Should Your Ranch Be Incorporated?

Should Your Ranch Be Incorporated? One of the questions that comes across my desk from time to time from farm and ranch clients is whether the farm and ranch operation needs to be placed in a formal legal entity, such as a corporation, limited liability company, or limited partnership. Because of the unique nature of farm and ranch businesses, the answer is not the same for every operation. My friend and colleague James Decker, of the SGDA Law Firm in Stamford, Texas, and I put together this fact sheet outlining the advantages and disadvantages of “incorporating” a farm or ranch operation. This fact sheet was also utilized as part of Mr. Decker’s presentation at the 2017 Texas and Southwestern Cattle Raisers’ Annual Convention, and its School for Successful Ranching – thanks to TSCRA for including this topic in their materials this year. Should Your Ranch Be Incorporated Or Not? TSCRA Annual Convention – School for Successful Ranching March 31, 2017 Note: for our purposes, the term “incorporated” includes creation of any formal legal entity such as a corporation (S or C), limited liability company, or limited liability partnership. General partnerships are not incorporated. Advantages Liability Protection – This term can apply to several contexts. The creation of a formal legal entity will typically serve as a shield for your personal assets that are not held by the entity, in the event valid claims are made against the entity. Generally speaking, entity owners are not personally liable for an entity’s debts and obligations Individuals serving in management of an entity are generally not personally liable for the entity’s debts and obligations, so long as they act pursuant to the law and applicable company regulations. Insurance Coverage Practically speaking, an entity’s liability protection extends as far as that entity’s insurance coverage. Each entity should have appropriate coverage (property, commercial liability, other specific lines); inform your agent periodically of any changes to your operation, to ensure planned activities are covered events Taxes In some situations, conveyance of certain assets into an LLC can offer estate tax advantages, by utilizing “discounting” and other rules regarding valuation of assets and assets owned by entities. Expenses that are related to the business are tax deductible. Income from S-corporations, limited liability companies and limited liability partnerships is treated as pass-through income and is only taxed once at the individual level. USDA – “Farm Program” Payments This can be an advantage to incorporating in some situations. Each legal entity is deemed to be a “person” and, provided that entity otherwise meets the eligibility determinations that would apply to a natural person, will be eligible to receive farm program payments, up to one “payment limit” for a person in each respective USDA program with a separate payment limit. Dollars received by an entity are “attributed” to entity owners, such that the natural person owners are allocated a proportionate share of the payments of each entity owned, up to payment limit Disadvantages Property Rights Considerations Once real property is conveyed to an LLC, it comes an asset of the LLC. The prior owner no longer has the right to partition (if it was previously held in co-tenancy) or the right to transfer the property via will or other estate planning instrument. Instead, the owner must transfer an interest in the entity. The entity must have separate bank accounts and recordkeeping from personal assets. Mixing entity assets with personal assets (including using entity assets as personal collateral) may void liability protection. Liability/Insurance Coverage Without a liability shield in place, personal actions can incur liability and personal assets can be at risk. Umbrella policies must be considered and purchased. Taxes Counsel of a CPA should be included in decision-making process to avoid unintended tax problems Certain entities have specific tax requirements that may complicate entity finances. Ex: C-type corporations must pay separate income tax; partnerships and LLCs may not be able to pay a true “salary” to an owner USDA – “Farm Program” Payments This can also be a disadvantage to incorporating in some scenarios. Each formal legal entity, otherwise eligible for program payments, can only receive dollars up to one “payment limit.” Ex: if entity is owned by husband and wife, or a general partnership, and each party is deemed “actively engaged in farming,” then, after attributing entity’s farm program dollars to the two owners, husband and wife together receive one payment limit, instead of each potentially receiving one payment limit (two total payments) If you have any questions pertaining to Agricultural law, you can contact Amber Miller at Crenshaw, Dupree & Milam, LLP. RESPECT. RESPONSE. RESULTS. CRENSHAW, DUPREE & MILAM, L.L.P. P.O. Box 64479 Lubbock, Texas 79464-4479 (806) 762-5281 www.cdmlaw.com Physical Address: Happy State Bank Building 4411 98th Street, Suite 400 Lubbock, Texas 79424 [The information provided in this article is for informational and educational purposes only and is not legal advice, nor is it meant to be a substitute for legal advice. If you have any legal, accounting or financial questions, you should consult with an attorney, accountant or other licensed professional, as applicable, in your jurisdiction. We do not accept unsolicited documents or electronic information of any kind, and please do not send us any confidential material whatsoever unless and until an attorney-client relationship has been formalized in writing.] [MR 7.3C attorney advertising]

In Brief: Real Estate Broker

IN BRIEF: Real Estate Broker ISSUE Can a real estate broker receive a commission for property sold when the real estate commission agreement does not adequately describe the land being sold? READ THIS!! CASE Burton Creek Development, Ltd.  v. Cottrell, Seventh District Court of Appeals (Amarillo), decided December 14, 2016. FACTS Burton Creek (hereafter “landowner”) owned four tracts of land. It placed a sign up saying “shopping center coming soon,” and advised interested persons to call Cottrell (hereafter “broker”), a licensed real estate broker.   The broker then began to put the landowner in contact with various potential buyers. In an email, the landowner let the broker know they would pay a 6% commission for any buyer that broker brings to the table that closes on the property in question.  The broker finally put the landowner in contact with a representative of Race Trac. The broker was e-mailed in the ongoing negotiations, but they failed. After continued ongoing negotiations without the broker’s involvement, an entity related to Race Trac signed a contract to purchase one of the lots on the property in question.  The broker then demanded that he receive his commission of 6%.  The landowner did not respond. PROCEDURAL BACKGROUND The broker filed  this lawsuit seeking recovery of the real estate commission. The landowner pled the affirmative defense of a violation of the statute of frauds. The trial court granted summary judgment in favor of the broker, and denied the summary judgment of the landowner based upon the statute of frauds.  The court entered judgment in favor of the broker for the real estate commission plus attorney’s fees for having to file suit to collect it.  The landowner appealed. COURT’S ANALYSIS The statute of frauds in the Texas Real Estate Licensing Act (RELA) states that a person may not maintain an action to recover a commission for the sale or purchase of real estate unless the promise or agreement on which the action is based, or a memorandum, is in writing and signed by the party against whom the action is brought.  Texas law has interpreted this provision to require that the written document contain a promise of a definite commission, naming the broker, and identify the property to be conveyed.  The party pleading the statute of frauds has the burden of establishing its applicability. Thereafter, the burden shifts to the opposing party (the broker in this case) to establish an exception that would take the agreement out of the statute of frauds. In Texas, partial performance is a well-recognized exception to the statute of frauds.  When contracts are partially performed, but don’t meet all the requirements of the statute of frauds, they may still be enforced in equity (fairness) if denial of enforcement would amount to a virtual fraud in the sense that the party acting in reliance on the agreement has suffered a substantial detriment, and for which he has no adequate remedy at law, and that the other party would reap an unearned benefit.    Whether a contract comes within the statute of frauds is a question of law for a court to decide, not a question of fact for a jury to decide.  When the brokerage commission agreement fails to adequately describe the property that is sold, the doctrine of partial performance may permit enforcement, notwithstanding the statute of frauds, if the broker fully performed; the landowner accepted the broker’s services; the landowner acknowledged its obligation to pay the commission; and all documentary evidence establishes that a commission is due. The question in this case turns on whether the broker provided sufficient affirmative corroboration as to whether there was a brokerage agreement encompassing the property actually sold.  Deposition testimony from the case corroborated that the lot sold was part of the larger tract identified in the email chain. The Court stated that the landowner implicitly agreed to pay a commission on a partial tract out of a larger tract based on language in the email chain. The Court stated: “We hold that application of the statute of frauds would work an injustice rather than prevent it because enforcement of the statute would cause [broker], the party acting in reliance on the agreement, to suffer detriment for which he has no adequate remedy, and the landowner would reap an unearned benefit.” For all your real estate law needs, call attorney Jack McCutchin or Art Cavazos. RESPECT. RESPONSE. RESULTS. CRENSHAW, DUPREE & MILAM, L.L.P.P.O. Box 64479Lubbock, Texas 79464-4479Phone (806) 762-5281Physical Address: 4411 98th Street, Happy State Bank Building, Suite 400, Lubbock, Tx. 79424

In Brief: Irrevocable Trust

IN BRIEF: Irrevocable Trust Do statutes of limitation for filing claims against an Estate for unpaid spousal support prevent a creditor (ex-wife) of the decedent from bringing a lawsuit against the  trustee of an irrevocable trust  on grounds of fraudulent conveyance and tortious interference with a contract? CASE Montgomery v. Montgomery, individually and as trustee of the James F. Montgomery Irrevocable Trust, decided by the Seventh Court of Appeals (Amarillo), December 6, 2016, opinion written by Justice Brian Quinn. DECISION The summary judgment granted by the trial judge in favor of the trustee is REVERSED, and the case is sent back to the trial court to allow the former wife to proceed with her claims against the trustee for fraudulent conveyance and tortious interference with a contract. FACTS Diane Montgomery was married to James Montgomery, but later divorced.  At that time, they executed a “marital settlement agreement” wherein James agreed to pay Diane $21,000 a month until she remarried or died. He paid this obligation for several years, but then ceased doing so. James’ son, Andrew (who was at one point a stepson of Diane), obtained a power of attorney from his father, James,  at which time he converted a revocable trust containing assets of over five million dollars into an irrevocable trust. James, the father, died the day after this irrevocable trust became operative.  Diane filed her initial claim against James’ estate, but it was denied by the administrator. PROCEDURAL BACKGROUND Diane filed suit, not against the estate, but against Andrew, the trustee of the trust, seeking damages of over one million dollars for past due spousal support payments. Two of the causes of action in the suit were fraudulent conveyance and tortious interference with a contract. Andrew (son), the trustee, moved for summary judgment arguing that he was entitled to judgment that Diane get no monetary recovery from her suit. His ground was that Diane’s lawsuit was based on her claim for unpaid spousal support, and that such claim was barred by the statute of limitations, therefore preventing her from pursuing these other causes of action against the trustee of an irrevocable trust. The trial court agreed with the trustee, Andrew, and granted summary judgment in his favor. Diane appealed, asserting that the trial judge made a mistake of law. THE COURT’S (Seventh Court of Appeals)  ANALYSIS The trustee argues that Diane’s claims for spousal support had become unenforceable due to her failure to abide by various California statutes. The trustee claims that since Diane never sued the estate, her claims against the trustee of the trust were barred.  “Tortious interference with a contract” is a cause of action recognizing that a contract not only confers rights on the parties to the contract, but that it also imposes on all the world a duty to respect that contractual obligation. When a person knowingly induces another to break his contract with a third person, such third person has a right to sue the one causing the breach of contract.  If Andrew knowingly impeded the performance of James’ spousal support obligation to Diane by placing the assets of the James F. Montgomery revocable trust into an irrevocable trust before James died, then it is that alleged misconduct which may serve as a basis for Diane’s claim for tortious interference with a contract.  Such liability is separate and independent from any liability that James F. Montgomery or his estate incurred to Diane due to breaching the spousal support agreement.  Because of this, whether limitations prevented Diane from recovering against James or his estate is irrelevant.  Furthermore, the cause of action for “fraudulent conveyance”  consists of recovering the property from whom it was transferred.  In Texas, a  transfer made by a debtor is fraudulent as to a creditor, such as Diane, whether the creditor’s claim arose before or within a reasonable time after the transfer was made, if the debtor made the transfer with actual intent to hinder, delay or defraud the creditor. A creditor is not required to file claims against the decedent’s estate before suing for fraudulent conveyance. This is true when the property pursued (i.e.- assets of a trust) is not part of the decedent’s estate, but where the decedent was divested of title to the property before his death. The Court stated: “…Diane’s claim underlying her suit to avoid fraudulent conveyance need not have been presented to, much less approved or rejected, by the administrator of James’ estate…nor was it barred by the [California] statutes of limitation when it was commenced; …the limitation periods had yet to lapse [at the time suit was filed]. Thus, her situation…could be the [basis] of a fraudulent conveyance action.” RESPECT. RESPONSE. RESULTS. CRENSHAW, DUPREE & MILAM, L.L.P.P.O. Box 64479Lubbock, Texas 79464-4479Phone (806) 762-5281Physical Address: 4411 98th Street, Happy State Bank Building, Suite 400, Lubbock, Tx. 79424