Liability Waivers – Busting Some Common Myths

Blog post by Mark W. Siler

A client recently approached me about reviewing and revising the liability waiver form he has patrons of his business sign prior to their entry to his business premises. While the legal issues involved in reviewing a liability waiver (also known as an “exculpatory agreement”) are not new – the Wisconsin courts haven’t decided a case on the topic since 2005 – they are some of the most misunderstood issues and generate a great number of questions from clients.

Business owners whose operations necessarily lend themselves to the possibility of injuries to patrons, such as ski hills and health clubs, generally seek advice regarding exculpatory agreements they can use to protect their businesses. My client made a request similar to the one made by these business owners, that was: draft an exculpatory agreement that is “air-tight.”

For me as an attorney working in Wisconsin this request creates a problem. This is because the Wisconsin Supreme Court has considered exculpatory agreements six times in the last 25 years and held the agreement in question unenforceable each time. What does this mean for business owners in Wisconsin? There are two answers to this question.

First, it means business owners must seek the help of a lawyer in drafting any exculpatory agreement. While Wisconsin courts have not set forth an easy test that can guide you in drafting such agreements, certain steps can be taken to increase the likelihood that a court will find an exculpatory agreement enforceable – generally avoiding mistakes made in the cases where the Wisconsin Supreme Court has held the agreements unenforceable. One mistake is not separating the liability waiver terms from other parts of the agreement such as registration or indemnity provisions. According to the courts, this combination of agreements may prevent patrons from understanding the gravity of what it is they are waiving. Another error includes having someone sign a document that causes her to assume liability for any injury no matter the cause. Such language is overly broad and even includes reckless or intentional acts which can never be waived. Finally, some agreements are too vague or don’t define terms that necessarily need to be defined. These agreements will fail because the patron does not know what he is actually waiving.

Second, it means business owners should not be depending on an exculpatory agreement to shield their businesses from all liabilities. Owners should make sure they are operating their businesses in a manner that cuts down on the possibility of needing such a waiver. Obviously, there are businesses that are unable to avoid the risk of patron injuries because they allow people to partake in high risk activities (i.e. skiing), but there are still steps that can be taken to protect these businesses. First, search out a good insurance agent. I wrote an earlier article for Magazine SoHo regarding business insurance which could be helpful in this area. Further, if you meet with several insurance agents and no one will insure your operation, it is a sign that your business may expose you to losses that you will be unable to afford. Another step to take is to consider your staffing very carefully. If there are jobs in your organization whose activities may directly expose a patron to more risk, you will want to consider very carefully the people you put in that position taking into account that intentional and reckless behavior can’t be waived by the patron. Careful staffing can go a long way to preventing unnecessary risks.

Overall, an exculpatory agreement may be helpful for your business, but you should not make the common mistake of believing that it will protect you from all liability. Instead make sure you are properly insured and that your employees are not creating any unnecessary hazards.

Considerations for Buy/Sell Agreements (part 2)

Blog post by Keith R. Butler

In Part 1 of our discussion of buy/sell agreements, we addressed considerations for triggering events and the terms of the purchase and sale for a variety of such events. In Part 2, we will discuss different types of buy/sell agreements.

Basically, there are two types of buy/sell agreements, a stock redemption agreement and a cross purchase agreement. I will briefly discuss each.

A stock redemption agreement is an agreement among the corporation and all shareholders. The corporation is the party that will purchase (redeem) the stock of the deceased, disabled or terminated shareholder. It is simpler than a cross purchase agreement, in that the corporation will own life insurance on the life of each shareholder. The insurance can trigger tax to the corporation, and the basis of each remaining shareholder in his/her stock is unaffected, even though the percentage ownership will increase as a result of the redemption.

A cross purchase agreement is an agreement between or among the shareholders, and each shareholder owns life insurance on the life of each of the others. With two shareholders this works fine, with three it is a little complex but still workable, and probably gets too cumbersome with more than three shareholders, due to the multitude of insurance policies needed, and the need to dispose of policies owned by the deceased on the lives of the others. A big advantage here is increased basis by the survivors, as they are in effect paying additional amounts for the stock (funded by the insurance they own). A disadvantage is that the shareholders must pay the premiums on this insurance out of their own pockets with after tax dollars.

Regardless of which type of agreement is used, the result is that the deceased or departed shareholder or his family no longer own stock, and the survivors benefit from a pro rata increase in the percentage ownership in the business.

When considering provisions of a buy/sell agreement, it is crucial to design the plan to avoid a situation where the agreement can be used as a weapon or create incentives that are counter to the best interests of the corporation and its shareholders. As noted in Part 1, it is human nature to want an agreement that will give a shareholder the most beneficial buyout possible upon death, retirement or other termination of employment. But this instinct is fraught with peril. There is no insurance product that pays out in the event of retirement or termination of employment. Therefore, any buyout upon those occurrences must be from the general funds of the corporation (in the case of a stock redemption agreement) or the shareholders personally (in the case of a cross purchase agreement). Whereas payment can and certainly would be made over time, interest will accrue and cash flow will necessarily take a hit.

Which specific type of life insurance is optimal is a facts and circumstances decision. Term insurance is certainly less expensive and may be preferable if the term is very likely to exceed the period that the shareholder will want to remain a shareholder. That is, if we have a 55 year old who intends to retire between 65 and 70, a 20 year term is probably safe. If the shareholders are both in their 30’s, a term policy can be risky because one or more of the shareholders may not be insurable when the term expires.

Short Sales = No shortcuts

Blog post by Ann K. Chandler

The failure of the residential real estate market to return to the pre-2007 historic trend of annual appreciation in value has led cash-strapped homeowners to question whether it makes sense to continue to make payments on mortgages that have balances that are higher than the appraised values of their homes.  Homeowners that took advantage of low down payments to purchase their homes and/or the 125% home equity loans offered pre-2007 are now faced with owning homes that have mortgage balances in excess of the home’s appraised value.  Some homeowners have come to believe that a “short-sale” may be the only option for them given their lack of equity in their homes.

In a “short-sale” a seller sells a home to a third party buyer for a purchase price less than the amount of the outstanding mortgage debt on the property.  If the property is listed with a real estate broker, the buyer may also be able to pay to convince the lender to allow the real estate commission and closing costs be paid and only reduce the amount of the mortgage payoff.  The need to reduce the selling prices of homes to reflect the deflated value of residential real estate have led to the requests by homeowners to their respective lenders to allow the homeowners to sell the homes at amounts less than the balance of the mortgage on the property.  Lenders may be willing to agree to such a sale to avoid the cost of foreclosing, maintaining and then disposing of a foreclosed property.  A short sale is attractive to a lender if the amount the lender is being requested to “write-off” does not exceed the additional loss the lender would incur in the foreclosure process.  If a homeowner has more than one mortgage on his/her property, the homeowner will need to gain the cooperation of both mortgage lenders to the short sale.

In order for a short sale to succeed, the homeowner must first be able to find a buyer – not an easy feat in markets swollen with foreclosed properties and other sellers offering short sales.  The homeowner must then obtain all mortgage lenders’ consents which may require the homeowner provide tax returns, wage statements, budgets and other financial statements verifying the homeowner’s inability to continue to pay the mortgage or to pay the deficiency – the difference between the amount to be paid to the lender and the amount owed under the mortgage.  If the amount that the lender is being requested to reduce the mortgage is too great and/or the lender determines the homeowner has income or other assets that may allow the deficiency debt to be repaid, the lender may require that the homeowner agree to execute a “deficiency note” for all or a portion of the amount between the mortgage and the amount the lender will obtain from the sale.  This deficiency note must be repaid by the homeowner at a later date with interest at the rate set forth in the note.  In addition to the deficiency note, a homeowner seeking a “short sale” should be aware the sale may take some time to get approved by the homeowner’s mortgage lender, will require the submission of a pile of paper work and will affect the homeowner’s credit rating.  However, even given the foregoing drawbacks of a “short-sale”, if a homeowner is able to find a willing purchaser and the homeowner’s mortgage lenders cooperate, the effects of the short sale are generally less detrimental to the financial life of the distressed homeowner than a foreclosure.


The comments and opinions expressed in this blog are intended for informational purposes only and do not constitute legal advice. Reading or using the information in this blog does not create the existence of an attorney-client privilege. Due to the changing nature of the law, the blog posts may contain dated material. For an update on the current law and the application of the law to your particular facts and circumstances, consult a legal advisor. The information contained herein is not a substitute for obtaining legal advice from a qualified attorney licensed in your state.