Robert J. Hahn | CMDA Law

Combating the Rise of Cyber Crime

January 4, 2018 By Robert J. Hahn

At the recent Securities Exchange Commission and Department of Justice Enforcement and Litigation Update Conference, speakers included the Director of the SEC Regional Office, Chicago, The Chief of the White Collar Unit of the US Attorney’s Office, Detroit, the Detroit Supervisory Special Agent of the FBI, as well as in-house counsel for local businesses. Much of the discussion was about the rise of cyber crime. The FBI agent said “There are two types of companies, those that have been hacked and those that just don’t know they have been hacked.”

As attorneys we are seeing this crime wave first-hand, and we have recently seen an increase in the number of clients who have been victimized by cyber criminals. For example, we obtained a favorable settlement in a matter in which our clients were closing on the purchase of a condo in Detroit when they received an email, ostensibly from their realtor, stating the closing had been rescheduled. They also received a separate email stating that the wire instructions for the down-payment for the condo had been “updated and corrected.” In fact, the “updated” instructions redirected the payment for the condo to a fraudster’s account, which then immediately transferred to an account in Hong Kong. (At the conference, the FBI said the rate of recovery for these crimes is 34%).

In speaking with the FBI, we have learned that there is a ring operating out of Hong Kong targeting Detroit for cyber crime. They hack the computer system of banks, brokers, title companies, and other transaction participants, and then watch as the transactions develop and strike just before closing. They are invisible until they send the fake payment directions. An easy way to prevent this type of fraud is to verify the wire transfer directions by a phone call to the office which ostensibly sent the wire transfer instructions. Do not trust the phone number on the email. Be sure to obtain the phone number independent of the wire instructions.

If you believe you have been the victim of a fraudulent scheme to redirect your down payment, or other cyber crime, it is important that you act quickly. Immediately contact the regional office of the FBI, your bank, and your legal counsel.

Robert J. Hahn is an attorney in the Livonia office of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on business law, utility law, and litigation. He assists business clients with matters relating to corporate and commercial litigation, collections, securities, and real estate. He may be reached at (734) 261-2400 or rhahn@cmda-law.com.

Attorney’s Article on Crowdfunding Featured in IRWA Newsletter

March 5, 2015 By Jennifer Sherman

Bob Hahn’s article “Crowdfunding Bill Intended to Assist Entrepreneurs and Small Businesses” was featured in the February, 2015 edition of the International Right of Way Association (IRWA) newsletter.

On December 30, 2013, Governor Snyder signed into law Public Act 264, Michigan Invests Locally Exemption (MILE), which permits crowdfunding for small business. It is an intrastate exemption from the State of Michigan and Federal securities laws, whereby Michigan residents can invest in Michigan businesses.

Crowdfunding refers to funding a company by selling a small amount of equity to a large number of investors. Michigan is one of the first states to give people the opportunity to support growing local businesses such as restaurants, manufacturers, merchants, and service providers, by helping to fund their startup and growth in exchange for a return on investment. These investments can be made online. If the entire deal stays within the State, the Federal Government does not have jurisdiction, and Federal securities regulations do not apply to the transaction. On signing the bill, Governor Snyder said that the new law will streamline government procedure and eliminate unnecessary regulation.

Raising capital is a challenge all small companies understand. Often small business owners have little access to credit or capital investment and are limited to raising investment or borrowing from family or friends. The crowdfunding process is a new and innovative way for Michigan businesses to gain access to capital to grow and expand, and to create jobs. Because it is less formal than the process of registration of securities, it is important for investors to carefully investigate and evaluate investment opportunities.

The crowdfunding law is intended to allow for more efficient access to capital. It permits a business to raise up to $1,000,000 per year or $2,000,000 per year if the issuer provides audited or reviewed financial statements to the prospective purchaser. An unaccredited investor having a net worth of less than $1,000,000 can invest up to $10,000 a year per business. Accredited investors, having an income in excess of $200,000 (or $300,000 for a married couple) or a net worth in excess of $1,000,000, can invest an unlimited amount.

On April 5, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act), which authorizes crowdfunding at the national level. Because of broad political support, it is expected that the Securities Exchange Commission and the Financial Industry Regulatory Authority will complete the rule making process this year, although the new laws provisions governing equity crowdfunding have been criticized as unduly cumbersome.

Crowdfunding has potential drawbacks. Costs, including accounting and legal, may be significant. The law permits only limited direct advertising, and requires disclosures to investors and the State of Michigan on a quarterly basis. Investors will have to be careful to avoid fraud and will have to consider the possible difficulty of selling their interests if they wish to get out of an investment.

We will address the issue of liquidity in a second article discussing the recently introduced House Bill 5273, which would permit the creation of local stock exchanges, and would permit investors and entrepreneurs to buy and sell in state stocks.

Robert J. Hahn is an attorney in our Livonia office where he concentrates his practice on corporate and business law, commercial litigation, utility law and collection and creditor’s rights law. He may be reached at (734) 261-2400 or rhahn@cmda-law.com.

Michigan Investment Markets Bill Would Permit Local Stock Exchanges

September 1, 2014 By Robert J. Hahn

On May 22, 2014, the Michigan House of Representatives passed House Bill 5273, Michigan Investment Markets (MIM). This Bill amends the Michigan Uniform Securities Act to provide for the creation and regulation of intrastate security markets or exchanges. It is designed to complement the Michigan Invests Locally Exemption (MILE), recently signed into law by Governor Snyder, which permits investment crowdfunding for small businesses.

The Bill is currently pending before the Senate. Given the strong support for the previously enacted crowdfunding legislation and the strong vote in favor of the Bill in the House of Representatives, it is expected to pass when brought to a vote later this year.

A Liquid Market for Crowdfunding Investments

The purpose of the MIM Bill is to legalize and facilitate the transfer of crowdfunding investments. The exchanges created under the proposed law will allow companies, after raising capital through crowdfunding, to apply for listing so shareholders could trade their shares.

The Bill defines “Michigan Investment Market” as a broker dealer, exempt from registration under federal securities laws, which provides a market or exchange, and includes an online market or exchange operated through a web portal. These markets will conduct the purchase and sale of crowdfunded securities issued under the intrastate offering exemption created by the MILE Act. Connecting buyers and sellers of interests in crowdfunded businesses will create liquidity of shares, enlarge the market for companies seeking money through the crowdfunding mechanism, and increase the value of these interests to investors.

A Michigan Investment Market will only serve businesses that are resident and doing business in the State of Michigan at the time the business conducts any offers, sales, or resales of its intrastate securities. The Bill would require the Market to be solvent, not subject to a disciplinary court order or injunction, and not a defendant in a pending court proceeding. It would also require the Market to keep records of transactions that would be subject to examination by regulators, and provide sanctions and penalties for violations of the law or fraudulent conduct or transactions.

Challenges

The MILE Act and the Michigan Investment Markets legislation present new and untested opportunities for Michigan entrepreneurs and business owners. Although the crowdfunding movement is spreading across the country, it is still in its infancy and complex issues need to be resolved in order for it to succeed. One critical question is the relationship between the State law, the Michigan Invests Locally Exemption, and the crowdfunding provision of the Federal JOBS Act recently signed by President Obama, which appear to be in conflict. Anecdotal evidence suggests that this conflict has created confusion in the business community and has slowed implementation and use of the MILE Act.

In addition, it will be necessary to construct the infrastructure to permit issuers and investors of crowdfund interest’s access to reliable information and transaction hubs for the sales of interest by investors. It will be important to create confidence in valuation of the interest, permit proper price discovery, and ensure accurate settlement of transactions. In other words, the infrastructure of the markets must be developed in order to draw investors and foster the growth of small business as intended by the MILE Act and the Michigan Investment Markets legislation. It can be anticipated that as the regulatory environment takes shape, standardized business practices will emerge. With time and use, greater certainty will emerge that will permit these new opportunities to fulfill their promise.

In future articles we will look at developments in crowdfunding and the establishment of liquid markets in crowdfunded securities. We will also discuss the use of crowdfunding by municipalities to develop local business and improve communities.

Crowdfunding Bill Intended to Assist Entrepreneurs and Small Businesses

June 11, 2014 By Robert J. Hahn

Michigan Court of Appeals Upholds Non-Recourse Mortgage Loan Act

June 3, 2013 By Robert J. Hahn

In what has been called a big victory for borrowers of commercial loans, the Michigan Court of Appeals has upheld the Michigan legislature’s recent passage of the Non-Recourse Mortgage Loan Act (NMLA). In the case of Wells Fargo Bank v Cherryland Mall Ltd Ptnsp, the Court addressed the issue of whether developer David Schostak is personally liable for a guarantee on an original $8.7 million non-recourse loan obtained for the purpose of renovations to the Cherryland Center Mall near Traverse City, Michigan.

Generally, a “non-recourse loan” means a commercial loan secured by a mortgage on real property. In a non-recourse loan, the lender takes the risk of a borrower’s insolvency, inability to pay, or lack of adequate capital. In the event of default, the lender is limited to recovery of the loan by the sale of the asset. The asset used as collateral, as well as the money that flows from the asset, are isolated by covenants referred to as recourse triggers or carveouts, which are generally related to bad acts.

In the case of the Cherryland Center Mall, the foreclosure sale resulted in a $2.1 million deficiency. Wells Fargo Bank sued David Schostak who had signed a guarantee making him liable for any deficiency if a violation of the loan covenants was found. The Trial Court found that Schostak was liable “as guarantor” for the entire loan deficiency because insolvency was a violation of the loan covenants.

While the case was on appeal, the Michigan legislature passed the NMLA, which provides, in part, that a post-closing solvency covenant may not be used as a non-recourse carveout or as a basis for a claim against a borrower or guarantor on a non-recourse loan. The legislation was effective retroactively. The Court made a review of the legislative hearings leading up to the passage of the NMLA. These discussions included the argument that allowing non-recourse loans to become recourse due to insolvency would “irreparably harm the current environment for investment in Michigan.” Furthermore, the failure to pass the proposed Act would “basically eliminate” non-recourse loans in Michigan leading to a collapse of non-recourse lending, a decrease in tax revenues, and a wave of foreclosures.

After considering the bank’s arguments that the retroactive modification of private contracts violated the Constitution of both the State of Michigan and the United States of America, and possible economic consequences of a failure to uphold the law, the Michigan Court of Appeals rejected the bank’s Constitutional challenge to the NMLA and held that it barred the bank’s claims against Schostak.

Robert J. Hahn is a partner in our Livonia office where he concentrates his practice on corporate and commercial litigation, securities and real estate. He can be reached at (734) 261-2400 or rhahn@cmda-law.com.

Conversion Statute Permits Treble Damages for Theft

December 1, 2012 By Robert J. Hahn

Changes were recently made to the Michigan Statute governing recovery of damages for theft. The Conversion Statute now allows a person to get three times the amount of actual damages sustained from a person who stole or embezzled property for their own use. To support a claim, the defendant must have obtained the property without the owners consent and must have an obligation to return the property to the rightful owner.

Prior to the change, the law permitted a treble damage claim only against a person “buying, receiving, possessing, concealing or aiding in concealment” of stolen or embezzled property. Because the prior law did not include the actual thief or embezzler, a claim under the statute could have the seemingly unfair result that the person who receives stolen goods gets hit with a treble damage claim, while the actual thief or embezzler does not.

The amendment to include the actual thief or embezzler is very useful to a person or business whose property has been stolen, as recovery is no longer restricted to the person who receives the stolen property or aids and abets in its concealment.

In our legal practice we have found the Conversion Statute very effective in recovery of damages for stolen property. First, lawyers representing defendants who are being sued under the Statute recognize their clients face risks of liability far in excess of the value of the stolen items, and that the Statute permits recovery of costs and attorneys fees. Consequently, defendants counsel advise clients to negotiate a settlement early in the litigation, rather than face the risk of a large judgment. Because of onerous nature of the treble damages provision, we have been able to obtain very favorable negotiated settlements.

Second, if a judgment is obtained against a person under the statute, it will generally be non-dischargeable in a bankruptcy proceeding, meaning that even if the defendant files for bankruptcy, the debt will survive. This gives defendants additional motivation to negotiate a resolution on terms favorable to the plaintiff.

Examples of how the Statute can be applied by a business include claims against a person who commits embezzlement of company funds or property, or cases of theft of company property by third parties. A common scenario is a trusted company bookkeeper who experiences financial difficulty and begins paying personal debts with company funds. By the time an audit uncovers the theft, the company may have lost thousands of dollars. In such instances we have made claims under the Conversion Statute and obtained very favorable settlements quickly, without unwelcome publicity.

If you or your business has been a victim of theft, fraud or embezzlement, contact an attorney in our business group for fast, effective and discrete resolution of all claims in a manner that best protects your legal rights.

What Is a Judgment Worth?

December 27, 2011 By Robert J. Hahn

If a judgment becomes final, several considerations come into play in deciding how vigorously to pursue collection efforts. First and foremost is the collectibility of the judgment debtor. If the judgment debtor appears to be collectible, one must consider the difficulty of reaching the debtor’s assets. For example, an individual judgment debtor may live in fine style, giving the appearance of collectibility, but his Lincoln may be leased and his home may be owned with his spouse, preventing a judgment creditor of only one married spouse from recovering money by sale of the house. Even if the judgment debtor is not married, or the judgment is against both husband and wife, there is now a good chance the home is underwater, meaning total mortgage debt exceeds its value, or there is so little value in the property as to make sale of the property not worthwhile. A judgment debtor living large on credit cards and deeply in debt is also not a good collection prospect as they generally have no savings and frequently end up in bankruptcy court.

If the decision is made to proceed with collection of the judgment, a judgment creditor has a number of tools available to recover the money owed. The most commonly used are writs of garnishment and writs of execution.

A garnishment is a means of reaching the judgment debtor’s money or property that is held by a third party (the garnishee). In order to garnish money or assets, the judgment creditor prepares a writ of garnishment which is signed by the court. The writ is then delivered to the garnishee believed to be holding the debtor’s assets. Within 14 days, the garnishee must then disclose assets held for the judgment debtor. If the garnishee discloses assets and the judgment debtor does not file a formal objection, the money held is paid to the judgment creditor. This procedure can be very effective if the judgment creditor knows where the judgment debtor banks, has brokerage accounts or where he or she is employed.

Execution is simply the seizure of assets from the judgment debtor. As with a garnishment, a writ is signed by the court directing a sheriff or qualified court officer to seize and sell the judgment debtor’s property to satisfy the judgment. It is important to note that judgments are not in themselves liens on property, so a judgment standing alone does not give a creditor rights in the debtor’s property. Further, the judgment lien permitted under the 2004 revisions to Michigan law is largely a toothless remedy, as the law does not permit foreclosure on the lien, preventing the judgment creditor from selling the assets liened to satisfy the judgment. The writ of execution must first be levied against the judgment debtor’s personal property. If the debtor does not have sufficient personalty to satisfy the judgment, it may then be levied against real estate.

Judgment creditors also have a number of tools to reach assets that a debtor has attempted to hide by improper gifts to friends or relatives, placing assets in other parties’ names, or sales for less than full value. The key to satisfying any judgment is to know the debtor’s finances, to act quickly after the judgment is final, and to be creative and persistent. It will pay off in the end.

If money is owed to you because you have been awarded a judgment in a court of law, you are a judgment creditor. The party against whom the judgment is entered is a judgment debtor. Winning a judgment in a court of law is only half the battle. Obtaining payment under the judgment is the other half. Obtaining payment from a reluctant and determined judgment debtor can turn into a lengthy and costly battle fought over a period of years with an uncertain outcome. A judgment debtor may appeal the judgment or may file bankruptcy, forestalling or preventing efforts to collect on the judgment.