LLC Membership [In]Securities and Nervous TICs

The real estate developer client asks for the “usual LLC” investor letter; it’s the one that says that the undersigned desires to purchase a member’s interest in the limited liability company is an “accredited investor” and can afford to lose his entire investment. I pull up the form and ask myself, “does anyone today know if their status is ‘accredited’ anymore? And in this environment, is the client (promoter) smart to rely on those representations?” If the wheels come off this deal, is a letter that was generated as a form by the promoter of the LLC and signed by the investor without the least bit of editing (or, likely, reading) going to trump the reality of the circumstances of the investor parties?

Is the sale of a member’s interest in a limited liability a sale of a security that requires registration of an offering—unless, of course, there is an applicable exemption? In Arizona, that question was answered by our Court of Appeals in the abstract, in the 1998 decision of Nutek Information Systems v. Arizona Corporation Commission, 977 P.2d 826, 30 Sec.Reg. & L. Rep. 1665, 1998 WL 767167 (App. 1998). The court reviewed the analytical standards set forth for an “investment contract,” found that the sales before them were indeed subject to state regulation of securities, and applied the Howey “reliance test” in reaching its decision. (In SEC v. W.J. Howey Co., 328 U.S. 293 (1946), the Supreme Court defined an investment contract as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”) While the number of investors in Nutek was significant (920), the essential fact was investor dependency on the promoters for return on investment. The LLC was formed to own and operate specialized mobile radio networks, a very technical field of communications. In context, even a very intelligent and sophisticated investor, lacking specialized knowledge, might be highly dependent on promoters to successfully operate the business.

These factors were viewed by the Nutek court as indicative that dependency was inevitable: (a) so little power resided in the hands of the investor that the arrangement was functionally like a limited partnership; (b) the investor did not have the background to be capable of exercising his member powers in the operation of the company; and (c) the investor was “so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or exercise meaningful . . . powers.” The Court of Appeals did not create a per se rule that all LLC interests in Arizona companies are securities, but stated that case by case analysis is obligatory.

Does Nutek stand up today as the state of Arizona law? And how far removed from federal court analysis is that decade-old opinion? The answer is “yes” to the first inquiry and “not much,” to the second question, if the decision of USA v. Leonard (Silver), 529 F.3d 83, US APP LEXIS 12409 (2nd Circuit, 2008) holds up. In Leonard, the court said that the promoters of the company had done their best to create the appearance of investor engagement in the management of the companies in question Little Giant, LLC and Heritage Film Group, LLC:

“were we to confine ourselves to a review of the organizational documents, we would likely conclude that the interests in Little Giant and Heritage could not constitute securities because the documents would lead us to believe that members were expected to play an active role in the management of the companies.” This is similar to the documents that have been prepared by “real estate” sponsors. The investor documents provided:

Each Member is required to participate in the management of the Company retaining one (1) vote for each Unit acquired. Each important decision relating to the business of the Company must be submitted to a vote of the Members. The purchase of interests in the Company is not a passive investment. While specific knowledge and expertise in the day to day operation of a film producing and distributing company is not required, Members should have such knowledge and experience in general business, investment and/or financial affairs as to intelligently exercise their management and voting rights[.] Further, each Member is required to participate in the management of the Company by serving on one or more committees established by the Members.”

In addition, the operating agreements for the LLCs indicated “that the Company shall be managed by the Members. . . . [E]ach Member shall have the right to act for and bind the Company in the ordinary course of its business.” Thus, the court stated, “on the face of the documents, [the LLC Interests] appear to provide for too much investor control to allow a jury to conclude that the units were securities.”

The Leonard court indicated that, when determining whether an LLC member’s interest was a security, a “case-by-case analysis” into the “economic realities” of the underlying transaction was necessary. The court noted that one of the original promoters of the LLC Interests testified at trial that the LLCs were structured to minimize the possibility that the investment units would constitute securities – “to get into . . . the gray areas of the securities laws.”

The real management of the LLCs was very different from the language set forth in the operating agreements, however. The court indicated that in reality, LLC members holders played an extremely passive role in the management and operation of the LLCs. At trial, members testified that they voted, at most, “a couple of times.” Although the organizational documents provided for the formation of a number of committees, only two committees were formed for each of the LLCs – a financial committee and a management committee. Of the 250-300 investors in one of the LLCs, five served on the management committee and seven served on the financial committee. Of the 350-400 investors in the other LLC, ten served on the management committee and seven served on the financial committee. Thus, the court concluded that the vast majority of investors in both LLCs did not actively participate in the venture, exercising almost no control.

The circuit court stated that “evidence allowed the jury to conclude, notwithstanding the language in the organizational documents suggesting otherwise that there could be no ‘reasonable expectation’ of investor control.” at 90. Such consideration of the reality of the transaction is consistent with the U.S. Supreme Court’s instruction to value substance over form in the evaluation of what constitutes a security. The court indicated that it was not bound by legal formalisms, but instead was required to take account of the economics of the transaction. The court stated, “[I]n searching for the meaning and scope of the word ‘security’ in the Act, form should be disregarded for substance and the emphasis should be on economic reality.”

The Leonard court also reviewed the management rights of the members of the LLCs during the syndication period. The investors’ managerial rights and obligations did not accrue until the LLCs were fully organized; interim management had control of the LLCs until the completion of the fundraising. The movies that were to be produced by the LLCs were pre-produced, and the court felt that the jury could reasonably conclude that the post-subscription managerial rights of the admitted members were hollow and illusory.

Likewise, “real estate” sponsors have complete managerial control prior to and during the syndication period. They usually establish a temporary manager to operate the property until all of the members are admitted and have made the most important decisions with respect to the offering, i.e., what property is to be acquired and how the property will be financed.
For contrast, consider a recent development in Arizona’s Mortgages, Ltd. bankruptcy. On January 21, 2009, the investors’ committee in the Mortgages Ltd. Chapter 11 bankruptcy (Court file number 2:08-bk-07465-RJH) filed a plan for reorganization. A portion of that plan calls for establishing a new LLC for each loan that the debtor had agreed to fund. Each new LLC under the reorganization plan would have a manager who could make recommendations on how to handle each loan. Members of the LLC, however, would vote on major decisions concerning the loans, such as whether to foreclose on a borrower, negotiate workouts of outstanding loan principal amounts or sell a loan. While I haven’t studied the plan, the member control over major decisions appears to illustrate how to structure management of an LLC so that a company’s members would not depend for their survival on the efforts of third parties—and, therefore, would pass the muster of a federal or Arizona court applying the Howey “reliance” analysis.

The Leonard court further noted that the LLC investors did not appear to have any ability to negotiate any terms of the operating agreement to which they were required to become a party. Rather, the investors were presented with the agreement on a take-it-or-leave-it basis. Thus, the court concluded that, because the investors played no role in shaping the organization agreements themselves, there was doubt as to whether the members were expected to have significant control over the enterprise.

The circuit court looked at the experience of the LLC investors and the realistic ability of the members to manage the LLC. The Leonard court echoed Nutek in finding that “investors may be so lacking in requisite expertise, so numerous, or so dispersed that they become utterly dependent on centralized management, counteracting a legal right of control.” The court went on to say that “notwithstanding the organization documents drafted to suggest active participation by members, the defendants sought and expected passive investors for [the LLCs], and therefore the interests that they marketed constituted securities.”

Similarly, in syndicated TIC transactions, the sponsor identifies the property to be purchased, obtains and negotiates the terms of the financing for the property and presents the investor with a completed set of documents to acquire and manage the property, usually including a tenants in common agreement and management agreement. The investors have no input into the initial structure of the transaction. TIC owners may not have experience with the property types that they buy into through a TIC investment. Not surprisingly, the typical TIC investor has no knowledge of the property’s marketplace and no ability, therefore, to make independent, informed decisions regarding the property’s management. As a result, input from the TIC owners regarding the management of the property is extremely limited, and the TICs rely on the property manager’s expertise to make all consequential decisions related to the investment property. TIC investors usually are also geographically dispersed, which makes active, group management an unrealistic prospect.

Arguing that such a syndicated TIC interest is not a security is head-in-the-sand thinking. Seriously, how can 35 investors, solicited from across a wide swath across the United States, actively manage a property when they do not know anything about the area in which the property is located or each other, and when they live thousands of miles apart? Add to that a lack of expertise with the type or location of the property they have purchased as a group. These investors rely on the sponsors to actively arrange and manage their properties. They expect to be “passive investors,” because they don’t know how otherwise to behave.

In a market where there are “bargain” buying opportunities but individuals aren’t holding enough cash to buy in on their own, alliances for group purchases through TIC arrangements or LLCs. Folks won’t want to sweat the small details of organization like whether they are making a securities offering in joining together investors in these structures. Promoters, beware. Same message for their legal counsel—watch yourselves; perhaps more on legal representative complicity in a future post.

-MNW

Escaping the “Takedown” of Arizona Mechanics’ Liens?

Mechanics’ liens (which include for purposes of discussion here those filed by mechanics, materials suppliers and those who provide professional services to landowners such as surveyors, civil engineers, land planners and architects) afford as nasty a chokehold as there is on a real property owner. Under Arizona law, a mechanics’ lien has priority over all encumbrances, including loans, arising after commencement of any work performed on a parcel (except for the lien of real property taxes, but foreclosure on tax liens isn’t an immediacy issue, so it’s not nearly as pernicious). Even if the landowner files bankruptcy, there is no relief from the force of the mechanics’ lien, so long as perfection is properly achieved after the date the bankruptcy petition is filed; that perfected lien is exempt from the effect of the automatic stay under Bankruptcy Code §363, see In re Designer Doors, Inc., 389 B.R. 832, 2008 WL 2445090 (Bkrtcy.D.Ariz. 2008).

This post is not to regurgitate suitable summaries of Arizona mechanic’s lien laws; a particularly fine outline is by Michael Ripp, Esq. found at this address on the Internet: http://www.rcalaw.com/Publications/Lending. Instead, my intent is to provide a property owner with a few, hopefully useful, tips on how to limit the leverage of the would-be lien filing party (call it the “lienor” here) in asserting a right to be paid via the mechanics’ lien statutes. Most owners become aware that many contractors use a “service” (an independent contractor) to prepare both the preliminary 20-day notice and the Notice and Claim of Lien, which is filed in the County Recorder’s Office in the county where the land is located. Many of these contractors offer very average to below-average service, since the principals or employees are in the habit of filling out a form but not researching the facts carefully; particularly egregious (and frequent) are these failings:

• Failure correctly to identify the Owner; often the services mistake the requirement of naming the “reputed” owner and doing so incorrectly (such as by identifying an officer or manager instead of the entity actually owning the land)
• Failure correctly to identify the parcel; often the services make one or more of these mistakes:
--incorrect statement of the legal description in the public records, or
--incorrect statement of the Assessor’s Parcel Number (a common error is to identify an old APN, meaning a larger lot pre-split that resulted in the creation of the subject (newer) parcel), or
--incorrect street address
• Garbling the name of the general contractor (or identifying a corporation by the name of its principal) or identifying a contractor subsidiary or a trade name instead of the legal name of the general contractor
• Significantly late service of the 20-day notice on the owner or general contractor

Understand, please, that perfection is not required in filling out these notices. Because the mechanics’ lien statutes are to be remedial in purpose, equity requires that substantial compliance with the statutory requirements be sufficient. However, in the decision of Lewis v. Midway Lumber, Inc., 114 Ariz. 426, 431, 561 P.2d 750, 755 (App. 1977) Arizona’s Court of Appeals held that where the defect in recording or some other step in perfecting a lien "is material to the perfection of a lien, it is beyond the remedial scope of equity . . . to protect the lien claimant against the untoward consequences of what may be and probably was his own neglect." 114 Ariz. at 432, 561 P.2d at 756. So, the mechanic doesn’t get a complete “pass” on any error, no matter how egregious or easily correctable it [they] may have been. Indeed, the statutes provide for one specific mistake in 20-day notice filing that requires a “do-over”; that’s when the contractor’s initial estimate of the amount due from the owner is less than the amount claimed under the lien statutes by more than 20%. In such a case, the contractor is obligated, in order to avail itself of the lien statute remedies, to re-notice the owner and add the excess amount. A.R.S. §33-992.01(G).

The owner must respond to an information request from a party desiring to file a preliminary 20-day notice by sending information to the potential future lienor under part I. of §33-992.01. This has me wondering what would happen if an owner reviewed every preliminary 20-day notice served on him and sent out a notice enumerating errors to the contractor. I’m curious to know how the outcome of a foreclosure-of-lien suit would be affected if the owner timely identified all mistakes contained in a 20-day notice and mailed a “notice of correction” to the mechanic. What if the mechanic received such an owner’s notice but [in all likelihood]:

1. Doesn’t read the writing and cause any corrections to be made, or
2. Gives the writing to the hired filing service, which (a) ignores the corrections noted by the contractor, or (b) miscopies them or (c) forgets to re-notice/re-serve the Owner, or
3. Makes certain corrections to the notice but files the corrected notice long after the contractor’s work is completed on the project.

The answer to this “what if” hypothetical involving the mechanic’s neglect is suggested by the text of part J. of the statute: “If the [right] information is received by the claimant after the claimant has given a preliminary twenty day notice and the information contained in the preliminary twenty day notice is inaccurate, the claimant shall, within thirty days of the receipt of this information, give an amended preliminary twenty day notice in the manner provided in this section. An amended preliminary twenty day notice shall be considered as having been given at the same time as the original preliminary twenty day notice, except that the amended preliminary twenty day notice shall be effective only as to work performed, materials supplied or professional services rendered twenty days prior to the date of the amended preliminary twenty day notice or the date the original preliminary twenty day notice was given to the owner, whichever occurs first.”

Unfortunately, I can’t find an Arizona case that supports the theory that volunteered, accurate information forwarded by the owner, if the mechanic or its independent contractor (filer) fails to file an amended 20-day notice responsive to the corrections, imperils the availability of the mechanic’s statutory relief—or to limit the lienor’s relief to some lesser amount than that claimed in the notice. The problem is that I cannot tell if part J. only applies if a request for information was made by a contractor under part I.

At the stage of recording the Notice and Claim of Lien (NCL), the lienor oddly is given more slack under Arizona case law as to the contents of the notice. The owner’s identity in the NCL doesn’t have to be correct, as long as there’s some evidence that the lienor checked some public records and the statement of the “reputed owner” is the result of the research effort. The legal description doesn’t have to be very accurate, as long as someone can figure out where the job site is from the description provided in the NCL. The scope of work can be fairly generic, and it appears that if work is done on several adjoining lots, a reference to some of the lots is sufficient. Even if the demand for payment is not allocated among several lots, if all of them are owned by the owner identified in the NCL, that’s close enough. Obviously, Arizona’s case law indicates that the owner’s preferred point of attack is action taken at the time of the 20-day preliminary notice’s service, if the owner’s contention is that this notice, if not corrected and re-served with accurate facts provided to the contractor, is fatally defective.

In the filing of the Notice and Claim of Lien, one common error is the failure to attach a copy of the complete contract and the 20-day notice. This invalidates the NCL under the text of the statute, which means it has to be re-recorded—and remember, recording has to occur within 120 days of the substantial completion of the project in question if the lien statutes are to be available to the would-be lienor. (If an owner records a notice of substantial completion, this period is reduced to 90 days.) But once again, Arizona’s appellate courts interpreting the statutory provision--at least once—have given relief on the theory of “close enough” to a lienor if the principal terms of the contract are incorporated into the body of the NCL and only the “fine print” terms are lacking. There is no case law describing what outcome results if several of the principal terms are not explicit in the NCL and the lienor does not attach to the recorded document the construction/services contract.

Other frequent errors occur when the contractor attempts to serve a copy of the lien on the tenant and/or owner. Assuming the owner of the property to be a partnership, trust or individual, the lien must be personally served on such entity or persons, and there are strict requirements set forth in the statutes governing such service. This service must be completed within 30 days after the lien has been filed. Proof of such service must be filed within 35 days after service has been accomplished. The contractor's failure to comply with these strict time frames and service requirements will cause him to lose his lien, but likely this becomes the outcome only after the complaint is filed by the lienor, and owner’s counsel brings such errors to the court's attention.

It’s a bonanza to the owner when the lienor, or its lien-filing service, serves the 20-day notice late in the performance of the contractor’s work; the statutes provide that lien rights for labor performed or materials provided only relate back 20 days from the date of the service. Once, I reviewed a preliminary 20-day notice that was served on the owner about 30 days after the last day on which the liening contractor had worked on the owner’s project. Game, set and match to owner.

The inability of the wannabe lienor to avail itself of the mechanics’ lien statutes eliminates the leverage of having a NCL in the public records at the very time the owner is attempting to sell or refinance its project. So, the optimal counseling advice includes (1) to scrutinize promptly the 20-day notice or the NCL if either is forwarded to you by the owner or the notice-preparation service, (2) to suggest sending a notice of errors and corrections to the contractor in the hope that it will not be addressed in a timely manner--or at all, (3) to recommend to the owner that he or you review the manner and timing of service of the NCL, and (4) to remind the owner that it’s not over just because the NCL goes away. (Legitimate claims for payment from a contractor can (and likely will, if the amount claimed is large enough and there’s no mechanic’s lien statute relief available) be pursued on the theory of “reasonable value of the service performed/materials supplied” in a civil action.)

A seemingly wacky thing that contractors do in conjunction with recording a NCL is to record a Notice of Lis Pendens concurrently with the NCL foreclosure lawsuit. It appears to me entirely redundant; I don’t have any reason to think that the title company will locate a Notice of Lis Pendens performing a title search without noticing the NCL. So, what’s the point? My theory is the redundancy has little to do with title-cloud “insurance” but something else instead. In any case, if an owner records a lien discharge bond (of 1.5 times the NCL claim) pursuant to A.R.S. Section 33-1004, any action brought by the lienor “is transformed into one which does not affect title to real property.” Hatch Companies Contracting, Inc. v. Arizona Bank, 170 Ariz. 553, 557, 826 P.2d 1179, 1183 (App. 1991).

The danger of playing around with lis pendens filings was discussed in an earlier post, and it would be entertaining to see how a court ruled if an owner recorded a lien discharge bond and the lienor, ignorant that the suit no longer affected realty, refused to terminate the Notice of Lis Pendens after the bond was recorded and served on the lienor and the owner demanded a termination of the Notice. The penalty for lis pendens dynamite-play is under appellate scrutiny now in Arizona. The Court of Appeals will hear oral argument on February 10, 2009, in the matter styled Galeb v. Markham, following a superior court order in which the judge penalized the contractor $5,000 per residential lot in a subdivision that was described in a recorded Notice of Lis Pendens--or $215,000 for the 43 lot subdivision. While an amici brief was filed in the matter by several groups engaged in the building trades, the arguments center on the inequity of the size of the penalty and the attending “chilling effect” on contractors. But, since no one forces the lienor under the NCL to record a Notice of Lis Pendens to begin with, it seems there’s an argument that if you undertake to employ a nuclear weapon, you’d best watch the wind’s direction. (In Galeb, the lienor claims that the lien discharge bond was not served on the contractor—but the public records among which it was filed are, well, public.) We’ll see whose side the court likes best among this cast of miscreants.

-MNW

The Market, Investing (NOT Real Estate!)

What does a conservative investor do?

First let me say that this is not meant to be specific advice for anyone – your situation is unique and you should consult with your financial advisor.

I have been an active, successful investor (or maybe trader) for many years – and at first when the market turned, I wasn’t sure what to do. Mostly I decided some serious education was in order. So I went to a class put on by SRI, a coaching company run by Steve Linder, who is a very, very successful individual.

The class was DMAS, and teaches trading based on market psychology rather than fundamentals. It doesn’t really use Dow theory, but is a technical trading methodology. Of course, I was primarily a value investor – it was really easy to make money, being a value person, for a long time. Doesn’t work so well now! So this class was my first look into technicals. Since then, I have learned more about Dow theory, Elliott Wave (really interesting stuff!) but the most interesting part of my education was reading The Fourth Turning by Strauss and Howe.

This book describes how generations of people move through economies and how they affect the economy. If you think about the baby boomers, they correlate pretty well with the US economy and the seasons – when the boomers were working really hard, young, super entrepreneurial, having their ‘summer’, we had the dot com boom and the internet explosion; as they moved on, aged, came into the ‘fall’ of their lives, we had the housing bubble. What’s next? If you buy into this theory, as the boomers age and come into the ‘winter’ of their lives, they are going to need health care, assisted living, etc. So there might be a bubble in this area.

The book was written more than 10 years ago, and it is a pretty accurate prediction of today: “… neither they nor their nation will have saved enough [money]. From this sudden realization could issue the end game of Boomer life-cycle consumption and savings habits: the Great Devaluation.”

Prophetic words indeed. The entire book is worth a read, though it can be a bit heavy at times. The interesting part to me, is that the predictions made are in alignment with Elliott Wave theory, at least my meager understanding of it.

So knowing this, and knowing what we do about the dollar, and the credit crisis, and the [divine] intervention of the new administration, what things should we think about? First, about energy. Oil is going to be around for some time, in spite of solar, wind, and other alternatives. Until someone invents a Zero Point Module, that is. And, I think we are on the declining side of the supply curve. So oil and gas prices are ultimately destined to rise; I think they are artificially low now, just as they were artificially high.

Second, about currency, credit, and gold. The price of treasuries is very low. This is because they are viewed as the ultimate liquid safe harbor; if and when people’s faith in the ability of the government to make payments on the debt comes into question, or when other investments once again provide a better risk/reward, but really when people are no longer as frightened as they are now, then the demand for treasuries will fall and the rates will rise. This will be the start of a huge rise in interest rates for everything. Right now, home loans are at an all time low rate. They will probably go lower, but ultimately they will rise, and I think they will rise dramatically. We are presently in a deflationary period – lower demand for things lowers prices. Housing is a large part of it. It is evidenced by a strong dollar. When this deflationary period bottoms, I think we will have pretty strong inflation, and the dollar will plummet as faith in the currency falls. Inflation will mean that our purchasing power, as measured against the value of goods on the world market, will fall. So we must hedge against this. Buying gold is likely a good idea, but I would wait until the current deflationary trend finishes. [I never try to call bottoms, being close is good enough].

Third, biotech, assisted living, and health care in general. The huge population of aging boomers will demand it. And Lastly, education:

Earlier this week I gave a talk to my investment club about something called Spiral Dynamics. It is a framework that can be used to understand where people are in their lives, where businesses are in their lifecycles, and in general where social groups are in their evolution. To move from an earlier, less expansive stage to a later, more expansive stage, change must occur. This change is often required because the strategies that have been employed in the past, are no longer adequate for the current (new) situations. So, the person, business, or society must evolve; new strategies must be found for coping with the new situations. These changes can come through revolutionary change, wherein the pain of the current situation becomes so severe as to force change to occur; and with this, the required growth is painful. Or, change can be evolutionary, wherein we see that things are not working and look for new strategies ourselves, through business consultants, coaching, or other methods.

Clearly we are living in different times than we were just a year or two ago. The smartest of us probably saw it coming, but most of us had no idea it would be like this. So we have to find new ways to live; we must adapt, companies must adapt or go the way of the passenger pigeon; our society must adapt or it could fail as well. The fear of this is so powerful and pervasive that people are strongly seeking to improve themselves and find new ways to cope; so educational companies are an interesting investment option.

In a nutshell: I like biotech and healthcare; I like educational and coaching companies; and when the deflation pressures ease, I like gold and energy, in particular Canadian oil and gas trusts.

I also think that it is very important to measure your capital against world purchasing power rather than against itself (ie. What does my worth look like in Euros or Singapore dollars as compared to how many dollars do I have today?)

A friend of mine who is a money manager established something called the Stable Currency Index, which is a ‘basket of currencies’ which attempts to provide a benchmark against which you can measure your wealth.

Contact me if you would like more information about the investment club!

-PLH

Charging Order Wrinkles

My esteemed colleague Bob Spurlock did a brave thing recently. He used his noodle to come up with an imaginative theory of recovery; and, it appears to have succeeded! Fine lawyers like Robert uniformly are envelope-pushers. His case involved the interpretation of application of a charging order’s reach.

Charging orders are about as unsexy as anything in the law. Here’s a procedure that a creditor of a partner or member of a partnership-type firm structure (these unincorporated enterprises include general and limited partnerships, LLCs and LLPs, which I’ll just call “firms” collectively for the rest of this post) must use to reach the partner or member’s interest in the firm. Significantly, the charging creditor can reach only the debtor-member’s interest in the firm’s distributions, somewhat like a garnishment of wages. You cannot reach any specific firm property. As in corporations, partnership-type statutes prohibit individual members from transferring the firm’s specific property. Partnership-type statutes go yet further, providing that, in the absence of contrary agreement among members, members can transfer only their economic rights, and not their management rights. This limitation reflects the traditionally “collective” nature of a firm--an association of individuals who care about the identity of their co-members. So, a charging order holder can pursue its debtor via the order--but no upsetting the firm’s direction by injecting yourself into the mix, if you please.

In some states, such as North Carolina and Georgia, you can foreclose on a charging order entered with respect to a firm. No so in the State of Arizona (well, unless you’re in bankruptcy court here, and you’re assigned to a judge who thinks a partnership/LLC member agreement is not an executory contract, so that Code Section 541(C) trumps Code sections that prohibit seizure of the member interest). The order just hangs fire, poised passively for distribution-grabbing, and therein lays the rub. The limited virtue of a charging order in Arizona assumes both that firms will make distributions that can be reached by the charging order and that there’s a need to reconcile firm creditors’ interests with those of non-debtor partners or members.
(But since neither of those conditions holds true in single-member LLCs [the stealthy, “disregarded” entities which can play “zero-sum footsie” with outsiders], they have lately become ersatz asset protection vehicles—but I digress.) A creditor of a partner or other member of a firm therefore has only the right to receive distributions that the non-debtor partners or managers choose to make, and not the right to compel the firm to make distributions. So, firms that are managed by collusive, clever folks become creative in avoiding, where there are no tax incentives to distribute to members, making any distributions directly to the members.

Bob’s client obtains a charging order against a limited partnership, and then Bob files a motion to seize payments emanating from the Company’s accounts. It seems that the Company general partners never made any cash distributions to partners, including the debtor. Instead of paying them, you see, management just picked up their laundry and bought their groceries. Well, actually the general partners signed checks to pay partners’ home mortgages and installments on fancy car leases—via reimbursement for the payments of such “obligations.” Bob argued that these reimbursements are de facto distributions. The debtor did nothing to prove that his house and vehicle lease payments were essential to the operation of the partnership. That was the factual, final coffin-nail for the debtor; the trial court found specifically that the payments were distributions, even though the funds had been previously committed to obligations incurred by the limited partners.

The judge cited a Connecticut case, PB Real Estate Inc. v. DEM II Properties, 719 A.2d 73 (1998), where the appellate court held that “company expense”-style payments to the members, who were lawyers (defendants alleging they were lawyering for the company), were distributions of profits—and therefore subject to a charging order against the limited liability company: “Although the defendants at trial presented a profit and loss statement for 1996 showing a net profit of only $23.44, that result was achieved only by treating the payments of $28,000 to each of them as expenses for wages. If those payments were neither distributions, as the defendants contend, nor wages, as the trial court found, they would have to be considered profits.” So, it behooves the practitioner (or the creditor) to do a bit of ongoing industrial spying, monitoring the behavior of the firm subject to the charging order after its service upon its management, to ensure that there’s no “gaming” of the charging order system. But I wonder: What if in Bob’s matter, the debtor had offered proof that the mortgage payment reimbursed was on the residence housing the “home-office” of the partnership in the basement? Or that the Lincoln Town Car was used only for sales calls by its debtor-lessee?

-MNW

Short Sale help coming?

If you have been through the fun of buying or selling a property which is upside down, ie. more is owed than the property is worth, you know how much fun this can be. For those of you who have not had the privilege, it is a 90 to 120 day process involving numerous lender phone calls, and lots of paperwork.

Recently, Fannie May started a pilot program in which they set a pre-approved price that is acceptable, so the negotiation time is minimized, at least in theory. Currently they are working only with Countrywide, and only about 400 homes in the valley are eligible. If the program goes well, expect more lenders to get on board.

It will be interesting to see what happens with pricing! My expectation is that initially, fewer short sales and more foreclosures will occur, because the pre-approved prices will be optimistic. We'll see.

For more info on this, see the original article.  

-PLH

Bird Dogs and other unique creatures

While my blogging partner, Mike Widener, is an attorney, I am not; I am but a lowly associate broker, and so my legal opinion is worth even less than his! So take this article with a grain of salt. Definitely do NOT depend on it for legal advice – this is just my take. And of course, this article is specific to Arizona.

Many Real Estate investors I talk with make use of bird dogs. Recently, I ran across several agents who claim to be using them. Bird dogs are usually unlicensed individuals who find deals for the principal in a transaction. Further, investors usually pay bird dogs a finder’s fee.

So what does the law say about that? Specifically, ARS 32-2101 defines what a “Real Estate Broker” does (excerpted):

32-2101. Definitions
In this chapter, unless the context otherwise requires:
47. "Real estate broker" means a person, other than a salesperson, who, for another and for compensation:
(a) Sells, exchanges, purchases, rents or leases real estate or timeshare interests.
(b) Offers to sell, exchange, purchase, rent or lease real estate or timeshare interests.
(c) Negotiates or offers, attempts or agrees to negotiate the sale, exchange, purchase, rental or leasing of real estate or timeshare interests.
(h) Advertises or holds himself out as being engaged in the business of buying, selling, exchanging, renting or leasing real estate or timeshare interests or counseling or advising regarding real estate or timeshare interests.
(i) Assists or directs in the procuring of prospects, calculated to result in the sale, exchange, leasing or rental of real estate or timeshare interests.
(j) Assists or directs in the negotiation of any transaction calculated or intended to result in the sale, exchange, leasing or rental of real estate or timeshare interests.
(n) Engages in any of the acts listed in subdivisions (a) through (m) of this paragraph for the sale or lease of other than real property if a real property sale or lease is a part of, contingent on or ancillary to the transaction.

A close reading of this indicates that a broker does pretty much what you expect – buys and sells or negotiates Real Estate transactions for others. Of particular interest is item (i), which indicates that a broker is also the person who gets leads.

This is important because of the next section (excerpted):

32-2122. License required of brokers and salespersons
A. This article applies to any person acting in the capacity of a:
1. Real estate broker.
B. It shall be unlawful for any person, corporation, partnership or limited liability company to engage in any business, occupation or activity listed in subsection A without first obtaining a license as prescribed in this chapter and otherwise complying with the provisions of this chapter.
D. Any act, in consideration or expectation of compensation, which is included in the definition of a real estate, cemetery or membership camping broker, whether the act is an incidental part of a transaction or the entire transaction, constitutes the person offering or attempting to perform the act of a real estate broker or real estate salesperson, a cemetery broker or cemetery salesperson or a membership camping broker or a membership camping salesperson within the meaning of this chapter.

So this section seems to say that we have to have a license to do anything falling under the definition of “Broker”; in particular, we cannot find leads for a principal and be paid for it, unless we are licensed. The law seems pretty black and white on this. So how do investors legally pay bird dogs? My feeling is that in most instances, they just pay them and hope not to get caught.

There are a few ways that a bird dog can be legally paid, however. One way, perhaps the “cleanest” way, is for the bird dog to be the initial purchaser of the property; they would write a purchase contract as “Bird M. Dog and/or assignee”, and get the contract signed by the seller. Then, the principal would pay the bird dog an assignment fee, purchasing the contract from the bird dog. Nothing wrong with that! However you might want to ask your tax accountant about the implications here – Is there a step up in the buyer’s basis as a result of the assignment cost? And what happens with any representations and warranties – do they flow from the assignor (Bird Dog) to the assignee (Principal) ? Good questions, I do not have the answers.

A second possible way is for the bird dog to again write the contract, but be a direct party to the transaction throughout: “Bird M. Dog and Joe Principal” are the purchasers, and a separate compensation agreement between the two can be arranged. The question here is, can a separate compensation agreement be made between the two parties without it being considered a commission? And, is a side agreement really needed -- to make sure that there is no misunderstanding later that Mr. Dog and Mr. Principal are co-tenants?

A third way is for the bird dog and the principal to form a partnership (or LLC or other entity) which is then the purchaser of the property, and the partners share in sales. Perhaps Mr. Dog has to put in $100 as his contribution, and for his work in finding the property, his compensation is the return of his capital plus $1000. Does this work? Maybe, ask a lawyer!

What must happen is that the bird dog needs to be a party to the contract; then they are not “practicing Real Estate without a license”, instead they are one of the principals in the deal. But let’s suppose for a moment that they are not a party, and just get paid. What’s so bad about this? Is the public really harmed, and, does the State really care? Apparently they do. There was a case where a Real Estate brokerage was paying a monthly fee to a mortgage lender so that the lender would forward all their mortgage leads to the Broker. The fee was not based on whether or not a transaction would close, it was a flat monthly fee. The broker was substantially fined, but not by the State; this was found to be a RESPA violation. RESPA is the Real Estate Settlement Procedures Act, and disallows Real Estate licensees from making payments to unlicensed individuals; the fine is $10,000 per occurrence. So not only can the State go after the recipient of the finder’s fee for unlicensed activity, but HUD can go after the Principal (if they are licensed).

My advice? Make sure your bird dog is on the contract as a principal. Even then, talk to a good attorney and make sure what you are planning is in compliance. And, don't forget about the potential tax implications.

-PLH

Six Degrees of Depredation

Retrieved from Voice Mail, 12-30-08, 6 a.m. Arizona Time:

Mike, where are you, buddy? It’s Moe in Miami—howzit goin’? Listen, Manuela and I are headed down to the Keys this morning to see our nephew, Earnest. There’s some weak cell coverage down here, so I’ll talk fast. Hey, remember you set up that LandHammerhead LLC for me a few years ago when I bought that 10 acre piece outside Mayer, up there in Yavapai County? Well, I got a good offer from a guy named Straw, Jack Straw, on the piece; him and some investors he’s talking to want to buy it-- and, listen, I got some losses on some condos down here to cover. I was thinking about doing a 1031 with the proceeds at first, but Jack’s got a great idea: he wants to buy the LLC. It’s sweet, Mike—check this! There’s no worries about buying title insurance, or that goofy disclosure statement you guys in Arizona want to make owners record with those questions nobody knows the answers to when the property’s out in the boonies like this lot. Jack saves the cost of setting up a new company—he thinks he’ll just keep the company and buy the member interests, and he won’t even have to get a new tax number. I told him I’ve got a $25,000 equity line lien on the title, but he says we’ll just deduct that from the sales price, and nobody’s the wiser—he’ll just get a new company checking account at his bank, and keep making the monthly home equity payments. This is great—this way, we can close right away, maybe tomorrow! So, listen, can you gin up some kind of assignment of member interest—just leave the new member’s names blank for now—oh yeah, and a letter for me to resign as Manager, and email it to [inevitable static message interruption here] at that Prescott title company? I bet her email’s on their Website. Oh, yeah, last thing—Jack may be a little light on cash at the closing if this one guy isn’t in the deal. So, we’re talking about selling half the membership interest this year and the other half next year, so I can keep their feet to the fire. Hey, call me if you think of anything I need to know or if there’s a question. Thanks!

The pit of my stomach calls to me—take today off! Someone—the odds favor me--is about to regret my picking up the telephone. But I need to at least communicate that he’s going to have to give up a lot more data if he’s to get my help. Google gets me to his home phone, so I leave this message: “Moe, I’ve got three and a half questions: When can I see the company operating agreement and the minutes of meetings or company resolutions and, if there are any of such, can I rely on what they say? Next, when do I get to speak directly to your wife? And, give me some names, Moe, so I can run a conflict check on the proposed investors in buyer group? Call me today if you want my help figuring this out, because until we speak, there’s no chance I can help on this deal!”

If you see the whole checkerboard at once, there are a few items in Moe, Manuela and Jack’s membership sale proposal that are going to require thought, and here are a half dozen or so:

Ethics Considerations:

Well, for starters, who’s your client? Is it the company, or the existing members? Did you know Moe was married to Manuela—and were they married before or after the company began? (Moe told me when the company was formed that he was the sole member and so there didn’t need to be a manager. Hasn’t something changed.) Do the spouses own their interest in the company in some joint form of ownership? Or are there, today, two separate members? In either case, has Manuela consented to this sale of member interest[s]—or is she just wedged beneath the steaming roller of Moe’s excitement? Ethics Opinion 02-06 of the State Bar of Arizona should be consulted on the representation of entities or their members in formation of a new business. Of course, this is an issue of the transfer of member interests, not initial formation; but some of the issues are analogous. What, for example, if Manuela doesn’t want to sell the company’s assets—or any of her separate member’s interest in the company (or the member interest, if she and Moe are joint owners in some manner)? What does the operating agreement say about consent of members to a disposition of assets or member interests, and is there any text on who votes when an interest is jointly owned? (I’m assuming, of course, that this company had an operating agreement; Arizona law does not make that document a condition of existence of an LLC.) Someone has to sign, more than likely, a waiver of conflict letter even if Moe and Manuela are on the same page with respect to the transaction pending.

Real Property Considerations:

a. Lien on the title and assumption of the obligation: The lien of the equity line of credit is documented probably by a deed of trust that very likely contains a due-on-conveyance clause. Those clauses, about 85% of the time, say that the change in identity of owners of more than a certain percentage of the equity interests (and frequently a very small percentage, at that) is deemed to be a sale of the collateral by agreement of the parties. An unhappy lender whose security instrument contains this language can declare the sale of LandHammerhead to be a conveyance, call the note, and commence its remedies if the note isn’t promptly paid. That could be a problem for Straw’s group—so will likely come back to haunt Moe, especially in his starring role [probably] as personal guarantor of the line.

b. Title Insurance and Fairway issue: Moe’s title insurance on the 10 acres won’t be any good as soon as the new members take over a majority interest in the company. So, landowners setting up LLCs to be absolutely safe, anticipating that over time a new person may be acquiring, or "buying into" the company, replacing one or more departing partners, should consider purchasing a Fairway Endorsement to the policy [an endorsement that got its name from a specific court case, Fairway Development Co. v Title Insurance Co. of Minn., 621 F. Supp. 120 (N.D. Ohio 1985)] when the company first acquires the property. Later, the title company will not be able to deny coverage if the title owned by the prior membership comes under attack. The company will not be able to say that coverage ended because the new entity does not have the same internal composition as the old partnership. But that approach won’t do Moe any good; you cannot purchase a Fairway Endorsement several years after the original policy is purchased. Instead, Moe’s successors will have to acquire, if one is available (and affordable), a so-called “additional insured” endorsement.

c. Affidavit of Disclosure: Moe’s reference is to A.R.S. §33-422, which identifies required written disclosures in connection with transfers of fewer than 5 lots in unincorporated areas of Arizona unless the subject lots have been subdivided. Moe believes that the disclosure isn’t required because fee title to the land isn’t changing owners—but that seems an unsupportable interpretation of the statute’s purpose, since a brand-new company member[s] is in no better position to be familiar with the circumstances of the property than any third party purchaser is. There are several cases pending before the Arizona Court of Appeals that may afford some insight on this issue (Verma v. Stuhr, Verma v. Dougherty, Vig v. Nix Project II); so stayed tuned for those opinions, in case they say anything pertinent to this issue.

Enterprise Considerations:

a. Securities Laws: Are there outstanding liabilities of the company besides the land-secured credit line? What if there are, and Moe neglects to disclose that fact? For that matter, what if Moe does, but Straw fails to disclose that fact to his investor group before the deal closes? Is there liability under any securities laws attaching to Moe and Manuela in connection with the sale of the membership interests by Jack to his investors, under a theory of aiding and abetting in the sale of a security? There’s a pretty fine summary on the Internet reviewing case law about the sale of LLC interests being subject to securities laws by Robert J. McGaughey, Esq., entitled “When LLC Interests are Securities” (2008); McGaughey’s Web site is www.law7555.com. Arizona’s law is that the sale of a member’s interest may be a sale of a security, depending on the facts and circumstances, see Nutek Information Systems v. Arizona Corporation Commission, 194 Ariz. 104, 977 P.2d 826 (App. 1998); watch out for the expectation of profits arising from third-party, “essential managerial efforts.” Jack Straw is the fellow in the direct line of security-liability fire, but what happens if Moe and Manuela don’t make sufficient disclosures about what happened in the company on his/their watch and liabilities or obligations survive the transfer of member interests—like the equity line of credit—and the new members are not aware of these constraints when they purchase their interests?

b. Status of substitute equity holders: What does the operating agreement for the company say about the admission of new members? If it says that the remaining members must approve their admission, and Moe (and maybe also Manuela) resign as members of LandHammerhead before the new investors are approved for admission, well, what then? (Under Arizona law, they may enjoy the status of distributees and nothing else.) And what happens if there is no replacement manager appointed by Moe (and maybe also Manuela) before the company’s member[s] resign? For more discussion of the anomalies caused when there is not a proper transition of LLC membership under Arizona Title 29, see my article in PDF format called Beware the Single Member, Member-Managed, Arizona LLC, available at www.bffb.com under my attorney profile.

c. Perfecting a security interest in the sold interest portion, if there is a default in purchasing the balance of Moe’s member interest: Unless Moe wants to be tied up with persons who may default under their agreement to buy the rest of his interest with the deferred portion of the purchase price, Moe had best remember to take a security interest in the member interest he has sold at the time the deal is consummated, so that if necessary, Moe can take back the equity interests in the company altogether. And he needs to remember to file a financing statement against the membership interest sold (since it is a “general intangible” under Article 9 of the Uniform Commercial Code) in the records of the Secretary of State of Arizona, I suppose, assuming that Straw will continue to use the state as the company’s principal place of business.

Taxation Considerations:

a. Deemed dissolution of the company: Was LandHammerhead, LLC originally taxed as a disregarded entity or a partnership? (I didn’t prepare the tax election.) There’s a loss of tax treatment of distributions from a partnership (such that revenue will receive treatment as ordinary income, with a higher tax rate) when there’s a technical termination in the year that the company sells 50% or more of the equity interests in the company. Section 751 of the Internal Revenue Code can cause all or a portion of the gain on the sale of a partnership interest to be treated as ordinary income despite Section 741, which provides that a partnership interest generally is a capital asset. So, two questions for Moe are fundamental—one, which box did you check for your tax election, and two, did you discuss this disposition program with your accountant before you bought into Straw’s transfer concept? If there’s no offsetting advantage to the possible increase in Moe and Manuela’s tax burden upon the conveyance of the company, why do the deal this way? If there is a need to proceed Straw’s way, and the company was being taxed as a partnership, then even the form and text of the transfer documents may become material in determining whether Section 751 will control the tax treatment of the disposition.

b. Use of the existing EIN: Since you don’t represent Jack Straw’s group, the only advice you need to give Moe and/or Manuela here is not to suggest how the buyer should proceed with LandHammerhead’s EIN; the rules are complicated enough--forget you don’t even know whether Straw will be the only new member, ultimately. There’s a helpful treatise available through Google Books, Cartaro, David J., Federal and State Taxation of Limited liability Companies (2008)(CCH, 2007); take a look at the discussion of use of EIN identifiers depending on whether there is one or more than one company member after reorganization, found at paragraphs 1117.04 and 1118.04.

Common sense issues:

If Straw’s group cannot come up with the closing price, why would Moe think the new company will timely make the payments on the equity line? And what is Moe thinking about issues such as his personal guaranty of the equity line note—and whether the lender will waive its security (not wishing to own land out in the boondocks in its REO portfolio) and sue Moe instead? Is Moe about to get pillaged by the lender and his buyer? And why am I letting myself be knitted into the fabric of this debacle?

-MNW

The Dangerous Art of Employing Lis Pendens Weaponry

A lis pendens is a mighty broadsword in obtaining satisfaction, because it prevents the adversary, a land owner, from conveying his property to a third party or financing it with conventional lenders until it is removed from the title. A statute in Title 33 of the Arizona Revised Statutes makes the offense of “groundless” lis pendens filings punishable by fines and awards of attorneys’ fees. Tying up property of another so that it cannot be put to productive economic use is a serious undertaking, so it behooves the filer of the lis pendens to know what she is doing. Likewise, it behooves the owner to understand his position. There is considerable confusion as to when a lis pendens is appropriately filed against real property in Arizona. The superficial, conventional wisdom is that if an aggrieved party has a claim of title or interest in the title to the property of another, a lis pendens recording is fair game.

But what’s a claim of interest in the title? If a claimant is saying that the property rightfully is hers, then that’s a claim of title, doubtlessly. So, if a person holds a deed to a particular parcel, and there is a dispute over the legitimacy of the deed, file away. If a person records a Notice and Claim of Lien that complies with the mechanics’ lien statutes in A.R.S. Title 33, ditto, filing concurrently or after the foreclosure lawsuit is filed in the Arizona Superior Court. After that, the waters get slushier. If you file a suit to collect a general money judgment, and if you believe that you’ll prevail and hope to execute your judgment against your adversary’s real property—so you file a lis pendens against that property—that’s not murky water. The filer’s name shall be “mud.”

The essence of the lawsuit has to involve staking a plaintiff’s claim affecting title to the property. And, in 2008, we understand in the legal community that a claim of ownership rights to the property has to be immediate, not contingent on the falling into place of a series of pieces. The appellate court decision endeavors to explain the meaning of the ambiguous phrase “rights incident to title to real property,” which is the “hook” upon which parties plaintiff justify the filing of notices of lis pendens in the less obvious claims concerning ownership of property.

In the case of Santa Fe Ridge Homeowners’ Assoc. v. Bartschi, the Arizona Court of Appeals (Division One) held that a homeowner’s association may not properly record a Lis Pendens under A.R.S. § 12-1191(A) in connection with an action to enforce the subdivision’s CC&Rs where the action filed by the association would not expand, restrict, or burden the property owner’s rights as bestowed by virtue of the title to the property. [The decision is subject to a Petition for Review before the Arizona Supreme Court at CV-08-0292, scheduled for consideration by the justices on 1-6-09]

Defendant Bartschi owns a home in the community of Santa Fe Ridge. Plaintiff Santa Fe sued Bartschi, seeking a permanent injunction compelling Bartschi to maintain her lot. It also asked that it be entitled to certain “self-help” remedies, for which the association could recover expenses from Bartschi if she failed to comply with the injunction it sought. Four days after suing, Santa Fe recorded a notice of lis pendens against Bartschi’s property. Bartschi counterclaimed, alleging wrongful recordation of the lis pendens. She moved for partial summary judgment on that counterclaim, which the trial court granted. Bartschi then moved for statutory damages, attorneys’ fees, and costs pursuant to A.R.S. § 33-420(A), which the trial court awarded, leading to Santa Fe’s appeal.

The Arizona Appeals Court affirmed and reversed in parts the ruling of the trial court. It found that the HOA improperly filed the lis pendens, as a matter of law, because the lawsuit it brought against Bartschi did not affect title to real property, as required by A.R.S. § 12-1191(A). In doing so, the Court discussed and distinguished Tucson Estates, Inc. v. Superior Court, 151 Ariz. 600, 729 P.2d 954 (App. 1986), a decision holding that a lis pendens may be recorded in an action affecting rights incident to title to real property. The Court explained that in Tucson Estates the claim affected rights tied to current ownership of real property and would bind future property owners; therefore, the lis pendens fulfilled the purposes of A.R.S. § 12-1191(A) by giving notice both to anyone directly affected by the outcome or to innocent third parties who might seek to acquire interest in the real property. Under the Court’s explanation of the decision in of Tucson Estates, “a lawsuit affects a right incident to title if any judgment would expand, restrict, or burden a property owner’s rights as bestowed by virtue of that title.” (paragraph 16, page 11 of slip opinion)

The Court found that Santa Fe’s lawsuit did not fall within its narrow reading of Tucson Estates, because any judgment obtained against Bartschi would not have affected rights incident to her title; it was already burdened by the CC&Rs—so the judgment would not have increased the land’s burden. Moreover, the Court noted that the purpose of the lis pendens statutes was not realized, because any injunction would have been personal to Bartschi, and therefore would have had no effect on future interest-holders with respect to the residence.

The Court also rejected Santa Fe’s contention that the action affected title to real property because its suit might result, ultimately, in the imposition of a lien. The Court cited Coventry Homes, Inc. v. Scottscom P’ship, 155 Ariz. 215, 745 P.2d 962 (App. 1987), for the rule that merely requesting a lien’s imposition does not affect title to real property--there must be a present basis for such a lien. Because no basis to conclude that a lien’s imposition was inevitable existed at the time of the lawsuit’s filing–and since Bartschi had not yet failed to comply with any order of the court already entered (or with any statute granting a present lien, I suppose)–the lis pendens was premature. The association was anticipating relief (in the event Bartschi did not comply with the injunction sought) that was “not yet ripe for adjudication.” (paragraph 22, page 14 of slip opinion)

The news on the last issue is this, unless our Supreme Court clarifies the waters otherwise: Merely because you believe your cause is just and that, as plaintiff, you’ll ultimately be entitled to the relief you’ve requested from the court, your confidence is not legally sufficient to entitle you to file a burdensome lien against your adversary’s property, unless your lien immediately affects rights bestowed by virtue of title to realty. En garde.

-MNW

Hiring Inspiration

As the three of us sat around the fire pit, watching the sunset, the radiance of the pit and the alcohol’s effects carried a conversation among accomplished men in their 50s in this philosophical direction: How will we find people to carry forward the institutions that we helped to build? How do you secure the efforts of persons with a long-term commitment to excelling in personal performance? How do you identify persons with leadership capabilities, possessing both the desire to elevate the enterprise and their careers by realizing their full potential?

In a time where resources are particularly precious, the correct investment in human capital is critical and mistakes are costly. Reviewing resumes, letters of reference and writing samples for anything but shallow background is ineffective in an era of fabrications and prior-employer fears of being sued. The wise path, I offered to my friends, is to secure the efforts of persons possessing two qualities: A sense of purpose and a sense of urgency. While the two qualities are not inextricably related, the employee’s sense of urgency is pointless without a well-developed sense of purpose; and a sense of purpose may never be fulfilled without a sense of urgency to power it.

Sense of Purpose:
By a “sense of purpose” I mean a developed guidance system producing in a person some long-term vision that lends profound significance and overall direction to his or her adult life. Here’s what to ask a recruit (in person, where there’s little opportunity for “massaging” answers) for a position to learn if he/she has developed a sense of purpose: What is your area of deepest expertise? What is your greatest passion in life? What do you believe in so strongly that you doubt you ever could be persuaded to change that view? Where do you feel you are able to add real value to potential clients/customers? If none of these questions is answered with any hint of ease by the recruit, you must ask yourself if there has been enough self-reflection going on in the interviewee for the person to own a meaningful sense of purpose—or alternatively, consider whether the person’s sense of purpose is being concealed because it is incongruent with your enterprise’s institutional goals.

Accumulating wealth or a position of power are legitimate purposes in life, but to what end? is a legitimate follow-up area of inquiry. I have interviewed, I know, a number of persons who wished to enter law practice for the primary purpose of making a great deal of money. There is nothing inherently wrong with this goal, but the lengths to which a person may go to achieve this end (or the end of accumulating power) may create problems for the institution, either from the ethical dimension (which hurts the external reputation of the firm or its internal culture) or in terms of damage done to other personnel in the firm in the process of the employee’s “getting ahead.” And those problems are likely inevitable, unless there is some apparent altruistic “by-product” of the quest for wealth/power. Recall that the intention to accumulate wealth or influence, especially in a person who has led a life of deprivation or lower-rung status, frequently drives a sense of urgency. However, the urgency in that instance should include implementing goals that will address the “to what end” inquiry.

Sense of Urgency:
John Kotter, emeritus of Harvard Business School, in his post “An Astonishing Lack of Urgency (And What You Can Do About It)” in the HBS Conversation Starter blog, summarizes a purposeful sense of urgency well, I think: “True urgency is a set of emotions, a gut-level feeling that we need to get up every single day with total determination to do something to deal with [issues] and make some progress, no matter how modest, and do so today. It's not naïve. It doesn't assume you have the power to create a miracle, or that big problems can be solved in a day. But that doesn't slow a resolve to do something now to help the [enterprise] win, no matter the circumstances.”

Otherwise stated, a sense of urgency mandates an intention to accelerate getting on with the business of attaining goals endemic to an adult’s sense of purpose. I have worked with a variety of persons in several careers who did not care whether consumers of their services were satisfied with their output, so long as their personal needs were not compromised and they could keep their job. I’m not much surprised anymore to hear that the “apprenticeship” periods prior to management conferral of ownership or leadership status on an employee have lengthened in duration, and that turnover in most offices has been increasing. I’m convinced that it’s harder to find persons with both a sense of purpose and of urgency these days. Why? Is it the product of a generation or two that developed a sense of entitlement? Is it a pervasive belief that beyond one’s friends and family, and one’s favorite athletic squads, there’s not much out there worth being passionate about? Has careerism lost its appeal? Have the demands of modern living worn us down? Or is there just not much understanding that purpose and meaning in life and personal fulfillment are inseparable?

So what can you ask the prospective hire to flush out contours of his or her sense of urgency? How about this: Do you recall a time during your life of sustained effort in difficult circumstances—what did you do, and what were the outcomes? How long do you think it will take you before you play a major role in decision-making in this company—and how do you think that will come about? If the recruit cannot give any answer that leaves a satisfying feeling in you, there’s a possibility he or she hasn’t any sense of urgency at the present time. You’ll have to decide how much to invest in the hire in return for the hope that a sense of urgency will develop over his or her career with your business.

-MNW

Fixturing Ownership Rights in Commercial Leasehold Improvements

It is an invitation to a lawsuit when a lease agreement does not clearly articulate your express understanding of what will and will not be removed from the premises at the conclusion of the lease. If you aren’t certain how your intentions should be expressed, then an attorney should be consulted. Disputes over what is removable by the tenant can be high-stakes in nature, because the materials subject to removal can be valuable. A few years ago, one of our clients had to deal with the “midnight” removal of booths and an entire stainless steel kitchen line in his restaurant building; the defaulting tenant used wrecking bars and an acetylene torch to wreak havoc throughout the building. The impact of this pillaging was devastating to the landlord’s re-let value of the premises—and it was avoidable. Another client of our firm engaged in a dispute over whether a telephone switch was removable; this single, specialized piece of equipment was worth tens of thousands of dollars. Consider the cost of copper in recent years. It’s no wonder that some tenants and landlords have heated conversations about the removal of copper piping or other copper-based products from premises—just the scrap value of such materials is significant.

Recently, another client became embroiled in an argument over removal of improvements from a Laundromat that had thousands of dollars in specialized improvements, some of which were interior while others penetrated the roof of the building housing the premises. Our client’s concerns led to the generation of a memorandum that gave this advice, which, although admittedly limited to the circumstances of the premises, gives some idea of the fact-intensity of any analysis of what property is removable at the conclusion of the term, when the lease indenture itself isn’t sufficiently clear on that subject:

Client:

There are three primary reasons why SMITHCO cannot remove any such leasehold improvements [generally identified below in 1. and 3.-6.] from the premises. First, they never belonged to the current tenant; second, the lease text doesn’t allow any removal of the sort I am advised is contemplated by Mr. Smith; and third, the contemplated removal is contrary to the intention of the original builder-owner of the premises. The items Mr. Smith claims to want to take out therefore are not, by the very terms of the lease, trade fixtures.

The lease does not contemplate that leasehold improvements can be removed at the end of the lease term; that is explicitly the parties’ agreement in Article 5B.—that leasehold improvements paid for by Landlord or installed by Tenant shall belong to Landlord at the termination of the lease. Indeed, the lease is very clear that the Tenant’s Property (so defined in Article 10A.) only includes equipment, furniture, inventory, signs and “movable trade fixtures,” and these clearly are defined by illustration (counters, shelving and mirrors) as things that readily slide away from a wall or are removed easily from limited moorings like screws, without the need to use cutting torches or heavy tools. Basically, movable trade fixtures are unattached to the premises in any but a placement or balance-maintenance manner (see, Mark A. Senn, Commercial Real Estate Leases, §22.4 (2003 Supplement, page 22-20), which recites the deliberately limiting scope of removable personal property included within the expression “movable trade fixtures.”)

Your building was intentionally designed by its original owner for two tenants, with the primary one being a Laundromat, and that owner, like the present Landlord, intended to leave it that way for future operations. The plumbing and electrical lines in the premises, therefore, were not installed for the convenience of one Tenant or for a temporary purpose that might argue in favor of their removal by Tenant at the end of the lease term. Here are some illustrations from the photographs you shared with me of the interior of the Laundromat that demonstrate the unmistakable intention of the Landlord that all items installed by it were intended to be leasehold improvements instead of fixtures:

1. The building owner installed 2” X 4” framing around a series of 24” X 24” boxes that house the five “bulkheads”; these bulkheads are connected to the premises ceiling by the framing and are bolted to the floor.
2. The wall height in the premises was designed specifically to house industrial-sized dryers.
3. The dryer venting pipes to the roof actually penetrate the roof structure to the outside; so the roof structure was designed to accommodate large venting pipes.
4. The water and waste water piping is specially designed to connect to the bulkheads; any piping removed becomes junk, without market value other than for scrap.
5. The electrical conduit is joined to the electrical panels, so if conduit is severed from any panel, that panel will be compromised, out of compliance with City building code.
6. The power sources are oversized, meaning that more amperage is available to the premises than would be needed for usual retail sales of goods and services. Here, there is no intention by the Landlord to modify the use of the building, which will be re-let to a Laundromat operation.

You advised me that the rent on the premises is substantially higher than it is at other, comparable Laundromat facilities around the valley—and the reason for that is that the original Landlord intended to recoup the investment in super-infrastructure for this particular use over time. So the intention of the Landlord, evidenced by the rent reserved, was to create a permanent facility for commercial laundry operations with permanent leasehold improvements—and to recoup over time the cost of those permanent improvements. And for nearly 50 years in Arizona, the intention of the parties as respects the use and adaptability of personal property has been the main emphasis in determining which party has a claim of ownership in the fixtures, see Voight v. Ott, 86 Ariz. 128, 341 P.2d 923 (1959).

As for the issue of whether electrical wiring is a non-removable fixture, in 35A Am. Jur. 2d, Fixtures, at §109 (p. 921), the author asserts this proposition: “Electrical wiring is ordinarily considered a part of the realty, irrespective of the other circumstances.” That seems logical from the perspective that the wiring is adaptable to future uses—even non-Laundromat uses—of the premises. That same perspective is suggested by our court of appeals, that in 2005 ruled that wall to wall carpeting is a fixture, in Hayden Business Center Condominiums Association v. Pegasus Development Corporation, 209 Ariz. 511, 105 P.3d 157 (App. 2005). So while intention of the parties is the paramount factor in determining the character of the improvement item, the adaptability of the application and the extent of its physical attachment remain consequential.

The Landlord’s position should be that the Tenant is free to remove the following items from the premises only at the time of its move-out and thereafter: stack dryers; washer extractors; washing machines; water heaters; folding tables, vending and coin changing machines and chairs. And that’s it. Everything else in the premises are leasehold improvements or immovable fixtures; therefore, no wiring or plumbing pipes or fixtures of any nature—including the bulkheads—are to be removed. [End]

It isn’t that difficult to articulate what the tenant can remove from the premises at the conclusion of the lease term; and the parties can agree that any personal property added after lease commencement to the premises (except inventory and equipment mounted on wheels or casters) that has a value in excess of some threshold amount will be deemed by the parties, in the absence of some written agreement to the contrary, to be a permanent accession to the premises—and therefore becomes the property of the landlord from the moment it is installed. One of the disadvantages of printed form leases, of course, is that the provisions about leasehold improvements versus fixtures tend to be scant or, at the opposite extreme, so overbearing as to endanger enforcement against a tenant by a landlord. So, landlords and tenants should discuss what will be added by the tenant to the premises in advance of personal property installation, and what the tenant desires to remove at lease expiration. And, thereby, avoid a donnybrook.

-MNW

Part of the problem or part of the answer?

I was recently at a seminar in Orlando where I was privileged to hear Gary King speak about Truth. He said several interesting things; one was that morality, like money, compounds; his example was that if you take a calendar, and on the 1st of the month you put down one penny, on the 2nd two pennies, on the 3rd 4 pennies, on the 4th 8 pennies, you can see the amount grow; it grows very, very slowly at first. After 10 days you only have around $5. By day 15 you have $164. By day 20 it is $5,243. At this point, if you offered someone either $100,000 up front or the penny thing for 30 days, many would be tempted to take the $100,000, right? But at day 30 the pennies add up to over five million dollars. All the significant growth occurs in the last few periods.

So Gary King says that morality is the same way; if we all do the right thing in small ways today, then over time we can turn things around – reduce crime, correct the political problems and economic problems. His take is that the problems we find ourselves in today started in the 60’s and 70’s with small bits of corruption in the system. His example is that if you tell your secretary to tell a caller you are in a meeting (because you don’t want to talk to the caller at the moment), that this gives your secretary permission to lie; and now she knows you are a liar. And it snowballs from there. Rather than the compounding taking 30 days, though, he looks at it as taking 30-40 years, which is similar to real monetary compounding.

He went a little further, saying that if you walk by some trash on the sidewalk and ignore it, you are part of the problem. It is the duty of each and every one of us to do what we think is “the right thing” whenever we have the chance; we do not have the luxury of being lazy and ignoring the trash on the sidewalk if we desire excellence in ourselves and in our society.

So what exactly, is the “trash on the sidewalk?” For me it is something Steve Linder said at one of his events (badly paraphrased): We may not be required to help, or add value, in every instance where we can, but we have some responsibility for everything in our sphere of influence, be it someone we meet on the street or one of our children.

For me, this means that I will stop and talk with people I don’t know if I think I can do something for them; I expect nothing in return, just as when I pick up trash in the street where I happened to park, I expect nothing. When someone is doing some work, if I can, I will stop and help. I was trying to load a large live Christmas tree into the back of my car in the Home Depot parking lot a couple of years ago, and someone I had never met walked up and helped me. It was not an HD employee, just some random person. This is the sort of thing we all need to think about.

It has bothered me when I am busy doing something, usually cleaning or hauling or something like that, and there are others in my family who just sit and ignore what is going on. I think they are part of the problem. When I was growing up, if Mom or Dad were doing something, almost anything, that my brothers and I thought we could help with, we offered. No matter what we were doing, or what was going on. We are a team, and if one of us is working to accomplish something, then we all pitched in. To this day, my brothers are the same way. When we get together someplace (often upstate New York) and one of us decides to work on some project or other, the other two pretty much pitch in without needing to be asked. The need is obvious. To do nothing would be inappropriate, even rude.

In a previous life, I spent a couple years working as a whitewater river guide in Arizona, a little in the Grand Canyon, but mostly on the Green River, and on the Colorado above the Grand. One of my favorite characters was Bill, who was the head of operations on the Grand, and by far the most senior guide. On one occasion, there was some problem with one of the boats, something was ripped, I think. He was off trying to drag this 30-foot raft around to get at the back to fix this problem, and never asked for help. He simply expected that one of the other guides would come help him. We did – and we all wondered why he didn’t ask for help! I understand now, he didn’t ask because he simply expected that we would help when we saw what was happening.

What would happen if everyone thought this way? Taken another way, what would happen if no one thought this way? No one would ever help anyone else. People would become more disconnected. Society would be a hoard of nameless, faceless automatons… Wait, isn’t that almost what we have now?

What sorts of things would you want to attempt, in your life, if you had certainty that no matter what you tried, no matter how hard it was, that other people would pitch in to help you – and expect nothing in return, except that perhaps you would help them at some point in the future? What would life be like then?

So next time you see someone doing something, don’t ignore them or try to hide. Ask if you can help.

You can find more info from Gary King at http://www.thepoweroftruth.com

-PLH

I Hate to See October Go [Merci, Johnny Mercer and Barry Manilow]

[I have no urge to say much of substance about property today. So, I offer this bit of fluff about one historic property. I am privileged to own, together with my wife of 30 years, a 150-acre farm in Tennessee, near her childhood home, with a main house that was built in the time-frame of 1852-55, best I can tell. Being a feller who never lived in a community of fewer than 1 Million folks before leaving for college in Charlottesville, it feels “out there.” And objectively, it is. The house sits in a valley between two hills, and in that depression there are exactly two spots from which cellular coverage is available. One is at the edge of our screened-in, quasi-skeeter-proof, back porch. The other is in the front of the lot between the highway and the front steps, and I practically have to find it with a compass. Once found, a step in any direction is fatal to reception—you need to stay right there. The house is on the National Register of Historic Places (a grandiose term for “the buildings have a façade easement”). The entire farm is subject to a conservation easement in favor of the Land Trust for Tennessee, which prohibits our placing additional buildings on the property in order to preserve the view shed. “View shed” is a real term of art that I used a few years ago to bludgeon the proposed installation of a 250’ high cellular telephone pole down the road a piece, that would have featured highly-visible, red-glowing lights at the top, to keep aircraft from toppling it and themselves. “A piece” is not a term of art; generally, though, historic preservation is an arcane but crucial area of real property law, since our rural landscapes disappear at a truly alarming rate as fallout from leapfrog development across America. There are a number of federal statutes and regulations that treat with the preservation of real property of consequence for historical or aesthetic purposes. And that, my readers, is how I segue into the following stream of consciousness about my old Tennessee homestead last visited in the month of October, 2008.]

Today, thankfully, it rains. The ground and plant life require it. Conway has been in the grip of a severe drought, like much of the Elk River basin. Only half the annual accumulation of rainfall has fallen this year. Either I’d better start building an ark, or it’s going to be end as one of the driest years in many previous.

Conway is a hamlet; it achieved some status by virtue of having had its own post office, twice in any living person’s memory. However, it lost its second post office establishment when Teddy Roosevelt left office. (Having your own post office bestows the gravitas on a place that impels geographers to take note.) Otherwise, Conway is a geopolitical nightmare. Part of it has the postal address of Prospect, TN (which is about 10 miles in some direction over back roads near Minor Hill; I seldom go there because I’ve been told that the boys there are “rough,” although I secretly suspect that reputation is actually a few decades outdated, to a time when my wife went to the county high school with some of their boy-ruffians—and why puncture a rural legend, or, for that matter, take any unnecessary risks?). 155 Rose Road, however, has the postal address of Pulaski, TN, and I know, having clocked it on my odometer, that the southernmost genuine boundary of the county seat is 12.5 miles from here. The closest town is Elkton, which lies just 7.5 miles directly south on the Columbia Highway. (Query why the postal service didn’t just assign Elkton the rights to cancel stamps gracing Conway denizens’ envelopes.) Weatheristically speaking, Conway is aligned with the north Alabama region, so that you have to watch the forecasts for the Huntsville-Decatur area to have a perspective on the likelihood of rain or tornados or whatever you’re counting on to deal with. The Nashville forecasts are useless for this purpose.

The Columbia Highway, which is both a federal (US 31) and state road, used to be called the Elkton Columbia Turnpike, part of a greater road system that connected, segmentally, Nashville with Elkton and Ardmore, which lies on either side of the TN-AL border. It was a subscription turnpike, with each segment having its own board elections for directors. This probably guaranteed that the entire turnpike, constructed piecemeal, would take a century to finish. The father of the man who built this house, a man named Thomas Edwards Abernathy, who lived in the house after Burwell, the builder, died in 1869, was a director of the segment closest by. Thomas Edwards Abernathy was the local magistrate and the clerk of records for this part of the county. He owned 35 slaves before the War of Northern Aggression, was the local magistrate authorized to sentence for petty offenses like public drunkenness, and was a turnpike director, so he must have been a man of some influence.

Burwell built this house, however. He built it for Samuella Deweese Tannehill (which had to have been a name assigned by some cruel person who wanted a son named Samuel and decided, by jack, that some child would carry that name or its closest equivalent!) his wife, who was the daughter of an early Mayor of Nashville, which at first, by the way, was named Nashborough. I expect this marriage was arranged due to the facts that (i) Burwell had just recently lost his first wife and (ii) Thomas Edwards, his father, was a man of some substance—otherwise, why engage with some family from Conway, three or more days drive by carriage-distance to the south, in a relative cultural wasteland? (Well, there could have been a female visage issue, but I’m resolved on this sojourn to purge myself of all meanness.) This Mayor of Nashville was a book collector and a Master Mason who was a director of the Nashville Order and an acquaintance of Andrew Jackson.

Peggy has opened the front doors of the house this morning; she believes she smells a dead rat in the cellar. I can’t smell any such a thing; I do smell the delicious odor of white beans with country ham cooking slowly on the stove with a bouquet of clove, and some sterile cleaning-concoction that she is using to scrub down the house and, likely, to mask the faux rat-odor. The noise from the Columbia Highway wafts occasionally through the house, tires on wet pavement and trucks downshifting as they begin the pull up the long hill between Rose Road and Tucker Bend Road-sounds. The front porch of the house is about 75 yards from the highway right of way. The front porch is mounted via very uneven, precipitously high-tiered stone steps, but the porch itself is grey, weathered wood. The porch is only 7 feet wide, still wide enough for chairs for watching whatever might occur along the Columbia Highway. Often times, that consists of truckers and tourists and some locals dispatching their paper trash and food waste and CDs, now objects of disgust from over-play, through their vehicle windows onto the front of the lot.

From the center of the porch, you look directly out toward three magnificent oak trees that are 60-70 feet high and 100 years or more old. A fourth tree, long gone, would have made a two-by-two column of these sentinels. The four trees, I surmise, would have marked the grand entry by carriage or wagon onto the lot before the Columbia Turnpike was paved and Rose Road was built. Peggy is not fond of any mammals sporting long tails (although I never have heard her speak ill of beavers, come to think of it, perhaps because their tails are not cylindrical and slender like a rat’s tail), and she dreads encounters with any such creatures, dead or alive. Last night we saw an opossum in the back of the lot when we returned from my in-laws’ place and Peggy almost drove the Corolla into the stairs that climb up high to the back porch deck. To be sure, it was the largest opossum I’d ever seen; it rivaled our dearly-departed Greta in size, and Greta was a standard daschund. I might myself have been terrified if I hadn’t known that I still am fleeter afoot than even the meanest ‘possum.

Autumn has come to Conway, in various hues and shapes. The walnut tree in the back of the lot has lost most of its leaves and, alas, all but a few dozen of its nuts as well. There is a dogwood in the front, near the three sentinels, bearing orange-shifting-brown leaves. Off to the Rose Road side there is a black-barked Maple emblazoned in yellow-ochre; and the pear tree is in full fruit, luscious and grainy to the chewing. There is a mystery flower garden in the back behind the back porch, which is 7-8 times the size of the front porch and is screened in with a fine mesh that doesn’t distort the view of the hillsides much. (The lot’s south boundaries run up a series of hills that are heavily wooded with junipers and scrub oaks and puny pine trees.) Peggy just finished sweeping and mopping the back porch. She loves this house (some Tucker family member lived there after the War o’ N.A. although she rarely was inside the house), and expresses her love by cleaning it vigorously whenever we arrive until she’s exhausted. She sweeps the back porch repeatedly, which is a fruitless task because the living and dead plant material in the yard gets all over your feet and you track it up the steps into the house despite your greatest respect for the tidiness of the broom-wielder and your polite intentions not to make a mess and your assiduous wiping of your shoes on the three door-mats that lamely guard the back house entrance. It’s the main entrance to the house, and it gets used, severely.

The flower garden is a mystery because no one alive remembers who planted it originally or what was planted there prior to when it fell into our ownership. I suspect it was originally a herb garden because (a) it was close to the finishing kitchen, which was located in the cellar where some of the slaves slept, and (b) it was close to the smoke house where the meats would have been hung and prepared and could have used some seasoning while cooking. Peggy has planted many flowers and a few bulbs in it, but every season she is here she discovers some flower or shrub that she didn’t plant has emerged. This morning while we were eating our breakfast oatmeal with raisins and looking out into the back yard from the round, indoor outdoor black iron table, we noticed a flaming red stand of flowers that Peggy has never seen in the garden before. These grow on high stalks like a tulip, but the heads of the flowers are aster-like, with ruddy but delicate, flaming spikes radiating out from the center.

Then, too, the house is itself a mystery to me. On the one hand there are the wonderments of history and craftsmanship. An elderly lady of the Rose family came by one night and told tales of when a slave who didn’t leave after Emancipation was given her own room in the upstairs of the house the last 10 years of her life (where our daughter, Alison, slept when she spent 6 months here in 2007); and when an emergency appendectomy was performed on the floor of a particular room by a surgeon called from town during World War I. These floors are a wonder of pine and poplar and those in the front of the house are most of 150 years old. Yet the house continues to settle on its stone foundation and in some of the rooms the walls are cracking from stem to stern. (I can’t say, “top to bottom” or vice versa, because I haven’t the patience to see which direction the cracks are moving—upward or downward.) The trees flourish and die, insects rampage freely (on one of the earlier visits, there were at least 2,000 red insects flying around the rooms, and I suggested the house be christened “Ladybug”—to no accord whatsoever, as people perceived I was being sarcastic, which seems unfair from my perspective) until we spray indoors, the yard gets overgrown while the window sashes are cracking and the glass, which is irreplaceable [Home Depot doesn’t do single-paned, wavy glass], wobbles in the window casements. The whole house needs painting, and 40’ of height exterior is beyond the limits of my courage for ladder-climbing. Pieces of the roof join the detritus of motorists in the front lot. It is like coping with an elderly parent whom you must respect while you search for the convenient way around dealing aggressively with the wasting away brought on by old age.

. . . . . . . . . . . . . . . . . . . . . . . .

Today we picked pears. They are the size and vague shape of television remotes, which is a strange comparison but works at some level because they have necks, so they balloon at the bottom and slenderize at their tops. They are mottled yellow, green and brown on the outside, and they release from their homes on their branches willingly, leaving a quarter-inch stem at their tops. Some have bad spots, like someone cut a black olive in half, pitted it, and imbedded the half-olive into the skin. The pears are sweet, but very firm, and their meat is gritty on the tongue. Farther down the road is a different species; they are of a like coloration, but round and the size of baseballs--neckless. We prefer the remotes for canning. Peggy has accumulated three pear preserves recipes in the last 4 days from her mother, two aunts and one southern cookbook. The peardom laboratory opens in a few minutes.

The pear tree is alongside Rose Road, named after the Rose family, which have lived in the area for 80 years. One of the Roses lived in the house for a time in the 1930s. Rose Road separates the residential lot from Newton Branch. That’s ironic. My name is Michael Newton. My father’s first name was Newton, and his father’s name was Newton, Sr. (There are no other Newtons in the Widener line; my father was the last of 8 children [5 boys]—perhaps they ran out of names they preferred.) Newton Branch runs into Buchanan Creek [pronounced “Buck-cannon”; perhaps President James was perceived as too much a Yankee]; this in turn flows into Richland Creek, which joins the Elk River, which intersects the Tennessee, which meets the Ohio headlong, and that in turn confluences with the Mississippi, which empties, we all learned, into the Gulf of Mexico at New Orleans. Everything, it seems, has a heritage or a line, including the pears, but I don’t know enough about horticulture to contribute to that understanding. I do understand that Newton Branch had a cotton gin alongside it, probably to serve Burwell’s crop and a few of his neighbors’.

The geopolitics of streams is fairly chaotic. If you seek advice from 10 people in these parts what velocity or volume of flow is needed to distinguish a branch from a creek or a river, you get 10 different answers. It appears the perception of which is what is a function mostly of childhood memory. Which stream was widest, was the most tree-lined or yielded the most fish or crawdads or what have you, determines whether a body of water is a branch, creek or river, I suspect. Because of the draught, most of this stream-ology is moot. There are only wider or narrower dried or semi-damp beds visible hereabouts.

It is warm today, and the weather is friendly with a light breeze, and the front double doors are open. This was the historical form of ventilation. The house is called, variously, a “dog-trot” or “Williamsburg” or “raised cottage” (more commonly associated with the deep South, especially Louisiana) or “shotgun” residence, but all of them share the feature that the front entrance and the back entrance were elevated and positioned to be directly opposite the front entryway so far as the construction techniques of the time permitted. In this fashion, if the prevailing breeze was rightly positioned, you got a nice flow of fresh air through the main hallway of the house. Dog-trot and shotgun [either, a straight course] describes the phenomenon of the original construction (later, a kitchen was added at the rear—it would have been in an out-building, next to the smokehouse, in the 1850s) and two wings from a cannibalized house sometime in the first decade of the 20th century. The back porch was added sometime in the 1950s, when finer mesh screen made a bug-minimized outdoor existence attainable.

The front facade architecture features a Greek Revival treatment. There are columns on the front porch, and a triangular thing at their top connecting the roof, is that called a pediment? Abutting the double doors at the entry are leaded-glass windows, three-quarters of the height of the doors. On two of the outermost columns I have installed flagpole holders, and in honor of Cristobal Colon, an early-though-temporary American, I have hung the flags of the nation and the State of Tennessee, or as some call it hereabouts, the “three states” of Tennessee (hence three stars on the circular, blue field—one for each province dominated by [left to right, lowlands to uplands] Memphis, Nashville and Knoxville, this last city being where I bought the flags) So, there’s a sort of small-scale grandeur about the front entrance visage, coupled with a reminder of the pragmatic treatment of how to deal with humid, hot mid-south summers.
There are a lot of birds resident this week. Some are familiar, including an old blue heron feasting on minnows and tadpoles in the shallow depths of Newton’s Branch and the Canadian geese which are semi-permanent winter visitors (but maintain over-flight Vee-formation maneuvers daily), and the woodpeckers with racing stripes down their necks. Others are unfamiliar. The other day we saw a sparrow-sized bird with a white breast—bright white. We are told that eagles and ospreys have taken up residence farther downstream and we will investigate that shortly.

The washer and dryer are beeping. They are modern as they run, resident in the new laundry room. I cannot decipher the computerized operation of these monuments to cleanliness, and when I phone my daughter Emmy (who has lived here longer than anyone but her sister and who is visiting her grandfather on Tucker Bend Road), she prefers that I just wait for her return. But they continue to complain, audibly and by flashing lights, to no one. Not exactly vintage-era implements, but history yields to functionality, a painful but inevitable reality.
Another historical figure, fellow lawyer Aaron Venable Brown, lived close by. Brown emigrated from North Carolina and was a peer of Burwell, albeit more a man of the world. He practiced law in Pulaski, the county seat of Giles, served in the Tennessee senate and house, and later the US Congress. After resigning from Congress in 1845, he learned while on his way home from Washington, DC that he had been nominated for Governor by the Tennessee Democratic Party. Though a reluctant candidate, he went on to defeat narrowly his Whig opponent. During his gubernatorial administration, several railroads were chartered, improvements were made to state mental and penal institutions, and a number of male and female academies were incorporated. Brown was defeated for reelection to a second term, after which he served as a member of the Southern Convention that met in Nashville. There, he co-authored the "Tennessee Platform," which opposed the compromise on the slavery question pending before Congress. At the Democratic National Convention in 1856, he received twenty-nine votes as a vice-presidential candidate. He was later appointed Postmaster General under President Buchanan. He died in Washington, DC and was buried in Nashville.

The federal historical marker is in the right of way at the westernmost edge of our lot—so, Gov. Brown must have had some tie to the vicinity. (The earliest Conway post office may have been sited somewhere close to the marker, along the Elkton Columbia Turnpike frontage.) And now, he and I are joined, as I keep the grassy area around his historical marker free of debris, when I get back there.

-MNW