| Who’s Minding the (Small Business) Mint? |
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The world of the typical small business owner can be a hectic place. The days are filled with seemingly endless activities, most of which are designed with the same goal in mind -- to make the business a profitable enterprise. Demands on time frequently conspire to prevent the accomplishment of greater, more productive, tasks. Not uncommonly, the days seem to end before they have gotten underway. Working hours turn into days, days turn into weeks, weeks turn into months, and months turn into years. When is there time to get it all done? When is there time to devote to the truly critical items, those things that feed the lifeline of the business? And, by the way, what are those things?
Certain owner responsibilities should qualify as critical – items that cannot be overlooked or neglected. At the top of the list are the small business owner’s responsibility for the regular review and analysis of the bookkeeping, banking and financial records of the business and the careful supervision of the employees who handle them.
While the business owner is tending to the affairs and general fiscal health of the business, he typically must delegate handling of the daily receipts and deposit activities to others. A small business owner is charged with a host of time-consuming responsibilities, including those of getting new business, servicing existing business, closing out old business, resolving issues with personnel, solving problems with customers or clients, and watching the ever-changing landscape of the competition, to name a few. The prudent small business owner will add at least one more item to that list of priorities: monitor the bank accounts, and closely.
In a common small business scenario, responsibility for daily bookkeeping matters is turned over to an on-site bookkeeper who discharges his or her duties with considerable leeway and little supervision. These duties often include such day-to-day business activities as writing checks, making deposits, handling payroll matters, paying suppliers, transferring funds between accounts and maintaining petty cash reserves. While it is true that the world is full of competent, reliable bookkeepers whose integrity and efficiency remain unchallenged, it is also true that there are those whose actions in the unsupervised handling of financial accounts become, for a variety of reasons, less than exemplary. The alert small business owner will always find time in an otherwise crowded schedule to exercise regular supervision of the company’s bookkeeping personnel, and to review the monthly bank statements and copies of canceled checks for all business bank accounts.
Many situations exist today in which an employee having access to bookkeeping records can alter, forge or fraudulently endorse checks or other instruments flowing in and out of a business. For purposes of illustration, consider the simple but relatively common scheme whereby the bookkeeper of a small business pursues over time a planned pattern of deceit by forging the owner’s name to company checks payable to “cash,” and then cashing the checks at the company’s bank where he/she is known to be an employee of the business. Suppose further, that this activity goes undetected over a period of years until the business owner finally discovers and discloses the forgery scheme.
Too frequently, small business owners seek false security by relying on assumptions that are destined to fail. Two of the more common are 1) that bookkeeping personnel would not or could not forge signatures on company checks, and 2) if they did, and the forged checks were cashed by the bank, then the loss could simply be recovered from the bank. These ideas find support in the law under the general premise that a person is not liable on an instrument (i.e., a check) unless he signed it. However, this thinking does not complete the analysis. The law in North Carolina as well as in other states imposes certain duties on the bank customer, in this case the small business owner, such that the customer’s failure to comply with those duties shifts the burden of loss from the bank to the customer. In the illustration at hand, for example, if the business owner’s failure to use ordinary care in supervising the bookkeeper substantially contributed to the making of the forged checks, the business owner could be prevented from recovering his/her loss from the bank.
Courts have routinely held that employers who do not closely monitor and regularly check on the activities of employees charged with handling company finances and given free access to company checks and bank statements are negligent in failing to detect forgeries that may occur. Likewise, allowing the same employee who has possession of the company checkbook to reconcile the company’s bank statements without supervision constitutes negligence on the part of the employer. A business owner has a duty to use ordinary care in supervising employees, and when a bookkeeper is authorized to both write checks and to reconcile the company books and records, a periodic review or audit by another person should be performed.
Another duty imposed by law on the small business owner as a bank customer is the duty to discover and report unauthorized signatures, forged checks or other unauthorized alterations to checks. Here the law requires that where a bank sends or makes available to its customer a statement of account, the customer must use reasonable promptness in examining the statement to determine whether any payment was improper because of an unauthorized signature. If the customer reasonably should have discovered the unauthorized payment, the customer must promptly notify the bank. The law gives the bank customer a reasonable period of time, not exceeding thirty (30) days, within which to examine the account statement and give notice to the bank of any irregularities.
Courts have commonly held that the bank customer’s duty to exercise this care is triggered when the bank provides sufficient information to the customer for review, including a statement of account showing payment of items with either return of the items paid or information sufficient to allow the customer to reasonably identify the items paid. The customer is then in jeopardy of bearing the loss when he/she fails to discover and notify the bank of unauthorized transactions. Applying these rules to the small business owner, courts would have little difficulty rejecting most excuses for the owner’s failure to detect a forgery of his own signature, particularly in light of the fact that since the owner is most familiar with his own signature, and should know whether or not a particular check was authorized, he is in a better position to prevent unauthorized account activity than the company’s bank which likely processes thousands of transactions in a single day.
In conclusion, with respect to matters pertaining to the use of business bank accounts, the small business owner would be well-advised to include time in an already busy schedule for the regular supervision of employees, and the periodic review and analysis of the bookkeeping, banking and financial records of the business.
John Honeycutt is the managing partner of Smith Debnam’s Charlotte office and can be reached at (704) 643-3220 or
jhoneycutt@smithdebnamlaw.com.
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Bankruptcy Court’s Interpretation of Disposable Income Has
Unanticipated Effect on Unsecured Creditors
The Bankruptcy Court for the Eastern District of North Carolina recently handed down an important decision governed by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Its ruling in In re Alexander has garnered nationwide attention and has led to a split in other regions of the country regarding the analysis of a debtor’s calculation of “disposable income” under BAPCPA. The effect of this decision? Unsecured creditors will receive less or no payment at all in cases where they may have otherwise received a dividend.
In Alexander, the court considered twenty-five proposed Chapter 13 plans, all of which provided for early termination. This early termination was to take effect once allowed secured, priority and administrative claims were fully paid inside the plan. The Chapter 13 trustee objected, contending that the debtors were attempting to end the plans sooner than the applicable commitment period without full payment to unsecured creditors. The debtors argued that some claims might be allowed for less than anticipated and, therefore, the early termination of their plans should be considered.
In determining the definition of “disposable income” under BAPCPA, the court held that disposable income is current monthly income minus reasonably necessary expenses. Current monthly income includes the average monthly income from all sources that the debtor receives during the six-month period preceding the commencement of the case or a date upon which the current income is determined by the court.
The court continued its analysis by considering how to calculate “projected disposable income” as a result of this definition of “disposable income.” Essentially, the court determined that projected disposable income is the same as disposable income and ruled that the formula should be based on a mechanical test using past income data. The court held that to determine projected disposable income, a debtor multiplies his or her disposable income calculation by the length of the applicable commitment period.
To determine the length of the applicable commitment period, one must look to BAPCPA. In a case involving an above-median debtor with projected disposable income, the applicable commitment period is five years; however, if the debtor does not fall into that category, the applicable commitment period is three years. BAPCPA further provides that a plan can only be shortened if the debtor fully pays his or her allowed unsecured claims over a shorter period of time. The court in Alexander concluded that the applicable commitment period is linked to projected disposable income and, therefore, it only comes into play when projected disposable income must be taken into account. Accordingly, the court held that a debtor who does not have projected disposable income should not be held to an applicable commitment period.
The Bankruptcy Court in the Northern District of Texas has taken an opposing view in In re Hardacre. That court held that the term “projected disposable income” is not the same as “disposable income.” The court in Hardacre ruled that projected disposable income should be based on the debtor’s anticipated income during the term of the plan. In other words, this figure should be based on the income the debtor reasonably expects to receive during the term of his or her plan.
At this time, twenty-six districts have embraced the Hardacre view, eleven districts have agreed with the decision in Alexander, and eight districts are split on the issue. It is in creditors’ interests to continue to monitor bankruptcy courts’ responses to this issue. Both the amount of projected disposable income a debtor must commit to a Chapter 13 plan and the length of a debtor’s Chapter 13 plan can greatly affect the amount unsecured creditors can expect to receive on their claims within the context of a bankruptcy proceeding.
For additional information or questions about this topic, contact Adam Gottsegen at (919) 250-2111 or at
agottsegen@smithdebnamlaw.com. Prior to joining Smith Debnam, Adam was a law clerk for the Honorable J. Rich Leonard, one of the Bankruptcy Judges for the Eastern District of North Carolina.
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Immigration Reform Update: What Employers Need to Know About the Current Debate
Immigration reform is an emotional issue that evokes strong opinions. Most people agree that some level of reform is necessary, but disagree over the goals of that reform. On the one hand, U.S. businesses facing continuing labor shortages seek relief through an influx of foreign employees. On the other hand, the American public’s increased hostility towards undocumented immigrants fuels the call for increased border security and employer sanctions. These competing interests have driven the recent comprehensive immigration reform debate in the Senate. After a failed attempt to find a solution during the previous session, the Senate recently took up debate on what some labeled a “grand compromise” between those endorsing strict enforcement-only and those in favor of some form of legalization of the estimated millions of existing undocumented immigrants. This “compromise” ultimately failed.
The struggles under the current immigration structure can be categorized loosely as either a problem for businesses, or a problem for individuals. From the business side, companies currently seeking to employ foreign workers must often complete a labor certification process. The purpose of this process is to prove that no American qualifies or is available for the advertised position. While perhaps good in theory, the highly limited number of such employment-based visas does not come close to matching the extraordinarily high demand. Ironically, some theorize that while the certification system is designed to secure American jobs for its citizens and nationals, it is actually responsible for the loss of those jobs. Such immigration challenges can force businesses to outsource more and more operations to other countries, thereby eliminating American jobs.
The current system also requires all employers to determine each employee’s identity and authority to work in the United States. Proponents of increased enforcement argue that American businesses are to blame for the tide of illegal immigration, since without jobs there would be no incentive to come here.
For individuals, the frustrations are numerous. Take, for example, a new high school graduate who was brought to the United States illegally as a child. Many such young people speak fluent English and desire to enter college and the workforce. Yet, without proper assistance, these individuals can find themselves lacking legal status, thus being forced to return to a country they hardly remember.
A similar situation arises when an undocumented immigrant marries a United States citizen and has citizen children. The current system often forces the foreign-born spouse/parent of the American citizen to accept long-term (if not permanent) separation, or live together in constant fear of discovery.
The Senate compromise sought to balance these interests by increasing border security while providing incentive for current undocumented foreigners to “come out of the shadows.” The proposals would have allowed a probationary status if the individuals paid a fine and met certain language and employment requirements. These would-be “Z visa” holders would not qualify for permanent residence status until the current backlog of applicants was cleared. Proponents hoped that by requiring fines and forcing these individuals to the “back of the line,” this measure would be distinguished from a much-maligned “amnesty” approach.
On the enforcement side, the bill would have required additional border agents and fencing, along with increased tools for an employment eligibility verification system. The bill would also have created a temporary worker program to alleviate the perceived labor force pressures of American businesses.
Immigration advocates severely criticized the bill regarding its establishment of a proposed point system for future immigrants (permanent visa holders). The point system would have eviscerated the current family-based permanent residence system by eliminating eligibility based upon four of the family relationships currently eligible. Additionally, it would have limited the ability of employers to hire foreign workers of extraordinary ability as permitted under current standards.
Ultimately, very few Americans seemed happy with the bill, and Senate leaders were unable to bring it to a vote. Proponents pronounced the reform bill to be dead.
Today, in the aftermath of failed comprehensive reform efforts, governing entities and lawmakers are trying to piece together other reforms, albeit on a much smaller scale. Several states, for example, have enacted measures either permitting or refusing driver’s licenses to undocumented immigrants. Other states have considered or passed measures prohibiting government entities from using contractors that hire undocumented workers.
Employers beware! There can be no doubt that employers in this country are viewed as the primary shield against illegal immigration. Many people have called for the government to cease all efforts at changing the law, and “simply” enforce the laws as written. In answer to that call, Homeland Security head Michael Chertoff announced that the Executive Branch would utilize its regulatory power to crack down on undocumented immigrant workers by taking sweeping enforcement measures. Some claim that the crackdown is the current administration’s way of telling the American public, “be careful what you ask for,” by allowing the country to feel the economic impact of living without migrant labor. One impact is certain: employers unclear of the regulatory changes can now find themselves subject to stiff penalties, and should take the appropriate measures to avoid problems.
For answers to your questions on how immigration reform affects you or your business, contact Amanda Bryant at (919) 250-2136 or
abryant@smithdebnamlaw.com.
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Managing Partner Jerry Myers
Reflects on His Recent Mission Trip to Villahermosa, Mexico
In April, my 17-year-old son William and I joined fourteen others from our church on a mission trip to Villahermosa, Mexico. Ranging in age from 16 to 85, our group was truly intergenerational. An ongoing relationship began ten years ago when our church built the first building for the seminary in Villahermosa. Ever since, with groups from our church traveling to Villahermosa at least once each year, we have helped build and maintain programs at the seminary, do projects in the surrounding community, and participate in worship in many of the local churches.
The poverty in much of Mexico is overwhelming. Even in larger cities like Villahermosa, Mexico suffers from poor infrastructure, high unemployment, and a generally poor economy. While our hosts warmly welcomed the money we brought, they were equally appreciative of our willingness to roll up our sleeves and work. We painted seminary buildings, planted grass, and cleaned out drainage ditches during our stay. When rainy weather prevented work outside, we organized a craft program for several hundred Mexican children who were attending a two-day camp at the seminary.
We scheduled our visit to Mexico during Holy Week. Most of the
local churches held some sort of worship service every day. We participated in worship services at four different churches. Our church hosts made us feel welcome and we were usually asked to come to the front of the church to say a few words about ourselves. Few us spoke Spanish and even fewer of our hosts spoke English, so the introductions were challenging. After several of these experiences, I was able to master the pronunciation of the word “abagado,” which is Spanish for attorney. One of my warmest memories from these worship services came when, after our group sang “Blessed Be The Tie That Binds” from the front of one of the churches, the entire congregation stood in unison and enthusiastically sang it back to us in Spanish. Then we all sang it together in our native languages.
By the end of our visit, we had formed dear friendships with our Mexican hosts. We also developed stronger bonds within our own group. It was great to get back to America, where it is not hazardous to drink water from a public fountain, but William and I will cherish special memories of our time spent with our neighbors to the South.
Jerry T. Myers is Managing Partner of Smith Debnam and can be reached at (919) 250-2133 or
jmyers@smithdebnamlaw.com. Several of Smith Debnam’s lawyers and staff have participated in mission trips over the years, and many regularly volunteer in our community.
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You Know that Maintaining Accurate and Detailed Personnel Files for your
Employees can Make all the Difference in an Employment Lawsuit?
Maintaining employee personnel files is often an afterthought for businesses, particularly with a run-of-the-will employee. But when the threat of a lawsuit arises, these files will be your best or worst evidence in proving whether a wrong has occurred.
In recent years a growing number of employees are requesting access to their personnel files, frequently in an effort to challenge an employer’s treatment or actions. Depending on a company’s policy and procedures and applicable state law, many employees have found support for their right to see them, even without a reason. An inconsistent or incomplete file may provide them with just the evidence they need to consider litigation.
Unquestionably, the best practice for employers is to keep accurate and detailed personnel records. The difficulty for many, however, is determining what information is appropriate to include in the file, and what is not. Small employers are often most at risk in this regard as they lack the dedicated human resources staff with the knowledge and priority to properly maintain the files.
Complete personnel files can be crucial. A file that does not include the necessary documentation supporting employment actions can end up being used against an employer in a claim from an employee for wrongful termination, harassment, or other actions brought by a disgruntled employee. In contrast, a complete and detailed file demonstrating employee work performance, meetings, communications, and events concerning the employee can help resolve a dispute.
Sometimes the absence of an item in the employee file can raise a red flag just as much is what is in the file. For example, if an employer discharges an employee for poor work performance after being counseled on several occasions without success, but nothing is contained in the personnel file, a judge or jury is less likely to have faith in the employer’s credibility.
The bottom line for employers? Understand the laws regarding employee files and make sure your files are complete and up to date. Protect against possible employee
claims.
If you have questions about employment related issues please contact Bettie Sousa, Connie Carrigan or Tom Lenfestey of Smith Debnam’s Employment Law practice group at (919) 250-2000.
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