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Corporate Transparency Act Penalties and Deadlines

Corporate Transparency Act Penalties & Deadlines

 The Corporate Transparency Act (or CTA) is a new law that very few people are talking about. It took effect on January 1st of this year, and it requires most small businesses to report personal, non-economic information to the Financial Crimes Enforcement Network (or FinCEN).

And if you don’t report this information, you can face very steep consequences.


What Are the Penalties for Not Filing?

If you don’t submit these reports to FinCEN, you can face penalties that include $10,000 in fines and/or 2 years in jail.

And even with these significant penalties, there has been no serious effort to educate people about the CTA. In fact, many business owners and real estate investors have been left in the dark.

The easiest way to avoid these penalties is to submit these FinCEN reports as soon as possible. And the timing to submit these reports depends upon when the entity was formed.


When to File the FinCEN Reports

So, when exactly are these reports due? The timing to file them depends upon when your company was formed.

    • If your reporting company was formed before January 1st, 2024, you have one year (or until December 31st, 2024) to report your information to FinCEN.
    • If your reporting company was formed between January 1st, 2024 and December 31st, 2024, you have 90 days to report your information to FinCEN.
    • If your reporting company was formed after January 1st, 2025, you only have 30 days to report your information to FinCEN.
    • When your reporting company has a change in ownership, a new mailing address, or someone discovers an error in a previous report, you only have 30 days to file the corrected reports.


It is best practice to get these reports in as soon as possible. In fact, if you formed a company in the first few months of 2024, these reports have already come due.

And if you don’t want to submit these reports, we here at Corporate Direct can report this information for you. For more information on the CTA and its reporting requirements, you can schedule a free 15-minute consultation with one of our incorporating specialists by clicking the link here:



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Spending Money in College: Mistakes & Solutions for College Students

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For most people, college is the first time to gain independence from your parents. But when college kids have this sort of freedom, they are prone to making many mistakes. And many of these mistakes involve money.

While many of these financial mistakes are made, they can certainly be avoided. In this article, we discuss the most common types of financial mistakes, and what you can do to avoid them.


Mistake #1: Not having a budget

The first mistake college students make is not capping how much money they spend each month. College students tend to rack up the bill on a lot of items, which can include food, coffee, and alcohol. And the solution to this problem is quite simple:

Solution: Create a budget

When college students create a budget, they can both track their expenses and see where their money is going. Having this in place will likely stop them from overspending. And it’s very easy to do. In fact, there are several different apps out there that can help college students create a budget and track what they buy.

Mistake #2: Impulse spending

The second mistake is when college students make purchases on a whim. This can happen when college students don’t track their expenses, or make impulse purchases with a credit card. When college students do this, they aren’t thinking of the long-term impact of their purchases. And this drains their funds very quickly.

Solution: Pay off the credit card in full

The best solution to a college student’s impulse spending is making sure that they pay off their credit card bill in full every month. Doing this will teach them a few things. First, it will teach them to use the card responsibly. When this happens, they won’t make as many bad purchases, and they may avoid any high-interest debt in the future. Second, it will teach them to live within their means. When college students live frugally, their monthly credit card bills will end up being much lower.

Mistake #3: Financial aid mistakes

Mistake #3 involves making mistakes with financial aid. One such mistake involves using the financial aid on nonessential items, including clothes and electronics. And once college students graduate, it is also common for them to ignore repaying their student loans.

Solution: Know the terms of the financial aid

In order to prevent the misuse of financial aid, college students must understand the aid they are receiving. This involves reading the terms of the aid they are receiving. Once college students do this, they will understand what they can and can’t use the aid for, what the interest rates are, and when they must pay off their loans. And when college students become aware of these things, they will likely spend their aid wisely. They may even start paying off their debts during college.

Mistake #4: Not setting aside money

The fourth mistake involves not setting aside money for the future. Unfortunately, colleges don’t teach financial education. Because of this, college students don’t fully understand the importance of investing and having an emergency fund.

Solution: Set up new accounts

To solve this problem, college students can set up new accounts. First, they can set up a savings account. If any unexpected expenses pop up, the funds from the savings account can cover them. Second, they can set up an investment portfolio. Every month, college students can transfer funds into the account. Over time, their portfolios will likely increase in value. When college students do these things, it will help them financially both in the present and in the future.

Mistake #5: Relying too heavily on their parents

The fifth and final mistake college students make is only relying on their parents for money. When this happens, college students have no independence because they only have one source of income.

Solution: Get a part-time job

One way to solve this issue would be for college students to get a part-time job. Once this happens, they will have a second stream of income. This can be used to cover other expenses like groceries, rent, and vacations.


College is the time for people to learn to be independent and functioning adults. If college students implement these solutions, they will be much more financially savvy both in college and in their adult life.


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The Difference Between Certificated And Uncertificated Securities

The Difference Between Certificated and Uncertificated

By: Ted Sutton, Esq.

A security refers to an ownership interest in a business or a financial instrument. These ownership interests can be in a private LLC, or corporation, or in a publicly traded stock or bond. There are two choices for holding ownership interests in a security. You can either own it either as a certificated security, or as an uncertificated security. In this article, we will walk you through the differences between the two, and when it’s best to use each one. 

Uncertificated Security

An uncertificated security is a security whose ownership is not represented by a physical stock certificate. These security interests are registered on the books of the issuer, and are tracked electronically. Given technology’s role today, this is how most securities are held. Other names for uncertificated securities include book-entry securities and electronic securities.

Pros of Uncertificated Securities

Securities can be bought and sold electronically. There are many different trading platforms today that you can buy and sell from, and given the ease of trading uncertificated securities, it is the faster, more efficient option.

The advantage is that there is no need for filling out and transferring paperwork, which reduces the overall cost of buying and selling stocks. And because uncertificated securities aren’t in paper form, there is little risk that they can be lost or stolen.

Cons of Uncertificated Securities

While uncertificated securities are preferred in many situations, there are some downsides to using them. One of them is that its owners don’t have physical proof of ownership. This can be an issue when owners are perhaps concerned about hacking or a widespread loss of data. A physical certificate avoids such risks.

And most importantly, using uncertificated securities does not provide nearly as good asset protection. Courts treat uncertificated securities as “general intangibles.” General intangibles are non-physical assets, like electronic stock ownership, and courts in your state of residence can easily exercise jurisdiction over them. So, when an individual is sued in their home state, their home state court can exercise jurisdiction over their uncertificated security.

Here’s an example. Let’s say that you live in California and own an interest (that’s an uncertificated security) in a Wyoming LLC. You then get sued in California. Because your interest in the Wyoming LLC is a general intangible that follows you to California, California will apply their law to the dispute. In this case, Wyoming’s stronger charging order protection wouldn’t apply to protect your interest in the Wyoming LLC.

Certificated Security

A certificated security is a security that is represented by a physical certificate. When you buy a certificated security, you receive a physical paper evidencing your ownership. This stock certificate contains important information about the security, including the owner’s name, the number of shares owned, the date that the owner received the security certificate and any restrictions on transfer. When you sell the stock, you transfer the physical certificate to the buyer.

Pros of Certificated Securities

The advantages to having certificated securities is greater asset protection, as discussed below.

Cons of Certificated Securities

There are more obvious cons to owning a certificated security. Selling a certificated security is more difficult and time consuming. Given how easy it is to buy and sell uncertificated securities online, trading certificated securities for public companies is not the best option for investors. Another downside is the cost associated with physically transferring the security certificate from a seller to a buyer. And because they’re in paper form, these certificated securities can easily be lost or stolen. But for your own personal investments let’s consider Armor-8.


At Corporate Direct we offer certificated securities for your own personally held Wyoming LLCs with our Armor-8 protection.

There are many states that offer weak asset protection (like California). However, if you are a resident of one of those states, there is a little wrinkle in the law that can protect you. Under the UCC Article 8, if the certificated security is delivered and kept in one state, then that state’s law will apply to how a creditor can reach its assets. Said another way, this means that if the security certificate is delivered and kept in Wyoming, then the out of state court must apply Wyoming’s charging order, a much stronger asset protection remedy.

We have a safe deposit box at a Wyoming bank to ensure that the security certificate is delivered and kept in Wyoming. This places the security certificate out of reach from your home state creditors. And the only way for them to reach it is to have a lawyer in Wyoming get a court order to release the paper certificate. This is a cumbersome process for an attorney on a contingency fee. The hassle factor gives you better asset protection.


Holding a certificated security can come in handy when you don’t want to sell your interest and want to protect your assets. However, uncertificated securities are helpful where they are regularly bought and sold on an exchange. Knowing this difference may be able to help you before you set up your business.

We here at Corporate Direct can help you protect your assets with our Armor-8 protection. This will provide you with a certificated security interest held in Wyoming for your protection from creditors.

For more information on our Armor-8 protection, schedule a consultation with us.

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

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Texas: The New Hotbed For Business?

Texas: The New Hotbed For Business?

By: Ted Sutton, Esq.


In the business realm, Texas has become the lone star that is burning brighter. And it may become a top state for business in the near future.


They say that everything’s larger in Texas. This also includes a larger demand to form a business in the Lone Star State. Forming a business in Texas has become a popular alternative to other larger states like California and New York. Given its thriving economy and a favorable tax climate, Texas has seen an increase in new LLC formations.


These formations may increase further. Under the recently-passed Senate Bill 2314, Texas now recognizes the charging order as the exclusive remedy for both single-member and multi-member LLCs.


The charging order apples when an LLC member is personally sued and loses in court. But in order for the lawsuit winner to collect anything from the LLC, they must wait until any distributions are made from it. So, if no distributions are made, then the winner doesn’t collect anything from the LLC. This is true, even if the loser is the only member of the LLC. This new law takes effect on September 1, 2023.


This new law overrules Devoll v. Demonbreaun, a 2016 Texas Court of Appeals case[1]. Devoll held that the charging order was not the exclusive remedy, even if it was charged against an LLC’s membership interest. This new Senate Bill changes this outcome. Now Texas LLC owners are better protected in the event they are personally sued.


On top of this, Texas has also just formed the Texas Business Court. Similar to the Delaware Court of Chancery, this new court system will handle corporate disputes and complex litigation matters. Texas will eventually set up these courts in Austin, Dallas, Fort Worth, Houston, and San Antonio. This court will help expedite lawsuits and provide case law to resolve these disputes. But most importantly, this will attract even more business to the state. These new courts are set to start on September 1, 2024.


Another thing Texas has is its large population and rapid population growth. Currently, Texas is the second largest state with 30 million people. And since 2010, Texas has had the third-fastest growth of any state at a whopping 20%. Given these recent trends, it could take that top spot in the not-too-distant future.


Could Texas overtake Delaware and Wyoming as the best state for businesses? Only time will tell. However, these recent developments show that it may be possible.


[1] Devoll v. Demonbreun, No. 04-14-00331-CV (Tex. App. Aug. 31, 2016).



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Five Reasons Why We Don’t Recommend DAO LLCs

We Don't Recommend DAO LLCs

By: Ted Sutton, Esq.

Over the last few years, the use of blockchain technology has exploded onto the scene. DAOs have grown in popularity alongside it.

So, what exactly is a DAO? A DAO is a new entity form that stands for Decentralized Autonomous Organization. What’s unique about them is how they can be managed. Like other entities, individual members can manage DAOs. What makes them different is that they can also be managed by a smart contract on the blockchain ledger. This new and unique form of management has encouraged people to form them as partnerships, which offer no protection. Because of this, a better vehicle was needed.

In response to this demand, some states have already enacted new laws. Wyoming has passed legislation allowing for DAOs to be formed as “DAO LLCs.” Tennessee has passed a similar law allowing for Decentralized Organizations, or “DO’s.” These entities can be formed with the Secretary of State and provide the same asset protection as LLCs. Utah also passed a similar act that allows for the creation of “limited liability decentralized autonomous organizations,” or “LLDs” for short.

Proponents say that this smart contract management makes the DAO easier to be managed remotely, more efficient to govern, and removes any management conflicts between humans. While these things may be true, there are five reasons why we here at Corporate Direct do not recommend forming DAOs for our clients.

    1. The Smart Contract is open-sourced

The first reason is that the smart contract is available for public view. Because the smart contract is on the blockchain ledger, anyone can see how your DAO is being managed. On top of this, the Wyoming Secretary of State requires DAO applicants to include the smart contract’s public identifier when forming the DAO LLC. So anyone can see your LLC’s roadmap. Do you want the world knowing how you distribute profits? Unlike a DAO’s smart contract, an LLC’s operating agreement or a Corporation’s bylaws are not available for public view. Every other entity provides this type of privacy. DAOs do not, which is why we stay away from them.

    1. The DAOs can still be hacked

Second, DAOs can still be hacked, even with a smart contract in place. This happened in the California case of Sarcuni v. bZx DAO. In Sarcuni, people deposited digital tokens into the bZx DAO in exchange for membership interests. Over time, the DAO accumulated over $50 million worth of these tokens.

One day, one of the members received a phishing email from a hacker. After the member opened the email, the hacker was able to access the member’s private key and take $55 million worth of funds from the DAO. One would think that the DAO’s smart contract would have stopped this transfer. But that was not the case. In fact, the DAO had lost $9 million in three previous hacks.

On top of this, the court also found that because the DAO is not a recognized entity type under California law, DAO’s are treated as general partnerships. This means that if the DAO is sued, each of its members are personally on the hook for any liability. Was anyone sued personally for the loss of $64 million in the Sarcuni case? Under California law, they could be.

Given the recent rise in computer scams, any business can be a victim to them. But because DAOs with smart contracts face these same risks, they are a much less appealing option. Even worse, if your state doesn’t recognize DAOs, any member is individually liable for any claims brought after the DAO has been hacked.

    1. The law still applies to DAOs and their owners

We also don’t recommend the DAO since they may still be subject to other regulatory requirements, even when its owners try to avoid them. This happened in the case of Commodity Futures Trading Commission v. Ooki DAO. In Ooki, BZero X LLC operated a trading platform where people would exchange virtual currencies on the blockchain network. In an attempt to avoid regulatory oversight from the CFTC, BZeroX transferred their protocol into the Ooki DAO. After this move, the CFTC filed suit against Ooki.

The court found that because the DAO traded commodities, the DAO was subject to regulation under the Commodity Exchange Act (CEA). On top of this, the court found that under the CEA, DAOs are treated as unincorporated associations. Like general partnerships, this also means that Ooki’s members are subject to personal liability.

While people may think that they can use DAOs as a conduit to avoid the law, they are sorely mistaken. You are much better off using a traditional LLC.

    1. DAO owners can be personally liable if the DAO is sued

In states that do not have DAO legislation on the books, DAO owners can be personally liable if the DAO gets sued.

The Sarcuni court found that DAOs are treated like general partnerships. In addition, the Ooki court found that DAOs are treated like unincorporated associations under California and Federal law. In both of these cases, after the DAO was sued, all of its owners were personally liable for any judgment entered against each DAO.

From a liability standpoint, this is disastrous for every DAO member. However, members of properly formed LLCs and Corporations do not have to face this issue. If those entities are sued, their owner’s liability is limited to their capital contributions. Not so in states that don’t recognize the DAO as its own entity.

    1. There is too much legal uncertainty with DAOs

The fifth and final reason for DAO avoidance is that there is too much legal uncertainty associated with them. Only three states have DAO laws on the books. Because of this, there are neither enough regulations nor enough case law to regard DAOs as a safe entity to recommend to our clients.

There are simply too many unknowns at this point in time. And we don’t want our clients to be the test cases.


There is a chance that some of these things may change in the future. Additional states could pass legislation that treat DAOs like LLCs with their own liability protections. Smart contracts could do a better job of stopping hackers. Lawmakers and agencies may also enact clearer regulations regarding DAOs. But because people face these issues when forming DAOs now, we do not recommend them for our clients.

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

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AI May Be Infringing On Your Copyrights

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By: Ted Sutton, Esq.


Many people have used AI to generate new artworks. A few of them can generate an image. And as we saw with the artificial hit “Heart on My Sleeve” meant to sound like Drake and The Weeknd, AI can also generate new songs.  But if you make these new works, you could face liability.

AI stands for artificial intelligence. This intelligence simulates that of humans, as it teaches machines to learn, perform tasks, and make decisions. Hot new search engines such as ChatGPT and Google Bard are forms of AI.

Other AI programs such as Midjourney and Stable Diffusion generate paintings. Users can input text describing the painting they want, and the programs will generate a painting for them. While you may love the final painting, you may hate the fact that you could be sued for copyright infringement.

What is a Copyright?

A copyright is any expressive work of art made by someone. These works can include books, movies, songs, paintings, and even sculptures. People who make these works can register them with the Copyright Office to obtain copyright protection.

What is Copyright Infringement?

A person can infringe on another’s copyright if they either reproduce the work, or make a similar work without the copyright owner’s permission. With people, infringement is more straightforward. But when AI infringes on others copyrights, the issue is much more complicated.

AI can infringe on other’s copyrights in two ways.

AI Training Process

The first way AI can infringe on copyrights is through its training process. All new forms of AI are trained to create new expressive works that could be copyrightable. But in order to train the AI to do this, its programmers need to show it large amounts of data from the internet. Some of this data, however, is copyrighted.

AI Outputs

The second way AI can infringe on copyrights is by the output. When a user enters text into an AI program, the output, or the final product, may be very similar to an already copyrighted work.

Is it Infringement?

Under current US case law, a copyright holder can show copyright infringement by proving two things:

  1. That the infringer has access to the copyrighted work; and
  2. That the infringer’s work was “substantially similar” to the copyrighted work.

Let’s use “Heart on My Sleeve” as an example here. Before generating the song, the AI that made it certainly had access to copyrighted works by both Drake and the Weeknd. How else would the voices in the song sound exactly like them?

Also, while you could make the argument that “Heart on My Sleeve” was a different song, it’s still obvious that it sounds “substantially similar” to anything Drake or The Weeknd produces.

Because of this, either the AI user or the AI company could be liable for copyright infringement.

Does the AI have a defense?

One defense that AI companies can assert is the fair use defense to copyright infringement. If an infringer copies the copyrighted work and uses it as a “fair use,” that infringer will be protected. Fair use of a copyrighted work can include criticisms, commentary, satire, news reporting, and teaching.

But does using copyrighted work in the AI training process, or creating an output that is similar to a copyrighted work, constitute a fair use?

Courts look at 4 factors to determine if a use is fair:

  1. The purpose and character of the use, including whether the use is of a commercial nature or is for nonprofit educational purposes;
  2. The nature of the copyrighted work;
  3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
  4. The effect of the use upon the potential market for or value of the copyrighted work

We’ll use “Heart on My Sleeve” again.

For the first factor, if the use is more commercial in nature, it will likely not be fair use. It is highly unlikely that the use would be for educational purposes. Plus, the person who posted the song made several thousand dollars after its release. So, under the first factor, “Heart on My Sleeve” is likely not a fair use.

For the second factor, if the nature of the copyrighted work was creative or imaginative, then the infringing work is likely not a fair use. Clearly, because Drake and the Weeknd’s are world famous artists, their copyrighted works are creative. Because of this, “Heart on My Sleeve” is likely not a fair use under the second factor.

The third factor, however, isn’t as clear. An AI company could argue that because the AI looked at many different songs, “Heart on My Sleeve” took a small and insubstantial amount from Drake and the Weeknd’s copyrighted works. Because of this, the third factor could constitute fair use.

The fourth factor focuses on the economic effect of the infringing work. If the infringing work would cause economic harm to Drake and the Weeknd, then the work likely would not be a fair use. As described before, “Heart on My Sleeve” made thousands of dollars. That is money that could have gone to Drake and the Weeknd. Because of this, “Heart on My Sleeve” is likely not fair use under the fourth factor.

Drake and The Weeknd could claim that the AI-generated “Heart on My Sleeve” is not fair use. However, a court could rule either way under this untested area of copyright law.

Who owns the Copyright?

Another question is if a copyright owner sues for copyright infringement, who is the rightful owner of the copyright?

Copyright owners are usually the “authors” of the copyrighted work. But when a user generates a work by using AI, it is unclear who the true “author” of the copyrighted work is. Is it the person who entered the text? Or is it the AI software that was both trained to and actually generated the image?

Another question to ask: who should you sue for copyright infringement? The AI company, or the person who used the AI?

Also, would it be fair to hold the user liable? They didn’t know what the final product would look like. And they certainly didn’t train the AI by using other people’s copyrights.


Some people have already filed lawsuits against AI companies. Getty Images has already filed a lawsuit against Stable Diffusion. Getty alleges that Stable Diffusion improperly used their photos to train its AI, in violation of the copyrights that Getty holds.

Individuals have also filed suit against these AI companies. Last year, a group of artists sued several AI companies. They allege that the AI companies both improperly used their photos to train the AI, and that the AI’s outputted photos are substantially similar to their own works.

Because AI brings a new set of untested issues to copyright law, it is unclear who the court would rule for.


As of right now, there are far more questions than there are answers. But in order to have these much-needed answers, we will need several things to happen.

First and foremost, Congress needs to act as soon as possible. They need to determine who owns the copyright to AI-generated works, who authored the work, and when exactly does an AI-generated work infringe on another’s copyrighted work? If they don’t, then there’s a good chance that innocent people who use the AI could be sued for copyright infringement.

To protect themselves from these lawsuits, AI users will need to demand more from the AI companies. Before using their services, companies should inform users that they have permission to both use copyrighted works in their training data and the outputted result. This will ensure that innocent users will not be sued by copyright owners.

But before they can do this, AI companies will need to get permission from the copyright holders themselves. These companies will not only need to obtain the consent of copyright owners, they will also need to compensate them. It is only fair for copyright owners to receive a payment if they agree to have the AI use their works.

Copyright holders should also do their due diligence. They should be on the lookout to see if AI companies are using their works. If they do, they should demand compensation.

Lastly, insurance companies and third-party vendors should demand from AI companies that they are licensed to use others works. This will help protect all parties from liability if a copyright infringement suit is brought.


AI is changing the world at a rapid pace. Some of that change may be welcomed. However, this changed is certainly not welcomed by copyright owners. We need to act fast to address these issues. If not, innocent people could be liable through no fault of their own.




Paul Manafort Case and Metadata: The Overlooked Factor That Determined His Fate

In March of 2019, former Trump campaign chairman Paul Manafort was sentenced to 7.5 years in prison on 8 counts. One count was conspiracy to defraud the United States due to his ties to Ukrainian officials. But could this count have been avoided? The answer is yes, and here’s why.

On January 8, 2019, Manafort’s attorneys filed a sensitive motion in Federal Court that included some redactions. Once these documents were sent to the opposing counsel, they were able to track the changes made to the redacted portion of the document.

This allowed Robert Mueller’s team to un-redact the information that discussed Manafort’s continuing ties to Ukrainian oligarchs after his time with the Trump campaign, and ultimately resulted in a longer prison sentence.

Instead of cutting and pasting the redacted information into another document, as Manafort’s attorneys should have done, they simply blacked out the information in the same document.

Had Manafort’s counsel moved that information into another document and reinserted it into the motion, the opposing counsel would not have been able to uncover the damning evidence. Many of you might be asking: How could the opposing counsel uncover this information? The answer: Metadata.

What is Metadata, and How Does it relate to the Paul Manafort Case?

Metadata in short is data about data. There are many different types of metadata, but it is commonly used to determine information relating to when and how documents were created, accessed, or changed.

While it is both easy and helpful to have metadata in many situations, it is of the utmost importance for users to be aware of how easy it is for sensitive information to be placed in the wrong hands. Just ask Paul Manafort.

Fortunately, there are ways to remove metadata to prevent any inadvertent disclosures. The first way is by manually removing data through various software programs in use.

Document editing programs like Microsoft Word have document inspecting features that allow the editor to inspect and remove any changes, sensitive content, or any other forms of metadata to ensure that any other viewer cannot uncover anything that you do not want them to see.

The second way is by installing additional scrubbing software to automatically clean metadata on other software programs. These software programs include iScrub, Doc Scrubber, and cleanDocs, and they can aid you tremendously if you do not want to manually remove metadata.

Given all of the measures that Paul Manafort’s attorneys could have taken to preserve that redacted information, it is clear that he would not be serving extra time for his ties to Ukraine had his attorneys not been either careless or incompetent.

The public would not have found out about his continual ties to Ukraine, and the prevailing narrative of the mainstream media would be very different. It is crucial that we be aware of the downsides of metadata. If we are not, many severe unintended consequences can occur. Just ask Paul Manafort.

Ted Sutton is a graduate of the University of Utah and will be attending the University of Wyoming Law School in the Fall of 2019.

Are Individuals Protected Within Their LLC?

New Texas Case Sends Shock Waves

LLCs are set up to make personal assets inaccessible for any obligations of the entity. Protection may be lost, however, if you are not aware of your personal conduct when managing business through your LLC. The case below deals with water and environmental issues, an area where governments like to hold individuals liable.

In State v. Morello, the Texas Supreme Court recently found that an agent or a member of an LLC can be found personally liable for any violation of statutes or regulations.

In Morello, the State of Texas brought a civil action under the Texas Water Code against both Bernard Morello and his single member entity, White Lion Holdings, LLC (White Lion).

In 2004, Morello purchased a piece of property that was subject to a hazardous waste permit and compliance plan under the Texas Commission of Environmental Quality (TCEQ). After the purchase, Morello assigned the TCEQ compliance plan and all other property interests from his own name into White Lion.

In hindsight, Morello should have first taken title in the LLC, as he would have removed his individual name from the chain of title. Once your name is associated with the title to environmental problems, you can be held personally responsible for the remediation and cleanup.

Over time, the obligations were not performed, and the state decided to press charges against both White Lion and Morello for violating the TCEQ compliance plan.

The state’s argument for targeting Morello as an individual rested on section 7.102 of the Texas Water Code stating that any “person who codifies, suffers, allows, or permits a violation of a statute…within the [TCEQ’s] jurisdiction…shall be assessed” civil penalties.

Morello’s argument depended on a section of the Texas Business Organizations Code which states that, “a member…is not liable for a debt, obligation, or liability of a limited liability company.”

Morello eventually worked its way up to the Texas Supreme Court. The high court ultimately ruled in favor of the State, writing that “the State’s position is not based on the Business Organizations Code; it is based on the Water Code.” The Texas Supreme Court also found Morello personally liable on three primary arguments.

First, the Court found no reason whatsoever to exclude an individual from the term “person” from section 7.102. Second, the Court found that White Lion being the sole owner and being solely responsible for the compliance plan was immaterial. Third, the Court cited cases stating that a corporate agent may not escape individual liability where that agent “personally participated in the wrongful conduct,” citing that Morello’s actions were in his capacity as an agent and member of White Lion.

The Court’s opinion stated that where a statute applies to any “person,” an “individual cannot use the corporate form as a shield when he or she has personally participated in conduct that violates the statute.”

Haven’t We Seen This Before?

Federal and state courts have consistently rejected the position that where an environmental statute applies to a “person,” corporate officers can avoid individual liability for violating a statute if they personally participated in the wrongful conduct:

Riverside Mkt. Dev. Corp. v. Int’l Bldg. Prods., Inc., 931 F.2d 327, 330 (5th Cor. 1991) (concluding that the federal act “prevents individuals from hiding behind the corporate shield” when they “actually participate in the wrongful conduct”)
U.S. v. Ne. Pharm. & Chem. Co., 810 F.2d 726, 745 (8th Cir. 1986), cert. denied, 484 U.S. 848 (1987) (“[I]mposing liability upon only the corporation, but not those corporate officers and employees who actually make corporate decisions, would be inconsistent with Congress’ intent to impose liability upon the persons who are involved in the handling and disposal of hazardous substances.”)
T.V. Spano Bldg. Corp. v. Dep’t pf Natural Res. & Envtl. Control, 628 A.2d 53,61 (Del. 1993) (concluding that the State could impose personal liability on an officer who “directed, ordered, ratified, approved, or consented to the improper disposal”)
People ex. Rel. Burris v. C.J.R. Processing, Inc., 647 N.E.2d 1035, 1039 (Ill. App. Ct. 1995) (“[C]orporate officers may be held liable for violations of the [state environmental act] when their active participation or personal involvement is shown.”).

While these cases involved different statutes than the one at issue here, it is important to know that under an environmental regulation applicable to a ‘person,’ an individual cannot use the corporate form as a shield when he or she has personally participated in conduct that violates the statute.

And Morello was not held liable for a debt, obligation, or liability of White Lion as he asserts is prohibited by the Business Organizations Code. See Tex. Bus. Orgs. Code § 101.114. Rather, he was held individually liable based on his individual, personal actions.

The Morello case is groundbreaking and could have a ripple effect across Courts in the United States. It is important for people to be aware of their behavior when acting as a member or an agent of an LLC, even before the entity is formed. This recent Texas case demonstrates that in certain specific circumstances individual persons may be found personally liable for any wrongdoing.

Ted Sutton is a graduate of the University of Utah. He will be attending Law School at the University of Wyoming in the Fall of 2019.

9 Rules to Consider Before Signing an Arbitration Provision

By Theodore Sutton

Binding arbitration is becoming a popular method to resolve disputes in real estate transactions. Arbitration provides certain advantages that courts do not. For instance, arbitrations are private, they resolve disputes in a more timely and efficient manner, and they obviously provide a much cheaper alternative to a full-on court trial. While arbitrations provide all these benefits, parties entering a contract must pay special attention to the language written in arbitration clauses. Many undesirable consequences can arise if the language in these clauses is vague and unsatisfactory, such as having unenforceable provisions or prohibiting the use of discovery. While laws differ from state to state (and be sure to consult your own attorney) below are some general issues to be considered before an arbitration provision is signed:

1. Transaction Documentation – The arbitration provisions are required to be included as an alternate dispute resolution matter within the transaction documentation. These provisions should be more general in order to encompass different types of disputes, such as tort and contract disputes. Stand-alone arbitration agreements are more definitive, and may be useful to also be included within the documents related to your specific transaction.

2. Arbitration Commencement – A provision acknowledging that both parties are voluntarily agreeing to an arbitration must be included in the contract. It is also imperative that this provision states that:

  • The parties are knowingly and voluntarily waiving their right to a jury or court trial.
  • Any uncooperative party be compelled to arbitrate through a court order.
  • The arbitration is binding and may not be appealed. (Know that some states don’t provide for exceptions).

3. Arbitrator Selection – These selection provisions must be clearly established so both parties will have a say in selecting the arbitrator, the person deciding your case. This is important because it allows both parties to select either an experienced retired judge or appellate justice, a private attorney or a licensed arbitrator.

4. Rules of Evidence – In some states, arbitrators are allowed to be “arbitrary.” The easiest way to avoid this is to include an arbitration provision that requires the arbitrator to follow to the rules of evidence in legal proceedings.

5. Discovery – Discovery rights (the right to discover the other side’s evidence) must be specified. Otherwise the arbitrator is not required to permit discovery. Specific dates and times must be provided in order for the discovery to be conducted.

6. Court Reporter – Court reporter costs are frequently ignored. One way to prevent this is to share the cost in the contract to avoid disputed fees.

7. Initials – Arbitration provisions must be initialed by both parties within the contract in order for them to be enforceable.

8. Exceptions – Exceptions from arbitration may be included in arbitration provisions. Some common exceptions are foreclosure proceedings, unlawful detainer actions, and injunctive reliefs.

9. Judgment Entry – In some states, it is required to authorize the arbitrator to enter their award as a court judgment.   Arbitration can save your time and money. But as with any legal matter, you want to do it right. This starts with a good contract. Be sure to consult your attorney on arbitration issues. As mentioned, the rules vary from state to state.

Theodore Sutton is a graduate of the University of Utah and will attend the University of Wyoming Law School in the Fall of 2019.