; however, beginning in 2007, Congress mandated that all tax-exempt organizations, except churches, had to file returns with the IRS beginning in 2007. If a non-profit fails to file the return for three consecutive years, the organization may lose its tax exempt status. Although the penalty of losing tax-exempt status did not kick in until this year, it is estimated that almost one-third of small tax exempt organizations have yet to file the required return. 
 

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This is part 2 of a 2 part post discussing expense, time and overall experience one faces during litigation. You can read part 1 here.


Likelihood of Success
The next important factor in deciding whether to go forward with litigation is the likelihood that a client’s claims will succeed.  Commonly, clients who are infrequent litigants believe that the moral “rightness” of their position and his or her opinion that the other party is a scoundrel is so plainly obvious that it will immediately be recognized by a Judge, who will cut through all of the usual procedural hurdles, Rules of Evidence, and legal technicalities to summarily enter judgment in his or her favor, chastising the other party in the process.  The client may have gotten this idea from television – which is the only place that you will see this happen.  When I counsel a client considering pursuing a claim in litigation, it is very important that we have a dispassionate review of the relevant evidence in the client’s possession or which the client believes can be acquired in Discovery in order to assess whether the client’s claims can actually be proven.  All of the time and expense in pursuing a claim will be for naught if there is a conspicuous gap in evidence necessary to prove a claim – making litigation a very bad economic decision.  


“Collectability” of the Judgment
The final factor that I counsel clients to consider when making the decision whether or not to pursue litigation is to try to estimate the “collectability” of a judgment against a potential defendant.  There are no longer “debtors prisons” in the United States, and therefore the ability to collect a judgment is contingent upon a potential defendant’s financial health, assets, and applicable insurance policies.  A Ten Million Dollar judgment against a penniless debtor is worth nothing – I like to counsel my clients to think of recovery in terms of “real dollars,” as opposed to the amount of a judgment which may not be converted into money in the client’s hand.  If a client is considering suing a business likely to stop operating or an individual on the brink of bankruptcy, it would be wise to consider these facts in making the decision to go forward.     


Some Final Thoughts
I find that good client service requires a candid discussion of these factors when deciding whether to litigate a claim as an economic decision, rather than after the client has spent significant sums in fees and costs.  It is the duty of a lawyer to counsel the client with the client’s economic interests in mind.  If a lawyer does not discuss the above factors with a client before counseling the client to go forward with litigating a claim, the client would be right to be a bit skeptical and wonder if the lawyer has not let his or her own need for business and fees to override the duty to be candid with the client.  Pursuing the litigation of a claim with little or no prospect of recovery of “real Dollars” can compound the client’s losses and be economically disastrous for the client.  While there are no guarantees in the law, in my experience keeping the client’s economic interests in the forefront and being honest with the client – and sometimes telling the client what he or she does not want to hear - yields more satisfied clients in the end and fosters an environment of trust and confidence between lawyer and client. 

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As most people are aware, litigating can be an expensive, time consuming, and unpleasant experience.  I find that an important part of competently counseling clients or prospective involves helping them determine whether bringing suit is a good economic decision.  I find that achieving a successful result for my clients involves taking the time to make a sober assessment of his or her claims, and dispelling myths about litigation which may distort the client’s decision making process in determining whether to proceed with a law suit.  It is best for the lawyer and the client to discuss these aspects of the client’s claims before the decision to go forward with litigation is made.


Attorney’s Fees
Very often, clients will come to a lawyer soon after a dispute – looking to bring suit in order to win “justice” for a perceived wrong done to them.  Just as often, these clients come to believe that the “justice system” is a misnomer because they are surprised to learn that winning “justice” can mean paying more in costs and fees than a judgment is worth.  Many critics of the American Court system fault the “American Rule” for this belief that justice is often denied due to the costs and expense of pursuing a legitimate claim against a defense that appears to be less than meritorious.  The “American Rule” employed in most American Courts holds that for most claims each party will bear the expense of Court costs and their respective attorney’s fees.  This is contrasted with the “English Rule,” employed in the Courts of the United Kingdom and most Commonwealth countries, which provides that the loser in a case that proceeds through trial bears the expense of all costs and the winning party’s attorney’s fees in addition to its own.     

Other than the customary contingent fee arrangements in personal injury and worker’s compensation claims, or specific fee shifting statutes, most claims will require that each party bear its own attorney’s fees and costs.  The attorney’s fees and costs that will accrue during litigation are the major out of pocket expenses which must be weighed against the potential dollar value of any judgment, the likelihood of success at trial, and what I call the “collectability” of that judgment. 


Potential Dollar Value of the Judgment
The next important factor to be weighed in determining whether to proceed with a lawsuit is the potential Dollar value of the judgment sought.  I list this factor second because the comparison of attorney’s fees and costs against the maximum potential value of a judgment – a “homerun” – will often bring matters into perspective for the client considering pursuing litigation.  Contrary to what many people may believe, damages in most kinds of cases are limited to an amount necessary to compensate the aggrieved party for his or her losses - and for only those losses that are reasonably foreseeable.  Generally, Courts will not award a judgment for damages that are causally remote and merely consequential to the defendant’s conduct if the class of damages was not reasonably foreseeable by both parties.  Punitive damages – damages imposed by the Court to punish and deter particularly malicious conduct – are only available under certain specific circumstances, and even more rarely awarded by Courts and Juries.  A realistic assessment of the damages suffered by the client for which he or she may receive compensation is indispensable in making the decision to pursue a claim in litigation.

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