More Lessons from the "Dark Side" - the Use of Online Legal Services

Beware The Use of Online Legal Services

A client whom I represented a couple of years ago regarding the sale of her company recently contacted me. This particular transaction involved the buyer purchasing the assets of her company and the new business carrying on in the same manner as it did before the sale. The transaction was a little unusual in that my client also became a 20% owner in the corporation that bought the new business and acquired the assets of my client’s company.

Like most sales of small businesses, my client acted as the “bank” for the transaction by accepting a down payment on the purchase price of the assets as well as a promissory note for the balance of the purchase price, which was to be paid by the purchaser over a period of time and secured by a pledging of the assets purchased as collateral for the amount owed.

Unfortunately, the new business failed and my client was forced to foreclose on the assets that her company had previously sold to the purchaser.

At the time of foreclosing on the assets, the new business, though failing, had established a significant relationship with a new customer, who thereafter had a need for much more of the services that were being provided by the new company prior to my client foreclosing on the assets.

A third party approached my client and wanted to purchase not only the assets, but the name of the new business that had been shut down as a result of my client’s foreclosure on the assets. Without consulting me, my client, at the suggestion of the third party purchasing the assets, unwittingly filled out a form whereby the third party supposedly was purchasing the “stock” of the new company, including the name and the assets of the company. The parties, having not consulted with legal counsel, did not understand the difference between an “asset sale” and “stock sale.” As a result, rather than the third party obtaining assets in the corporate name in order to continue to do business with a large customer, the third party treated the transaction as a purchase of the stock and operated the company for approximately the remaining 11 months of the year under the same corporate tax ID number, if as though the third party had simply stepped in and acquired overall ownership of the stock of the company.

Upon the company submitting records to its CPA after the close of the year, the players involved then learned of the problems resulting from the supposed transactions that were intended to be one way but, based on the documentation, were entirely another type of transaction. At the end of the day, all of the parties involved were able to agree upon a somewhat income tax-neutral resolution of the transaction, and I was able to draft documents to reflect what had actually happened earlier in the previous year.

In addition to the situation above, I have also been contacted during the past year by individuals whose father signed a form that left his entire estate to his second wife. Upon the father’s death, the second wife inherited the estate, and when she died, the assets went to her blood relatives. As a result, the children of the husband’s first marriage received nothing. It was a difficult meeting to look at the dismayed faces of his children and explain to them that, in spite of their belief that their father had made a mistake or simply not thought through the consequences of the various aspects of the will he had drafted, that there was nothing legally that could be done to recover any assets for their benefit. As a result, the second wife’s distant relatives inherited all the proceeds that primarily belonged to her husband prior to his death, and the children from his first marriage received nothing.

The sad fact is that many people sign simple or form documents copied from a book or downloaded from the Internet only to find out that it didn’t serve their purposes at all. That’s why it is essential to consult with an attorney about the type of transactions and/or documents that you are intending to implement, and make sure that all of the contingencies and “what ifs” are at least considered and addressed in the documents so that unintended consequences do not occur.