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Posts on Jan 1970

Peculiarities of Public Sector Process

I recently had the privilege of teaching a class in Municipal Law at the Santa Barbara College of Law.  One thing that I found myself emphasizing to the students was how public entities have to observe a number of things that the private sector doesn’t need to worry about.  This isn’t just because of State or Federal laws that might apply to the entity, but also because of the fact that when a governmental entity acts it has to be aware of and make sure that it is conducting itself in accordance with Constitutional principles.  This comes up in a number of different contexts. 


For example, if a special district allows private groups to include announcements or messages in utility bills it has to be aware of the First Amendment, because it may be deemed to have opened up a “public forum” for free speech purposes.  Also, cities frequently regulate in areas that involve the First Amendment, whether it’s adopting sign regulations, regulating adult oriented businesses or seeking to restrict expressive conduct in public places, such as distributing leaflets or soliciting donations.  Based upon cases from all the way up to the U.S. Supreme Court, numerous legal concepts and rules apply to such regulations, and it gets very complex.


Also, consider for a moment how a body like a city council acts in a number of roles when it carries out its responsibilities.  It may be acting in an administrative capacity when it deals with a budget or a contract, or in a legislative capacity when adopting laws through the “police power” (Article XI, Section 7 of the State Constitution).  It may also be acting as a decision maker in what is called a “quasi-judicial” proceeding, applying existing laws or regulations to a set of facts, such as when it might be considering issuing or revoking a license or permit.  In such hearings both State and Federal cases have held that the participants are entitled to some degree of “due process” of law, and a number of procedural rights have to be afforded, such as having a fair hearing with an opportunity to present evidence and respond to evidence to impartial decision-makers.


Another area where there is a big difference between the public and private sectors is how the entity must deal with its employees, especially when imposing discipline.  Cases have held that permanent employees in a government employment system have a “property right” in their continued employment once they have passed their probationary period.  What that means, in a Constitutional sense, is that before they can be disciplined they have a right to procedural due process (again, an opportunity to present evidence, know what the charges against them are, and have it heard by an impartial decision-maker).  This type of requirement doesn’t apply to private sector employees, but applies to government employees based upon the 5th and 14th Amendments to the Constitution and the requirement that a person cannot be deprived of life, liberty or property without due process of law.

One of the things I told the students in the class, most of whom will be attorneys in private practice after they pass the bar, and not working as public sector lawyers, is that they need to be aware of these distinctions when representing private clients in their dealings with public agencies.  Often, a different set of principles and concepts will come into play than what would otherwise apply to a non-governmental entity.


Although I don’t necessarily agree, in the words of one of my law partners; for every simple private sector process, there is a far more complex, irrational but important public sector process.


– Posted by David H. Hirsch;



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Your Business Succession Plan (“BSP”) – WHY, HOW AND WHEN

As discussed in our last posting, not having a BSP in effect can have some very undesirable results – such as increased tax liabilities and the unnecessary or unplanned sale or closure of a winery.

An example of the potential for a negative result where no BSP is in effect is the sale of the historic Sebastiani Vineyards and Winery in 2008 to the Foley Wine Group. Prior to the sale, the winery had been owned by Sebastianis for over 100 years. Foley Wine Group founder Bill Foley believed that the sale was due mostly to the fact that the current generation (the grandchildren of founder Samuele Sebastiani) simply could not agree on how to run the business. Due in large part to the lack of a carefully thought-out and crafted BSP, the winery ceased to be Sebastiani-owned and instead is now owned by what is essentially a winery conglomerate. A BSP could have specified the details of how the winery was to be run once it was passed down to the current generation.       

Part of planning a BSP requires a winery owner to carefully consider how much his or her own personality contributes to the goodwill of the business. For example, if a winery founder and owner has always been highly involved in all decisions related to the winery and is the “face” of the winery that clients and business associates know, there is a real possibility that once that owner is no longer running the winery, client and business relations will falter. If this is likely, a winery owner should consider bringing in his or her successor(s) while the owner is still running the winery. That way, the successor(s) can become an integral part of the winery, and clients and business associates have the opportunity to get to know the successor and to trust him or her while the original owner is still involved with the winery. This should also help ease any fears about a reduction in quality of the product and/or customer relations once the original owner is no longer there.

Lastly, having a BSP can instill a greater amount of confidence in the winery’s partners, employees and associates or affiliates, as well as lenders and the local community. A BSP clearly shows that a business owner is serious about his or her business continuing on past his or her own involvement, and that everything possible is being done to ensure a smooth transition when the time comes for new ownership and management.

When should a winery owner create a BSP? As early as possible. Once the start up phase has passed and the winery is firmly established, the owner should immediately begin penciling out long term goals and his or her preferred ownership and management structure for the business. The winery owner should consider all aspects of the business and start making decisions about what he or she would like to happen to the business itself and to any real property owned or utilized by the business once he or she will no longer be running the winery. Those details should then be formalized in the appropriate legal documents.

Stay tuned for our next posting, discussing the importance of ensuring your BSP is congruent with your estate planning documents.

– Posted by Ziyad Naccasha and Jeannie Goshgarian

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Contractors: Another Good Reason not to Hire Unlicensed Subs

Contractors know that hiring unlicensed subcontractors is a bad idea for a number of reasons.  Sometimes it happens, however, because the prime contractor does not carefully check paperwork or just cannot pass on the price offered by an unlicensed sub.  However, this carelessness or desire to cut costs can cost a prime contractor dearly.  The court of appeal recently held that a prime contractor that hired an unlicensed drywall subcontractor could be liable not only for the wages of that unlicensed sub's employees but for statutory penalties arising from unpaid wages.  Sanders Const. Co. v. Cerda(2009) 175 Cal. App. 4th 430.

In Sanders, the general hired the drywall contractor not knowing that it was unlicensed.  After several months of shoddy work by the drywall contractor, the general discovered that the contractor was unlicensed.  During this time, the general had been paying the sub, believing he was paying his employees.  The unlicensed sub, of course, did not pay his employees everything they were due.  With a deadbeat unlicensed sub, the workers pursued a Labor Commission claim against the general and prevailed.  The general filed an appeal in superior court.

The superior court upheld the Labor Commission, finding that the unlicensed sub's employees were statutory employees of the general under Labor Code section 2750.5.  The general then took its grievance to the court of appeal, where the ruling was once again upheld.  The court of appeal soundly rejected the general argument that the "statutory employee" language of section 2750.5 applied only to workers' compensation cases and unemployment benefits.

Again, the lesson is do not hire unlicensed subcontractors.  If you take a chance and do so, the unlicensed sub's employees are likely to become your employees for purposes of workers' compensation benefits, unemployment benefits, and claims for unpaid wages in the event something goes wrong.

Posted by Michael McMahon

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Estate Planning with Retirement Benefits

As a general matter, retirement benefits are pretax dollars that have been invested on behalf of an employee. Accordingly, when the employee, or his designated beneficiary, ultimately receive the funds, they will be subject to ordinary income tax.

There is little that can be done to minimize taxes once mandatory distributions have begun, that is April of the year following the employee attaining the age of seventy and one-half. Basically, the employee must take mandatory distributions calculated to exhaust the entire balance of the retirment plan by the end of the employee's life expectancy. However, there are many occasions when an employee dies with a balance remaining in his or her retirement account. This is the circumstance where simple steps can result in large tax savings and deferral.

Once an employee receiving retirement benefits passes away, the employee's beneficiary designation controls the ultimate tax consequences. Generally, the designated beneficiary is either a spouse, child/children, or the decedent's trust or estate. There are three available transfers with the following resulting tax consequences:

1. If the beneficiary is employee's spouse, the spouse can always roll over the Plan assets into a new IRA, giving the spouse the ability to use his or her own life expectancy, achieving further tax deferral. This ability to roll over Plan assets is limited to employee's spouse, and only if the beneficiary is the spouse individually, not a trust for his or her benefit unless the spouse has the right to withdraw the Plan assets from the trust. Although the spouse has other options, rolling over Plan assets will almost always be the best choice.

2. If the beneficiary is not employee's spouse and if employee dies prior to attaining seventy and one-half, there are two options.

        a.  If the beneficiary is a named designated beneficiary under the retirement benefit plan, then the beneficiary can withdraw Plan assets over his or her life expectancy.

        b. If, on the other hand, the beneficiary is not a designated beneficiary under the retirement benefit plan but instead receives the plan funds pursuant to a trust or estate bequest, then the beneficiary must withdraw the entire balance of the retirement account (and pay income taxes on the withdrawal) within 5 years of employee's death.

3. Finally, if employee dies after the turning seventy and one-half and beginning his mandatory distributions, then a designated beneficiary named in the retirement plan has the option of  withdrawing Plan assets over the longer of the the beneficiary's life expectancy or employee's remaining life expectancy. If there is no designated beneficiary named in the retirement plan documents, then the ultimate beneficiary, who generally takes pursuant to a trust or estate bequest, is required to withdraw the funds over employee's remaining life expectancy.

    The difference between being required to withdraw an entire retirement account over five years versus a younger beneficiary's life expectancy could be very significant. Simple math illustrates that removing 1/5 of something is far greater than removing 1/30.

    All taxpayers should review their retirement plans to ensure they are maximizing the available tax benefits. Often times, people name their trusts or estates as the beneficiary which automatically precludes the use of a beneficiary's longer life expectancy.

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