Wednesday, October 6, 2010

Pre-Authorization of UCC 1 Financing Statement

The typical loan/credit scenario unfolds that a creditor will run various credit checks on a potential debtor and, as part of that search, will run a search of all existing UCC financing statements on the debtor. After approval, the creditor will then prepare documents, set up the customer, and prepare whatever business preparations are necessary for that creditor's line of business. The credit department, having done its due diligence, then green lights the transactions knowing that they are holding a first lien position and away we go.

However, this particular scenario can cause some probems since many things can happen to the debtor after they apply for credit and before the actual purchase of the goods intended by the loan transaction. Even setting aside those nefarious characters out there, even honest business people, particularly when setting up a new business, are applying for credit at all sorts of institutions. So what is a prudent credit department to do?

Well, best practices would dictate that not only should a creditor "re-check" the UCC statements and credit reports prior to first shipment (depending on the length of time of the delay that is typical between that business approving credit and first delivery), there is one other way to ensure the best lien position possible. What is that?

Pre-filing the financing statement (UCC-1).

In Texas and under UCC 9-509(a)(1), a creditor can pre-file a UCC-1 financing statement with authorization from the debtor. What's more, the "first in time" rule, even if the transaction is later consummated, would allow the creditor to be ahead of any subsequent filed similar UCC-1 financing statements (unless they have special priorities, like purchase money security interests).

So how does one get authorized? Well, there must be some intent from the debtor to grant some future security interest, so getting the debtor to sign a "pre-authorization" letter (or you could include same conspicuously in your initial credit application) should do the trick. Basically, if the debtor authorizes the pre-filing in writing, you will meet the standards of 9-509(a)(1). A simple signed letter can also do the trick. Now it should be noted that you will still have to terminate the financing statements according to the rules as if the transaction occured should the transaction not occur.

So don't wait for the loan file to be complete before filing your UCC-1's...file the financing statement at the very beginning and establish / lock in your security interest priority.

Tuesday, July 6, 2010

Under What Circumstances are Texas Businesses Required to Pay Franchise Taxes?

A business that is considered a taxable entity is required to pay a state franchise tax if it is a partnership, limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity.

A business that is not considered a taxable entity does not have to pay a state franchise tax if it is a sole proprietorship, or a general partnership that is directly and solely owned by natural persons, unless it is a limited liability partnership. (A natural person is a human being as opposed to a legal entity, such as a corporation, limited liability company, partnership or trust.) Also, a business is not a taxable entity if it is an exempted or passive entity as defined by the Texas Tax Code. Exemptions from federal taxation may also be granted under Internal Revenue Code (IRC) Section 501(c) (2), (3), (4), (5), (6), (7), (8), (10), (16), (19) or (25). If your business has not received this federal exemption, it may still qualify for exemption from the franchise tax. For more information about whether your business is exempted, visit the Texas Comptroller of Public Accounts website. (

A business is a passive entity if it is a general or limited partnership, it does not receive more than 10 percent of its federal gross income from conducting an active trade or business, and at least 90% of the entity's federal gross income comes from specified passive sources such as dividends, interest, income from a limited liability company, distributive shares of partnership income, gains from the sale of property, commodities, and securities, and royalties, bonuses, or delay rental income from mineral properties and income from other non-operating mineral interests.

Trusts (except business trusts) and estates of natural persons are not considered taxable entities. More information, such as due dates, rates, discounts, forms, and other important details can be found at the Texas Comptroller of Public Accounts website listed above.

***This article was prepared by Sarah Raley,
and edited by Chloe Love.

Wednesday, April 14, 2010

Trademark & Domain Name Disputes

Under Texas law, a domain name dispute could potentially lead to a trademark dispute. A trademark is, “a word, name, symbol, device, slogan, or any combination thereof that, whether registered or not, has been adopted and used by a person to identify his or her goods and distinguish them from the goods manufactured or sold by others.” A person commits trademark infringement if, without the registrant’s consent, he uses a reproduction, copy or imitation of a registered mark in selling or advertising goods when such use is likely to cause confusion with the likely source of the goods. A person may also bring suit against a party for actions likely to dilute the distinctive quality of a mark. Texas courts have determined that a domain name can violate the statute prohibiting trademark dilution.

Courts applying Texas law have determined that “dilution arises when a subsequent user uses the trademark of a prior user for a product so dissimilar from the product of the prior user that the subsequent user will lessen the uniqueness of the prior user's mark.” To recover, the owner of the tradmark must show that it owns a distinctive mark and dilution is likely. Distinctiveness can be proved by showing uniqueness of the mark or that it has acquired a secondary meaning. A secondary meaning means that the public has come to associate the trademark with a given entity.

For example, in a 2001 Texas case, the owner of the trademark “Ernest and Julio Gallo” sued a domain name owner who had registered The court held that the name was distinct and it had a secondary meaning and further found that the value of the trademark was likely to be diluted because the defendant owning the domain name denied the plaintiff of the ability to use its mark to serve as a unique identifier for its goods. The defendant’s website used Gallo’s trademark in a way that diverted potential customers to a website containing disparitive remarks about Gallo, tarnishing its trademark. A domain name dispute can become an issue of trademark infringement if the holder of the name denies the holder of the trademark of the right to exclusive use over their trademark. Because the domain name denied Gallo the right to exclusive use over their trademark and confusingly directed customers to a website harmful to them, potentially weakening their trademark, the court applied Texas law and determined that a violation of the dilution statute had occurred.

So, under Texas law, a domain name dispute could lead to a trademark infringement suit if the trademark is distinct and has a secondary meaning, and the owner of the domain name denies the owner of the mark of exclusive right over their trademark and/or uses it in a way that will dilute or weaken the trademark.

** This article was prepared by Zachary Popovich and edited by Sarah Berry.

Friday, April 9, 2010

Should my company hire unpaid student interns?

What criteria determine if an internship can be unpaid?
First, governmental agencies and non-profit entities can almost always hire student and professional interns or employees without the obligation to pay those employees a minimum wage. Second, once students have graduated from their school of choice with a degree in their field, they may elect to volunteer their time with any employer they so choose. This is true for lawyers, doctors, accountants, and even teachers. Third, if a student intern receives school credit for an internship, it is almost never in violation of the law.

In the case of student interns, they must be paid a fair wage under the Fair Labor Standards Act (FLSA) unless the position can be properly designated as that of “trainee”. In order to be considered a trainee under the FLSA, six criterion must be met:

1. The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school.
2. The training is for the benefit of the trainees.
3. The trainees do not displace regular employees, but work under close observation.
4. The employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion his operations may actually be impeded.
5. The trainees are not necessarily entitled to a job at the completion of the training period.
6. The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.

Thus the vast majority of student internships do not meet the standards for “trainees” under the FLSA.

What are the risks to the employer if they do not adhere to these criteria?
If an employer does not adhere to these criteria, they may find themselves faced with complaints filed with the Department of Labor (DOL) by their intern/employees. The DOL will then investigate and make a ruling, and if it determines that the employer owes the employee back wages, it may enforce the ruling by a variety of methods:
· conciliation - if the DOL can persuade an employer to cooperate, it may supervise a settlement of the claim between the employee and employer, in which case the employer may be able to escape with only liability for back pay (Section 216(c);
· civil action for back pay and damages - the DOL may sue on an employee's behalf to recover back wages and liquidated damages (Section 216(c);
· injunction - the DOL may apply for an injunction to restrain further violations by the employer or to restrain the sale or transfer of goods produced with labor that was compensated in a way that violated the FLSA (Section 217);
· criminal action - under 29 U.S.C. 216(a), the U.S. Department of Justice may bring a criminal action against an employer in the case of a willful violation of the FLSA; and
· civil actions by employees - employees have the right to file suit in a court of competent jurisdiction to protect their rights under the FLSA (29 U.S.C. 216(c)).
The employer may also face additional penalties under their relevant state’s laws.

Do you have examples of unpaid internships that clearly should be paid internships?

Any time an employer hires an unpaid student to do a job that would otherwise be performed by a paid employee they run a risk of violating the law. These types of illegal unpaid internships are widespread in certain industries such as fashion, publishing, and journalism. If the purported “trainee” is doing nothing more than menial labor, it is very likely that there is a violation of the FLSA.

What recommendations do you have for employers that want to offer unpaid internships?

Adhere to the six criteria above! First, provide your interns with valuable training. In the legal industry this can mean critiques of interns’ work product and tips on how to be better writers. Second, don’t rely on unpaid interns to run your business. If a certain task is critical to your business, it should be performed by a paid employee or a licensed volunteer. Third, have your interns sign an internship agreement that explicitly states that they will not be paid for their time.

What recommendations do you have for those seeking them?

Come to your unpaid internship with an open mind, but also know what you want to get out of the position. Ask questions of your employer, and let them know if you feel like you’re not receiving valuable training. If you’re only taking the job to expand your contacts within your chosen field, you probably don’t want to rock the boat for fear of long term repercussions. If your employer has made it clear that they are not interested in paying you and will not provide you anything of value in exchange, quit that position and move on.

Tuesday, March 16, 2010

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.