When Your Business Partner Uses Company Money to Purchase Assets for Himself, You Have a Remedy – If You Don’t Wait Too Long

Minority owners of closely-held businesses are often shocked to learn what their business partner – usually the majority owner – has been doing with the company’s money.  In some cases, an investigation reveals that your worst suspicions are true, and your partner has actually started a competing company on the side.  But diverting assets and resources can often have results other than an active, competing business.  Sometimes embezzlement is as simple as company funds being used to purchase assets – such as real estate – in which you, of course, have no ownership interest.  This can be done by having the jointly-owned company purchase the land outright, or make the mortgage payments on property your business partner has cut you out of.  Either way, joint money is being used to subsidize your partner’s solo venture.

I have had clients come to me believing that because they do not have an ownership interest in an asset, they cannot possibly have any rights to it, or in it.  But that is not necessarily true.  For example, in New Jersey, if you are a 1/3 owner of a company, and the 2/3 majority owner uses company money to buy real property, you may have an excellent argument that you should be legally recognized as a 1/3 owner of the property, or at least be entitled to 1/3 of any profits or proceeds from it. Similarly, if company monies are used to start a competing company, you may be entitled to be awarded 1/3 ownership of that competing company, or at least damages equaling 1/3 of that company’s profits.

The logic is obvious – 1/3 of the money improperly used effectively belongs to you.  However, many business owners suspect something like this for years but fail to act, usually because they think it’s too late once the money is gone.  If you believe money is unaccounted for in your own company, you are entitled to answers.  If you can’t understand why your business partner is suddenly devoting time to other business ventures, but will not explain to you what he is doing, you are entitled to answers.  If you do a search and learn that your business partner owns real estate, and you can’t understand how he paid for it and want to know if any of your money was used, you are entitled to answers.  You can get those answers in court – but the fact that you are entitled to do so should help you get them without resorting to a disruptive and expensive judicial filing.

When, exactly, you learned of the embezzlement will impact how long you have to take action before it is legally too late.  So if you have suspicions, don’t wait to seek legal advice.  You just may have more rights than you realize.

©2022 Norris McLaughlin P.A., All Rights Reserved
For more content on business law, please visit the NLR White Collar Crime & Consumer Rights section.

Community Banks and Overdrafts — Time for Reconsideration?

Bank consumer overdraft fees (together with nonsufficient funds (NSF) fees and returned check fees) have long been a target of attacks by consumer advocacy groups and progressive politicians who claim that such fees are disproportionately levied on the most vulnerable consumers. The Obama-era Consumer Financial Protection Bureau (CFPB) initiated efforts to regulate overdraft programs, which were shelved during the Trump administration, and legislation to restrict overdraft fees has regularly been proposed and considered by Congress, but not enacted.

2022, however, may be the year that the US financial regulatory agencies finally move to impose formal restrictions on banks’ overdraft fee programs. In particular, the CFPB, increasingly assertive in President Biden’s second year in office, has clearly signaled its intent to take action in this area:

  • Rohit Chopra, the director of the CFPB, has spoken out on numerous occasions — in public appearances, opinion pieces, and blog posts — regarding the imperative of reining in so-called junk fees charged by banks and other financial companies.
  • On January 26, 2022, the CFPB published a request for public comment targeting “exploitative junk fees,” including overdraft and NSF fees. The CFPB stated that the goal of its information request was to assist the agency’s plan to “craft rules, issue industry guidance, and focus supervision and enforcement resources,” with the goals of reducing excessive fees and eliminating illegal practices.

The attack on overdraft fee programs has been echoed by other administration officials as well as by allied politicians. Acting Comptroller of the Currency Michael Hsu has called traditional bank overdraft programs “a significant part” of a “regressive system” that penalizes the poor and has stated that “banks that hesitate to adopt pro-consumer overdraft programs will soon be negative outliers.” On March 31, 2022, the House Financial Services Subcommittee held a hearing on possible government intervention to restrict overdraft programs, clearly showing coordination by the committee majority with the Biden administration’s initiatives. In March 2022, a group of US Senate Democrats (including Banking Committee Chairman Sherrod Brown) sent letters to seven large banks urging them to abolish or significantly reduce overdraft and other fees, and in early April, New York Attorney General Letitia James, in recent letters signed by numerous other state attorneys general, asked the country’s four largest banks to eliminate consumer overdraft fees altogether by summer 2022.

Adding to the chorus of Biden administration and other political voices critical of overdraft fees has been a steady stream of announcements over the past year by many large banks regarding plans to eliminate or greatly restrict their overdraft and related fees. In January 2022 alone, five of the country’s largest banks announced the planned elimination of NSF fees and certain overdraft charges. These announcements add weight to the CFPB’s attacks on overdraft fee programs and will inevitably result in additional pressure on other large banks to follow suit.

The bottom line is that federal regulation of this area may finally be on the horizon, if not imminent, although it is anyone’s guess what form regulatory action will take. The initial targets of any action taken by the CFPB — whether formal rulemaking, statements of policy, or increased enforcement activity — are likely to be banking companies that have total assets in excess of $10 billion and that are thus subject to direct supervision by the CFPB. However, whatever new policy is implemented by the CFPB in this area will inevitably be applied by the three principal federal banking agencies to financial institutions of all sizes, and community banks should prepare themselves for increased examination scrutiny of their overdraft fee programs and the potential for enforcement actions.

Accordingly, community banks — especially those heavily reliant on overdraft fee income — should review their overdraft programs, ensure that they are compliant with existing regulations and best practices, and consider changes to respond to possible regulatory concerns. While it is impossible to react effectively to a regulatory regime that has not been proposed, much less implemented, reports and statements by the CFPB and other banking agencies provide some guidance. First, the CFPB has indicated that it will demand transparent and fully disclosed pricing of overdraft solutions that allow consumers to make an informed choice. In addition, Acting Comptroller Hsu stated in a December 2021 speech — in which he notably did not call for banks to eliminate overdraft fees — that the OCC had identified several features of bank overdraft programs that could be modified or recalibrated to help achieve the goal of improving the financial health of vulnerable consumers. He stated that these changes included:

  • Requiring consumer opt-in to the overdraft program.
  • Providing a grace period before charging an overdraft fee.
  • Allowing negative balances without triggering an overdraft fee.
  • Offering consumers balance-related alerts.
  • Providing consumers with access to real-time balance information.
  • Linking a consumer’s checking account to another account for overdraft protection.
  • Collecting overdraft or NSF fees from a consumer’s next deposit only after other items have been posted or cleared.
  • Not charging separate and multiple overdraft fees for multiple items in a single day and not charging additional fees when an item is re-presented.

Finally, community banks should closely monitor CFPB and other bank regulators’ overdraft fee initiatives, through state and national bankers associations and otherwise, and continue to explore potential methods of managing their overdraft programs in line with stated and possible future regulatory concerns.

© 2022 Jones Walker LLP
For more about banking institutions, visit the NLR Financial, Securities & Banking section.

Debt Ceiling Shrinks for Small Business Bankruptcies

Subchapter V of Chapter 11 of the Bankruptcy Code, which took effect in February 2020, creates a more streamlined and less expensive Chapter 11 reorganization path for small business debtors.  Under the law as originally passed, to be eligible for Subchapter V, a debtor (whether an entity or an individual) had to be engaged in commercial activity and its total debts — secured and unsecured – had to be less than $2,725,625.  At least half of those debts must have come from business activity.

In March 2020, in response to the COVID-19 pandemic, Congress passed the CARES Act, which raised the Subchapter V debt ceiling to $7.5 million for one year.  Congress extended it to March 27, 2022.  A bipartisan Senate bill would make the Subchapter V debt limit permanent at $7.5 million and index it to inflation.  But Congress has not yet passed the legislation or sent it to President Biden for signature.  So, for now, the debt ceiling has shrunk to the original $2,725,625.

Subchapter V has proven popular, with over 3,100 cases filed in the last two years (78 in North Carolina).  Many of those cases could not have proceeded under Subchapter V but for the higher debt limits.  The American Bankruptcy Institute has reported that Subchapter V cases are experiencing higher plan-confirmation rates, speedier plan confirmation, more consensual plans, and improved cost-effectiveness than if those cases had been filed as a traditional Chapter 11.  Anecdotally, most debtors in North Carolina are filing under Subchapter V if they are eligible.

We will continue to monitor legislative activity and report if Congress passes a law to reinstate the $7.5 million debt ceiling.

© 2022 Ward and Smith, P.A.. All Rights Reserved.

New Rules Offer Clarity On China’s Outbound M&A Crackdown

On August 18, 2017, China’s State Council issued guidelines clarifying rules passed a year ago by the State Administration of Foreign Exchange (SAFE) limiting outbound investments as cover-up to move money out of China.

The new guidelines provide different policies for Chinese companies’ investment overseas, broadly dividing overseas investment into three categories:

  • investments in “real estate, hotels, entertainment, sport clubs, [and] outdated industries” are restricted;

  • investments in sectors that could “jeopardize China’s national interest and security, including output of unauthorized core military technology and products” and investments in gambling and pornography are prohibited; and

  • investments in establishing R&D centers abroad and in sectors like high-tech and advanced manufacturing enterprises that could boost China’s Belt and Road Initiative, and investments that would benefit Chinese products and technology will be encouraged by Chinese outbound regulators.

These guidelines are new and we have to wait and see how they will be interpreted and implemented by regulators. Still, there may be reasons to believe they will have a net positive effect on the China-U.S. M&A market. The new guidelines bring about greater certainty to buyers, lenders and targets on whether a deal will get approved by Chinese regulators.

The volume and size of Chinese outbound M&A is already on an upward trajectory in the second quarter of 2017, as buyers are already getting more acclimated to SAFE rules announced at the end of 2016 restricting the outflow of Chinese capital. Chinese buyers completed 94 deals totaling $36 billion in Q2, compared to the 74 deals totaling $12 billion in Q1. The current Chinese outbound M&A trend, coupled with greater certainty under the new guidelines, is likely to result in more Chinese outbound M&A deals during the last quarter of 2017, as well as in 2018.

This post was written by Shang Kong & Zhu Julie Lee of Foley & Lardner LLP © 2017

For more legal analysis go to The National Law Review

Financial Crimes Enforcement Network (FinCEN) Proposes Anti-Money Laundering Rules

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On July 23, 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking that would amend existing Bank Secrecy Act regulations with respect to customer due diligence (CDD) requirements for certain covered financial institutions, including mutual funds, brokers or dealers in securities and futures commission merchants and introducing brokers in commodities. The proposed rules would formalize certain CDD requirements and also require that covered financial institutions “identify and verify the beneficial owners of legal entity customers.” FinCEN’s proposal includes a standard certification form that covered financial institutions would be required to use for documenting the beneficial ownership of their legal entity customers. An individual may qualify as a “beneficial owner” of a legal entity customer if the individual either (1) owns 25% or more of the equity interests of the entity, or (2) has significant management responsibilities within the entity. As proposed, covered financial institutions would be exempted from identifying the beneficial owners of an intermediary’s underlying clients if the covered financial institution has no customer identification program obligation with respect to those underlying clients.

Comments on the Notice of Proposed Rulemaking are due by October 3, 2014.

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Digital Currency Identified as an “Emerging Risk” in the Canadian Federal Government’s 2014 Budget

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On February 11, 2014, the Canadian Federal Government released its 2014 Budget. In the 2014 Budget, the Federal Government pledged to introduce legislative amendments to strengthen Canada’s anti-money laundering and terrorist financing regime in the area of virtual (digital) currency.

2013: Year of Bitcoin?

At the beginning of 2013, one bitcoin could be purchased for $12. For a brief period in November 2013, one bitcoin was worth more than one ounce of gold ($1242 to $1240, respectively). Forbes and MarketWatch wrote articles proclaiming 2013 as the year of bitcoin, and “bitcoin” was chosen as the word of the year by the Australian National Dictionary Centre (beating out worthy candidates, including “selfie” and “twerk”).

This increased popularity of digital currency has brought increased scrutiny from regulators and law enforcement. Last year in the United States, the Financial Crimes Enforcement Network issued guidance with respect to whether activities by individuals and companies related to virtual currencies are subject to registration, reporting, and recordkeeping requirements, and the FBI arrested the “mastermind” of Silk Road (a marketplace selling illegal items and accepting payment in virtual currency). In early 2014, a prominent member of the bitcoin community was indicted on money laundering charges.

Canada Revenue Agency (“CRA”) Release Its Position on Bitcoin

Prior to the release of the 2014 Budget, the main Canadian government references to digital currency were from the CRA. The first notable CRA acknowledgment of bitcoin was in April 2013 in the form of a CRA communication to the Canadian Broadcasting Corporation (“CBC”). The communication stated that transactions involving bitcoin are barter transactions and that gains resulting from bitcoin transactions could be income or capital depending on the specific facts.

On November 5, 2013, the CRA issued its first release on the taxation of digital currency. This release reinforced the CRA’s earlier position on bitcoin that was set out in its April 2013 e-mail to the CBC. On December 23, 2013, in CRA Document No. 2013-0514701|7, subject “Bitcoins,” the CRA further clarified its position with respect to bitcoin “in response to a summary of comments that were provided in response to a recent media enquiry describing the income tax consequences of various transactions involving digital currency.”

Accordingly, the CRA considers bitcoin to be a commodity, not a currency. Therefore, using bitcoins to purchase goods or services is considered a barter transaction. The sale of bitcoins at a profit is treated as either income or capital depending on a particular taxpayer’s circumstances.

Virtual Currency in the 2014 Budget

Virtual currency is identified in the 2014 Budget as an “emerging risk” that threatens Canada’s international leadership in the fight against money laundering and terrorist financing. Bitcoin is cited in the 2014 Budget as an example of such virtual currency.

In the 2014 Budget, the Federal Government proposed to introduce anti-money laundering and anti-terrorist financing regulations for virtual currencies, such as bitcoin.

The Federal Government noted in the 2014 Budget that this proposal was based on a report by the Standing Senate Committee on Banking, Trade and Commerce entitled Follow the Money: Is Canada Making Progress in Combatting Money Laundering and Terrorist Financing? Not Really (the “Report”). The Report is a five-year review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “Act”) and was issued in March 2013. However, the only reference in the Report to digital currency is a brief note that the development of electronic methods to launder money must be addressed through timely amendments to the Act and its regulations.

2014: Year of Bitcoin Regulation

The Federal Government has identified digital currency as an “emerging risk” in the fight against money laundering and terrorist financing. Accordingly, the regulation of digital currency in Canada is imminent, and individuals and businesses dealing in bitcoin will soon be subject to certain registration, reporting, and recordkeeping requirements.

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Dickinson Wright PLLC