How to fight for your investment in a small business

From time-to-time we answer questions related to business law -- and this one deals with lulling, equitable estoppel, breach of contract, and fraud. Right up our alley! The petitioner wrote:

I have an affidavit of trust signed with my employer for money that I gave him 100k cash. The Affidavit of trust states that I can ask for the money back only after 6 years after his business starts which would be in 2011. I have done that several times, but each time he comes up with the excuse that the business is not doing well etc... This time I am determined -- especially now that I heard he moved to Pennsylvania, sold his house in the area, and now he is not paying rent for the restaurant where I work (we received and eviction notice). Is he going to just declare bankruptcy? What are the ways for me to get my money back?

This is a great question! We just finished a multi-year LLC/corporate lawsuit covering just these questions last week -- a major jury victory in Washington, DC. There are actually three questions in what you wrote -- and so I'll cover each briefly.

First, you need address the problem of statute of limitations. You were a bit confusing in your time frames. Did you loan this fella money which was suppose to come due in 2011? If so, you need to move very quickly, as VA has stringent guidelines regarding statute of limitations. However, if you have been trying to collect from 2011, it is entirely likely you can win on a "lulling" -- a form of equitable estoppel that stops (or "tolls") the statute of limitation clock. You'll need to talk to us more about this, but the theory is alive and well, and we won a major law suit in 2014 based on lulling. This will also play-out in bankruptcy court (see below).

Second, you asked about the money. I'm not sure what you think you signed (an "affidavit of trust" sounds very squirrely), but if it was a contract of some kind, you can sue for breach. You may also be able to sue for material misrepresentation (fraud), and fraud in the inducement (also, well...fraud). We would need to see the contract, and determine how, if at all, you are constrained by the terms. This is a good time to kick yourself for not consulting with an attorney before entering a deal involving $100K. Always, always, always spend the couple of hundred it takes to make these deals work properly in the beginning. That's too much money to rely on the signer's "good faith."

Thirdly, as for bankruptcy, it depends on what type of experience he hires for a bankruptcy attorney (i.e. their understanding of the various form of exclusions/objections to discharge of debts). A mere breach of contract won't be excluded from discharge, however, equitable tolling and possibly fraud/misrepresentation certainly can, and should be argued (we've won those, too -- so I can assure you, it works!). Challenging his potential bankruptcy requires a fight in bankruptcy court - and that is different than a fight in state court (which you would also need to do for points 1 and 2 above). This are called "multi-dimensional cases" as they involve state law cases and strategies (state court) that then bleed into bankruptcy court (federal court).

A couple of important reminders here -- remember that you need to file -asap-. This is because (a) your time is running out under the statute of limitations (presumably), but more importantly, (b) your must have a state suit underway PRIOR to his filing bankruptcy or you are largely in trouble. Although you could technically do the entire state AND bankruptcy fight in bankruptcy court, this is not the preferred method, and you should not expect a very sympathetic bankruptcy judge.

If you need help with your state claim (breach of contract, and various forms of fraud), equitable estoppel (lulling), or the bankruptcy motions to object to this fellow's discharge, give us a ring at 703-402-2723 or email admin@hanoverlawpc.com. We'd be glad to help!

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com		Lili O'connell, Esq. Abby Archer, Esq.
888 16th St., NW Ste 800 Washington, DC 20006	2751 Prosperity Ave, Ste 150 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.
1-800-579-9864	admin@hanoverlawpc.com	Charles Hatley, Esq.

How to Sell Shares as a Private Business - Rule 504 of the SEC

So you own a small business, and are contemplating obtaining investors? Good news -- It's possible! Bad news, you better know what the heck you're doing.

Care is required here. As a small company contemplating a Rule 504 filing under Regulation D of Security and Exchange Commission, you need to be sure you understand the rules. Generally, you want to be a corporation and not a limited liability company. No hard and fast rule, however, LLC's don't generally have shares, and usually the operating agreement reads more like a partnership than a corporation. Make sure you have a seasoned attorney review the LLC agreement BEFORE soliciting any investors. LLC vs. Corp. aside, let's take a moment to understand what Rule 504 is all about.

At a minimum, Rule 504 allows you to sell shares of your company to qualified investors (considered a "public offering") without having to file notices without the requirement of formal registration and regulation by the SEC. You are, however, still required to complete Form D (hence the name of the action: Rule 504 under Reg D) which provides certain minimal data to about the company. The SEC then enters that information into an online database accessible by any individual or organization that might want to reference or research the company. Although you are not required to file the Form D annually, each time you make a sale under a 504 offering, you SHOULD update the Form D to ensure the SEC information is current. If the information in the online database is off, you risk a fraud charge even under Rule 504. Be careful.

You qualify for a 504 filing if your company has has sold or plans to sell up $1 million in shares in a given 12 month period (hence the annual comment above), and your company is established (defined as having a clearly definable business plan, and some footprint in the market). Generally, shares sold under a 504 plan are restricted -- meaning, they cannot be resold on the open market without meeting further requirements. Those requirements are a bit complex, and generally relate to state regulations -- contact us if you need more information on that.

To find out more about 504 ops, visit the SEC website devoted to the same. It's a tad complex, but it gives a good background. See: SEC Rules for 504 filings.

If you need additional help with SEC matters, or business transactions, give me a ring! I'll be glad to discuss your individual situation, and see what steps make the most sense. Hanover Law: 703-402-2723 or SeanHanover@hanoverlawpc.com.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com		Lili O'connell, Esq. Abby Archer, Esq.
888 16th St., NW Ste 800 Washington, DC 20006	2751 Prosperity Ave, Ste 580 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.
1-800-579-9864	admin@hanoverlawpc.com	Charles Hatley, Esq.