Author Archives: Andrea Jacobs

About Andrea Jacobs

Ms. Jacobs is an associate of the firm whose practice focuses on civil litigation and transactional law in a variety of business areas. She represents clients in all stages of civil litigation, including mediations and arbitrations, and has specific experience with public and private construction litigation, business defamation, and general business disputes.

UPDATE: Airbnb Hosts Beware: Boston Proposes Regulations on Short Term Rentals

By on April 16, 2018

Airbnb Hosts Beware, as the Massachusetts Legislature is now considering a bill to tax Airbnb and the short term rental industry.

Recently, the Massachusetts House of Representatives passed a bill (H 4327) that places a tax on short-term rental units as well as establishes a state registry of short-term rentals. The short-term rental tax established by the bill is imposed via a tired system depending on the amount of units any one host rents/owns. More specifically, and based on the short-term rental rent:
• Hosts that rent two or fewer units (“Residential Hosts”) are subject to a 4% tax;
• Hosts that rent three to five units (“Investor Hosts”) are subject to a 5.7% tax on the short-term rental rent; and,
• Hosts that rent more than six units (“Professionally Managed Hosts”) are subject to an 8% tax on the short-term rental rent.
The bill also allows city and towns to impose an additional tax on the same short-term rentals, however, such tax is limited to:
• 5% on Residential Hosts;
• 6% on Investor Hosts; and,
• 10% on Professionally Managed Hosts.

While the House bill still has a ways to go before becoming law, Massachusetts Governor Charlie Baker has indicated that he would like to sign a short-term rental bill this legislative session.
Boston residents who participate in the short-term-rental economy are well advised to understand, and keep an eye on, proposed changes in housing law as regulations begin to promulgate in response to a growing industry.

Commercial Leasing Series: Decoding SNDAs

By on March 12, 2018

Subordination Non Disturbance and Attornment Agreements (SNDAs) often seem like afterthoughts in commercial leasing as they govern the potential future relationship between a tenant and the landlord’s lender rather than the current relationship between the tenant and landlord. SNDA’s, however, should not be overlooked, as they are crucial to protecting a tenant’s interests in the event that a landlord is foreclosed upon and its lender takes over in its place. In the absence of an SNDA, a tenant may find itself at the mercy of a new landlord that has little obligation to honor the terms of tenant’s original lease. Thus, commercial tenants should be aware that SNDA’s exist to protect their rights and should have a basic understanding of how they operate.

As a quick overview, SNDA’s are comprised of three (3) main components, the:

Subordination: Where the Tenant agrees that Lender’s interest in the leased property takes precedence over Tenant’s lease interest in the event of a foreclosure;

Non-Disturbance: Where the Lender agrees to honor Tenant’s lease in the event Lender takes over for Landlord; and

Attornment: Where the Tenant agrees to recognize Lender as its new Landlord.

While most SNDA’s contain largely standard language, there is almost always room for some negotiation. This could be as simple as negotiating for clear tenant protections relative to potential lease defaults, or as complicated as negotiating for protections with regard to promised funding per the lease between a tenant and original landlord. Regardless, it is important that tenants take the time to understand SNDAs in their entirety in order to ensure that their rights are sufficiently protected. Thus, commercial tenants, particularly those seeking long term leases, would be well advised to consult with a knowledgeable real estate attorney both when deciding whether to seek an SNDA and when negotiating the same.

Corporate Considerations: Piercing the Corporate Veil, a Primer

By on January 23, 2018

             The creation of a formal corporate entity and compliance with state prescribed formalities can offer business owners and members substantial protections from individual liability for business debts when acting by and through an entity. That protection, however, is not a given. In order to enjoy the benefits that limited liability entities afford, one must respect established corporate formalities and comport business practices accordingly.

            Generally, corporate entities enjoy the presumption that an entity is legally separate from its individual shareholders or members, such that individual shareholders/members are not liable for an entity’s liabilities.  Certain actions by shareholders/members, however, can lead the courts to pierce that liability protection, often called the “corporate veil,” and impose individual liability for facially corporate actions.  Thus, it is imperative to understand what behavior can cause such a result.

            Shareholder/members, or even other controlling or related entities, may find themselves liable for corporate debts where it is evident that those shareholders/members, or other controlling or related entities, are using an entity for their personal objectives.  My Bread Baking Co. v. Cumberland Farms, Inc., 233 N.E.2d 748, 751–52 (Mass. 1968). Further, in Massachusetts, piercing the corporate veil may be appropriate in instances,

(a) when there is active and direct participation by the representatives of one, apparently exercising some form of pervasive control, in the activities of another and there is some fraudulent or injurious consequence of the intercorporate relationship, or

(b) when there is a confused intermingling of activity of two or more corporations engaged a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the corporations and their respective representatives are acting. Id.

            More specifically, the courts consider and weigh twelve factors when considering whether piercing the corporate veil is appropriate in any given case. Court consider whether there exists:

(1) Common ownership;

(2) Pervasive control;

(3) Confused intermingling of business activity assets, or management;

(4) Thin capitalization;

(5) Nonobservance of corporate formalities;

(6) Absence of corporate records;

(7) No payment of dividends;

(8) Insolvency at the time of the litigated transaction;

(9) Siphoning away of corporate assets by the dominant shareholders;

(10) Nonfunctioning of officers and directors;

(11) Use of the corporation for transactions of the dominant shareholders; and,

(12) Use of the corporation in promoting fraud.

Pepsi-Cola Metropolitan Bottling Co., Inc. v. Checkers, Inc., 754 F.2d 10, 14-16 (1st Cir.1985).

           Not all factors need apply to justify the disregard of a corporate form, however, all are considered in the determination of whether or not the protections afforded by corporate formality are being abused to an extent that warrants piercing.  Thus, people conducting business by and through various formal corporate entities would be well advised to ensure that their business practices observe corporate formalities, to ensure that they retain the protective benefits such entities generally afford.  If you have questions with regard to business formation and/or operations you should consult with a knowledgeable attorney to determine your best options. 

 

Corporate Considerations: The Importance of Formal Dissolution

By on January 2, 2018

            As discussed in previous posts, the creation of a formal corporate entity and compliance with state prescribed formalities can offer business owners and members substantial protections from individual liability for business debts when acting by and through an entity. This compliance with formality can also offer substantial protections in the event the choice is made to close, or otherwise cease conducting business through, a formal entity.

            If the choice is made to dissolve an entity, members would be well advised to take the proper statutory steps in order to cease operations formally.  It is important to undertake the appropriate formalities in order to terminate the existence of the entity with State officially, and more importantly, to place the dissolved entity and any remaining assets (including final shareholder/member distributions) outside of the reach of third party claims. 

            The Massachusetts Business Corporations Act spells out all steps necessary to  dissolve a corporation formally.  Among other formalities, it is necessary to take a proper vote to initiate dissolution, file Articles of Dissolution with the Commonwealth, properly notice creditors and potential creditors of dissolution, and properly wind down corporate activity.  As previously noted, adherence to the prescribed steps is paramount to limiting future liabilities as they may relate to a dissolved corporation. If you have questions with regard to business formation and/or operations you should consult with a knowledgeable attorney to determine your best options. 

Corporate Considerations: Duties of LLC Members

By on November 10, 2017

            One of the first considerations to make when starting a business is whether to create a formal corporate entity.  The creation of a formal entity and compliance with state prescribed formalities can offer business owners and members substantial protections from individual liability for business debts when acting by and through an entity.  One particularly popular corporate form is the Limited Liability Company (LLC).  LLCs are governed by state law and, if established and maintained properly, LLCs can offer a flexible and relatively uncomplicated business form.

            While LLCs protect members from individual liability related to the claims of outside actors as against the LLC, members do owe certain duties in exchange for such protection.  In Massachusetts, as in other jurisdictions, members of corporate entities owe implicit duties of loyalty and care to the entity.  Unlike other jurisdictions, however, in Massachusetts heightened protection is given to shareholders in what are referred to as “close” corporations, or corporations where, there exists “(1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.”  Donahue v. Rodd Electrotype Co. of New Eng., Inc., 328 N.E.2d 505, 511 (Mass. 1975).  Massachusetts views such entities as little more than incorporated partnerships, and thus, insists that shareholders in close corporations, “owe one another substantially the same fiduciary duty [loyalty and care] in the operation of the enterprise that partners owe to one another.” Brodie v. Jordan, 857 N.E.2d 1076, 1080 (Mass. 2006).

            Majority shareholders have been found to have violated their fiduciary duties toward minority shareholders in instances where, the “majority frustrates the minority’s reasonable expectations of benefit from their ownership of shares.” Id. Massachusetts refers to this tactic by a  majority as a “freeze out,” as it creates a dynamic where a disadvantaged minority party can be compelled  to come to inequitable terms with the majority party in order to leave the entity.  Thus, Massachussets provides additional protections to close corporations in an attempt to dissuade “freeze outs.” 

            While this heightened duty is explicitly applied to shareholders of close corporations, it is very likely that courts in Massachussets could apply the same to members of LLCs, where the definition of “close” corporation is easily applicable by analogy. Thus, members of LLCs need to be aware that they not only owe duties of loyalty and care to the entity itself, but may also owe the same to their contemporaries as well.  If you have questions with regard to business formation and/or operations you should consult with a knowledgeable attorney to determine your best options.

Online Business Defamation and Public Forum Websites — Part II

By on October 9, 2017

            Part I of this series on Online Business Defamation and Public Forum Websites briefly touched on Section 230 of the Communications Decency Act (“Section 230”), a federal law that limits whom businesses can hold legally responsible for defamatory postings.   As previously discussed, Courts have consistently interpreted Section 230 as providing close to blanket immunity to public forum websites where the content in question is generated by a third party.  Thus, as a practical matter, claims against the Googles, Yelps and Facebooks of the world face significant legal barriers and businesses are currently better served by focusing on claims against the actual author of the posted defamatory comments, rather than the forum on which the comments were published.

            Section 230 was codified as law in 1996, right as the modern Internet came into being. It has not faced significant alteration since, even though the Internet landscape of today bears little, if any, resemblance to the landscape of 1996.  In no uncertain terms, Section 230 states, “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”  It is that language that has afforded modern websites (and their affiliated companies) enormous legal protections- legal protections that many of those same websites  (and affiliated companies) have lobbied extensively to keep in place as they have allowed the companies to flourish and have fostered an Internet environment where free speech is clearly protected.

            Section 230, however, has recently come under intense public scrutiny due to its rigid application creating harsh legal realities and unintended consequences, specifically with regard to the cover Section 230 has provided websites that host user-generated content that promotes and facilitates illegal activity.  Public pressure is currently mounting in favor of lessening the protection Section 230 provides to such websites (and companies) and a hotly contested bill has been introduced in Congress that would accomplish just that.  Thus, there is real potential that the momentum exists to shift the Section 230 paradigm away from the historically stringent protections afforded to companies and websites and toward allowing some form of recourse against pubic forum websites for offending hosted-content.  Regardless of the merits of such potential shift, such reform stands to have a significant impact on the potential viability of future online defamation claims.  Accordingly, business owners are well-advised to monitor the changing landscape carefully.  Should you find your business interests harmed by false or misleading statements on the Internet, consult with an attorney concerning the potential rights and remedies available to you.

Online Business Defamation and Public Forum Websites

By on July 15, 2017

            All publicity is good publicity — or so the saying goes.  Nevertheless, it’s safe to assume that businesses saddled with false and misleading reviews on public forum websites, such as Google, Yelp, Angie’s List and other rating websites, would strongly disagree.

            People leave reviews on such sites for many reasons: to reward good service, to offer legitimate advice, to warn of a bad experience and for other reasons. While bad reviews may be rightly earned, what happens when that is not the case?  In other words, what can a business owner do when false and misleading reviews harm business?

            In Massachusetts, a business may have a claim for online business defamation.  An online business defamation claim contains five elements.  In order to prevail on such a claim, a business must prove, “(1) that the defendant published a written statement; (2) of and concerning the plaintiff; that was both (3) defamatory, and (4) false; and (5) either caused economic loss, or is actionable without proof of economic loss.” Noonan v. Staples, 556 F.3d 20 (1st Cir. 2009).  Further, a statement is considered defamatory when it, “may reasonably be read as discrediting [the business] in the minds of any considerable and respectable class of the community.” Clay Corp. v. Colter, 2012 Mass. Super. LEXIS 357 (Mass. Super. Ct. 2012).

            Who is responsible to the business for a defamatory review? While it is tempting to want to pursue the public forum website itself, federal law, specifically, Section 230 of the Communications Decency Act (“Section 230”) limits whom businesses can hold legally responsible for defamatory postings.  Courts have consistently interpreted Section 230 as providing close to blanket immunity to public forum websites where the content in question is generated by a third party.  As a practical matter, claims against the Googles, Yelps and Facebooks of the world present significant additional challenges and businesses are better served by focusing on claims against the actual author of the posted defamatory comments, rather than the forum on which the comments were published.

     Should you find your business interests harmed by false or misleading statements on the internet, you’d be well-advised to consult an attorney concerning the potential rights and remedies available to you.

Show Me the Money: When Payment is Due on Massachusetts Public Construction Projects

By on April 5, 2017

Traditionally, general contractors on Massachusetts state-level public construction projects employed one of two types of risk allocation provisions in payment clauses in their subcontracts with subcontractors:  a “pay-if-paid” or a “paid-when-paid” clause.  This changed, however, due to a 2004 Massachusetts court decision that largely did away with condition precedent payment clauses commonly referred to as “pay-if-paid” clauses.  While the differences between the two clauses may not jump off the page, the use of one rather than the other had a significant impact on a subcontractor’s right to collect payment from the general contractor.

“Pay-if-paid” clauses create a condition precedent to payment.  That is, a subcontractor has no right to be paid for completed work until or unless the general contractor received payment from the owner.  “Pay-when-paid” clauses create no such condition precedent to subcontractor payment.  Rather, a “pay-when-paid” clause is a timing provision; that is, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within a ‘reasonable time’ the subcontractor retains the right to collect payment from the general contractor for its work.  Ambiguous contract language often complicated the subtle, yet substantial, difference between the two types of clauses, leading to high stakes contract interpretation disputes.

In 2004, Massachusetts did away with the distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects.  In,  Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004), the court reasoned, that absent express contract language, if “payment to the subcontractor is to be directly contingent upon the receipt by the general contractor of payment from the owner,” then the default interpretation of subcontract payment provisions, “should be viewed ‘only as postponing payment by the general contractor for a reasonable time after requisition … so as to afford the general contractor an opportunity to obtain funds from the owner.’”  This decision virtually eliminated “pay-if-paid” in favor of “paid-when-paid” clauses on Massachusetts state-level construction projects.         

While the holding in Framingham is generally good news for payment-seeking subcontractors, the issue remains, however, as to what a “reasonable time,” is to afford general contractors before general contractors must make payment to subcontractors should the owner not pay.  In Framingham, the court determined that where the payment issues originated in December 1998 and continued through March 1999, that by the end of April 1999, “the general contractor had exceeded any reasonable period of time,” and thus the subcontractor’s claim for payment for completed work could not be defeated even though the owner had yet to pay the general contractor for the subcontractor’s work.

There has been no subsequent case in Massachusetts that further defines the “reasonable time” standard to determine when general contractors must pay subcontractors when the general contractor objects to making payment as a result of a “pay-when-paid” clause.  Thus, subcontractors should be keenly aware of any developments in the law regarding what constitutes “reasonable time” for payment in connection with these provisions.  If you have questions regarding payment issues on state-level public construction projects you should contact a Massachusetts construction lawyer.   

Show Me the Money: Getting Paid on Private Massachusetts Construction Projects

By on March 15, 2017

As a general rule, parties to private contracts are afforded wide latitude to dictate and negotiate the terms as they see fit. While this notion of “freedom of contract” is an entrenched tradition within American law it is not without its limitations.  The Prompt Pay Act, enacted in 2010, is one such limitation that every Massachusetts sub-contractor and contractor should have an acute awareness of.

In effect the Prompt Pay Act requires that standard state provisions be incorporated into otherwise private construction contracts with an original valuation of over three million dollars. The Prompt Pay Act specifically affects the interpretation of payment clauses in such contracts.

As a reminder, “pay-if-paid” clauses create a condition precedent to subcontractor payment. That is, a subcontractor has no right to payment for completed work until the general contractor has received payment from the owner. “Pay-when-paid” clauses create no such condition precedent to subcontractor payment. Rather, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within the ‘reasonable time’ the subcontractor still has the right to seek payment from the general contractor. Ambiguous contract language often complicates the subtle, yet substantial, differences between the two types of clauses leading to high stakes contract interpretation disputes.

In 2004, Massachusetts did away with distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects.  Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004). Thus with regard to Massachusetts state-level public construction projects “pay-if-paid” causes have been effectively eliminated in favor of “paid-when-paid” clauses.”

Federal-level public construction projects, on the other hand, have not completely eliminated the distinction between “pay-if-paid” and “pay-when-paid” contract clauses. On federal-level public construction projects “pay-if-paid” language included in a subcontract could complicate subcontractor recovery in relation to the principal contractor. The limited amount of Federal case law on the issue, however, leads to the inference that Federal Courts disfavor allowing “pay-if-paid” clauses to operate in the federal-level public construction context.

The Prompt Pay Act directs that, on private construction projects valued at over three million dollars, payment clauses be interpreted as “pay-when-paid,” thus effectively eliminating “pay-if-paid” in most instances. Specifically, and with very narrow exception, “[a] provision in a contract for construction which makes payment to a person performing the construction conditioned upon receipt of payment from a third person that is not a party to the contract shall be void and unenforceable.” MGL c. 149 sec. 29E (e).

This statutory language is a clear attempt, in the name of the broad public interest, to provide protections to subcontractors by endeavoring to ensure swift payment for work provided in order to keep construction projects moving and companies afloat by regulating cash flow.

Smith Ironworks, Inc. v. Torrey Co., Inc., Not Reported in N.E.3d (2014), is the only Massachusetts case to discuss the Prompt Pay Act at any length. Even so, it is an arbitration decision as discussed in Smith, and not the Court itself, that provides the limited interpretation of the Act. In Smith, the subcontractor applied for payment from the contractor for work provided on a private project. Disputes as to the actual amount owed existed, however, rather than actively reject the request for payment, the contractor did not respond at all. Pursuant to the terms of the Prompt Pay Act the request for payment was deemed approved after the statutorily prescribed time passed without formal rejection. The parties submitted to voluntary arbitration and an arbitrator found that the contractor was liable to the subcontractor for the amounts submitted, plus interest, as the contractor failed to properly respond to the request for payment as prescribed by the Prompt Pay Act. The contractor was deemed liable even though it had not been paid in full by the owner.

To reiterate, while Smith details an outcome favorable to a subcontractor by application of the Prompt Pay Act, that outcome is not of true precedential value. Questions remain as to the effectiveness of the Prompt Pay Act. Specifically, questions regarding the true parameters and enforceability of payment timelines and the exact remedy for non-compliance. Thus, subcontractors should keep an eye towards the development of the law in this area and strive to understand how the Prompt Pay Act may apply to various projects. If you have any questions about payment issues on public construction projects you should contact a Massachusetts construction lawyer.

Massachusetts Court Holds That Strict Condominium Bylaws Preclude Lawsuit Against Trustees

By on February 13, 2017

Massachusetts Court of Appeals recently affirmed the legal validity of a condo’s bylaws requiring the consent of eighty percent (80%) of unit owners as a prerequisite for owner standing in lawsuits against the trustees of the condominium’s board. The bylaw in question made it functionally impossible for unit owners to sue the trustees as, by virtue of the number of units and number of trustees, it necessitated at least partial trustee-owner consent to reach the eighty percent (80%) threshold. Bettencourt v. Trustees of Sassaquin Village Condo Trust, 59 N.E.3d 455 (Mass. App. 2016).

The Court held that the bylaw was neither unconscionable nor against public policy and thus concluded, “that the consent requirement is valid and the plaintiffs’ failure to comply with it mandates dismissal of their derivative claims.”  The Court reasoned that as the plaintiffs, “knowingly and voluntarily agreed to the consent requirement when they purchased their units,” and were not precluded from, “persuading other unit owners and one or more of the trustees to consent to a lawsuit,” that the bylaw was not unconscionable as the, “plaintiffs [had] not identified any aspect of the consent requirement that is substantively or procedurally unfair.”  Additionally, the Court noted the bylaw was not “one-sided” as the provision applied to all owners, included potentially aggrieved trustee-owners. The Court also held that  condominium trustees do not owe a fiduciary duty to individual condominiums owners, but rather that duty is limited to the board of trustees itself.

Functionally this ruling implies that even the most stringent of condominium bylaws may be read as valid so long as owners were aware of the bylaws at the time of purchase and the bylaws treat all owners the same (including trustee-owners). This ruling should serve as a reminder to current and potential Massachusetts condominium owners that heightened vigilance with regard to the contents of condominium bylaws and other condominium related documents is necessary and advantageous.