Why do Texas businesses incorporate in other states?

Many businesses benefit from incorporation. Limited liability, an unlimited lifespan, and various tax breaks are advantages every corporation enjoys. All incorporation, however, is not created equal. Every state has its own laws governing the formation and operation of corporations.

A business may incorporate in any state it chooses, regardless of where it is physically located. It should come as no surprise, then, to learn that many businesses are incorporated out of state in order to take advantage of another state’s business laws. Of all such states, none has proven more alluring to corporations than Delaware. Nearly a million business entities have legal foundations in Delaware, and that includes over half of all the Fortune 500 corporations.

Why Delaware? There are three major reasons. First, its laws are among the least restrictive to corporate decision making. For example, while many states, including Texas, require a two-thirds shareholder vote to affect most extraordinary corporate transactions, Delaware requires only a simple majority. Second, its courts are viewed as efficient and sophisticated in the area of corporate law and finance. Perhaps Delaware’s most distinct advantage is its Court of Chancery, which can date its existence back to 1792. Over the years this court has compiled well-recorded case law in corporate matters. Combined with the fact that judges rather than juries sit as the decision makers, corporations have ample confidence in the courts of Delaware. Third, the public sentiment is generally pro-corporation. People and elected officials understand that a substantial amount of the state budget comes from fees and taxes associated with businesses incorporated there, so state laws are geared towards maintaining this reputation.

If you think this is why Texas businesses incorporate in other states, you are only partially right. In reality, many do not incorporate elsewhere. For smaller or purely local businesses, there are several reasons to incorporate right here in Texas. Perhaps the biggest reason is that businesses incorporated out of state must qualify as “foreign corporations” where they do business. Since there are fees and taxes associated with this process, it often becomes more of a financial burden than benefit for smaller businesses to incorporate out of state. Another reason is that businesses incorporated in Delaware can be subject to lawsuit there. As a result, business owners may be hauled into a courtroom hundreds of miles away from their place of business (and residence for that matter). Finding a lawyer locally licensed in Delaware, or familiar enough with Delaware corporations to advise on corporate structure changes (or the expense of hiring Delaware counsel in addition to Texas counsel), is also a reason to register locally and form under Texas laws.

It is also important to understand that Texas is arguably among the three most corporate friendly states in America (Delaware and Nevada being the other two). Texas and Nevada business laws are very similar to those of Delaware, if not preferable in many instances. Perhaps the only thing lacking in both Texas and Nevada is corporate confidence in the courts. Over time, however, it would not be surprising to hear one ask the question, “Why do so many businesses incorporate in Texas?”

**This article was prepared by Matt Lloyd, and edited by Chloe Love.

Bexar County JP Courts going all electronic

The Bexar County Justice of the Peace Courts have implemented an automated case management, scheduling and document filing system that is designed to improve staff productivity and streamline workflow.

The new software programs were developed by Herndon, Va.-based AMCAD. The suite of programs includes AMCAD’s integrated Case Management System (AiCMS) and the AMCAD integrated Capture System. The new system will allow for electronic citation issuance and electronic filing of truancy cases. It also will make possible remote access for the public to view case and calendar information.

In addition, AiCS provides access to documents electronically, eliminating the need to transfer paper between locations.

“Bexar County is AMCAD‘s first AiCMS installation in the state of Texas,” says Visagar Shyamsundar, AMCAD‘s chief operating officer. “We are very excited and committed to providing a state of the art technology solution that will improve the courts operations and provide better service to the people of Bexar County.”

Bexar County is the 20th largest county by population in the United States.

San Antonio Business Journal

Landlord's Remedies When Tenants Abandon Leased Premises

As a real estate lawyer in San Antonio, I am frequently asked about a Landlord's options upon learning that a Tenant has moved-out without notice, or who simply abandoned the leased premises before a lease ends. The Texas Supreme Court has recognized four distict causes of action that a landlord may assert against a tenant who breaches a lease by abandoning the premises:

(1) maintain the lease and sue for rent as it becomes due;
(2) treat the breach as an anticipatory repudiation, repossess, and sue for the present value of future rentals reduced by the reasonable cash market value of the property for the remainder of the lease term;
(3)treat the breach as anticipatory, repossess, re-lease the property to a new tenant, and sue the original tenant for the difference between the contractual rent and the amount received from the new tenant; or
(4) declare the lease forfeited (if the lease so provides)and relieve the tenant of liability for future rent.

See Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc., 948 S.W.2d 293, 300 (Tex. 1997).

However, it is important to remember that a landlord has a duty to mitigate its losses/damages when a tenant abandons the leased premises and stops paying rent. Id., at 295–300. This principle recognizes that a landlord who claims anticipatory breach has a duty to mitigate because the landlord’s claim is contractual in nature. Id. at 300.

Further, the Texas Legislature has codified the landlord’s duty to mitigate as section 91.006 of the Property Code. See TEX.PROP.CODE ANN.§ 91.006 (Vernon 2007). That same section prohibits, and makes "void," lease terms that attempt to exempt a landlord from a liability or duty to mitigate its losses. Id.

Understanding the "Due on Sale" Clause in Texas Deeds of Trust

Many times in today's economy, homeowners will desire to sell their properties to buyers who are unable to qualify for financing through a mortgage loan. Among the factors that contribute to a prospective Buyer's inability to obtain the loan are creditworthiness, tight capital markets, and low appraisal on the property to be bought/sold. Irrespective of the reason, the absence of a mortgage lender presents unique challenges to the Seller and the Buyer. The most common solution to these challenges is some form of Owner Financing.

However, many of the historically-common mechanisms for Owner Financing have come under strict scrutiny by the Texas Legislature and Courts. The most significant of the Legislature's "reforms" are contained in Chapter 5 Texas Property Code which makes lease purchase or rent-to-own agreements very tough. Investors and other sellers intent on making the sale to Buyers who can't get financing tend to favor "wrap-around mortgages." However, utilizing this mechanism may present unreasonable risks to the new Buyer and sometimes even the Seller (who was the original Buyer/borrower under a still-existing mortgage note.

The biggest problem with utilizing a wrap-around mortgage -- a mortgage from the Seller to the new Buyer under which the Seller's underlying mortgage (the first one, held by the original lender) is not being paid off at closing -- is the "due on sale clause" contained in the Deed of Trust associated with the underlying/first mortgage.

The following is a fairly typical DUE ON SALE CLAUSE found in a Texas Deed of Trust:

"If Grantor [Borrower] transfers any part of the Property without Lender’s prior written consent, Lender may declare the debt secured by this deed of trust immediately payable and invoke any remedies provided in this deed of trust for default. If the Property is residential real property containing fewer than five dwelling units or a residential manufactured home occupied by Grantor [Borrower], exceptions to this provision are limited to (a) a subordinate lien or encumbrance that does not transfer rights of occupancy of the Property; (b) creation of a purchase-money security interest for household appliances; (c) transfer by devise, descent, or operation of law on the death of a co-Grantor; (d) grant of a leasehold interest of three years or less without an option to purchase; (e) transfer to a spouse or children of Grantor or between co-Grantors; (f) transfer to a relative of Grantor on Grantor’s death; and (g) transfer to an inter vivos trust in which Grantor is and remains a beneficiary and occupant of the Property."

In plain English, a "Due on Sale" clause like the one above means that in the event that ownership of the property is transferred from the original Buyer (now acting as Seller) the original lender may accelerate its note or "call the note" due in full.

Under a "wrap-around mortgage" the first/underlying mortgage is still in the Seller’s name and monthly payments must still be made to the original lender as if the sale to the new Buyer never occured. If there is a default in those payments or if the first lender accelerates the note, then that lender could foreclose on the property, causing a dominoe effect under which the new Seller’s wraparound mortgage is invalidated or simply pre-empted and the new Buyer loses any and all ownership interest in the property as well as whatever monies he or she has paid against the wrap-around mortgage.

As a Texas lawyer with an active real estate litigation practice, I've seen many wrap-around mortgage situations go sideways. This occurs most frequently in 2 situations:

1. When the new Buyer defaults in payments, causing the Seller to default on his/her mortgage. This frequently results in a foreclosure that ends-up on the new Seller's credit. Sometimes the Seller is even stuck with a deficiency judgment.

2. When the new Buyer timely pays all monthly payments but the Seller (or more likely a middleman "investor") fails to remit those payments to the original mortgage lender. This can result in a foreclosure without notice to the new Buyer (even though he is timely paying everything he is supposed to pay) because the original mortgage lender isn't even aware of that person's existence, much less their claim to an ownership interest in the property.

Wrap-around mortgages, due-on-sale clauses, and other owner-financing mechanisms are complex and highly regulated by the Texas Property Code and the Courts. Buyers and Sellers considering entering into an arrangement that impicates "executory contracts" should ALWAYS obtain the review and advice of separate real estate lawyers. Your home and your credit are far too valuable to leave to chance and/or to negotiate "under the radar."

Real Estate Commission Agreements MUST be in Writing to be Enforceable

Real Estate commissions paid to brokers and realtors are often the subject of legal disputes in Texas. Participants in real estate sales and purchases often squabble over who, if anybody, is entitled to a commission arising from that sale.

Disagreements frequently arise between brokers over who was the "procuring cause" of a certain sale. Likewise, sellers sometimes dispute that their listing agent or salesperson has adequately represented his or her interests. Real estate professionals, on the other hand, must be wary of clients who benefit from their services, but do not wish to compensate them.

No broker or agent should be required to freely provide services, advice or expertise. But -- at the same time -- brokers must disclose to their customers the method and amount of compensation they intend to realize from a given transaction.

This dilemna has a simple solution -- PUT IT IN WRITING!

The Texas Real Estate Commission, and local Boards of Realtors, frequently publish materials encouraging that commission and representation agreements be in writing so as to avoid disputes over commissions.

Texas law does NOT require that agreements for the engagement of Realtors as either "Listing Agents" (Seller's Representatives)or "Buyer's Representatives" be in writing. However, a broker/agent MAY NOT file a suit to enforce any commission claim, unless theagreement to pay a commission is in writing and signed by the customer.

Section 1101.806(c) of the Texas Occupations Code (the Texas Real Estate License Act) expressly provides as follows:

A person may not maintain an action in this state 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 or by a person authorized by that party to sign the document.

A prudent broker, seller and/or buyer will not enter into a real estate transaction without a written agreement concerning payment of commissions. This arrangement protects all participants in real estate purchases and sales.

Further, Buyers or Sellers from whom a broker/agent/salesperson seeks a commission, based upon anything other than a written agreement might be spared the expense of paying that commission.

When Is the Seller of Real Estate Liable for Misrepresentations Regarding Restrictions on Use?

As a San Antonio lawyer with an active real estate litigation practice, I'm often confronted with scenarios under which a Seller has assured a Buyer of real property that the property is acceptable for the Buyer's intended use.

There are all kinds of scenarios under which these types of representations are made. Some memorable situations I've encountered relate to use of residential property for commercial purposes, construction of certain facilities on the property, the right of the owner to maintain various animals (pit bulls and horses come to mind), and the existence or non-existence of restrictive covenants.

In some situations the Sellers are clearly misinformed or ignorant about whether the Buyer's proposed activities are permissible -- "Sure , you can use the property for anything you want!" These representations are often made without much thought or consideration of the consequences. Other times, Sellers or their agents knowingly make false representations for the purpose of inducing the Buyer to purchase the property. In both situations, Buyers frequently rely on these pre-sale representations to their own detriment.

I'm frequently asked to explain when the Seller liable for these types of misrepresentations about real estate, and when a Buyer be responsible for his own decision to rely on the Seller's representations.

The Answer to this question is not a simple one, and can differ significantly based upon the facts and circumstances surrounding the transaction and the property in question.

Under Texas caselaw, a very simplistic distinction and determination of liability is often tied to the following:

1. Whether the Seller knew facts that were unknown to the Buyer.
2. Whether the Buyer actually relied on the Seller's representations.
3. Whether the Buyer undertook an independent investigation (through inspection, examination, attorney review or even the purchase of a title policy) of facts that may have been covered by the Seller's representation.

The 3rd of these factors -- independent investigation -- is somewhat important. In the context of real estate sales in Texas when a seller makes an affirmative representation, the law imposes a duty upon the seller to know whether such a statement is true. First Title Co. of Waco v. Garrett, 860 S.W.2d 74, 76 (Tex.1993). However, when a Buyer undertakes his own investigation -- regardless of the result --the buyer's decision to undertake such an investigation indicates that he or she is not relying on the seller's representations about the property.

Even in these instances, however, Sellers can be liable for intentionally fraudulent representations, or for facts that could not have been discovered by the Buyer through his own investigation.

Another avenue of potential recovery for a duped Buyer lies with the persons or entities who participated in the Buyer's investigation -- title examiners, attorneys, real estate agents and others who should have but did not discover restrictions on the property's use. Reliance on a title committment issued by a title insurance company and/or on an opinion by an attorney are sometimes easier to prove than reliance on a Seller's representations about the property.

If you are the Buyer or Seller of real estate, you should be careful to fully examine all facts surrounding the property, to conduct a reasonable and diligent investigation, and to limit your affirmative representations to the opposing party. Both Buyers and Sellers of real property are encouraged to involve a licensed Texas attorney experienced in real estate transactions and disputes.

Miranda Warnings Changed By US Supreme Court Last Week - And It's Not Good News

The United States Supreme Court released two opinions last week that directly impact what we've all understood regarding Miranda v. Arizona, 384 U.S. 436 (1966).

Now, according to the Supreme Court, confessions that wouldn't be admitted at trial in the past WILL BE allowed as evidence at trial -- despite the reality that law enforcement interviewed individuals and got those confessions in ways that weren't considered legal until last week.

Florida v. Powell

First came Florida v. Powell, 08-1175 ___ U.S. ___ (2010). Here, the Court found that even though Florida's Miranda Warning does not state to the individual clearly and directly that he or she has a right to have a lawyer present when they are being questioned by police, the Florida warning is okay.

Guess the Court is depending upon all those TV shows to let everyone know that when the cops start to ask you questions, you have a constitutional right to an attorney.


Maryland v. Shatzer

Then, two days later, came Maryland v. Shatzer, 08-680, ___ U.S. ___ (2010). Here, the "Edwards v. Arizona rule" gets whammied. That rule was clear: when an individual invoked his Miranda rights ("get me a lawyer!") then that's it. Even if the man or woman says something later that amounts to a "nevermind" it didn't matter. The cops couldn't question any further and it be okay under the law.

Now, it's a big huge mess. The Supreme Court tells us that the Edwards v. Arizona rule shouldn't be an "eternal" bar to police questioning someone. Now, if there's a 14 day long "break in custody" between the police trying to question the individual, then a confession after that two week interval is going to be just fine. What??? Really???

"That provides plenty of time for the suspect to get re-acclimated to his normal life ... and to shake off any residual coercive effect of his prior custody," opines Justice Scalia in the decision.

What about if the individual is spending those two weeks behind bars? Doesn't matter, apparently: Shatzer was in prison during the "break in custody" and the Supreme Court didn't think that was a big deal.

Wonder how many confessions we'll see in the future that aren't dated at least 14 days after the individual was initially questioned by the police?